:: wikimiki.org ::

Comparative Advantage

Comparative advantage

In economics, the theory of comparative advantage explains why it can be beneficial for two countries to trade, even though one of them may be able to produce every kind of item more cheaply than the other. What matters is not the absolute cost of production, but rather the ratio between how easily the two countries can produce different kinds of things. It was first described by Robert Torrens in 1815 in an essay on the corn trade. He concluded that it was to England's advantage to trade various goods with Poland in return for corn, even though it might be possible to produce that corn more cheaply in England than Poland. However, it is usually attributed to David Ricardo who explained it clearly in his 1817 book The Principles of Political Economy and Taxation in an example involving England and Portugal. In Portugal it is possible to produce both wine and cloth with less work than it takes in England. However, the relative costs of producing those two goods are different in the two countries. In England it is very hard to produce wine, and only moderately difficult to produce cloth. In Portugal both are easy to produce. Therefore, while it is cheaper to produce cloth in Portugal than England, it is cheaper still for Portugal to produce excess wine, and trade that for English cloth. And conversely England benefits from this trade because its cost for producing cloth has not changed but it can now get wine at closer to the cost of cloth. When one entity (be it a firm or a country) is able to produce more efficiently than another entity it has an absolute advantage; that is, assuming equal inputs, the entity with an absolute advantage will have a greater output. Stanislaw Ulam once challenged Nobel laureate Paul Samuelson to name one theory in all of the social sciences which is both true and nontrivial. Several years later, Samuelson responded with David Ricardo's theory of comparative advantage. :"That it is logically true need not be argued before a mathematician; that it is not trivial is attested by the thousands of important and intelligent men who have never been able to grasp the doctrine for themselves or to believe it after it was explained to them."—Paul Samuelson Ricardo's principle relies on a variety of assumptions that are arguably false, such as there is no cost of transportation, no externalities such as environmental contamination or social inequities. Ricardo's explanation of the theory depended on the labour theory of value, but Gottfried Haberler showed in the 1930s that it could also be expressed in terms of opportunity cost. The following worked examples explain the reasoning behind the theory. In Example 3 all assumptions are italicized for easy reference, and some are explained at the end of the example.

Example 1

Two men land alone in an isolated island. To survive they must undertake a few basic economic activities like water carrying, fishing, cooking and shelter construction and maintenance. The first man is young, strong, and educated and is faster, better, more productive at everything. He has an absolute advantage in all activities. The second man is old, weak, and uneducated. He has an absolute disadvantage in all economic activities. In some activities the difference between the two is great; in others it is small. Is it in the interest of either of them to work in isolation? Specialization and exchange (trade) can benefit both of them. How should they divide the work? According to comparative, NOT absolute advantage: the young man must spend more time on the tasks in which he is much better and the old man must concentrate on the tasks in which he is only a little worse. Such an arrangement will increase total production and/or reduce total labour. It will make both of them richer. Specialisation and exchange will not be possible if there is an absolute resource constraint. If, for example, the amount of fresh water available on the island is enough for one man only. Then there will be war.

Example 2

A Needs 100 P1 and 100 P2
B Needs 100 P1 and 100 P2

A: No trade

Product	Cost	Produced	Cost
P1	10	100	1000
P2	20	100	2000
Net	-	200	3000

B: No trade

Product	Cost	Produced	Cost
P1	15	100	1500
P2	25	100	2500
Net	-	200	4000

A with trade: 100P1 for 56 P2

Product	Cost	Produce	Cost
P1	10	200	2000
P2	20	44	880
Net	-	244	2880

B With trade: 56 P2 for 100 P1

Product	Cost	Produce	Cost
P1	15	0	0
P2	25	156	3900
Net	-	156	3900

So A saved 120 cost units or 4% and B saved 100 cost units or 2.5%. Clearly A gained more from the trade, but both parties experienced growth. Now if B adds some taxes to protect the producers of P1 he can try to get a larger percentage of the trade but his savings goes down as do the overall savings.

Example 3

Suppose for example we have two countries of equal size, Northland and Southland, that both produce and consume two goods, Food and Clothes. The productive capacities and efficiencies of the countries are such that if both countries devoted all their resources to Food production, output would be as follows:
- Northland: 100 tonnes
- Southland: 200 tonnes Conversely if all of the resources of the countries were allocated to the production of Clothes, output would be:
- Northland: 100 tonnes
- Southland: 100 tonnes We need to assume the each of the countries has constant opportunity costs of production between the two products, and that both economies have full employment at all times. Also all factors of production are perfectly mobile within the countries between clothing and food industries, but are immobile between the countries. Finally the price mechanism must be working to provide perfect competition. So Southland has an absolute advantage over Northland in the production of Food, and both countries are equally efficient in the production of Clothes. Intuitively it would seem that there is no mutual benefit in trade between the economies. But an examination of the opportunity costs shows something different. For Northland the opportunity cost of producing one tonne of Food is one tonne of Clothes and vice versa. But for Southland the opportunity cost of one tonne of Food is 0.5 tonne of Clothes; and the opportunity cost of one tonne of Clothes is 2 tonnes of Food. Looked at this way, Southland has a comparative advantage in Food production because of its lower opportunity cost of production with respect to Food. And Northland also has a comparative advantage over Southland in the production of Clothes, the opportunity cost of which is lower in Southland with respect to Food than in Northland. To show that these different opportunity costs can lead to mutual benefit if the countries specialise production and trade, consider the following starting position. Both countries produce and consume only domestically. The volumes are: We now examine the consequences of trade between the two countries. This example has includes no formulation of the preferences of consumers in the two economies which would allow the determination of the international exchange rate of Clothes and Food. But given the production capabilities of each country, in order for trade to be worthwhile Northland requires a price of at least one tonne of Food in exchange for one tonne of Clothes; and Southland requires at least one tonne of Clothes for two tonnes of Food. It follows that the actual exchange price will be somewhere between the two. The remainder of the example works with an international trading price of one tonne of Food for 2/3 tonne of Clothes. If both countries specialise completely in the goods in which they have comparative advantage, their outputs will be: Note that world production of Food had increased and Clothing production has remained the same. Using the exchange rate of one tonne of Food for 2/3 tonne of Clothes, Northland and Southland are able to trade to yield the following level of consumption: Northland has traded 50 tonnes of Clothing for 75 tonnes of Food. Both countries have benefited. In fact, both countries are now consuming at points outside their production possibility frontiers.

Assumptions in Example 3

- Two countries, two goods - the theory is no different for larger numbers of countries and goods, but the principles are clearer and the argument easier to follow in this simpler case.
- Equal size economies - again, this is a simplification to produce a clearer example.
- Full employment - if one or other of the economies has less than full employment of factors of production, then this excess capacity must usually be used up before the comparative advantage reasoning can be applied.
- Constant opportunity costs - a more realistic treatment of opportunity costs the reasoning is broadly the same, but specialisation of productin can only be taken to the point at which the opportunity costs in the two countries become equal. This does not invalidate the principles of comparative advantage, but it does limit the magnitude of the benefit.
- Perfect mobility of factors of production within countries - this is necessary to allow production to be switched without cost. In real economies this cost will be incurred: capital will be tied up in plant (sewing machines are not sowing machines) and labour will need to be retrained and relocated. This is why it is sometimes argued that 'nascent industries' should be protected from fully liberalised international trade during the period in which a high cost of entry into the market (capital equipment, training) is being paid for.
- Immobility of factors of production between countries - why are there different rates of productivity? Capital includes production technology and know-how. If it can be moved between countries then the production capabilities of the countries will change. Similarly the movement of labour will change that factor cost and productivity. Perfect transnational mobility of factors of production would invalidate comparative advantage. Imperfect transnational mobility reduces the mutual benefit of trade.
- Perfect competition - this is a standard assumption that allows perfectly efficient allocation of productive resources in an idealized free market.

