good morning everyone welcome to this
lecture it's been a pleasure for you to
wake up this morning is such a sunny day
right and come to the lecture today we
will focus on the very first lecture of
this course as you know it's called
International Economics and Development
Studies so it has a part of
International Economics about
international economics and a part about
Development Studies they're not exactly
the same thing and I will say that the
most important aspect is that the
perspective under which things are
studied are bit different however in
both cases both for the International
economics point of view and the
Development Studies point of view what's
important is that they deal with some
very very fundamental and I would say
big questions such as why are some
nations richer than others why is
quality of life better in some places
rather than others and when you see the
red word it means is a key word it's a
key word richer or quality of life
they're not the same thing and we will
discuss over the course of these module
why they are different and also why they
require for instance different
measurements can a poor country improve
its wealth and quality of life and if so
how what are the policies for instance
that can be undertaken to improve a
country situations what about
international exchange is of course
these are fundamental exchanges of goods
money capital people though we won't go
that much into detail as to migration
but for everything else exchanges of
goods and services or capital between
countries and then useful to improve a
country's situation and we will ask
ourselves are they useful for whom or
under what circumstances ok so and as I
mentioned last time actually if you
think about it for those of you that
already
took history of economic thought course
these are some of the basic questions
that the economic discipline has put at
the center of its studies since the very
beginning okay so they are common in
many respects to all of these fields but
as I know that many of you didn't take
any course in history become excited
I said we would briefly have an overview
okay
briefly have an overview of the
different points of view of very very
influential scholars so this is what
we're going to do today and I'll try to
stress that they have sometimes very
immediate implications in terms of
international exchanges or policy
suggestions for international exchanges
they they had a view on free trade for
instance or protectionism so for
instance these questions are common to
political economy development economics
international economics industrial
economics sometimes microeconomics
macroeconomics very very fun fundamental
questions these are the scholars that we
will briefly touch and I mentioned the
books that I think are very very
important so at least you should be
aware that these exist okay and be able
to place them somewhere in history
roughly okay
of course Adam Smith with two important
books one is the Theory of Moral
Sentiments it's a bit less known than
the at least two economists then the
other one that it's called and inquire
into the nature and the causes of the
wealth of nations
okay the second one is very famous is
called The Wealth of Nations and I'm
sure that you've all heard about it have
you heard about it yes all of you okay
then we have David Ricardo on the
principle of political economy and
Taxation
then can marks that's capital a critique
to political economy then we have
Hartford Marshall with two books in
particular I want to mention one is
principle of economics and the other one
is industry and trade and then the last
one is Keynes okay
the economic consequences of the peace
is one of the books and then the very
very famous one the general theory of
employment interest and money okay we
will go briefly have an overview of
these scholars and their basic
intuitions and try to understand that
what would they think about
international exchanges free trade or
trade policies are still influenced by
the thought of these on these scholars
no what do you know about Adam Smith
come on anyone remembers anything about
him don't be shy yes she's saying he
placed a lot of importance to workers in
the economy yes okay so she's suggesting
what's important about Ian Smith he
started talking about economy economic
economic studies has a science on of its
own okay
yes exactly so he was mentioning two
important contribution that Adam Smith
gave one is the invisible hand concept
and which is normally the one that
everyone remembers okay the most famous
one the second one is mentioning which
we could argue is even more important is
an understanding about the concept of
the division of labor okay and we will
come that back to this in a moment yes
that's important first of all let us
think that Adam Smith was first studying
and teaching moral philosophy okay and
then it's true he started he was
studying also Newton's mechanic and was
trying to apply the same
of scientific method to the study of
economy and society okay that that's why
we say that in fact we think about Aiden
Smith had as at least one of the
founders of the economic discipline as a
standalone discipline okay but coming
from more philosophy and it's important
the term political political comes from
polity or police means referring to a
community of people so the set of rules
governing a community of people so even
the standard it's quite clear why it
comes from the moral philosophy has to
do also with things such as what's good
