Nievas and Piketty on Unequal Exchange – Developing Economics

By Güney Işıkara and Patrick Mokre

The recent paper by Gastón Nievas and Thomas Piketty, “Unequal Exchange and North-South Relations” has gained substantial praise as well as criticism in a short period of time. Their empirical endeavor is impressive: the authors compiled and published a large dataset of balance of payments, including traded goods, services, direct transfers, and income from foreign labor and capital assets. This is a gruelling task in itself, and the dataset will certainly provide the foundations for many fruitful studies. For many academic economists, Nievas and Piketty’s own interpretation of the data constitutes one such great contribution for it puts forward, as the title of their paper suggests, that modern inequalities across regions and countries have their roots in colonial extraction and unequal exchange characterizing international trade until today. 

We on the other hand argue that the paper falls behind the state of perception of international inequalities in the Marxist tradition, dependency and structural economics literature. It (1) grasps global inequality as the outcome of a collection of distortions of the capitalist market mechanism rather than as an intrinsic feature of the latter; (2) consequently, proposes structural reforms to alter the power asymmetries in international trade, without an appropriate model of those power relations and why they exist in the first place; (3) lacks an adequate theory of production, value and price to understand the exchange relations at stake; and (4) artificially separates the term unequal exchange from the existing literature on trade inequalities, value transfers, and drain of wealth.  

This is not the alternative economics needs

Our first insight is trivial: Nievas and Piketty’s political economics is not radical. They describe fundamental and persistent inequalities at the heart of global capitalism but provide no fundamental criticism of global capitalism as an exploitative system endogenously generating various forms of inequality. Instead, they run counterfactual simulations that cancel out colonial extraction (for example, tributary payments), price differentials between raw materials and manufactured goods, and balance them with hypothetical decreases in the consumption of high income segments. These simulations suggest that persistent global inequalities result from a (vast and heterogenous) collection of one-off market distortions. 

Consequently, they propose fundamental, but not systemic, regulatory changes that should enable market-driven global convergence. The authors argue that “changes in bargaining power and terms of exchange can have enormous consequences on the relative wealth of nations and on their development opportunities,” and discuss the possibilities of designing a mutually beneficial trade and monetary system through structural reforms of the international monetary and exchange system, a language that is familiar from economic textbooks and IMF publications. It amounts to the defence of hopelessly failing mainstream theories of international macroeconomics by means of identifying isolated imperfections.

No theory of political and economic power relations

That is a toothless conceptualization of power and conflict in global capitalism, where international inequalities are expressed in and through the market mechanism and competition, not as deviations from it. Political and economic power are inseparable, especially at the international level, a pattern the authors themselves describe with the help of the relationship of colonial extraction and capital accumulation.  As capital accumulation transgressed national borders and gained an international character, it built on and transformed existing inequalities, and created new ones as an inherently uneven process. By implication, the roots and interplay of political and economic power need theorization. While the authors state that “global economic relations appear to be characterized by persistent inequalities and power relations rather than self-correcting market mechanisms” (p.7), their conclusions delude that the market mechanism would produce internationally equitable outcomes, if only non-economic power imbalances were held in check.

The study of what the authors call “unequal exchange” thereby becomes a descriptive, empiricist exercise. It does not provide (any) systematic analysis of the dynamics which favor the imperialist center, let alone understand them as an integral part of global capitalism. It comes as no surprise that they fully ignore the theoretical and empirical investigations undertaken in the past hundred years, associated with Marxist studies of imperialism, unequal exchange, and the vast dependency literature, which their paper has significant overlaps with.

A “bastardized” theory of unequal exchange and imperialism

It is even more striking what Nievas and Piketty choose to ignore. They document how trade deficits in raw materials with simultaneous trade surplus in manufactured goods enabled the European imperialist powers of the 19th century to dominate global capital accumulation while sustaining a trade deficit. The crude distinction between raw materials and manufactured goods is a reasonable trade-off when harmonizing large datasets with considerable gaps, and when discussing the data collection. But the ensuing theoretical interpretation lags significantly behind the theoretical contributions of Marxist and dependency theories which argue that value transfers go from less to more capitalized, from high to low rates of surplus value production. 

Since the authors emphasize terms of trade and bargaining power rather than transfers of value based on conditions of production, and propose a justice-based reform agenda for international institutions, references at least to Raúl Prebisch and Hans Singer, or Arthur Lewis would have been expected. This structuralist tradition perceives the root of inequality in the deviation of actual terms of trade from an ideal set of relative prices reflecting perfect competition (that is, the absence of any imperfections or external factors distorting the market). Strictly speaking, this entails a relative loss of potential gains from trade rather than a drain of economic surplus in the sense of unequal exchange.  

