International Economics and the Growing Dominance of Multinational Corporations: Explaining the Disconnect and Finding a New Approach for International Economics

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International Economics and the Growing Dominance of Multinational Corporations:

Explaining the Disconnect and Finding a New Approach for International Economics

Hendrik Van den Berg*


Keywords: Culture, Neoclassical economics, Orthodoxy, Sociology, Dialectic, Marxism

* Instructor, Department of Economics, University of Massachusetts, Amherst, 217 Gordon, 218 North Pleasant St., Amherst, MA 01002, email:; Professor Emeritus, Department of Economics, University of Nebraska, Lincoln.

I. Introduction
The models used by mainstream international economists have not kept up with the changing political, economic, and social conditions in the “globalizing” world economy. The standard model of international trade is still the Heckscher-Ohlin model, which assumes perfectly competitive markets, fixed factor endowments, profit maximizing behavior among firms and self-centered welfare maximization on the part of consumers. Models of international investment and international finance assume efficient markets, rational expectations, and full information. And, models of immigration are still based on the idea that people voluntarily move to maximize their personal well-being while the effects of immigration are analyzed in a labor market framework. The shortcomings of these approaches have been widely discussed and criticized, but to no avail in terms of how international economists go about analyzing, prescribing, and estimating the consequences of international economic activity. For example, the Heckscher-Ohlin framework is still used to estimate the gains from prospective trade agreements, immigration policy is still analyzed using the static labor market model of immigration, and open-economy macroeconomists were as blind to the possibility of a global financial crisis as were all mainstream economists in 2007. In fact, mainstream economists continue to tout free trade agreements, while they add little to the immigration debates going on in political circles throughout the world and they remain silent as governments dial back even the meager financial regulations enacted after the 2007-2009 global financial crisis.

The main reason for the inaction of international economists and the slow movement of economic thinking after major shifts in political, economic, and social circumstances is the failure of economists to understand the implications of the growing dominance of large multinational corporations in global economic activity, the political sphere, and in the formation of popular culture. This particular failure of international economists results requires a new way of thinking as well as a much broader perspective on what economists are supposed to do. I suggest a way forward: international economists should embrace Marx’s materialist dialectic.

The narrow mainstream perspective of economic activity as consisting of only exchange rather than a complete cycle of production, exchange, consumption, and indirect production, that is, Marx’s circuit of capital, will continue to hinder international economics. International trade is part of the whole circuit of capital, not an independent, isolated source of utility, and to assume that all gains from international trade are the result only of this exchange, without taking into consideration production, misses the fundamental source of human well-being. Yet, this is what mainstream international trade theory does. By focusing only on exchange, it is impossible to understand the full causes and consequences of international trade, especially now that trade is just one component of the overall activity of large corporations who produce, trade, employ labor, accumulate capital, and finance both short-term stocks and long-term investment and innovation throughout the global economy. Models of efficient markets tell us little about how large business organizations decide where to produce, what to export and import, who to employ, how much capital to accumulate, what technologies to develop, or how to maximize profits and, ultimately, how to extract surplus from their various global activities. Using mainstream terminology, international economics must become more holistic. That is, it must adopt a more dynamic, systemic, and inter-disciplinary approach. Comparative advantage is not static, and international trade involves commodities, commodities that are the result of production that requires human labor. All across the international economy there are complex systemic relationships between technology, resources, labor, production, consumption, and finance that extend beyond the simple markets international economists focus on. Furthermore, the economy is well-embedded in human society and the natural environment, which are both influenced by and causes of international economic activity. All economic activity is historical, in that economic activity takes place in within economic structures and social structures that developed over time. International economic activity takes place within structures that developed historically in many different places, in part influenced how those places were integrated into the international economic, political, and social structures. The were also shaped, in part, by the very same international economic activities they now influence.

Mainstream international trade theory’s depiction of international trade as nothing more than the exchange of products in order to exploit comparative advantage is “silly,” as the heterodox economist Michael Hudson (2018) recently suggested. We will make the case here for adopting the Marxian materialist dialectic, a “holistic” form of thought and analysis, in international economic theory, analysis, and education. This dialectic will bring out the importance of the modern multinational corporation in all international economic activity. The quest for surplus has led business firms to extend their activity across borders, and the largest firms today are those who extended themselves into the world economy most successfully at the expense of national firms. The wealthy class associated with these large firms now dominates within nations and across national boundaries, effectively becoming the contemporary ruling class. This political reality is shaping current political, economic, and social outcomes.

