64 SOCIAL SCIENTIST
Heretics", this discussion of Keynesian theory and its implications does not seem, at least to us, out of place. In fact, while the Keynesian system presented a rigorous theoretical critique of the ability of the market mechanism to lead to optimal solutions, it is necessary to point out that Keynes' own ideas on this question were not as novel as he made them out to be. Ronald Meek has emphasised the fact that even before Keynes, the limitation of Say's Law had been realised and in fact there were explicit discussions on money and the trade cycle.4 Again, in a recent paper Prabhat Patnaik has argued th^t discussions on a theory of inducement to invest were carried on in the con-troversies on the classical version of the market question.5 That is, theoretical tendencies gaining weight today, not only ignore important theoretical insights provided by Keynes, but are also completely oblivious of the history of economic thought.
Liberalisation and the Open Economy
We now turn to the case for liberalisation in an open economy. The dominant analytical framework within which the causes and effects of international trade are assessed, and 'outward-oriented* policies prescribed, is the theory of comparative cost advantage in its neo-classical version. This commences with the entire set of assumptions described in the preceding sectioi. and adds some more. In particular, it assumes away a range of factors which might be of special relevance in explaining cost differences between developed and developing countries : differences in natural resources, scale of operation and technology—in fact, everything except factors of production like labour and capital. Crucial developmental questions go by default, for endowments and technology are assumed to be exogenously given; all countries have the same technology; factors are perfectly mobile within, but immobile between them, being allocated domestically by a market mechanism which generates full employment of all factors.
In this rarified setting, free trade is shown to yield a finite increment in total income through improved allocation of factors. Note that this fundamental proposition refers to absolutely free trade. Under the assumptions* this is potentially Pareto-superior to restricted trade, which is in turn superior to no trade. No general ranking can be made of various degrees of trade restriction : it cannot be unequivocally stated that more trade is better than less trade. Note also that the Pareto- superiority is only potential, for as in the case of a closed economy the income redistribution brought about by free trade may make certain groups worse off. In addition^ the gains from trade are international; not all countries need benefit. Securing the Pareto-efficient outcome depends on the possibility of making lump-sum transfers from countries and groups which benefit to those which do not. (Interestingly, in labour-abundant economies, according to a standard theorem, capitalists will be on the losing side).
Once monopolistic elements, wage differentials and rigidities, or increasing returns to scale are admitted, free trade turns out to be a welfare— decreasing policy, and 'second best" interventions by the state are sanctioned.