what's right or wrong when you try to
manage a community of people okay so he
was observing the Industrial Revolution
which was a shift actually from a system
to a completely different one basically
from a feudal system to a market economy
okay and the difference so to a
capitalist system and so called market
economy where market is intended as an
institution so the set of rules were
people can exchange probably property
rights basically so equal individuals
are free to exchange property rights
it's a different system than the
previous one of course as you understand
it and important to Adam Smith studies
is that at the center of these studies
are has he said the organization of
labor within a factory but also the
social organization of labor within a
society and the two things are kept
together that's why it's called
political economy because the two sides
are studied together and he observed of
course that a new social class was
emerging the capitalist class or
industrial bourgeoisie as you want to
call it what is very different from the
previous feudal system is that the
position of each
in a society is meant to depend upon one
owns ability okay what ability ability
to organize labor for instance
intrapreneurial ability okay that what
puts you in a specific position in a
society not because of a dynasty or not
because you're the son of an of a noble
person but because of your ability
that's the fundamental change that he
was trying to describe at least and to
some extent I'll go pay okay but for
these to happen into work
so basically was suggesting there's no
need to fear that's the metaphor of the
invisible hand there's no need to fear a
system in which people are free to
exchange property rights the system will
not collapse and it will actually
produce a desirable solution for
everyone provided that there is a shared
system of rules and values and a system
of equal rights that's when it works
that's why there was the Theory of Moral
Sentiments before the The Wealth of
Nations now of course you see the
difference between the two systems and
if we have time we come back to this
later on this was also possible because
before the Industrial Revolution there
had been a political revolution and also
to some extent that because there were
there had been scientific revolutions
which basically changed the way in which
people thought about the universe so
they were also ready to change the way
they thought about society and the
economy okay but we'll come back to this
later if we can now the coming to the
fundamental questions why are some
nations richer than others
basically they the answer according to
Adam Smith was due to the division of
labor and the extent of the market these
are two concepts that are very much
useful today if you think about it I'll
give you an example in a minute what is
this concept these are the two bits web
Smith talks about division of labor and
extent of the market
the greatest improvement in the
productive powers of Labor and the great
the greater part of the skill dexterity
and judgment
seem to have been the effects of the
division of labor as it is the power of
exchanging that gives occasion to the
division of labor so the extent of this
division must always be limited by the
extent of that power or in other words
by the extent of the market what does it
mean what does it mean well basically
he's observing the pin Factory how it's
organized the pin Factory and he
observes that of course to realize a
single pin you need several phases ok
you need to cut the material you need to
sharpen it several phases ok a single
person on its own can do probably 20
pins per day but then if you organize
labor in a different way within a
factory you can come up to four thousand
pins for each person that's what your
colleague is saying productivity
skyrocket productivity really goes up
just because you are organizing labor in
a different way okay and of course you
have machinery and you're you are
organizing both capital and labor but
division of labor that the improvement
in the productive powers of Labor
improvement in productivity is the
effect of the division of labor okay
then the question is once you have once
you come up to four thousand pins per
worker what do you do with all those
pins okay nothing if you cannot sell
them okay so you need to have the power
of exchanging possibilities of
exchanging goods and services so you
need to have a market for those goods
and services or in other words there has
to be a demand if you are living in a
small town in the middle of the UK
in the middle of nowhere in the UK
basically where there's no city or in
the countryside and that's your market
there's no way you're gonna sell those
four thousand pins you need to have an
extent of the market that allows you to
sell those beans which means having
people be able to exchange in goods and
services having a demand for those goods
and services the extent of the market
its limiting that possibility to benefit
from increased productivity if there's
no demand there's no occasion for the
division of labor okay now they're still
very helpful inside because can you
think of an example of an increase in
the extent of the market what would be
an example of a sudden increase of the
extent of the market yes for instance
extending your market to another country
okay okay so one suggestion is when you
start producing and goods become cheaper
all of a sudden all people can acquire
the goose book those goods and services