II. The Growing Economic and Social Dominance of Multinational Corporations

The growing concentration of most industries in the United States and in the World has been well-documented. According to a report for the Brookings Institute, a rather mainstream organization, by William Galston and Clara Hendrickson (2018), the Fortune 500’s revenue as a share of GDP has increased from 58 percent to 73 percent since 1980. The share of the largest 100 has risen from 33 percent to 46 percent. They conclude: “Over the last two decades, over 75 percent of U.S. industries have seen an increase in concentration, with the number of firms competing against one another in precipitous decline.” Along with the rise in concentration, corporate profits have risen sharply: Shapiro (2017) finds that corporate profits made up 7-8 percent of GDP in the mid-1980s, but is now in the 11-12 percent range.1 The Economist finds, furthermore, that today’s firms are much more likely to remain profitable for longer periods, suggesting that persistently high profits remain unchallenged for longer periods of time.2 Grullon, Larkin, and Michaely (2017) investigate recent mergers in the U.S. economy, and they find many different manifestations of industrial concentration, not least the lax enforcement of anti-trust laws and the near complete freedom for large firms to buy smaller rivals: …authorities are less likely to investigate a $20 billion form buying ten $1 billion firms that a similar firm buying a $10 billion firm. Gao, Ritter, and Zhu (2013) found that the main reason for the near disappearance of IPOs over the past two decades is that innovative startups are now much more likely to sell their assets directly to a larger firm than to go public.

Grullon et al. (2017) also look at the role of foreign competition in mitigating the consequences of increased concentration in the U.S., but they find that neither the presence of foreign firms nor import competition substantially changes the strong relationship between concentration measures and firm profitability.3 International competition has often been suggested as a source of competition, but that channel does not seem to be offsetting the effects of concentration in corporate profits. Of course, when similar increases in concentration are occurring in all countries, and the firms operating in each country are the increasingly multinational firms rather than local firms, foreign firms are no longer adding much to competition levels in national economies.

Pol Antràs and Stephen Yeaple (2014) collected a wide range of data on the operations of multinational firms, and they distinguished the following general characteristics of firms that operate internationally:

  1. Most multinational business activity occurs in developed economies, and developing countries were more likely to be the destination of multinational activity than the source.

  2. The relative importance of multinationals in economic activity is higher in capital intensive and R&D intensive goods,

  3. A substantial share of two-way FDI flows is intra-industry in nature.

  4. The parents and the affiliates of multinational firms tend to be larger, more productive, more R&D intensive, and more export oriented than non-multinational firms.

  5. Within multinationals, parents are relatively specialized in R&D while affiliates are primarily engaged in selling goods in foreign markets.

  6. Cross-border mergers and acquisitions make up a large fraction of FDI and are particularly important mode of entry into developed countries.

The implications of these general findings are obvious. Multinational firms have grown in importance because they are more productive, conduct more R&D, and specialize and trade more than non-multinationals. Furthermore, multinational firms are engaged in extending the capitalist accumulation process into developing countries with new investments, but within the more developed capitalist economies, they are primarily engaged in concentrating production by acquiring competitors. Helpman (1984) showed that intrafirm trade is correlated with factor endowment differences across countries, suggesting that FDI is often used to take advantage of comparative advantages across borders. The finding that most FDI occurs between similarly-endowed developed economies suggests that, indeed, most FDI serves to concentrate ownership, which conforms with findings elsewhere that globalization has not offset concentrations within individual economies. Concentration of production occurs within and across countries, with the result that multinational firms control an increasing share of economic activity worldwide.

Pol Antràs and Stephen Yeaple (2014) find evidence suggesting that greenfield investments and M&A are not equivalent, even though the efficient markets literature suggests that they should be. More productive firms tend to engage in greenfield investments more often. Another issue is that greenfield investments add to competition while M&A investments reduce competition; this latter phenomenon seems to dominate FDI between developed economies. The prediction that wage inequality should decline, as suggested by the Stolper-Samuelson theorem, does not seem to be supported by the evidence.

