Impacts of international trade on the SMT view of the economy

Abstract

Shiozawa, Morioka and Taniguchi (2019)'s Microfoundations for Evolutionary Economics (Springer Japan) provided an alternative view (SMT view) of the economy to the orthodox equilibrium view of the economy. According to the SMT view, demand and supply are matched by quantity adjustment under fixed prices, and prices function as a transmitter of cost information downstream as well as a guide for choice and development of techniques. This paper examines the impacts of international trade on the SMT view based on the new theory of international values (NTIV). In a closed economy, prices are uniquely determined even if there are many choices of techniques by the minimal price theorem. With international trade, due to the multiplicity of wages, prices are not uniquely determined. Whether this fact allows demand to participate in the determination of prices is examined, and it is clarified that because of the disparity of real production possibility set from the hypothetical one, which is effective in determining prices, demand loses the power of equilibration. This fact opens up the possibility and even necessity of production taking place below the maximal boundary, which is accompanied by unemployment. Individual firms' behavior in the choice and development of techniques and the process of price conversion that are consistent with the SMT view and the NTIV is formulated. A residual unsolved question of wage adjustment following technological changes is identified.