References

- Hardwick, Khan and Langmead (1990) An introduction to modern economics - 3rd Edn

External links

- David Ricardo's [http://socserv2.socsci.mcmaster.ca/~econ/ugcm/3ll3/ricardo/prin/index.html The Principles of Trade and Taxation] (original source text)
- [http://web.mit.edu/krugman/www/ricardo.htm Ricardo's Difficult Idea], an economist's exploration of why non-economists don't understand and won't take seriously the idea of comparative advantage
- [http://www.tutor2u.net/economics/content/topics/development/development_models_comparative_advantage.htm Further study notes on comparative advantage] Category:International trade Category:International economics ja:比較優位

Trade

Trade is the voluntary exchange of goods, services, or both. Trade is also called commerce. A mechanism that allows trade is called a market. The original form of trade was barter, the direct exchange of goods and services. Modern traders instead generally negotiate through a medium of exchange, such as money. As a result, buying can be separated from selling, or earning. The invention of money (and later credit, paper money and non-physical money) greatly simplified and promoted trade. Trade between two traders is called bilateral trade, while trade between more than two traders is called multilateral trade. Trade exists for many reasons. Due to specialization and division of labor, most people concentrate on a small aspect of production, trading for other products. Trade exists between regions because different regions have a comparative advantage in the production of some tradable commodity, or because different regions' size allows for the benefits of mass production. As such, trade at market prices between locations benefits both locations.

History of trade

Trade originated with the start of communication in prehistoric times. Trading was the main facility of prehistoric people, who bartered goods and services from each other. Peter Watson dates the history of long-distance commerce from circa 150,000 years ago. Trade is believed to have taken place throughout much of recorded human history. There is evidence of the exchange of obsidian and flint during the stone age. Materials used for creating jewelry were traded with Egypt since 3000 BCE. The Phoenicians were noted sea traders, travelling across the Mediterranean Sea, and as far north as Britain for sources of tin to manufacture bronze. For this purpose they established trade colonies the Greeks called emporia. From the beginning of Greek civilization until the fall of the Roman empire in the 5th century, a financially lucrative trade brought valuable spice to Europe from the far east, including China. Roman commerce allowed their empire to flourish and endure. Their widespread empire produced a stable and secure transportation network that enabled the shipment of trade goods without fear of significant piracy. The fall of the Roman empire, and the succeeding dark ages brought instability to western europe and a near collapse of the trade network. Nevertheless some trade did occur. The Radhanites were a medieval guild of Jewish merchants who allowed trade between the Christians in Europe and the Muslims of the near east. From the 8th century to the 11th century centuries, the Vikings and Varangians traded as they sailed from and to Scandinavia. Vikings sailed to Western Europe, while Varangians to Russia. The Hanseatic League was an alliance of trading cities that maintained a trade monopoly over most of Northern Europe and the Baltic, between the 13th and 17th centuries. Baltic Vasco da Gama started the Spice trade in 1498. The spice trade was of major economic importance and helped spur the Age of Exploration. Spices brought to Europe from distant lands were some of the most valuable commodities for their weight, sometimes rivaling gold. In the 16th century, Holland was the centre of free trade, imposing no exchange controls, and advocating the free movement of goods. Trade in the East Indies was dominated by Portugal in the 16th century, the Netherlands in the 17th century, and the British in the 18th century. In 1776, Adam Smith published the paper An Inquiry into the Nature and Causes of the Wealth of Nations. It criticised Mercantilism, and argued that economic specialization could benefit nations just as much as firms. Since the division of labour was restricted by the size of the market, he said that countries having access to larger markets would be able to divide labour more efficiently and thereby become more productive. Smith said that he considered all rationalizations of import and export controls "dupery", which hurt the trading nation at the expense of specific industries. In 1799, the Dutch East India Company, formerly the world's largest company, became bankrupt, partly due to the rise of competitive free trade. In 1817, David Ricardo, James Mill and Robert Torrens showed that free trade might benefit the industrially weak as well as the strong, in the famous theory of comparative advantage. In Principles of Political Economy Ricardo advanced the doctrine still considered the most counterintuitive in economics: : When an inefficient producer sends the merchandise it produces best to a country able to produce it more efficiently, both countries benefit. The ascendancy of free trade was primarily based on national advantage in the mid 19th century. That is, the calculation made was whether it was in any particular country's self-interest to open its borders to imports. John Stuart Mill proved that a country with monopoly pricing power on the international market could manipulate the terms of trade through maintaining tariffs, and that the response to this might be reciprocity in trade policy. Ricardo and others had suggested this earlier. This was taken as evidence against the universal doctrine of free trade, as it was believed that more of the economic surplus of trade would accrue to a country following reciprocal, rather than completely free, trade policies. This was followed within a few years by the infant industry scenario developed by Mill anticipated New Trade Theory by promoting the theory that government had the "duty" to protect young industries, although only for a time necessary for them to develop full capacity. This became the policy in many countries attempting to industrialize and out-compete English exporters. The Great Depression was a major economic recession that ran from 1929 to 1941. During this period, there was a great drop in trade and other economic indicators. The lack of free trade was considered by many as a principal cause of the depression, and World War II. During the war, in 1944, 44 countries signed the Bretton Woods Agreement, intended to prevent national trade barriers, to avoid depressions. It set up rules and institutions to regulate the international political economy: the International Monetary Fund and the International Bank for Reconstruction and Development (later divided into the World Bank and Bank for International Settlements). These organizations became operational in 1946 after a enough countries ratified the agreement. In 1947, 23 countries agreed to the General Agreement on Tariffs and Trade to promote free trade. Free trade advanced further in the late 20th century and early 2000s:
- 1992 European Union lifted barriers to internal trade in goods and labour.
- January 1 1994 NAFTA took effect
- 1994 The GATT Marrakech Agreement specified formation of the WTO.
- January 1 1995 World Trade Organization was created to facilitate free trade, by mandating mutual most favoured nation trading status between all signatories.
- As of mid-2005, there is a proposal for a Central American Free Trade Agreement, which would also include the United States and the Domincan Republic.

Development of money

Main article: History of money The first instances of money were objects with intrinsic value. This is called commodity money and includes any commonly-available commodity that has intrinsic value; historical examples include pigs, rare seashells, whale's teeth, and (often) cattle. In medieval Iraq, bread was used as an early form of money. In Mexico under Montezuma cocoa beans were money. [http://www.foodrevolution.org/slavery_chocolate.htm] Montezuma]] Currency was introduced as a standardized money to facilitate a wider exchange of goods and services. This first stage of currency, where metals were used to represent stored value, and symbols to represent commodities, formed the basis of trade in the Fertile Crescent for over 1500 years. Numismatists have examples of coins from the earliest large-scale societies, although these were initially unmarked lumps of precious metal. Ancient Sparta minted coins from iron to discourage its citizens from engaging in foreign trade. The system of commodity money in many instances evolved into a system of representative money. In this system, the material that constitutes the money itself had very little intrinsic value, but none the less such money achieves significant market value through being scarce as an artifact.