think about China joining the WTO and
growing fast
that's an increase in the extent of the
market because it's a big big big market
opening up and globalization in general
can be seen as an increase in the extent
of the market okay so possibilities to
change change goods and services which
gives occasion to the division of labor
okay to some extent you can think think
about also industrial clusters whole
cities and towns specializing okay in
one single product and selling it to the
rest of the world it's a different point
of view is not the single factory it's
the city but still the issue is division
of labor and extent of the market so
still very helpful inside okay we can
apply this even at a different scale not
the single Factory but a city for
instance or in industrial clusters with
division of labor inside an extent of
the market now of course the math floor
of the invisible hand has to be
understood in that specific historical
context okay so he was kind of as I said
advocating for this change suggesting
that the system would not collapse and
that the outcomes could be desirable if
you let people free to engage let
interpret aerial capacity to emerge and
let people free to exchange goods and
services among them themselves
because it was kind of trying to
overcome the old spirit system and come
into a different organization of society
and production what do you think are the
implications of this idea of division of
labor and extent of the market and of
course the invisible hand in terms of
trade policies for instance or
suggestions in terms of international
exchanges yes it might it might imply
that buying things from abroad might be
less costly than producing them by
yourself
oh come that back to these in a minute
but when I say policy implication I'm
thinking if he had to suggest to the
policy maker what to do in terms of
trade policy or international exchanges
what would be the suggestion okay don't
worry we will come to 2008 this was a
yes it's called it's normally thought of
as lazy Fair policy so don't worry the
market will adjust on its own don't need
to have government intervention though
actually Smith didn't say that
government only needed to defend people
and protect rights he was an advocate of
public education as well so there was a
rules of
government to to engage in public
education but for sure of course
thinking about the time it has a
different meaning than thinking about
this today okay you have to understand
we're back in the industrial revolution
laissez-faire so basically the policies
adjusted in terms of international
exchanges would be left international
exchanges happen okay it's not a problem
and free trade would be the policy
suggestion okay so that free trade would
be advantages for countries now of
course think about a situation it was a
Great Britain the time and the time the
UK who was the first industrialized
power so the ability of that country to
produce goods and services what was
different from that of other countries
David Ricardo became famous for his
contribution to the labor value theory
but today we're going to concentrate on
its contribution to the concept of
comparative advantage so basically what
Ricardo was suggesting is that there is
space for all countries to take part to
this free trade game let's call it like
this and anyone can take part and anyone
can benefit in a win-win situation the
industrialized countries or the less
industrialized countries they can all
take part provided that they specialize
in the production where they have a
comparative advantage okay
even though Great Britain might have an
absolute advantage might be better at
reducing everything
given the cost structure and given its
endowments
however if if country specialize in
productions where they have a
comparative advantage they can exchange
goods and services Great Britain can
give up some of the productions and
leave some of these production to other
countries comparative advantage in order
to understand where you have a
comparative advantage you have to think
in terms of opportunity costs okay it's
where you have the lowest opportunity
costs
giving up some production don't worry
because we will come to these are all
things that we will discuss later on in
the course what's important to
understand the importance of comparative
advantage concept it's that it gives the
occasion to everyone to take part to the
game in international exchanges and also
that subsequent developments in
international economics well it's
normally thought of as international
economics and trade policy and trade
theory such as the heckscher-ohlin model
which is one of the most famous one in
international economics build upon these
the this idea of comparative advantage
they build upon it ok over the years now
of course there was another influential
economists and political activist and
philosopher and Karl Marx which also was
observing what was happening throughout
the Industrial Revolution and actually
observing that from his point of view
what was happening was the emergence of
actually two classes one was the
capitalist class okay the other one was
the working class or urban proletariat
as you want to call it and that somehow
this second one was also asking for more
power and voice and that what according
to Adam Smith was a change from a
vertical structure of the society the
feudal system into a horizontal
structure of the society where people
could exchange property rights actually