Antràs and Yeaple point out that while vertical integration may be common to many large multinational firms, many multinationals that offshore production do so not by opening their own foreign production plants, but by contracting with other producers. This brings up the issue of why firms choose to internalize production across borders instead of operating at arms length with foreign suppliers, licensors, and distributors. The Singer Co. learned back in 180 that internalization, despite its investment costs, may be more profitable than licensing. Contract theory, and the imperfections of contracting, have been used by economists to predict FDI flows. The new institutional economics, with its focus on transactions costs, provided much of the impetus for this research in international economics. Rent dissipation and hold-up problems may lead to direct foreign investment, either by creating an affiliate production or distribution operation abroad or by acquiring and directly controlling a foreign operation. Also, high firm-specific economies of scale relative to plant-specific economies of scale generally favors FDI over contracting. And, ownership per se raises bargaining power, no matter what the combination of international arrangements.

All of these conclusions by researchers examining the growth of multinational firms confirm that, indeed, industrial concentration is occurring. However, there is little discussion within the field of international economics with the deeper causes and consequences of this global concentration of production, profit, and power. Specifically, the current discourse in international economics has stranded on an unproductive path, along which a narrow set of issues are discussed within a narrow theoretical framework that ignores the changed power structure within the international sphere of economic activity. Not only are multinational corporations (MNCs) responsible for most of the world’s international trade and international investment, but they increasingly “capture” government institutions. Technically, as the overall stakes from international economic integration rise, policy makers’ political ability to close borders gives them power over MNCs and international financial corporations. On the other hand, MNCs seem to be getting the upper hand in their relationship with governments because international economic integration lets MNCs play one government against another. That is, commercial interests no longer bargain with a single national government about how they pay for protection and favoritism, but with open borders they can threaten to take their taxes, political contributions, investment projects, and jobs elsewhere if one national government’s terms are not to their liking. Of course, the superior ability to accumulate wealth also gives MNCs the economic power to shape national and international institutions in their favor. They engage in lobbying, public relations, advertising, marketing, and other exercises to solidify their political and economic power.

Modern Mercantilism?

It is important to note that even when Smith (1776 [1976]) was writing about why free trade is beneficial for human well-being, most international trade was being carried out within colonial empires, and among very unequal trading partners. So when Smith criticized mercantilism, he was effectively criticizing the business culture of his day. Unfortunately for subsequent historical analysis, Smith framed his criticism of mercantilism in a very simplistic manner, defining mercantilism as little more than the attempt by countries to accumulate gold by boosting exports and restricting imports. This interpretation of mercantilism persists in the international economics literature. More appropriate is Charles Wilson’s (1963, p. 26) definition of mercantilism as “all the devices, legislative, administrative, and regulatory, by which societies still predominantly agrarian sought to transform themselves into trading and industrial societies.”

As described by Marx and many other historians, sixteenth century Europe mercantilism solidified the political base of national monarchs at the expense of the local feudal relationships that remained from earlier feudal societies. Mercantilism is characterized not only by actively managed international trade, but also by the primitive accumulation and strengthening of property rights detailed by Marx in his Capital. When the same alliances between central governments and commercial interests were extended overseas, mercantilism became colonialism, the government-private conquests of overseas territory and resources.

The growth of modern MNCs, which increasingly shape government policy by using a combination of direct monetary influence and indirect threats to shift investment and employment overseas, as a new phase of mercantilism, one in which government is very much the junior partner in the power arrangement. As a result of the political clout of wealthy and footloose MNCs, the internationally integrated economic system is increasingly characterized by formal and informal institutions that raise MNC profits and reduce political and economic opposition to corporate power and profit. Voters increasingly vote for right-wing and libertarian politicians who lower taxes on capital, scale back labor laws and union power, and accept “the market” as a symbol of not only economic efficiency, but also of justice.

The fact is that markets can only function in the presence of rather sophisticated government institutions, such as a legal system that enforces property rights and contractual arrangements, a justice system that arbitrates business disputes, regulations that require information on products and firms’ financial conditions, and regulations that prevent the financial sector from stealing the savings entrusted to its care. It is this need for collective institutions in a market system plus the likelihood that the private business enterprises that arise under these institutions will gain disproportionate power to shape the institutions in their favor that has led many intellectuals since the time of the Enlightenment to argue that government should be democratic. The self-interested behavior of individuals and wealthy firms will not maximize overall human well-being unless the institutions that shape the individual behavior are designed with the public interest in mind. MNCs are using their huge financial wealth to corrupt democratic political systems and to shape institutions that give them greater freedom of operation. Large entertainment MNCs have even come to control most of the news media around the world, and MNCs increasingly use their money to influence universities and other educational institutions to manipulate people’s beliefs and society’s cultures. MNC-funded advocacy groups have even influenced appointments to the U.S. Supreme Court, which in 2010 returned the favor by ruling that corporations are effectively individuals with unlimited freedom to directly fund political campaigns.