Current trends

Doha rounds

The Doha round of World Trade Organization negotiations aims to lower barriers to trade around the world, with a focus on making trade fairer for developing countries. Talks have been hung over a divide between the rich, developed countries, and the major developing countries (represented by the G20). Agricultural subsidies are the most significant issue upon which agreement has been hardest to negotiate. The Doha round began in Doha, Qatar, and negotiations have subsequently continued in: Cancun, Mexico; Geneva, Switzerland; and Paris, France.

China

Beginning around 1978, the government of the People's Republic of China (PRC) began an experiment in economic reform. Previously the Communist nation had employed the Soviet-style centrally planned economy, with limited results. They would now utilize a more market-oriented economy, particularly in the so-called Special Economic Zones located in the Guangdong, Fujian, and Hainan. The results of this reform has been spectacularly successful. By 2004, the GDP of the nation has quadrupled since 1978 and foreign trade exceeded $1 Trillion US. This occurred in spite of the backlash from the Tiananmen Square Massacre. The PRC maintains a $30 billion trade surplus, and is rapidly becoming a leader in industrial manufacturing. In 1991 the PRC joined the Asia-Pacific Economic Cooperation group, a free-trade organization. More recently, in 1999 they also joined the World Trade Organization. See also: Economy of the People's Republic of China

International trade

International trade is the exchange of goods and services across national borders. In most countries, it represents a significant part of GDP. While international trade has been present throughout much of history (see Silk Road, Amber Road), its economic, social, and political importance have increased in recent centuries, mainly because of Industrialization, advanced transportation, globalization, multinational corporations, and outsourcing. In fact, it is probably the increasing prevalence of international trade that is usually meant by the term "globalization". Empirical evidence for the success of trade can be seen in the contrast between countries such as South Korea, which adopted a policy of export-oriented industrialization, and India, which historically had a more closed policy (although it has begun to open its economy, as of 2005). South Korea has done much better by economic criteria than India over the past fifty years, though its success also has to do with effective state institutions. Trade sanctions against specific country are sometimes imposed, in order to punish that country for some action. An embargo, a severe form of externally imposed isolation, is a blockade of all trade by one country on another. For example, the United States has had an embargo against Cuba for about 40 years. Although there are usually few trade restrictions within countries, international trade is usually regulated by governmental quotas and restrictions, and often taxed by tariffs. Tariffs are usually on imports, but sometimes countries may impose export tariffs or subsidies. All of these are called trade barriers. If a government removes all trade barriers, a condition of free trade exists. A government that implements a protectionist policy establishes trade barriers. The fair trade movement, also known as the trade justice movement, promotes the use of labour, environmental and social standards for the production of commodities, particularly those exported from the Third and Second World's to the First World. Standards may be voluntarily adhered to by importing firms, or enforced by governments through a combination of employment and commercial law. Proposed and practiced fair trade policies vary widely, ranging from the commonly adhered to prohibition of goods made using slave labour to minimum price support schemes such as those for coffee in the 1980s. Non-governmental organizations also play a role in promoting fair trade standards by serving as independent monitors of compliance with fairtrade labelling requirements.

Organisation of trade

Patterns of organising and administering trade include:
- State control - trade centrally controlled by government planning.
- Laws regulating Trade and establishing a framework such as Trade law, Tariffs, support for Intellectual property, opposition to Dumping.
- Guild control - trade controlled by private business associations holding either de facto or government-granted power to exclude new entrants.
- In contemporary times, the language has evolved to business and professional organizations, often controled by Academica. For example in many states, a person may not practice the professions of Engineering, Lawyer, Law Enforcement, Medicine, Teaching unless they have relevant College Degree and may need a License issued by a national association of that profession.
- Free enterprise - trade without significant central controls; market participants engage in trade based on their own individual assessments of risk and reward, and may enter or exit a given market relatively unimpeded.
- Infrastructure in support of Trade, such as Banking, Stock Market,
- Technology in support of Trade such as Electronic Commerce, Vending Machines.

Types of trade

- Commodities
- Staples
- Luxuries
- Slave trade
- International trade
- Arms trade
- Wholesaling
- Retailer
- Stock exchange

Support for trade

- Infrastructure
- computers and Internet
- e-commerce
- Search engine
- Critical infrastructure
- Accounting
- Banking
- Insurance
- Public services
- Police protection
- Postal service
- Public utilities
- Telephone
- Fax
- Telephone directory
- Translation
- Transport
- Highways
- Railroads
- Ship transport

Notes

Introduction. Gold was an especially common form of early money, as described in [http://www.ex.ac.uk/~RDavies/arian/origins.html Origins of Money and of Banking]

References

- [http://epub.wu-wien.ac.at/dyn/virlib/wp/mediate/epub-wu-01_807.pdf?ID=epub-wu-01_807 Working Paper Vienna University of Business and Economics: Trade amd Productivity]
- [http://www.foodrevolution.org/slavery_chocolate.htm The Food Revolution]

External link

- [http://www.globalissues.org/TradeRelated/TradeRelated.asp Trade-Related Issues]
- [http://directory.google.com/Top/Business/International_Business_and_Trade/Import_and_Export/Portals/Trade_Boards/ Dmoz Directory Trade Boards] Category:Commerce Category:International trade ja:貿易 simple:Trade

1815

1815 was a common year starting on Sunday (see link for calendar).

Events

- January 2 - Lord Byron marries Anna Isabella Milbanke, Seaham, County Durham.
- January 3 - Austria, Britain, and France form a secret defensive alliance treaty against Prussia and Russia.
- January 8 - War of 1812: Battle of New Orleans
- February 3 - The first commercial cheese factory is founded in Switzerland
- February 4 - Netherlands, Foundation of the first dutch student association, the Groninger Studenten Corps, Vindicat atque Polit. The first rector of the senate was B.J. Winters.
- February 6 - New Jersey grants the first American railroad charter to a John Stevens.
- February 26 - Napoleon Bonaparte escapes from Elba
- March 1 - Napoleon returns to France from his banishment on Elba.
- March 16 - Willem I becomes King of the Netherlands
- March 20 - Napoleon enters Paris after escaping from Elba with a regular army of 140,000 and a volunteer force of around 200,000 beginning his "Hundred Days" rule.
- April 5-April 12 - Mount Tambora in the Dutch East Indies blows its top during an eruption event. 92,000 are killed during this eruption. The event is the cause of 1816 becoming known as the Year Without a Summer.
- April 23- Second Serbian Uprising against Ottoman rule takes place in Takovo, Serbia. By the end of the year Serbia had been acknowledged as a semi-independent state. Ideals of the First Serbian Uprising have thus been temporarily achieved.
- June 9 - End of the Congress of Vienna: new European political situation is set.
- June 18 - Battle of Waterloo ends the Napoleonic wars.
- June 22 - Napoleon abdicates again, restoration of Louis XVIII as King of France
- July 8 - Louis XVIII returns to Paris
- July 17 - In France, Napoleon surrenders at Rochefort to British forces.
- October 15 - Napoleon I of France begins his exile on St. Helena in the Atlantic Ocean.
- October 21 - Humphry Davy patents the miner's safety lamp for use in coal mining
- Austria, Prussia and Russia sign a Holy Alliance to uphold the European status quo.
- British missionaries arrive in New Zealand
- In Britain, use of pillory is limited to punishment for perjury
- Second wave of Amish immigration to North America
- First-class cricket begins.