according to Marx again we would end up
in a capitalist system into a vertical
organization of society still because
you will have a capitalist class on top
and the working class at the bottom so
basically he concentrated his studies
concentrated on the conflict between
these two classes and suggesting that
this conflict between the two classics
was an intrinsic feature of
capitalism okay an intrinsic feature and
the only way to manage this conflict
would be to guarantee growth
never-ending growth on a global scale
okay but that at the same time this
wouldn't be possible and that then the
socialist revolution was a solution and
because capital is necessarily had to
become imperialist as somebody was
mentioning trying to sell okay goods and
services in a different country this
would have turned into imperialism
Marx view and the table the pleura Thai
Revolution had to become international
what do you think of implications in for
the poorer nations if this is a view
what do you think is the possibility for
poorer nation is there a possibility to
truly develop in this system or not
unless through a revolution well the
implication is that it's very difficult
if not impossible for poor countries to
develop themselves in this fabulous
system and we will go back to this when
we studied a different school of thought
in development economics we will go back
to also the dependency theory and these
kind of conclusions okay and we will
discuss also whether you think it's
possible in reality okay
so at some point these scholars were
observing that in fact Industrial
Revolution was underlying a sort of
double conflict on the one hand an
internal conflict between the two
classes and on the external from the
external point of view a conflict
between industrialized nations and the
poorer ones the so-called late comers
and then you see you start here start
some of the bigger questions what does a
late camera do a country
that comes in late meaning after
somebody else has already industrialized
by definitions everyone but Great
Britain is a late comer Germany was a
late comer America was a late comer and
then now today we have different late
comers ok people that countries that
still have to industrialize then we have
another important I would say milestone
in the history of economic thought which
is up in Marjah 1842 1924 here we talk
about the neoclassical revolution or
marginalist revolution have you ever
heard this term before yes only those
that have taken history of economic
thought right everyone else do you know
what the marginal revolution is no okay
do you remember we said oh one thing one
important thing if you go back to this
life that we've seen so far
think about Marx think about Smith they
all had in common that they treated the
study of the economy as political
economy do you see that combination even
though they came to different
conclusions okay but it was political
economy because it was talking about
social organization of the economy and
keeping together study of the society
and the study of the economic systems
okay now when we talk about the marginal
revolution or neoclassical revolution we
mark we mean to mark a shift from
political economy to what it's called
economics or yeah economics and we
normally think about Alfred Marshall as
the first one that initiated this this
change with principle of economics
famous book is principle of economics
what did he explain in principle of
economics do you know if I now draw a
graph with a supply and demand would you
recognize it because you've done
microeconomics all of you okay now
that's what he was explaining
in principle of economics that's where
it comes from okay so basically
explaining trying to understand markets
through the laws of supply and demand
okay a very very important step into the
economics for many reasons what's the
characteristic of the supply and demand
graph of course you know how it works
when they cross you have a quantity and
the price the equilibrium quantity and
the price but think about the difference
between the political economy approach
what's the difference it doesn't involve
the state okay that's one point what
else does it not involve classes okay
yes
I mean it's individual acts or company X
you don't need to know where it lives
it's not in the industrial revolution
it's everywhere basically it's universal
so that person the consumer that makes
his choice or the company that decides
how much to produce that's that kind of
choice its equal everywhere and in
anytime okay at any time and everywhere
in the world so it doesn't imply the
political aspect of the discussion it's
abstract in a sense and universal at the
same time because we think that any one
chooses the consumers all make the
choice in the same way and companies all
reason in a similar way when making
those choices and basically so economics
gradually becomes the science that
studies the choice of a different
options of a representative agent as I
said individual X or a company X we
don't need to know that name
we don't need to know where they live we
don't need to know in what time history
they are and that takes this choice in a
rational way okay and normally at the
margin it's a marginal choice if you go
back into your studies of microeconomics
I'm sure that you've discussed a lot
about marginal costs marginal revenues
and the choice made taken into account
marginal cost marginal revenues okay
that's why it's called marginalist
revolutions because the important choice