Critical to this conflict between national governments and MNCs is the degree to which MNCs increasingly control the power of national governments and use that power to shape the world to their commercial ends. In short, modern mercantilism is international, not national in nature. As MNCs and multinational financial corporations gain control of national government institutions, other national constituencies, such as farmers, labor organizations, bureaucrats, professionals, regional ethnic groups, small businesses, intellectuals, and national political parties, among others, are losing the influence they had gained under the spread of democracy and the creation of democratic institutions during the nineteenth and twentieth centuries.

Modern mercantilism is potentially very destructive of democracy and social justice. MNCs and international financial firms are enriched by the profits from international economic integration, agglomeration, and the monopolization of global product and labor markets, and this wealth permits them to capture national government institutions. Instead of the democratic principle of one person, one vote, modern mercantilism puts economic policy in the hands of inherently autocratic organizations that tolerate little dissent from their single-minded pursuit of profits. Corporations are certainly not democratic organizations, which means that their control of national governments is an inherently antidemocratic shift in political power. As the wealth of MNCs lets them gain greater control of mercantilistic commerce-government alliances, it becomes even less likely that international trade, investment, finance, and migration will maximize human welfare or spread the gains from international economic integration equitably. Under these ominous circumstances, it also becomes less likely that trade policy can be used to improve human welfare.

It is important to grasp the nature of the large corporation. As William Dugger (1989, p. xiii) described over 25 years ago:

Unfortunately, the capitalist corporation is an inherently narrow and short-sighted organization. It has not evolved to serve the public purpose. It has not evolved to monitor and coordinate economic activity for the benefit of society at large. The corporation has evolved to serve the interests of whoever controls it, at the expense of whoever does not. This is the simple but profound truth. The corporation, not the market, is the dominant economic institution in the industrialized West, and it serves the private purpose rather than the public purpose.
Dugger was also keen enough to distinguish the rise of new management structures and methods that were, already 25 years ago, transforming how corporations were managed. No longer was management widely dispersed throughout large corporations; instead, new financial controls and rigid procedures were being introduced to, in Dugger’s (1989, p. xiv) words, “allow huge commercial empires to be managed by one central staff.” Dugger saw that even in the late 1980s:

…while the corporate purpose has narrowed down to the immediate bottom line, corporate planning and administration have expanded. The modern economy has become a global, corporate economy. And the corporate economy is a mindless growth, driven onward by a renegade institution that serves its own narrow and immediate interests and denies its long-term, social responsibilities.

So, in June 2009, the Royal Dutch Shell Oil Company settled a court case for a minute percentage of its annual profits over alleged killings of political opponents of its oil operations in Nigeria. Among the dead were the environmentalist and writer Ken Saro-Wiwa, who had organized a worldwide campaign to stop Shell’s projects on the Ogoni tribe’s lands in Nigeria. According to company documents obtained by lawyers representing the families of those killed and reported on in 2009 by the London newspaper The Independent, Shell had written to the local governor requesting “the usual assistance” after Ogoni activists blocked the laying of a pipeline in 1993. One death resulted when government soldiers disrupted the protests. A few days later, Shell went to the country’s military leadership to “request support from the army and police.” Eventually, the military’s clampdown on the Ogoni resulted in about two thousand deaths, thirty thousand people made homeless, and numerous reported cases of rape, plunder, and theft by the brutal forces of Nigeria’s military government.

Then there is the extraordinary evasion of environmental regulations by Volkswagen, the German automaker. In 2015, regulators finally admitted that Volkswagen had systematically designed the computer chips on more than 10 million diesel powered vehicles to run the engines in such a way that they would satisfy emissions requirements when the motors were connected to environmental test equipment, but to provide a peppy but 40 times more polluting performance for drivers at all other times. Between 2008 and 2015, Volkswagen automobiles were responsible for most diesel emissions of pollutants that caused health and climatic damage in Western Europe.