Ongoing events

- Napoleonic Wars (1799-1815)-Seventh Coalition/Hundred Days
- War of 1812 (1812-1815)
- Congress of Vienna (1814 - 1815)

Births

- January 10 - John A. Macdonald, first Prime Minister of Canada (d. 1891)
- February 15 - Constantin von Tischendorf, German Biblical scholar (d. 1874)
- April 1 - Otto von Bismarck, German statesman (d. 1898)
- April 1 - Edward Clark, Governor of Texas (d. 1880)
- April 6 - Robert Volkmann, German composer (d. 1883)
- April 24 - Anthony Trollope, British author (d. 1882)
- August 5 - Edward John Eyre, explorer
- October 16 - Francis Lubbock, Governor of Texas (d. 1905)
- October 31 - Karl Weierstrass, German mathematician (d. 1897)
- November 2 - George Boole, English mathematician and philosopher (d. 1864)
- December 10 - Augusta Ada King (neé Byron), Countess of Lovelace, early English computer pioneer (d. 1852)
- November 12 - Elizabeth Cady Stanton, American women's rights activist (d. 1902)
- December 21 - Thomas Couture, French painter (d. 1879)

Deaths

- January 8 - Edward Pakenham, British general (killed in battle) (b. 1778)
- January 16 - Emma, Lady Hamilton, English mistress of Horatio Nelson (b. 1765)
- February 24 - Robert Fulton, American inventor (b. 1765)
- February 26 - Prince Josias of Coburg, Austrian general (b. 1737)
- March 4 - Frances Abington, English actress (b. 1737)
- March 5 - Franz Mesmer, German developer of hypnotism (b. 1734)
- April 21 - Joseph Winston, American patriot and Congressman from North Carolina (b. 1746)
- June 1 - Louis Alexandre Berthier, French marshal (b. 1753)
- June 16 - Friedrich Wilhelm, Duke of Brunswick, German noble and general (killed in battle) (b. 1771)
- June 18 - Thomas Picton, British general (killed in battle) (b. 1758)
- June 18 - Claude-Etienne Michel, French general (killed in battle) (b. 1772
- June 18 - Guillaume Philibert Duhesme, French general (killed in battle) (b. 1766)
- August 2 - Guillaume Marie Anne Brune, French marshal (murdered) (b. 1763)
- September 9 - John Singleton Copley, American painter (b. 1738)
- September 20 - Nicolas Desmarest, French geologist (b. 1725)
- October 15 - Joachim Murat, French marshal and King of Naples (executed) (b. 1767)
- December 3 - John Carroll, first American Roman Catholic Archbishop (b. 1735)
- December 7 - Michel Ney, French marshal (executed) (b. 1769) Category:1815 ko:1815년 ms:1815 simple:1815 th:พ.ศ. 2358

1817

1817 was a common year starting on Wednesday (see link for calendar).

Events

- March 4 - James Monroe succeeds James Madison as the President of the United States of America
- April - Earthquake in Palermo, Italy
- April 3 - Princess Caraboo appears in Almondsbury in Gloucestershire, England
- May - The General Convention of the Episcopal Church founded General Theological Seminary while meeting in New York City.
- July 4 - At Rome, New York, construction on the Erie Canal begins.
- June 5 - First Great Lakes steamer, the Frontenac, is launched.
- June 25 - Large prison riot in Copenhagen prison - army is sent for to quell it
- August 22 - City of Araraquara, Brazil founded.
- August 23 - Earthquake near the site of the ancient Greek city of Helike. 65 deaths.
- December 10 - Mississippi is admitted as the 20th U.S. state.

Unknown dates

- Elgin Marbles displayed in British Museum
- Emperor Ninko ascends to the throne of Japan
- Battle of Maipú
- John Kidd extracts naphthalene from coal tar

Births

- January 8 - Sir Theophilus Shepstone British South African statesman (d. June 23 1893)
- February 19 - King William III of the Netherlands (d. 1890)
- February 22 - Carl Wilhelm Borchardt, German mathematician (d. 1880)
- March 6 - Clémentine of Orléans, daughter of King Louis-Philippe of France and mother of Tsar Ferdinand I of Bulgaria (d. 1907)
- March 22 - Braxton Bragg, American Confederate general (d. 1876)
- May 15 - Debendranath Tagore, Indian philosopher (d. 1905)
- June 30 - Joseph Dalton Hooker, English botanist (d. 1911)
- July 12 - Henry David Thoreau, American philosopher (d. 1862)
- July 24 - Adolphe, Grand Duke of Luxembourg (d. 1905)
- August 3 - Archduke Albert, Austrian general (d. 1895)
- August 24 - Aleksey Konstantinovich Tolstoy, Russian writer (d. 1875)
- November 3 - Leonard Jerome, American entrepreneur and grandfather of Sir Winston Churchill (d. 1891)
- November 12 - Bahá'u'lláh, Persian founder of the Bahá'í Faith (d. 1894)
- November 17 - Benjamin Champney, Founder of the White Mountain school of painters (d. 1907)
- November 30 - Theodor Mommsen, German writer, Nobel Prize laureate (d. 1903)

Deaths

- January 12 - Juan Andres, Spanish Jesuit (b. 1740)
- January 16 - Alexander J. Dallas, American statesman and financier (b. 1759)
- April 4 - André Masséna, French marshal (b. 1758)
- June 24 - Thomas McKean, American lawyer and signer of the Declaration of Independence (b. 1734)
- July 14 - Anne Louise Germaine de Staël, French writer (b. 1766)
- July 18 - Jane Austen, English novelist (b. 1775)

Literature

- Samuel Taylor Coleridge publishes Biographia Literaria Category:1817 ko:1817년 ms:1817 simple:1817

Nobel Laureate

The Nobel Prizes are prizes instituted by the will of Alfred Nobel, awarded to people (and also to organizations in the case of the Nobel Peace Prize) who have done outstanding research, invented groundbreaking techniques or equipment, or made outstanding contributions to society. The Nobel Prizes, which are generally awarded annually in the categories listed below, are widely regarded as the supreme commendation in the world today. As of November 2005, a total of 776 Nobel Prizes have been awarded (758 to individuals and 18 to organizations). However, a few prize winners have declined the award. The prize is occasionally awarded to those who persevered through critical moments in a process despite the risk of failure. There may be years in which one or more prizes are not awarded; however, the prizes must be awarded at least once every five years. The prize cannot be revoked. Since nominees must be living at the time they are nominated, it is very rare that the prize is awarded posthumously.

