Bhagwati and Ramaswami: Why it is a Classic

1. Introduction In a recent profile of James Meade, Max Corden (1996) writes, "Most students, and possibly many readers of this review, know the theory of internal and external balance through the Swan diagram and believe that Swan originated this theory or approach. They are also likely to believe that the 'theory of domestic distortions' originated with Bhagwati in various writings, especially Bhagwati and Ramaswami (1963), and with Johnson (1965). Furthermore, they may believe that the theory of the second-best originated with Lipsey and Lancaster (1956). Of course, all these authors and others made important and very influential contributions, reformulating problems, presenting essential points more clearly and neatly, and carrying the work forward. But the basic ideas can be found in Meade's two books. The theory of internal and external balance formed the centerpiece of the Balance of Payments. Swan just summed up many pages in one neat diagram. The theory of domestic divergences (as Meade called it) was fully expounded in two substantial chapters [emphasis added]. The theory of the second-best was quite central to Trade and Welfare (1955a), and indeed Meade invented the term 'second-best' which is now part of every economist's language, as well as exploring many of its implications in four chapters....From the point of view of history of economic thought, it is particularly worth rereading the chapter entitled, 'The Second-Best Argument for Trade Control: (3) Domestic Divergences'." This is an extraordinary tribute to an extraordinary figure in the field of international economics. While appreciating it, most readers familiar with Corden's measured writing style will also detect in the tribute an indictment of post-Meade international economists. In Corden's 1 judgement, international economists who followed Meade contributed little that was not already there in the latter's two books. 1 He makes this message more explicit later in the profile where he goes on to state, "While a graduate student I studied Meade's two books extremely carefully,... The result was the numerous later articles by various people containing supposedly new ideas, or even new wrinkles on old ideas, seemed obvious to me. This was especially true in the field of optimal trade policy, but also in public finance: I knew it all, and at first I found it difficult to see why the trumpets were blowing." Corden's view contrasts sharply with that of Harry Johnson, his contemporary and himself an influential contributor to the theory of commercial policy …