Theories of Unequal Exchange: Emmanuel and Kay

 Arghiri Emmanuel's theory of unequal exchange, dating from the late 1960s, was in certain respects in extension of Prebisch's and Singer's analyses of the deteriorating terms of trade for the less developed countries, although Emmanuel himself claimed that his mode of reasoning was different. Emmanuel tried to explain the deteriorating term of trade with reference to Karl Marx's labour theory of value. This made his theory somewhat complicated and difficult to review in a few words. The aim here is therefore just highlight a few main points.

According to Emmanuel, tie industrial countries could buy goods from the peripheral countries at prices below the costs involved in producing the same goods in the industrialized countries - due to the very low wages in the peripheral countries. Emmanuel argued that wages were so low that the workers there were paid the equivalent of only a tiny fraction of the value of the work they performed and the goods they produced. 

This fraction was considerably smaller than that paid to workers within the same branches of industry in the centre countries. In this sense, a kind of over-exploitation prevailed in the poor and dependent countries. This over-exploitation, according to Emmanuel, was a more important mechanism of surplus extraction than monopoly control over trade (as suggested by Frank). It resulted in a significant transfer of value to the industrialised countries. This transfer of value was at the same time the main explanation of the perpetuation of underdevelopment.

Emmanuel's original theory has since been strongly criticized and reworked in several versions. Doubt has been raised about the theory's general validity. On the other hand, his theory of unequal exchange has sown more seeds of doubt about the blessings of international trade for the underdeveloped countries, thus reinforcing the criticism put forward by the structuralist economists and others. The theory has pointed out some further weaknesses embodied in the neo-classical theory of comparative advantages and its basic thesis that trade under all circumstances will be advantageous for all parties involved.

It may be added here that in the mid-1970s an attempt was made to incorporate a special version of the theory of unequal exchange into Geoffrey Kay's analyses of the causes of underdevelopment (Kay, 1975). Kay argued that unequal exchange was the preferred mechanism for extracting economic surplus of a particular social class, which he termed the pre-capitalist commercial bourgeoisie. 

This bourgeoisie, which also existed in Europe prior to the Industrial Revolution, did not acquire its revenue (as did the industrial and capitalist commercial bourgeoisies) by appropriating the surplus value produced by labour, but on the contrary by exploiting the distortion of prices — a distortion that enabled this class of merchants to buy goods at a costs below their real value and sell them at prices above their real value. 

This was possible because of an exceptional position in the buyer's market, for example as a monopsonist, and a corresponding exceptional position in the seller's market, for example as a monopolis. The British East India Company and other similar transnational trading companies which operated during the colonial period could be seen as organized representatives of this particular pre-capitalist commercial bourgeoisie.

The emphasis on market position distinguished Kay's theory from Emmanuel's. In certain respects, it resembled instead the mode of reasoning proposed by Frank. The most interesting aspect of Kay's approach, however, is that he took a first decisive step towards a systematic differentiation and, hence, a limitation of the validity of the theory of unequal exchange. 

It thus followed from his consideration that he establishment of industrial capitalism in the peripheral countries would pave the way for the growth of a 'normal' capitalist commercial bourgeoisie which would not be dependent on price distortions, but would receive its revenue from the surplus value produced by labour in the production processes. As a result, unequal exchange would no longer be necessary.

More specifically, this implied that peripheral societies which experienced considerable industrial development — such a South Korea and Taiwan, but also India, Brazil and Mexico — at the same time would experience a reduction of the value transfers through unequal exchange. Conversely, countries like the small African ones, with very limited industrial production, would continue to be subject to the special mechanisms of surplus extraction referred to as unequal exchange.