Prize categories

- Nobel Prize in Physics (decided by the Royal Swedish Academy of Sciences)
- Nobel Prize in Chemistry (decided by the Royal Swedish Academy of Sciences)
- Nobel Prize in Physiology or Medicine (decided by Karolinska Institutet)
- Nobel Prize for Literature (decided by the Swedish Academy)
- Nobel Peace Prize (decided by the Norwegian Nobel Committee, appointed by the Norwegian Parliament, Stortinget)
- Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel (decided by the Royal Swedish Academy of Sciences) The Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel, sometimes referred to as the Nobel prize in economics, was not a part of Nobel's will. It was instituted in 1969 by Sveriges Riksbank, the Bank of Sweden. Since this prize has no foundation in Nobel's will, and is not paid for by his money, and it is technically not a Nobel Prize. However, it is awarded together with the other Nobel prizes.

The prizes and the ceremony

The prizes are awarded at formal ceremonies held annually in the Stockholm Concert Hall and the Oslo City Hall on December 10, the date that Alfred Nobel passed away. However, different committees and institutions that serve as selection boards for the prizes typically announce the names of the laureates in October. Each award can be given to a maximum of three people per year. Each prize constitutes a gold medal, a diploma, and a sum of money. The monetary award is quite large, currently about 10 million Swedish Kronor (slightly more than one million Euros or about 1.3 million US dollars). This was originally intended to allow laureates to continue working or researching without the pressures of raising money. In actual fact, many prize winners have retired before winning, and many Literature winners have been silenced by it, even if younger. If there are two winners in one category, the award money is split equally between them. If there are three winners, the awarding committee has the option of splitting the prize money equally among all three, or awarding half of the prize money to one recipient and one-quarter to each of the other two. It is customary (but not mandatory) for the recipients to donate the prize money to benefit scientific, cultural or humanitarian causes. Since 1902, the King of Sweden has formally awarded all the prizes, except the Nobel Peace Prize, in Stockholm. King Oscar II initially did not approve of awarding grand national prizes to foreigners, but is said to have changed his mind after realising the publicity value of the prizes for the country. The Nobel Peace Prize is given in Oslo, Norway, by the Norwegian Nobel Committee. Starting in 1901, it was initially given by the President of Norwegian Parliament, until the Norwegian Nobel Committee was established in 1904. Its five members are appointed by the Norwegian Parliament (Stortinget), and it is entrusted both with the preparatory work related to prize adjudication and with the awarding of the Nobel Peace Prize. Its members are independent and do not answer to lawmakers. Members of the Norwegian government are not allowed to take any part in it.

Nobel's Will

The prizes were instituted by the final will of Alfred Nobel, a Swedish chemist, industrialist, and the inventor of dynamite. Alfred Nobel wrote several wills during his lifetime. The last one was written on November 27, 1895 — a little over a year before he died. He signed it at the Swedish-Norwegian Club in Paris on November 27, 1895. He was shocked to see how his invention of dynamite was used for violent purposes and wanted the prizes to be awarded to those who served mankind well. It is said that this was motivated by his reading of a premature obituary of himself, published in error by a French newspaper who mistook Alfred for his brother Ludvig when Ludvig died, and which condemned Alfred as an 'angel of death'. So in his will, Alfred left 94% of his worth to the establishment of five prizes (physics, chemistry, physiology or medicine, literature, and peace) for "those who, during the preceding year, shall have conferred the greatest benefit on mankind." It states: :"The whole of my remaining realisable estate shall be dealt with in the following way: :The capital shall be invested by my executors in safe securities and shall constitute a fund, the interest on which shall be annually distributed in the form of prizes to those who, during the preceding year, shall have conferred the greatest benefit on mankind. The said interest shall be divided into five equal parts, which shall be apportioned as follows: one part to the person who shall have made the most important discovery or invention within the field of physics; one part to the person who shall have made the most important chemical discovery or improvement; one part to the person who shall have made the most important discovery within the domain of physiology or medicine; one part to the person who shall have produced in the field of literature the most outstanding work of an idealistic tendency; and one part to the person who shall have done the most or the best work for fraternity among nations, for the abolition or reduction of standing armies and for the holding and promotion of peace congresses. :The prizes for physics and chemistry shall be awarded by the Swedish Academy of Sciences; that for physiological or medical works by the Caroline Institute in Stockholm; that for literature by the Academy in Stockholm; and that for champions of peace by a committee of five persons to be elected by the Norwegian Storting. It is my express wish that in awarding the prizes no consideration whatever shall be given to the nationality of the candidates, so that the most worthy shall receive the prize, whether he be a Scandinavian or not." Although Nobel's will established the prizes, because his plan was incomplete and due to various other hurdles, it took five years before the Nobel Foundation could be established and the first prizes awarded in 1901.

The nomination and selection process

Each year there are 100 to 250 nominees for each prize. Although anyone can be nominated, not everyone can nominate someone for a Nobel Prize. For example [http://nobelprize.org/ the website of the Nobel Foundation] says that in the case of the peace prize the following people may nominate:
- Members of national assemblies and governments of states
- Members of international courts
- University rectors
- Professors of social sciences, history, philosophy, law and theology
- Directors of peace research institutes and foreign policy institutes
- Persons who have been awarded the Nobel Peace Prize
- Board members of organisations who have been awarded the Nobel Peace Prize
- Active and former members of the Norwegian Nobel Committee
- Former advisers appointed by the Norwegian Nobel Institute Similar requirements are in place for the other prizes. However, unlike many other awards, the Nobel Prize nominees are never publicly announced, and they are not supposed to be told that they were ever considered for the prize. These records are sealed for 50 years to avoid turning the awarding of the prize into a popularity contest. The strictly enforced deadline for postmarking of nominations is February 1. Self-nominations are automatically disqualified. Only living persons may be nominated for the Nobel Prize. This has sometimes sparked criticism that people deserving of a Nobel Prize did not receive the award because they died before being nominated. In two cases the prize has been awarded posthumously to people that were nominated when they were still alive. This was the case with UN Secretary General Dag Hammarskjöld (1961, Peace Prize) and Erik Axel Karlfeldt (1931, Literature) — both of whom were awarded the prize in the years they died.

Criticism of the prize

:Main article: Nobel Prize controversies The prize has been criticized over the years, with people suggesting that money, influence and fame are more important than actual achievements. The most famous case for this was in 1973 when Henry Kissinger won the peace prize for bringing peace to Vietnam, when the War in Vietnam did not end until two years later.

Lack of a mathematics prize

A common legend states that Nobel decided against a prize in mathematics because a woman he proposed to (or his wife, or his mistress) rejected him or cheated on him with a famous mathematician, often claimed to be Gösta Mittag-Leffler. There is no historical evidence to support the story, and Nobel was never married. However, there are more credible reasons why Nobel may have chosen not to recognize mathematics. At the time, mathematics was not considered a practical science from which humanity could benefit (a key purpose for the Nobel Foundation), and there was already a well known Scandinavian prize for mathematicians. The existing mathematical awards were mainly due to the work of Mittag-Leffler, who founded the Acta Mathematica, which a century later is still one of the world's leading mathematical journals. Through his influence in Stockholm he persuaded King Oscar II to endow prize competitions and honor distinguished mathematicians all over Europe, including Hermite, Bertrand, Weierstrass, and Poincare. The Fields Medal is widely considered an equivalent substitute for the "missing" Mathematics Nobel Prize. Some even consider it more prestigious, as it is awarded less frequently.

