A theory of dynamic tariff and quota retaliation

This paper establishes relationships between static Nash equilibria and dynamic Markov perfect equilibria of tariff and quota retaliation games. In supermodular games where tariffs are strategic complements, the steady state of every, symmetric Markov perfect equilibrium must have lower tariffs than in the static equilibrium. If tariffs are strategic substitutes, tariffs in the dynamic game are higher than in the static equilibrium. The supermodular case is extended to quota competition. Instead of the well-known non-equivalence between tariff and quota retaliation outcomes under complete myopia, in some circumstances, free trade can be supported in the steady state of a Markov perfect equilibrium, regardless of whether policies employed are quotas or tariffs. We reach the conclusion that the effect of introducing dynamics crucially depends on whether the policy instruments employed by the countries are strategic substitutes or complements irrespective of whether they are tariffs or quotas.Foreign trade policy; Tariff; Quota; Retaliation; Dynamic Game; Markov perfect equilibrium; Supermodular games

International economic theory and politics: world structure before, during and after the early 21st Century Crisis

In his Inquiry into the Nature and Causes of the Wealth of Nations Adam Smith (1776) considered the phenomenon of division of labor so enormously significant for the creation of a nation’s wealth that he devoted the first three chapters of his book to an investigation of this process. This is an ongoing process of greater and greater specialization, and there have been episodes of faster pace, and some slower pace, but the process has never stopped so far in human history. However, this process, carried far enough, can eventually results in episodes, sometimes painfully prolonged, in which there emerges a divergence between the distribution of quantities supplied of horizontally-differentiated distinct types of human capital embodied in different persons and distribution of quantities demanded of persons with distinct skills by employers, private or public, or otherwise. This sustained divergence of supply and demand distributions of distinct skill categories may be called Embodied Human Capital Unemployment. This is a phenomenon not seen before in social history, simply because specialization of persons in very narrowly partitioned skill types that are, effectively, non-transferable across different persons, had never occurred before in our history. That is why it is a new phenomenon, and it is time we understood what it is. Moreover, it has an abiding character, a stationary state nature, and (1) thus should emerge as an equilibrium phenomenon in a fully specified general equilibrium model of a market economy, and (2) should be of concern to us, since it is going to be around for a while as we all live our lives. I illustrate the relevance of this new concept of unemployment to the U.S economy in the first decade of the 21st Century. This helps achieve a deeper understanding of the current global economic crisis, and inter alia to identification of potentially effective, and potentially ineffective, public policies. Additional implications are (b) the emergence of a new social formation that may be called World Market Capitalism, which has a vastly different economic foundation of relations of production and income distribution compared to the pre-21st Century economic system that then existed in the world, and (c) the transition from a uni-polar world, with the U.S.A. as the single center of power, after the fall of the Soviet Union in 1989, to a multi-polar world order at the end of the first decade of the 21st Century, with implications for strategic interaction and coalition formation. (403 words)Marxian; Keynesian; human capital; unemployment; economic; financial; political; crisis; globalization; capitalism; international capital mobility; division of labor; Adam Smith; USA; China; India; Japan

On two theories of value and distribution

This paper compares the theory of value and distribution of Arrow and Debreu [1954] with that of Sraffa [1960]. I consider such versions of the two models that capture their salient features, without aiming at the greatest possible generality, so as to isolate the precise nature of the differences between the two conceptions of the same economic reality, and inter alia, to quarantine both the sources and the entailments of the differences in the two theories that respectively purport to determine the values of commodities and distribution of income in society. Both theories are complete and consistent. Sraffa’s model is based exclusively on factual information, so it achieves less in terms of determining endogenous variables. The Arrow-Debreu is based on counterfactual information regarding additional production scenarios that are unobserved, in addition to the factual information that Sraffa has, so it achieves more by way of determination of endogenous variables. In terms of entailments, in Sraffa's theory there is an insufficiency of determinants in the economic grounds of society, thereby requiring the political component of society to also play an influential role in the joint determination of values and distribution. In the Arrow-Debreu model this determination is made complete solely in the economic sphere of society, rendering this theory purely economic, rather than political-economic, as in Sraffa. Both the information content difference at source, and the purely-economic versus political-economic difference in the entailments of what it takes to determine values and distribution, render the two theories radically different. In addition, (1) the prices in the two theories are different both in terms of definitions and values, and (2) since Sraffa’s model has only one set of numbers on the observed production of commodities by means of commodities and labor for a single year, it is impossible to define constant returns to scale, while in the Arrow-Debreu model, this property is admissible, and possible to define, because their model’s information base is sufficiently larger than Sraffa’s. Further, Sraffa’s theory is invariant to (a) the interpretation of prices – market-clearing, long-period, or whatever, (b) multiplicity of profit rates across industries, instead of a uniform rate of profit, and (c) presence or absence of general aggregate demand functions for commodities, and is (d) more general than the Arrow-Debreu theory because it is based on weaker assumptions, in the sense of a strictly smaller information set, so that it is only to be expected that the Arrow-Debreu theory would be capable of determining more endogenous variables in the model of an economy. (416 words)theory of value; income distribution; general equilibrium; capital; constant returns to scale; rate of profit