are those at the margin okay and that's
where you have the toolkit for economics
to understand how people or our
companies make their choice and in a
different book in subsequent times in a
different books he discusses about
colonialist trade and also social
organization of production within
clusters so he was also studying
industrial clusters gave important
contributions to industrial economics
but in a different book so even we can
think about it really the separation
between the two of course he was trained
we have to remember so sometimes it's
useful to go back also today the
background of these scholars he was
trained as a mathematicians so he had a
natural inclination towards using
mathematic as a language okay although
he was warning that mathematic should
not become the essence of the study of
economics okay it should be useful as an
analytical tool but then when you had to
transfer the concept to everyone even to
the normal person even to the non expert
you should use words and keep the
Mathematica side okay otherwise it would
be difficult for everyone to understand
he was very conscious on this on this
point what about trade what was there
what was his
attitude to war trades we could say it
was he had a pragmatic approach okay so
generally in favor of free trade but him
but in a pragmatic ways it could also
understand that in some circumstances
for instance for the late comers in
certain conditions limiting free trade
could be useful in very specific
circumstances so he was not he didn't
have an ideological let's say approach
towards three trades free trade always
and ever
it depends in some circumstances so it
tried to be more pragmatic on this point
of view now of course you see that the
political aspect is taken aside he
wanted he had lead the ambition of
giving a toolkit for economics to be
more scientific okay and and to resemble
Natural Sciences modern social sciences
that's why also he was stressing these
in principle of economics and also he
was he had the ambition to try to
separate the positive analysis from the
normative one now what's the difference
between positive analysis and normative
analysis so what's your name again
Ezra says positive analysis asks what's
the problem and normative analysis tries
to give a solution positive analysis is
that it has positive analysis is a
description normative analysis in is an
opinion okay so that's the difference
basically it's positive analysis tries
to describe a phenomenon okay
asks the kind of tries to answer to
these kind of questions what happens if
you write if you raise interest rates
what happens to savings okay try to
describe the phenomenon normal even
alice's tries to suggest what should be
done so is it a good idea to rise
interest rates in this
in history that's kind of a normative
questions okay so the ambition is to
make economics science free from value
judgments okay and and concentrate more
on the positive side of economics that
rather than normative point of view this
was something that Russia was trying to
do though of course many many scholars
later on discussed whether it is really
possible to be free from value judgments
okay but it's important to remember
these two did the difference between
positive analysis and normal even
Alice's okay that's something that is
very useful for well I would say in your
future career always try to remember
that you as a separate not always that
separate but for sure description and
the policy suggestions for instance or
what we call policy implications now
then coming to them that's one of our
brief overview we have another
revolution even with the contributes of
Keynes we talked about Keynesian
revolution okay say revolution because
it's a completely different set of
perspectives explanations on how
economic phenomenon work different
theory and different policy implications
okay and here we have two books that are
important the first one is the economic
consequences of the peace after world
war one he was discussing about the
peace process at the end of World War
one suggesting that it was badly being
badly managed okay and he was suggesting
that it was a mistake
- let defeated nations pay for the war
damages and that somehow country
intuitively after the war you should
help defeated nations recovering because
if you don't do it and if you put too
much pressure on defeated nations you
will get in even bigger troubles ok
those and which is actually what
happened
so it was suggesting that the bad
management of the peace process would
pave the way for totalitarian regimes
that then came about especially in
Germany because he was stressing that if
you don't help defeated nations they
will get into even more economic trouble
and that then in turn these will become
social and political will turn into
social and political instability ok he
was an economist and very very active in
terms of policymaking always active in
suggesting he held positions very
important positions both at the end of
World War one and at the end of World
War two in suggesting policymakers what
to do and he had this view about how to
deal with the peace process but they
were not
they didn't come through in the policies
in the policy process okay then he
published the general theory as the most
famous one general theory of employment
interest and money in 1936 Henny
stresses I hope then how why we say it's
revolution because it was stressing that
he called it general because according