Other prizes

Some fields without a Nobel prize have instituted prizes of their own, most of which are not as well-known: the Léonie Sonning Music Prize, the Polar Music Prize, the Fields Medal in mathematics; also the Abel Prize in mathematics, presented by the King of Norway, the Pritzker Prize in architecture, the Turing Award in computing, the Wollaston Medal in geology, the Templeton Prize in religion, and the Schock Prizes in logic and philosophy, mathematics, visual arts and musical arts. The WTN X Prizes, for technological solutions to pressing global needs, announced in 2004 by the World Technology Network, are in a sense a continuation of the wishes of Alfred Nobel. In his will Nobel opened the door to technological awards in both chemistry and physics, but he did not leave instructions on how to divide the recognition between science and technology. Since the deciding bodies in these domains have been more concerned with science than technology, it is not surprising that the Nobel Prizes have gone to scientists rather than to engineers, technicians or other inventors. The Kyoto Prizes are awarded in three categories: Advanced Technology, Basic Sciences, and Arts and Philosophy. The Millennium Technology Prize is an international award for outstanding technological achievements. The Right Livelihood Awards (also known as "Alternative Nobel Prizes") are awarded to persons who have made important contributions in areas such as environmental protection, peace, human rights, health etc. In 2002 the Astrid Lindgren Memorial Award, an international prize for children and youth literature, was instituted in honour of Swedish children's book author Astrid Lindgren. The Kavli Foundation will begin awarding prizes in Astrophysics, Nanoscience and Neuroscience every two years from 2008. The Dan David Prize, also valued at about 1.3 million US dollars, is awarded every year in three categories - the past, present, and future. The humorous Ig Nobel Prize is a parody which annually honours research "that cannot or should not be repeated".

External links

- [http://nobelprize.org/ Nobelprize.org] — Official site
- [http://nobelprizes.com/nobel/nobel.html The Nobel Prize Internet Archive]
- [http://www.kva.se/KVA_Root/swe/awards/nobel/index.asp The Nobel Committees] of the [http://www.kva.se/ Royal Swedish Academy of Sciences]
- [http://info.ki.se/ki/nobel_en.html The Nobel Committee] of the [http://www.ki.se/ Karolinska Institute]
- [http://www.svenskaakademien.se/ENG/ The Swedish Academy]
- [http://www.nobel.no/ The Norwegian Nobel Committee] Category:Nobel Prize Category:Prizes Category:Swedish organizations Category:Science zh-min-nan:Nobel Chióng ko:노벨상 ja:ノーベル賞 simple:Nobel Prize th:รางวัลโนเบล

Paul Samuelson

Paul A. Samuelson (born May 15, 1915) is an American economist known for his work in many fields of economics. He was awarded the John Bates Clark Medal in 1947 and The Bank of Sweden Prize in Economic Sciences: Nobel Prize in Economics in 1970. He earned a bachelor's degree from the University of Chicago in 1935 and a Ph.D. from Harvard University in 1941. As professor of economics at the Massachusetts Institute of Technology, he has worked in fields including:
- Welfare economics, in which he popularised the Lindahl-Bowen-Samuelson conditions which are criteria for deciding whether an action will improve welfare;
- Public finance theory, in which he is particularly known for his work on determining the optimal allocation of resources in the presence of both public goods and private goods.
- International economics, where he influenced the development of two important international trade models: the Balassa-Samuelson effect, and the Heckscher-Ohlin model (with the Stolper-Samuelson theorem).
- Monetary economics, where he devised the overlapping generations model as a way to analyze economic agents' behavior across multiple periods of time. He was also the author of an influential economics textbook, Economics, first published in 1948, and revised regularly for the following fifty years. Stanislaw Ulam once challenged Samuelson to name one theory in all of the social sciences which is both true and nontrivial. Several years later, Samuelson responded with David Ricardo's theory of Comparative advantage. Along with Kenneth Arrow, he is considered one of the founders of modern neoclassical economics. The following is an excerpt from the reasons for awarding Samuelson the Nobel Prize: : Generally speaking, Samuelson's contribution has been that, more than any other contemporary economist, he has contributed to raising the general analytical and methodological level in economic science. He has simply rewritten considerable parts of economic theory. He has also shown the fundamental unity of both the problems and analytical techniques in economics, partly by a systematic application of the methodology of maximization for a broad set of problems. This means that Samuelson's contributions range over a large number of different fields.

External links

- [http://www.nobel-winners.com/Economics/paul_samuelson.html Paul Samuelson, short Biography]
- [http://www.nobel.se/economics/laureates/1970/press.html 1970 Press Release, Nobel Prize in Economics]
- [http://cepa.newschool.edu/het/profiles/samuelson.htm A History of Economic Thought biography]
- [http://www.nobel.se/economics/laureates/1970/samuelson-bio.html Biography at the Nobel e-Museum]
- [http://cepa.newschool.edu/het/profiles/samuelson.htm Profile, Including a list of major works]
- [http://www.geocities.com/gfh_axds_as/zax/samuelson-bio-press.html the scientific work through which he has developed static and dynamic economic theory and actively contributed to raising the level of analysis in economic science.] Samuelson, Paul Samuelson, Paul Samuelson, Paul Samuelson, Paul ja:ポール・サミュエルソン

Labour theory of value

The labor theory of value (LTV) is a theory in economics and political economy concerning a market-oriented or commodity-producing society: the theory equates the "value" of an exchangeable good or service (i.e., a commodity) with the amount of labor required to produce it. The fundamental argument is that prices are determined by costs of production and all costs are labor costs in the final analysis. The dominant view sees this as a theory of price determination in competitive markets, a substitute for the neoclassical theory of price determination. But to others, it is a tool for understanding the social relations of production, more of a historical and institutional theory than a price theory. Adam Smith, David Ricardo, and Karl Marx are most often associated with this theory. However, elements of the theory are older, going back to John Locke.