III. Meanwhile, in Mainstream International Economics…

The Heckscher-Ohlin model of international trade continues to be the model taught to most students in an international economics class, and the model continues to form the fundamental framework for analyzing international trade. The model is essentially a model of exchange, as it assumes given endowments of resources and a given state of technology. With regard to exchange, the model assumes perfect competition, the absence of externalities, and welfare as dependent only on the consumption of goods produced and traded. Not only is the model used to show that all countries gain from free trade, a result that is emphasized by mainstream economists, but it is used show how comparative advantage, as determined by opportunity costs of production, determines a country’s trade pattern. The principle of comparative advantage enjoys near heavenly status in international economics, so the Heckscher-Ohlin model’s elegant proof of the idea necessarily given the model its status in the field. Finally, the model is also used to estimate the precise gains from international trade because its assumptions make such estimates easy to derive.

Measuring the Gains from Trade

The empirical estimates of the gains from trade using the purely exchange focus of mainstream economic theory are very small. There have been numerous studies in which economists use the Heckscher-Ohlin model’s general framework, assuming specific functional forms for a consumption-determined welfare function and production functions representing the economy’s fixed supply side to estimate how the predicted price changes from shifting to free trade affect overall national welfare. The conclusion of virtually all of these studies is that the welfare gains from abolishing restrictions on international trade are very small. For example, one of the earliest studies by Giorgio Basevi (1966) estimated that trade restrictions cost the United States one-tenth of one percent of the value of its GDP. Robert Feenstra (1992) surveyed a set of pre-1990 studies on the costs of protection to the U.S. economy and found that estimates of the total loss to the United States from its protectionist tariffs and quotas across all industries was $30 billion at 1986 prices, or about three-quarters of one percent of U.S. GDP. U.S. protectionism also caused losses in other countries, of course, and Feenstra concluded that these foreign losses were about equal to the United States’ losses, which implied that the total cost of U.S. trade restrictions to the world was about $60 billion, a very small percentage of total world income. More recent studies based on the conceptual framework of the HO model presented above provided estimates of the gains from international trade that ranged from 0.5 to 1 percent of a country’s GDP. Dialectically, it is difficult to reconcile these small estimated gains from trade with either mainstream economists’ enthusiasm for free trade or the attention that trade policy gets from lobbyists, corporate interests, or labor interests. Perhaps the model, and thus estimates based on the model, misses much of the action surrounding international trade.

A general equilibrium approach to imperfect competition

Multinational corporations have not been incorporated in the main models of international trade, finance, investment, and migration. However, it would be incorrect to say that they have been completely ignored. To the contrary, there is an extended literature dealing with what causes firms to become multinational business organizations, what advantages accrue to international corporations, and why they choose to operate in some countries but not others. Traditionally, MNCs were considered nothing more than profit-maximizing arbitrageurs who allocated capital across countries. Hymer (1960) is usually credited beyond that simplistic finance approach to MNCs by proposing n industrial organization approach to finding what strategic advantages a MNC gained over purely national firms in both their home market and in potential foreign markets. In other words, Hymer posited that it was real factors that shaped the location of multinational activities, while the resulting financial flows were just the consequences of such real managerial decisions. This approach culminated with Dunning’s (1981) OLI framework of analysis, which highlighted Ownership, Location, and Internalization as the deterministic characteristics of MNCs.

There was a major increase in analysis of multinational firms after the field of microeconomics developed its general equilibrium analysis of imperfect competition, increasing returns to scale, and product differentiation, and others developed contract theory. Krugman’s (1980) model of increasing returns to scale in international trade is still the most-often cited alternative model in international economics. In his classic article “Increasing Returns, Monopolistic Competition, and International Trade (1979),” Krugman assumed that the world consisted of several identical economies, each with the potential for producing a wide range of products whose production functions are all subject to increasing returns to scale. He also assumed that consumers preferred more variety to less variety. With increasing returns to scale making large-scale production cheaper but consumers preferring more variety to less variety, a choice would need to be made. The economy thus has to decide whether to concentrate production in a small number of large industries that produce very large amounts of just a few products very inexpensively or in a large number of different small-scale, high-cost industries.