to his point of view the mainstream
neoclassical revolution that came before
which came mainstream because at that
time martial studies were very very well
in fact were the mainstream economics
and many textbooks were based upon
martial understanding of the markets and
he was suggesting that case that we are
studying as if it was the universal
important one which is basically built
upon the perfect competition ok that
setting that you know from my co
economics has perfect competition has
the reference model ok
that's the special case so Keynes
was explaining at the beginning of the
general theory we're studying actually
the special case I don't think that
that's the general case so I'm calling
this theory general because I wanted to
make it clear that we are concentrating
on a special case and they actually
market if they're like free to operate
without any rules they get into failures
ok that's what of course for
microeconomics you know that there are
market failures and he was stressing
somehow that market failures are the
rule not the extract not not the
exception ok and also with other
scholars that gave contribution to
industrial economics also trained in
Cambridge and that we're working with
Keynes suggested that ok perfect
competition is the exception actually
normally markets are structured around
different structure if it's not perfect
competition it's what
in perfect competition which means plant
I'm saying I'm talking about the market
structure so if a market is not
structure it doesn't work as a perfectly
competitive market it's not perfect
competition what else can it be
monopoly or oligopoly or
absolutely an apple is the competition
okay so and that these are the rules
actually so it's so even when you think
about how companies decide their prices
in monopolistic competition or oligopoly
or even more so monopoly they're not
price takers okay they have some market
power and this also has a meaning for
the general functioning of the economy
okay so he was trying to to link this
micro economic bit but focusing not on
the exception he said but on the the
more general situations okay and of
course of course he was studying this he
was very much stress on to understanding
the Great Depression okay because if you
think about it according to the the
mainstream view markets would adjust
quad automatically and even if you had a
crisis you should see market adjusting
quite automatically but then the Great
Depression didn't work like that
he was observing persistent unemployment
so he tried to he was trying from the
theoretical point of view to understand
how can he be that we have persistent
unemployment there must be something
that doesn't work as the previous theory
is suggesting on that market adjust and
and that the laws of demand in offer are
enough to make markets adjust
there's something that we're not
capturing that's what the general theory
was about trying to explain for instance
why wages are sticky and do not adjust
immediately and also trying to
understand the impact of monetary policy
on the economy but he wanted to do so
basically to understand unemployment why
an employment was something that could
not be resolved so easily after the
Great Depression and there must be
something wrong in the theory it was
suggesting and also you know he gave the
counterintuitive intuition that
counterintuitive solution that in a
crisis time actually a stage should
intervene and spend more instead of less
during a crisis time why because you
needed a super partes institution that
would basically give confidence okay
change agents expectations on the future
okay and then of course for instance
with the New Deal that's an example of a
kind of policy that follows these
suggestions you can invest with through
public spending and that activates a
demand okay because people then are
working in today public investment and
getting higher income and through higher
income increased the demand for more
goods and services and it was basically
about also changing the expectations and
of course he had a different views about
how individuals make their choice he
didn't quite believe in the rational
idea of rational choices but he called
it stressed for instance the concept of
animal spirits especially thinking about
financial markets and how them prices
came about in nineteen
99 thinking about financial markets
there was an irrational exuberance as
the irrational exuberance
so people investing not in a very
rational way okay so one solution to the
market failures is is through government
intervention basically markets do fail
and you need government to intervene I
would say that also he had kind of a
pragmatic approach still was very
conscious to not embrace free trade to
cool that's it but try to grip more
pragmatic so free trade yes it can
benefit everyone that it's engaged in
free trade but we must be aware there
are also there can be negative
consequences in particular he was very
very he was who say his attention went
more on to trade imbalances so he was
cautious in warning against trade
imbalances you can have free trade but
make sure that countries do not run hi
trade imbalances okay
hi trade deficit for instance or trade
surpluses when I get too high that can
be a problem so he was very much focused
on trade imbalances okay and that you
should try to limit those trade
imbalances when we come to after this
brief brief overview so we ended up with
the general theory 1936 okay that's what
we ended we come to this time here you