The latter term, unequal exchange, is historically grounded within a Marxist theoretical framework. Unequal exchange exists even in a domestic context as a result of between-industry competition, which had already been analyzed by Marx. On the international level, in addition to differences between capital compositions across industries and countries, persistent differences in wages and rates of surplus value come up as a second channel of value transfers. Arghiri Emanuel formulated this dual mechanism of value transfers, and pioneered unequal exchange studies more than fifty years ago. The term unequal exchange refers to unequal magnitudes of social labor being traded at the same price, which favors the imperialist center to the disadvantage of less capital intensive and lower wage conditions of production in the periphery. 

Nievas and Piketty add insult to injury by putting the term unequal exchange in the paper title – without even mentioning the work of Arghiri Emmanuel, Samir Amin, Ruy Mauro Marini, and many other thinkers. We encounter the same problem when the authors interpret the imbalance of net foreign asset holdings. Hilferding’s and Lenin’s analysis of capital exports as a strategy of accumulation beyond borders, as well as to enforce the dependency of the periphery, ground these phenomena in analysis. But the authors only cite them as examples for early empirical approaches to the topic and forgo any theoretical explanation of the root causes as well as the consequences of capital exports. 

Unlike some critics on social media, though, we do not regard this as some form of plagiarism, as their paper does not rely on the insights of the terms of trade, unequal exchange, or imperialism literature. At most, much like when Joan Robinson coined the term “bastard Keynesians” for those who cited Keynes only to reinforce earlier equilibrium models which Keynes’ theory overcame, we could speak of a bastardization of unequal exchange: they use the term in a purely descriptive way, deliberately ignoring its intellectual history, which allows them to avoid the discussion of capitalism as an exploitative mode of production with built-in tendencies to generate massive inequalities in income, wealth, and power within and across countries.

An alternative approach anchored in value theory

Marxist theory (and the classical political economics tradition in general) argues that commodity prices gravitate around centers that are regulated by the direct labor time necessary to reproduce a commodity as well as indirect labor used up in the form of capital inputs, and an economy-wide general profit rate. A substantial empirical literature corroborates this theory as a general empirical pattern. And the theory of unequal exchange is precisely concerned with unequal amounts of social labor being traded at the same monetary price: transfers of value. Once the underlying theory of value is discarded in favor of a subjectivist approach, as Nievas and Piketty do, there is nothing unequal being exchanged, strictly speaking.

Their interpretation of the impressive data collection is neither systemic nor structural in a meaningful sense. This extends beyond the usual lamenting that non-radical economists tend to suggest some original or desirable variety of capitalism exists out there, in the vast depths of textbook knowledge, only to be discovered through market-centered reform. The paper lacks any clear theory of price beyond the assertion of bargaining power. It is true that power imbalances enable individual capitals as well as states to push others into unbalanced patterns of trade and accumulation. The crucial point is, however, that the capitalist mode of production and reproduction self-regulates in ways that generate these power imbalances. Therefore, the main aim of (classical and modern) political economics is to grasp those regulatory principles.   

There is an alternative, nevertheless, and the extensive dataset compiled by Nievas and Piketty will help enable such systematic analysis. The unequal exchange literature provides a consistent framework to understand how imperialism operates in trade through transfers of value, through capital exports and debt traps, and in value capture by non production industries like finance and trade. In our forthcoming book titled Marx’s Theory of Value at the Frontiers, we provide a framework to estimate international value transfers brought up by the market mechanism (rather than distortions thereof) based on the tendential equalization of profit rates and non-equalization of wages (and rates of surplus value). This allows us to estimate the relative importance of differences in (1) value compositions of capital, and (2) rates of surplus in overall transfers of value through international trade. The same framework can also accommodate the analysis of value capture by non-production industries and capital exports, which makes use of exactly the kind of data Nievas and Piketty gather. Rather than relying on bargaining power as the dominant form of price formation, we show that labor values regulate the centers of gravity for market prices, and how competition expresses and deepens international inequalities. 

Difficulties mostly arising from the availability of data aside, the approach briefly outlined above has the crucial merit of integrating the spheres of production and circulation. It allows for studying various phenomena ranging from productivity differentials to trade accounts, from regularities between prices and values to terms of trade, from unequal exchange to power asymmetries on grounds of a materialistic understanding of society and history. A corollary, which might be charmless, or even repulsive to some, is the following: if all these are integral parts of the same totality called global capitalism, challenging one or more of them implies challenging the latter. This is the crux of the actual unequal exchange literature which Nievas and Piketty spirit away.

Güney Işıkara is a a Clinical Associate Professor in Liberal Studies at New York University.

Patrick Mokre received his PhD in Economics from the New School for Social Research in 2022. Patrick’s research gravitates around the political economy of labor, inequality and capitalism.