The theory’s development

In his Second Treatise on Government,[http://libertyonline.hypermall.com/Locke/second/second-frame.html] the philosopher John Locke asked by what right an individual can claim to own one part of the world, when, according to the Bible, God gave the world to all humanity in common. He answered that persons own themselves and therefore their own labor. When a person works, that labor enters into the object. Thus, the object becomes the property of that person. Locke argued in support of individual property rights as "natural rights". Locke argued that a landowner's property was "his" because he had worked for it. Locke held that this relation between labor and ownership pertained only to property that was unowned before such labor took place. Benjamin Franklin in his 1729 essay entitled "A Modest Enquiry into the Nature and Necessity of a Paper Currency" advanced a version of the labor theory of value. Later British political economy focused on issues of price theory. Adam Smith distinguished between "nominal value" (the amount of money one would exchange for a given commodity) and "real value" (the amount of labor required to produce an object). Making matters confusing, he also used a "labor commanded" definition of value, referring to the real value of a product as the amount of labor that could be purchased by selling it. That these two different kinds of labor-value (labor embodied and labor commanded) seldom correspond gave rise to the so-called transformation problem discussed below. David Ricardo stressed the role of the first kind of labor value, the amount of labor "embodied" in a commodity, developing what might be called a "labor theory of price": the amount of labor embodied in a commodity determines its equilibrium price. This theory of price determination by costs is a predecessor of the modern theory that equilibrium prices are determined solely by production costs associated with "[http://cepa.newschool.edu/het/schools/neoric.htm neo-Ricardianism]". The "Ricardian socialists" — Charles Hall, Thomas Hodgskin, John Gray, and John Francis Bray[http://cepa.newschool.edu/het/schools/utopia.htm#hall] — applied Ricardo's theory to develop theories of exploitation which were similar in some ways to that later developed by Marx. Marx returned to Locke's issues of the origins and legitimacy of property rights. He used the LTV to support a very different political argument than Locke's, clarifying the Ricardian socialists' contributions: in his view, landowners are exploitative because only labor adds value to the product. His LTV holds that, in aggregate, the price of the product equals the sum of the value of the capital goods (means of production) used up in production and the value added by direct labor. In this theory, property owners can only make a profit by paying workers less than the value their labour adds to the finished product. Workers work for a part of each day adding the value required to cover their wages, while the remainder of their labour is performed for the enrichment of the capitalist. It is important to note that Marx did not deny the role of supply and demand influencing price. In Value, Price and Profit (1865) he wrote: ::It suffices to say that if supply and demand equilibrate each other, the market prices of commodities will correspond with their natural prices, that is to say, with their values as determined by the respective quantities of labour required for their production. Very early on, the Austrian school, led by Eugen von Böhm-Bawerk, argued against the whole tradition of the LTV (see below). Much of Western economics followed this lead — and that of Jevons, Menger, and Walras — in the 1870s to discard the LTV as a theory of price determination in favour of neoclassical models based on supply and demand. In the end, the neoclassical "theory of value" (general equilibrium theory) is identical to the theory of price. Corresponding to this shift is one from Marx's emphasis on the inner workings of the societal process of production to an emphasis on individual exchange and markets (and on methodological individualism.) 19th century American individualist anarchists based their economics on the labor theory of value, with their particular interpretation of it being called "Cost the limit of price." They, as well as contemporary individualist anarchists in that tradition, hold that it is unethical to charge a higher price for a commodity than the amount of labor required to produce it. Hence, they propose that trade should be facilitated by using notes backed by labor.

The theory explained

Marxian political economy uses the concept of "socially necessary abstract labor-time" to modify the Ricardian LTV. To some, this modification is profound enough to support the claim that Marx's theory is not, after all, a labor theory of price of the Ricardian sort, but a new type of value theory. This aspect of value as a social process, unexamined by Marx's predecessors in classical political economy, cannot be reduced to magnitudes. The phrase "socially necessary", far from being an arbitrary adjunct to the theory (as charged by Robert Nozick), expresses that societal perspective, radically distinct from neoclassical economics. Whereas the latter starts with the individual's perspective and exchange, Marx starts with the perspective of society as a whole. "Social production" involves a complicated and interconnected division of labor of a wide variety of people who depend on each other for their survival and prosperity. Individual labors are contributions to the whole. "Abstract" labor refers to a characteristic of commodity-producing labor that is shared by all different kinds of heterogeneous (concrete) types of labor. That is, the concept abstracts from the particular characteristics of all of the labor and is akin to average labor. Socially necessary abstract labor is measured in hours of application of labor-power but can only be realized in exchange: only labor which produces a commodity that is a use-value to someone else (which they can afford and are willing to buy) counts as socially necessary.

Some definitions

Marx's LTV holds that the labor needed to produce a commodity includes both labor directly expended on production of the commodity and labor expended on the production of means of production used up in its production. For example, if twenty workers are used for a year to produce means of production used by twenty workers in the next year to produce a consumer good, the good embodies the labor of forty workers. (This example assumes that technology is unchanged between the two years.) However, a lazy or inept worker (who spends more time producing an item) does not produce more value than an industrious one. Rather, the first worker's time produces less because the value depends on what is socially necessary. That is, the value of a product is determined more by societal standards than by individual conditions.

“Exploitation”

Marx used his LTV to derive his theory of "exploitation" under capitalism. He assumed that all commodities sell at prices equal to values (with both measured in the same units). In his era, this "equal exchange" represented a standard of fair exchange: an hour of labor could be used to purchase the product of an hour of labor. In effect, he asked, "under equal exchange, how is it that a capitalist can sell commodity X at price P and make a profit?" If a boss hires labor at value and then sells the commodity at value, where does profit come from? Unlike Ricardo or the Ricardian socialists, Marx distinguished between labor-power and labor. "Labor-power" is the ability of workers to work, given their muscles and brains. "Labor" is the actual activity of producing use values (goods and services) and value. In his examples, Marx assumed that the value of labor-power (v) was constant, determined by prevailing socioeconomic conditions. (In his time, this was seen as "subsistence.") The profit or surplus-value can arise if workers do more labor (L) than is necessary to pay the cost of hiring their labor-power. Marx's numerical examples in volume I of Das Kapital never "prove" that capitalism always involves exploitation, i.e., that L always exceeds v. Instead, this relationship involves class struggle over the length of the working day, the intensity of labor, the use of machinery, etc. The existence of exploitation reflects the capitalists' victory (so far) in the struggle. Instead, the "proof" that capitalism typically involves exploitation comes from his institutional and historical analysis of capitalism as a whole. One way to get L > v is to use force against the workers. But unlike other systems (such as feudalism or slavery), under capitalism the direct use of force to get workers to produce a surplus is the exception rather than the rule. To Marx, under capitalism workers are free to quit their jobs, while they are rarely beaten. To explain the normality of L > v, Marx instead pointed to capitalism's institutional framework, in which a small minority (the capitalists) monopolize the means of production, in which the workers cannot survive except by working for capitalists, and in which the state preserves this inequality of power. In this explanation, the normal role of force is structural, part of the usual workings of the system: the reserve army of unemployed workers continually threatens employed workers, pushing them to work hard to produce for the capitalists.

Böhm-Bawerk’s critique

The Austrian economist Eugen von Böhm-Bawerk argued against both the Ricardian labor theory of price and Marx's theory of exploitation. On the former, he contended that return on capital arises from the roundabout nature of production. A steel ladder, for example, will be produced and brought to market only if the demand supports the digging of iron ore, the smelting of steel, the machines that press that steel into ladder shape, the machines that make and help maintain those machines, etc. Advocates of the labor theory will point out that every step in that process, however roundabout, involves labor. But Böhm-Bawerk said that what they missed was the process itself, the roundaboutness, which necessarily involves the passage of time. Roundabout processes, Böhm-Bawerk maintained, lead to a price that pays for more than labor value, even the labor value of all the process involved added together statically, and given any empirical standard for the latter. This makes it unnecessary to postulate exploitation in order to understand the return on capital. Marx might respond that this did not contradict his understanding of prices, in which sectors of the economy which have higher "capital intensity" (greater roundaboutness) have higher prices (see below). The difference, it seems, between Marx and Böhm-Bawerk concerns perspective: for Böhm-Bawerk, roundaboutness explains entrepreneurial profits on the microeconomic level, whereas for Marx, a society-wide institutional explanation is needed. To him, roundaboutness explains only those profits of the more capital-intensive operations relative to less capital-intensive ones. Furthermore, in Böhm-Bawerk's development of a positive theory of interest he said that workers trade in their share of the end price for the more certain and soon wages paid by the entrepreneur. In other words, he claimed that profits compensated the entrepreneur for the willingness to bear risk and to wait to receive income. Critics of Böhm-Bawerk's theory argue that workers are often exposed to risks such as injury on the job, a more profound kind of risk than the merely financial risk that the entrepreneur takes. A capitalist entrepreneur also has a greater ability to diversify (to minimize risk) than does the laborer because the latter has only one main asset, i.e., labor-power. Further, when the entrepreneurs' risk-taking does not pay off, this cost can be shifted to workers as wage cuts and/or layoffs. The existence of the "reserve army of the unemployed" means that even if they are aware of these risks, they often have little choice but to take them. In the Marxian view, this argument means that entrepreneurs have no right to compensation for bearing entrepreneurial risk. Böhm-Bawerk and other Austrian economists replied to such critics by claiming that they played upon the ambiguities of the term "risk," that specifically financial risk must be isolated in order to understand the production process. Furthermore, the fact that capital markets lead to the control and minimization of financial risk is a valuable development in itself — an argument for, not against, the overall social efficacy of capitalism. Some critics take another tack, observing that not all risk-taking seems worth rewarding: for example, the invention and promotion of "crack" cocaine or e-mail spam were clearly a matter of risk-taking entrepreneurship, yet both seem to have more social costs than benefits. This is the problem of external costs, a form of market failure which (if serious enough) encourages people to seek non-market solutions.

