Heterogeneous Capital and the Heckscher-Ohlin-Samuelson Theory of Trade

Abstract

While many objections have been raised as to the validity of the assumptions underlying the Heckscher-Ohlin-Samuelson theory of trade, that theory is widely regarded as immune from criticism of its internal logic, once the assumptions are granted. If the theory is to be useful in the understanding of real world trade, however, the assumption that each country has a given endowment of capital must be interpreted in such a way that the heterogeneity of capital goods can be allowed for. Such an interpretation is indeed possible but it immediately raises doubts as to whether recent results from the controversy over capital theory might not show the internal logic of the HOS analysis to be open to criticism. The object of the essay is to suggest that the existence of heterogeneous capital goods does lead to a breakdown of the logic of the HOS theory and hence to that of its major conclusions.

This paper was presented to the conference of the Association of University Teachers of Economics, Aberystwyth, 1972, and then published in the conference proceedings: J. M. Parkin (ed.), Essays in Modern Economics, Longman, London, 1973. We should like to thank C. J. Bliss and J. M. Parkin for helpful comments. (See also note 17, below.)