Krugman showed that international trade makes possible a one-time gain in welfare from both lower unit costs and increased variety. By specializing, each country produces a larger quantity of fewer goods, thereby taking advantage of increasing returns to scale. And, by exchanging some portion of each of the goods for different foreign goods, each country increases the variety of goods available to its consumers. For example, suppose that in the absence of international trade each identical country balances variety and unit-cost results by producing 1,000 differentiated products. In the case of free trade, however, new options become available. For example, each country could continue producing their 1,000 products and send half of the total of each product overseas in exchange for half of each of the 1,000 products produced by the other country. In this case, consumers in each country would enjoy a doubling of the variety of products without any increase in unit costs. On the other hand, each country could cut the number of different products it produces in half, thus more than doubling the production of each of the remaining products, and then export half of each of those products. In this case, consumers in each country would enjoy lower prices while still enjoying 1,000 different products. Most likely, since consumers value both variety and low costs, trade will result in some intermediate solution—for example, each country produces larger quantities of 750 different products and consumers thus have access to 1,500 different products. Under this idealized scenario, international trade permits more favorable compromises between costs and variety.

An interesting implication of Krugman’s simple economies of scale trade model is that the direction of specialization by each of the two initially identical economies is arbitrary. What made one country specialize in producing one set of products and the other in another set of products? How will the terms of trade develop over time as production and consumption changes over the long term? In practice, these decisions are made by large firms that think and act strategically. Therefore, depending on the size of the firms, their market positions, and consumer demand, a great variety of outcomes are possible. There is also a timing issue: the first firm to expand and exploit increasing returns gains the comparative advantage. There may be competition among imperfectly competitive corporations to gain a competitive advantage in those businesses that will in the future generate the greatest profits. For example, the income elasticity of demand may be such that, as economies grow and income increases, demand increases more for pizza than for books. Perhaps government policy can push the direction of international trade toward a more favorable outcome, rather than letting these decisions be made independently by corporations. Policies to protect and promote industries with the greatest growth potential are called strategic trade policies.

Increasing returns to scale are common in manufacturing, mining, agriculture, and many other productive activities. Over the past thirty years, international economics has investigated what dropping the assumption of increasing costs in favor of the assumption of increasing returns to scale does to models of international trade. T he model of two identical countries above suggests that national welfare can still increase from international trade when production is subject to increasing returns to scale. This is reassuring because so many of the products traded are produced in factories and firms whose activities are subject to economies of scale. However, note that the model also suggests that future gains may not accrue equally across countries as corporations make their decisions on what to produce, what new products to develop, where to produce them, how to market them, and how well they can use the power of the state to help shape the events in their favor. The growth of MNCs links international trade to international investment, market structures, and institutional factors that are not covered in the HO model of trade. When a large portion of the gains from trade are in the form of corporate profits, the country with the most stockholders of TNCs gains the most from international trade, while workers and many other groups across all countries may experience declining real incomes.

The fact is that TNCs, not small national firms, dominate international trade, and the foreign direct investment that constructs these TNCs dominates long-run international investment flows.
Factor Price Equalization Theorem

The way international economics has dealt with the price equalization theorem of the Heckscher-Ohlin model is an interesting example of how the field deals with its blatant contradictions. This theorem says that under completely free trade, not only will the price of each of the final products be equalized across countries, but the price of each factor of production will also become identical in every country. As with the other theorems derived from the HO model, the assumptions of completely free trade, zero transport costs, and perfect competition are critical to this result. In this case, free trade effectively unifies separate national markets into fully integrated single-product markets. Hence, free trade will make the price of clothing the same in all countries. Then, if we also assume that both product and factor, including labor, markets are perfectly competitive, so that the price of final goods is exactly equal to the costs of the resources used to produce them, and we also assume that technology and production methods are the same in all countries, then the identical product prices translate into identical factor prices. This result is formally known as the factor price equalization theorem.

The factor price equalization theorem seems to verify rich-country workers’ worst fear, which is that free trade will drive wages down to the levels of sweatshops in Bangladesh and India. That interpretation is not quite correct, of course. The theorem also suggests that free trade will raise the wages of poor Indian workers closer to current American workers’ wages. The model suggests that all workers’ wages will end up somewhere between the world’s highest and the world’s lowest wages. Even this prospect is not comforting for workers in high-wage countries. Unfortunately, there is no consistent evidence showing anything like this happens in the real world, and, interestingly, those who use the Heckscher-Ohlin model to justify free trade often reject the factor price equalization theorem as unrealistic. Of course, it is completely inconsistent to accept one theorem but not another derived from the same model and assumptions.

