13 March, 2016 at 16:30 | Posted in Economics | 7 Comments

In 1817 David Ricardo presented — in Principles — a theory that was meant to explain why countries trade and, based on the concept of opportunity cost, how the pattern of export and import is ruled by countries exporting goods in which they have comparative advantage and importing goods in which they have a comparative disadvantage.

Heckscher-Ohlin-HO-Modern-Theory-of-International-TradeRicardo’s theory of comparative advantage, however, didn’t explain why the comparative advantage was the way it was. In the beginning of the 20th century, two Swedish economists — Eli Heckscher and Bertil Ohlin — presented a theory/model/theorem according to which the comparative advantages arose from differences in factor endowments between countries. Countries have a comparative advantages in producing goods that use up production factors that are most abundant in the different countries. Countries would a fortiori mostly export goods that used the abundant factors of production and import goods that mostly used factors of productions that were scarce.

The Heckscher-Ohlin theorem –as do the elaborations on in it by e.g. Vanek, Stolper and Samuelson — builds on a series of restrictive and unrealistic assumptions. The most critically important — beside the standard market clearing equilibrium assumptions — are

(1) Countries use identical production technologies.

(2) Production takes place with a constant returns to scale technology.

(3) Within countries the factor substitutability is more or less infinite.

(4) Factor-prices are equalised (the Stolper-Samuelson extension of the theorem).

These assumptions are, as almost all empirical testing of the theorem has shown, totally unrealistic. That is, they are empirically false. 

That said, one could indeed wonder why on earth anyone should be interested in applying this theorem to real world situations. As so many other mainstream mathematical models taught to economics students today, this theorem has very little to do  with the real world.

From a methodological point of view one can , of course, also wonder, how we are supposed to evaluate tests of a theorem building on known to be false assumptions. What is the point of such tests? What can those tests possibly teach us? From falsehoods anything logically follows.



  1. As a matter of epistemology, I would not object to empirical testing of a theory. As you say, the theory has been very extensively tested against data, and shown to have little explanatory power: the world is not like the imaginary model.
    So, why don’t economists move on?
    The most curious and exasperating thing about neoclassical economics is this unwillingness to accept that a theory is wrong.
    We only learn from mistakes. This was a big mistake that should have led economists to learn that the world was not like the Heckscher-Ohlin model, and by extension, possibly not as Ricardo imagined it either.
    Why can’t economists learn?

    • Bruce its their old adage “before you discard a model (even if it is patently false) you have to have a better model”.

  2. First of all, may I respectfully correct a couple of inconsequential language mistakes in your post?

    “… importing goods in which they had comparatively less disadvantage.” Surely, “comparatively less advantage” or “comparative disadvantage” ? (same meaning, in both cases)

    “What is the point of such tests? What can those tests possibly learn us?” What can those tests possibly TEACH us. I suspect (tho’ I don’t speak Swedish) that you are translating from your native Swedish there where (like the German “lehren”) “learn” can have both an active and a passive meaning.

    Further, I take this post http://nakedkeynesianism.blogspot.lu/2011/10/more-on-free-trade.html by Matias Vernengo as saying that the problem with the HOS model is not JUST unrealistic assumptions. The very notions it is built on are, to say the least, shaky. Would you agree?

    Finally, I find your final sentence (“From falsehoods anything logically follows”) somewhat ambiguous. The point of a model, I think, is that you make certain assumptions and you then find out what those assumptions logically lead to. Which can be a useful exercise, but not if your assumptions are patently unrealistic, and you’re trying to explain the real world or predict its future development. From a such a point of view, you can’t say that ANYTHING can follow from a particular set of (false) assumptions. A very particular set of (probably useless) conclusions will follow. I guess what you wanted to say is that, if you don’t care about making patently false assumptions, then you can write a mode that will “prove” anything you want to prove. You just choose the particular false assumptions that will help your case.

    • Thanks for your constructive suggestions 🙂
      Re Vernengo I do agree with him, but I specifically wanted to focus only on the assumptions.

  3. Several other students of international trade relations have reached parallel conclusions.
    One of these (from the USA) uses radically different assumptions and methodology. He expresses his conclusions in vernacular rather than academically correct language. He says US trade negotiators are “stupid” and that foreign competitors are “killing us”.
    Donald Trump’s methodology is very powerful, unlike the “low energy” methodologies of most academics. He is able to reach clear conclusions regarding policy. In particular he proposes a 45% tariff on manufactured goods as a starting negotiating position.

    Prof. Syll, with the benefit of two Ph.D.’s which Trump lacks, using your own preferred methodology and assumptions, can you improve upon Trump’s proposals?

    • And mainstream economists wonder why they get hated on.

  4. Lars, when you say that from falsehoods anything follows, you need to specify which type of logical system you are using. I realize that you are assuming the extensional predicate calculus, but there are others. And in these, that particular theorem is false. I.e., it is not the case that everything follows.

    And with respect to your excellent distinction between “theory” and “model” in your recent book, you fail to hew to your own distinction consistently. For instance, in your post on statistical significance, your last sentence says that p-values mean nothing if the model is wrong. What you have to mean is that p-values mean nothing if the theory is wrong. Models are neither true nor false. Like definitions, which are also neither true nor false. Models are non-linguistic conceptual constructs or physical structures in which the theory is true (using Tarski’s famous distinction).

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