The transformation problem

The most common interpretation of the LTV is as a theory of price determination, which makes Marx's theory roughly correspond to that of Ricardo. In this view, a commodity's price derives neither from its utility to the consumer (Marx's "use value") nor from supply and demand but from the labor that society has expended on its production. Early in volume III of Capital, Marx presents an analysis of the relationship between values and prices. Most read this as describing how prices can be calculated from given values. The problems with Marx's "solution" to this mathematical problem have spawned a long debate concerning the "transformation problem." This problem of finding (or rejecting) mathematical formulae linking individual prices to individual values is central to the dominant interpretation of the Marxian LTV. Even as "a simple theory of price" in which prices are directly determined by values, Marx's LTV does not deny the role of demand. Not only must each commodity have a use-value to its buyer, but demand and short-term supply determine its "market price" (p). Following the classical-school perspective, Marx saw each p as tending toward the "price of production" (Smith's "natural price") due to market forces. Prices of production (p
- ) are long-term average prices, seen as totally determined by costs. It was thus only in the long run that Marx denied the role of demand in determining relative prices (under competitive markets, with no land-rent). A simple example shows that on the micro level, the p
- cannot be proportional to values, even when pure competition prevails. Even before Marx presented his numerical examples exploring price/value relationships, David Ricardo had presented a numerical example of this fact. 1. Again measure values and prices in the same units, labor hours. Thus, the value/price contrast corresponds to Smith's distinction between labor-embodied values and labor-commanded values and Marx's distinction between "values" and "exchange values." 2. Assume that each p initially equals value so that for any given commodity, total profits are proportional to unpaid labor-time (surplus-value, S), total wages are proportional to paid labor-time (W), and the total amount of money invested by the capitalist is proportional to the value of the capital invested (K). This is the "simple labor theory of price" referred to above. 3. Suppose the ratio of unpaid labor-time to paid labor-time is the same for all commodities. This assumption reflects the tendency (when workers are not slaves or serfs and labor-power markets are competitive) for workers to move away from sectors with more exploitation, toward those with less. Thus, the rate of exploitation tends toward equality between sectors. This ratio is measured here by s = S/W (unpaid labor-time/paid labor-time). 4. But there is no reason why technical conditions of production will be the same for all commodities. Different proportions of labor and means of production are used in distinct production processes and for different commodities. To Marx, the "organic composition of capital" or OCC differs between sectors. For any commodity, measure this as k = K/W, the ratio of the total amount invested in "capital" to the total amount spent on paid labor. K includes raw materials and fixed capital purchased before a production process starts. An industry with high OCC is capital-intensive, i.e., is relatively roundabout. 5. If products were traded according to labor-values, different rates of profit will be received on the capital invested in different industries. The rate of profit, r, equals the total amount of profit divided by the capital advanced, or S/K. This implies that the profit rate equals :::r = (S/W)/(K/W) = s/k If s is the same for all commodities, while k varies, r differs between commodities. 6. This situation makes no sense in the real world of capitalism, even as conceived by Marx, in which firms and sectors are competing with each other, with capitalists seeking profits everywhere. Competition among industries should remove differences in profit rates. When able to do so, capitalists earning low r move their capital out of their industries, reducing supply and raising p there. They enter high-r sectors, raising supply and reducing p there. 7. Thus, market prices tend toward being equal to the p
- which are proportional to long-term average costs and r is equalized between sectors. Since, according to the equation above, it is high k – or a high degree of roundaboutness – that depresses the rate of profit, the mobility of capital raises p in the high-k sectors, assuring capitalists a r equal to that of low k sectors. To Marx, this represents a redistribution of value and surplus-value between sectors. This means that the commodities produced in high-k sectors command more labor than it took to produce them. This is Marx's take on the issue of capital intensity that Böhm-Bawerk stressed (see above). This in turn implies that the p cannot equal values. In the long run, they equal p
- , but these latter differ from values — because they reflect profit-rate equalization. That is, the simple labor theory of price cannot be true while "equal exchange" is not the norm. The above consequence of varying capital intensity has been central to critiques of Marx's LTV. Some see this as its reductio ad absurdum. However, Ricardo himself employed a "93 percent labor theory of value," believing that most of the time labor-values were a good guide for guessing relative prices and (after correcting for inflation) the progress of prices over time. In general, the above shows that the simple "labor theory of price" cannot work exactly (100 percent) unless
- the organic composition of capital (k) is the same in each industry;
- there is no capital invested (k = 0, as in Smith's [http://www.online-literature.com/adam_smith/wealth_nations/6/ "early and rude state of society"]);
- the rate of surplus-value (s) equals zero (as in Marx's hypothetical "simple commodity production");
- differences in the rate of surplus-value between sectors are perfectly correlated with those of the organic composition; or
- there is no tendency for the rate of profit to equalize between sectors, so there is no tendency for prices to move away from proportionality to values (again as in Marx's simple commodity production). Even if one or more of the conditions above applies, price/value deviations will arise if monopolies exist or if land has been appropriated as private property, so that land-rent income is received (beyond "normal" profits). In either of these cases, demand plays a role in determining long-term prices. More complex labor theories of price (more complex mathematical relationships between values and prices of production) have been proposed — but then most, if not all, of them have been criticized severely and rejected. In 1969, Amit Bhaduri pointed out that the "transformation" problem of finding a mathematical relationship between individual prices and i

Comparative advantage

Example 1

Example 2

Example 3

Assumptions in Example 3

References

See also

External links

Trade

History of trade

Development of money

See also

Current trends

Doha rounds

China

International trade

Organisation of trade

International organizations

Free trade areas

United Nations umbrella

Types of trade

Support for trade

See also

Notes

References

External link

1815

Events

Ongoing events

Births

Deaths

1817

Events

Unknown dates

Births

Deaths

Literature

Nobel Laureate

Prize categories

The prizes and the ceremony

Nobel's Will

The nomination and selection process

Criticism of the prize

Lack of a mathematics prize

Other prizes

See also

External links

Paul Samuelson

See also

External links

Labour theory of value

The theory’s development

The theory explained

Some definitions

“Exploitation”

Böhm-Bawerk’s critique

The transformation problem