There have been many studies to estimate the effects of international trade on the distribution of income. Observers noted already back in the 1990s that in a number of countries, such as the United States, Great Britain, and China, the growth of international trade over the past several decades has coincided with a sharply rising income inequality and stagnant real wages.4 That is, the surplus accruing to capital has consistently increased over the past several decades, in both capital and labor intensive countries.

Economists in developing countries saw comparative advantage differently

From the perspective of the developing countries, international trade did not always seem so beneficial. The colonial and postcolonial experiences of countries in the third world led one school of mostly Marxist economists to call third world countries to sever all economic ties with their former colonial masters and the capitalist developed economies in general. Representative of this perspective was Andre Gunder Frank (1967), who built on the works of Karl Marx, the socialist economist Paul Baran (1957), and numerous Marxist Latin American economists. Specifically, Frank pointed out that developing countries were not just in a stage of development that the more developed countries had passed through earlier. Contemporary developed capitalist countries had never passed through a stage during which they had had to coexist with much wealthier and more highly industrialized countries and to play the role of subservient provider of those countries’ economic needs. According to Frank (1967, p. 100):

[E]ven a modest acquaintance with history shows that underdevelopment is not original or traditional and that neither the past nor the present of the underdeveloped countries resembles in any important respect the past of now developed countries. The now developed countries were never underdeveloped, though they may have been undeveloped. It is also widely believed that the contemporary underdevelopment of a country can be understood as the product or reflection solely of its own economic, political, social, and cultural characteristics or structure. Yet historical research demonstrates that contemporary underdevelopment is in large part the historical product of past and continuing economic and other relations between satellite underdeveloped countries and the now developed metropolitan countries. Furthermore, these relations are an essential part of the structure and development of the capitalist system on a world scale as a whole.
Frank and the other dependency theorists distinguished themselves by claiming that economic interdependence with wealthy countries prevents less developed economies from ever developing and permanently raising their living standards:
When we examine this metropolis-satellite structure, we find that each of the satellites, including now-underdeveloped Spain and Portugal, serves as an instrument to suck capital or economic surplus out of its own satellites and to channel part of this surplus to the world metropolis of which all are satellites. Moreover, each national and local metropolis serves to impose and maintain the monopolistic structure and exploitative relationship of this system . . . as long as it serves the interest of the metropoles which take advantage of this global, national, and local structure to promote their own development and the enrichment of their ruling classes. (p. 101)
Dependency theorists hypothesized that rather than serving as an engine of growth, trade is the channel through which rich center countries exploit poor peripheral countries within an institutionalized power structure that perpetuates the unequal distribution of world income.

Economists like Frank and many of his Latin American contemporaries were often labeled as Dependency Theorists or classified as members of the Structuralist School of economics. Structuralist economists explicitly rejected mainstream economics’ fundamental assumption that economic outcomes were the result of free choices made by individuals who sought, rationally, to maximize their individual welfare. Structuralists argued that human behavior is holistically influenced by, among other things, culture, institutions, and psychological factors that have a high degree of persistence. Like structuralists in the fields of philosophy, anthropology, and sociology, structuralist economists accepted that human economic behavior was tightly bound by broader economic systems and, for developing countries, the international economic system, within which they lived.5 Structuralist economists emphasized that international trade perpetuated unequal economic and social structures, such as, for example, the way the export of sugar by Brazil in the sixteenth and seventeenth centuries created a plantation society whose slavery and unequal wealth still distorted Brazilian society. Thus, where modern economic analysis assumes smooth functions and continuous marginal adjustments to price signals, structuralists were convinced that if developing countries followed their current comparative advantages, they would forever be locked in to exporting primary products and to deteriorating terms of trade. Protectionist policies by developing countries after World War II were often blamed on the emotional reaction to colonialism, but structuralism provided an economic justification based on the rejection of both mainstream Western economic thinking as well as the rejection of the Western system. Interestingly, even mainstream international trade theory predicted that trade changes the structure of the economy and alters the income distribution.

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