see it's called in 1944 what's the
economic historian Hobsbawm calls the
age of catastrophe no wonder why okay
the age of catastrophe after two world
wars okay one of the darkest periods of
our times so age of catastrophe 1994
it's a very very significant a year
and very much connected to canes and
also to his ideas on free trade what
happened in 1944 among other things now
you see that we are observing different
in this graph here you are observing
different phases of globalization okay
you have an index here that it's called
trade openness index and it's trying to
capture the volume of trade so imports
and exports some duck together over GDP
okay at the global level what is it that
you note that you notice first
this is imports and exports over GDP but
at the global level what is it that
you're noticing what catches your eyes
can be even more than one things okay
yes it went up very quickly after 45
that's one thing what else yeah okay
this lowest point in 1944 yes what else
her straight lines before okay we don't
have prolly data okay data is a way we
can get trend data the lines are
interesting because they tell you that
even if we go back in time and of course
also back in history there were periods
were exchanges in goods and services
happen did take place but the volume
volumes are by no way comparable to
those of today okay even if you think
about it okay there was a new silk roll
at some time but think about the speed
and the volumes of goods and services
that could be traded back then so
they're not comparable to those of today
so yes one point good point is 44 is the
slowest the lowest point and then it
started increasing we can spot different
phases of these increase in
globalization
measured this is a proxy okay just
measuring trading goods and services is
a proxy well the other thing is that we
are at the peak okay we never
experienced anything like that in recent
history such a peak in terms of volume
of trade okay so you understand that
this means that institutions governing
globalization it needs change even just
because for the simple fact that we
haven't experienced such an integration
in terms of volumes of trade before okay
we're at the peak 60% so if we go back
in the 70s we were around 20% okay of
trade volumes in terms of GDP means that
60% of what we produce is actually
exchanged more than a half and it never
happened before okay so we need to think
about the rules that govern these
exchanges okay
these thinking about the rules that
govern these exchanges actually it's not
new in 1944 exactly after the end of
World War two at some point the world
felt the need to think about the rules
that should govern international
exchanges now during the during the two
world wars exchanges went down because
world economy is by definition not based
on exchanges of came you don't trade
goods and services while you're at war
with someone okay so that's why
exchanges go down down down down up to
the end of World War two and then at the
end of World War two countries felt the
need to set the rules that basically
would prevent another war that was the
issue at stake they they wanted to
prevent another world war so they had to
think about a place where to discuss
political issues global political issues
the United Nations and they needed a set
of rules to govern the economy in a way
that would prevent another world okay so
when did that happen where the set of
rules governing the next phase of
globalization 1944 Bretton Woods yes
Bretton Woods conference okay
Bretton Woods conference that was very
important because basically set the
rules for the next phase of
globalization okay which basically
remained so until the 70s and then
slightly changed
what do you remember about Bretton Woods
it's important because when you look at
that conference those rules were based
upon what they believed was the relevant
economic theory the relevant economic
theory to explain even exchanges between
countries and to provide the correct
policy suggestions to policymakers to
set the rules for governing exchanges
across countries so in the Bretton Woods
conference what is it that countries
decided the architecture of economic
relations at the global level
so some institutions were funded at the
Bretton Woods conference do you remember
which ones yes that that the World Trade
Organization is saying it was the
general agreement on trade and tariffs
which then became the WTO okay that's
true general agreement on trade and
Tabak ties with big which basically was
paving the way for free trade free trade
across countries okay the World Bank
okay the World Bank the International
Monetary Fund you've heard about it
right yes you have what else
what about exchange rates between
currencies
yes exactly so basically these are the
pillars at the Bretton wood conference
the pillars that came out from the
discussions at the Bretton wood
conference the architecture that was
governing the next phase of
globalization based upon fourth pillars
one a fixed exchange rate system with
the dollar as a reference currency so
other currencies would be packed against
the dollar okay fixed against the dollar
the International Monetary Fund which
would help countries dealing with
financial instabilities providing
short-term loans okay and monitor over
monetary policies okay basically to
avoid hyperinflations and trying to deal
with macroeconomic stability short-term
loans the World Bank was meant to
provide long term long term loans
