Tag Archives: john mccombie

Noah Smith On Free Trade

In an article The Man Who Made Us See That Trade Isn’t Always Free for Bloomberg View, Noah Smith says this about David Autor:

So, I asked, how should trade policy be changed? Autor’s answers again surprised me. He suggested that the process of admitting China to the World Trade Organization back in 2000 should have been slowed down significantly. That would have given American workers and industries time to prepare for, and adjust to, China’s competitive onslaught.

He told me that the U.S. government should focus attention on manufacturing industries, and even use industrial policy to bolster the sector.

Traditionally, economists have looked down their noses at “manufacturing fetishism,” but Autor says he thinks the sector is underrated.

Of course, heterodox economists have known this for long. As Nicholas Kaldor said in his 1980 articleFoundations And Implications Of Free Trade Theory, written in Unemployment In Western Countries (probably my most favourite quote in this blog):

Owing to increasing returns in processing activities (in manufactures) success breeds further success and failure begets more failure. Another Swedish economist, Gunnar Myrdal called this’the principle of circular and cumulative causation’.

It is as a result of this that free trade in the field of manfactured goods led to the concentration of manufacturing production in certain areas – to a ‘polarization process’ which inhibits the growth of such activities in some areas and concentrates them on others.

Of course Smith saying all this isn’t exactly heresy as economists are known to make mea culpa all the time and then backtrack. Nonetheless, this article is still revealing. Smith also talks of the importance of empirical work. In heterodox literature, there is of course the work of Anthony Thirlwall, John McCombie and others. See Models Of Balance of Payments Constrained Growth: History, Theory And Empirical EvidenceSoukiazis, E., Cerqueira, P. (Eds.).

There’s also evidence from Ricardo Hausmann and César A. Hidalgo of Harvard University. See this Nature article.

John McCombie in the above quoted book, Models of Balance Of Payments Constrained Growth, in his chapter, Criticisms and Defences Of The Balance Of Payments Constrained Growth Model: Some Old, Some New, recognizes the work of Hausmann, Hidalogo, et al. :

Hausmann et al., (2007) have also stressed the importance of the sophistication of a country’s exports for its rate of output growth. They measure the sophistication of a particular export in terms of an index of the weighted per capita income of the countries that export that good, where the weights correspond to the revealed comparative advantage of the countries producing that good (PRODY). Then the average productivity of a country’s export basket is measured using this productivity index together with the relative shares of exports of the country concerned (EXPY). They found that EXPY was a statistically significant explanatory variable of per capita GDP growth in a regression which also included control variables.

These theoretical and empirical works go so much against the economist case for free trade, the most sacred tenet in economics.

Krugman’s 45 Degree Rule

Recently, Paul Krugman reminded us of his “45 degree rule” on his blog Conscience Of A Liberal. This was a reference to his paper in 1989 which was a rediscovery of Thirlwall’s Law from 1979 [1] which states that the long run rate of growth of any country is constrained by the rate of growth of exports divided by the income elasticity of imports. Krugman rediscovered this law but interpreted the causality in the opposite way. This shouldn’t be surprising because in neoclassical economics, growth is explained by a production function and it is then difficult to interpret the causality in Thirlwall’s way. In an essay [2], John McCombie explains:

Krugman (1989) rediscovered Thirlwall’s Law, which he termed the 45-degree rule, as empirically ε/π = y/z or, when the (log) of the former is regressed on the (log) of the latter, the coefficient is unity or the slope of the line is 45-degrees. (Krugman provides some empirical evidence providing further confirmation of this empirical relationship). Like McCombie and Thirlwall (1994), he rules out sustained changes in the real exchange rate as a factor in bringing the balance of payments into equilibrium. Consequently, it is necessary to explain why the rule holds. The Keynesian explanation is that it is growth rates that adjust to maintain the balance of payments in equilibrium, but this is rejected by Krugman on “a priori grounds” that it is “fundamentally implausible.” He continues that “we all know that differences in growth rates among countries are primarily determined in the growth rates of total factor productivity, not differences in the rate of growth of employment; it is hard to see what channel links balance of payments due to unfavourable income elasticities to total factor productivity growth” (Krugman, 1989, p. 1037).

The Krugman article is instructive because it goes to the heart of the question about the direction of causation. Drawing on new trade theory, monopolistic competition, and the importance of increasing returns, he argues that faster growth leads to increased specialisation and the production of new goods for sale in overseas markets. Thus high “export elasticities of demand” are due to a dynamic supply side and rapid growth, rather than vice versa.

