Trade Theory in the Age of Marshall

Marshall systematically developed and refined by means of geometrical and analytical methods the classical theory of international values, in particular the ideas originally expounded by John Stuart Mill. He combined Mill’s analysis of demand (in terms of reciprocal demand) with the older emphasis on supply.1 Marshall argues that the international exchange ratio (terms of trade) is influenced not only by demand, but also by the ability of a country to adjust supplies of its own products to the demands of foreign markets; although in practice the influence of cost factors is pushed into the background by the analytical assumption that each country specialises in one product. In addition to the presentation of Mill’s reciprocal demand method in diagrammatic form, Marshall tries to improve upon labour time as a measure of costs (i.e. he includes capital and other production costs along with labour costs)2 and to deal with the problem of aggregation over commodities. This he does by means of the concept of a ‘representative bale’ of a country’s factors of production. In classical spirit, he wants to express the costs of production and gains from trade in real terms (effort, abstinence, etc.). Ricardo had measured the value of commodities in labour time; but, says Marshall, ‘it seems better to suppose either country to make up her exports into representative “bales”; that is, bales each of which represents uniform aggregate investments of her labour (of various qualities) and of her capital’.3 Each ‘bale’ corresponds to a fixed input of labour and capital (or factors of production in general).