especially to poorer countries helping
to help them in their industrial
development process and then the general
agreement on trade and tariffs opening
international trade which then became
WTO you see it's a different setting of
rules with respect to world war one
there's a bank trying to help poorer
nations there's an International
Monetary Fund dealing with macroeconomic
instability fixed exchange rate regimes
which would promote exchanges between
countries okay
taking out the risk of a currency
fluctuations in currencies and the WTO
WTO you know that Keynes was part of
these right he was a delegate for the
United Kingdom so he his views were
really put forward in this discussion
and in this debate though it had
different vision he didn't come out
exactly has he envisaged because there
was a discussion between the United
States and the delegate was Harry Dexter
white and in the United Kingdom and the
delegate was Keynes particularly he was
stressed with the idea that it was a
mistake to fix all other currencies with
the real currency of a real country so
using the dollar as a reference
currencies could be a mistake he was
advocating for creating a new currency
not a real one only a virtual one and
and using that for instance for
international exchanges and also for
fixing the exchange rates right because
if anything happened to the reference
country or the reference currencies the
whole system could collapse okay if
anything went wrong with the economy of
the reference country okay and the
system did actually break up in the in
the 70s okay and and then they had to
shift to a flexible exchange rate regime
okay and also he was suggesting which
did not pass and you should have a sort
of clearing Union a super party's again
institutions that would make sure that
countries didn't run too high trade
deficits or too high trade surpluses he
suggested that he should control trade
deficits or trade surpluses okay and the
imbalances but his views were not didn't
completely pass but he was very
influential in in this whole
architecture okay
now if you go back and look at the graph
surely you see that international
exchanges
soon after started growing but not that
much actually the speed was much higher
than we had to wait until 1970s to see
the next wave of increase in exchanges
okay but they started growing growing up
up and then we had the stop of course
there are at least two stops beginning
of the 70s and end of the 70s
why yes to oil shocks okay and
recessions that came about after the two
oil shocks which stopped also trade
exchanges and then again a sharp
increase and I would say that a new
phase also begins if you look at the
rates I didn't I didn't put the rates
here but if you you look at the increase
rate in in trade measured by these index
there's a sharp increase after 2001 so
the growth rate the growth rate of
exchanges increases a lot after 2001 so
we say that that's a new fun and you
faced globalization with especially with
the entry of China into WTO which
changed a lot of these equilibrium and
then of course we have 2008 you see a
stop sudden stop and sudden stop in in
exchanges which is then soon recovered
okay and then now for our course it's
important because it's exactly at this
point here around 1950 when all these
things were happening when they were
setting the rules of the games the
theoretical debate was very active okay
theoretical debate was very active so we
have in that moment in time most of the
international trade theory the bulk of
the international
trade theory developed at that time for
instance age actually model based upon
the idea of comparative advantage and
basically has a policy implication
advocating free trade but also at the
very same time we you had the real
beginning of development economics as a
subject of studies and development
studies beginning people dealing with
development studies and advancing their
theories for instance the prohibition
single hypothesis which will then
explain and dependency theory trying to
understand what was the role of the so
called late camera in this architecture
and whether they could really improve
their situations in in such a world okay
and they are kind of separate into twin
but separate also because they use
different languages and different set of
tools okay so you might have very
abstract models coming from the marginal
marginal revolution kind of approach and
at the same time you have development
studies which still keep some part of
political economy inside okay
political economy inside PR inter twin
but and around the 50s most of them were
developed and are still very much
influential today so when you think
about it the debate is still alive even
about protectionism you know that we
live in a in a phase where apparently
now protectionism is has become a viable
policy program and but there are a lot
of theories that might have a lot to say
about protectionism in this phase and
what would be the consequences for the
US what would be the consequences for
China can they really engage into that
sort of policy and what are the
consequences over Europe and under what
circumstances protectionism work okay so
we will come to that but
questions issues okay you are with me
Stephen yes all of you Wow
good okay we can stop I'm gonna take
some time here to deal with them
materials anything you might want to ask
me these things are gonna be on the
Moodle platform okay
from this afternoon and then we will
start from here tomorrow okay thanks