[x is the growth of the volume of exports, π is the domestic income elasticity of demand for imports, ε is the world income elasticity of demand for exports, and z is the growth of world income]

For a more forceful defence of Thirlwall’s Law, see McCombie’s paper.

In my opinion, the causality runs in both directions. However I am more sympathetic to Thirlwall and McCombie. And because the causality runs in both directions, there is still a balance-of-payments constraint. Complex economic dynamics still benefit richer nations and immiserate others. To an extent, this is already present in Kaldorian models. Growth brings in rise in productivity and this effects price competitiveness and hence beneficial to balance of payments generally. However, I also consider the income elasticity as being affected by growth at home and abroad.


  1. Thirlwall, A. P. (1979) ‘The Balance of Payments Constraint as an Explanation of International Growth Rate Differences’, Banca Nazionale del Lavoro Quarterly Review, March.
  2. McCombie, J.S.L. (2011) ‘Criticisms and defences of the balance-of-payments constrained growth model: some old, some new ‘, PSL Quarterly Review, vol. 64 n. 259 (2011), 353-392. (Can be previewed on Google Books here)

John McCombie Reviews Marc Lavoie’s Post-Keynesian Economics: New Foundations

John McCombie is one of my favourite economists. He is the co-author of the book Economic Growth And The Balance-Of-Payments Constraint, one of the most supremely insightful books.

McCombie has written a review of Marc Lavoie’s book Post-Keynesian Economics: New Foundations, which is the second edition of his book titled Foundations of Post-Keynesian Economic Analysis.

He says:

… the greatest significance of this work is that it clearly demonstrates that there is a coherent and interrelated body of economic theory that stands in marked contrast to the neoclassical framework. Indeed, with the deficiencies of the prevailing orthodoxy exposed by the subprime crisis the publication of this book could not have come at a more propitious time. Some post-Keynesians have concentrated on attacking the foundations of the neoclassical paradigm … to such an extent that it could (and has been) unfairly accused of nihilism.

But as Kuhn has pointed out, a paradigm can only be overthrown by the development of a  new paradigm and Marc‘s book shows that there is a substantial corpus of Post Keynesian that meets this criterion. Criticisms of a paradigm is not enough to cause a change in the world view of the practioners …

… It is worth re-emphasizing that one of the great successes of this book is that it takes many important contributions of the Post Keynesians which may otherwise have been lost buried in the journals and integrates them into a coherent story; in a very real sense the sum of this work is greater than the parts.

Marc Lavoie - Post-Keynesian Economics - New Foundations

Read the full review here.

New Book By Felipe And McCombie

The production function has been a powerful instrument of miseducation.

– Joan Robinson (1953–54), The Production Function and the Theory of Capital, Review of Economic Studies, vol. 21(2), pp. 81–106. (jstor)

… that is how Jesus Felipe and John McCombie begin their new book The Aggregate Production Function and the Measurement of Technical Change.

I have observed that although neoclassical economists use the aggregate production function heavily, even those who do not learn it somehow err and assume it implicitly somewhere in their analysis. This book I believe is a rewriting of both authors’ work in this area collecting various papers written in many places — critiquing the very “foundation” of neoclassical economics.

From the publisher’s site for the book:

‘This is an extremely important and long-awaited book. The authors provide a cogent guide to all that is wrong with the theory and empirical applications of the discredited notion of an aggregate production function. Their critique has devastating implications for orthodox macroeconomics.’ – Anwar Shaikh, New School for Social Research, US

h/t Matias Vernengo

Martin Wolf Pays A Generous Tribute To Anthony Thirlwall

Readers of this blog will notice how I attach special importance to the balance of payments in telling the story of how economies work.

In a recent blog post Can one have balance of payments crises in a currency union? at FT, Martin Wolf refers to the work of Anthony Thirlwall – who has made great contributions to the Kaldorian story of growth of nations.

(photo courtesy Wikipedia)

The following article on the Euro appeared in the Financial Times on 9 October 1991 and the FT link of the article is here.

The whole blog post is written nicely by Martin Wolf and although lacking the Kaldorian punch, definitely worth reading.

Let us start at the most basic level: that of the individual. Can individuals have a balance of payments crisis? Certainly.

: -)

Thirwall and his colleague John McCombie wrote this supremely insightful book in 1994 titled Economic Growth and the Balance of Payments Constraint