Journal Article Note on a Marshallian Conjecture Get access Murray C. Kemp Murray C. Kemp University op New South Wales Search for other works by this author on: Oxford Academic Google Scholar The Quarterly Journal of Economics, Volume 80, Issue 3, August 1966, Pages 481–484, https://doi.org/10.2307/1880734 Published: 01 August 1966

I. Assumptions, 140. — II. Tariffs and employment under fixed exchanges, 141. — III. Tariffs and the distribution of income under fixed exchanges, 145. — IV. Tariffs, employment, and the distribution of income under flexible exchanges, 146. — V. Summary, 149.

SPECULATIVE activity may contribute to the stability of price, or it may promote and feed on instability. But how may one determine, for a specific market over a specific period of time, whether on balance the activities of speculators have been stabilizing or destabilizing? It has been maintained by Milton Friedman that destabilizing speculation must be unprofitable since it involves selling at low prices and buying at high prices.' If this proposition were valid, and if it were also true that stabilizing speculation is always profitable (because it involves buying at low prices and selling at high), the question would take a more tractable form. For then the empirical investigators need only identify the sign of speculative profits: if they were positive, the speculators must have contributed to price stability; if profits were negative, speculators must have added to instability. Unfortunately, neither proposition is generally true; counter examples will be produced in sections 2 and 3. They may be untrue, however, only under conditions which in practice are most unlikely to be satisfied. If this were so, speculators' profits might yet serve as a useful, if not infallible, guide to the stabilizing or destabilizing effects of speculators' activities. This possibility is examined in Section 3. In Section 4 there is outlined an alternative, more direct approach to the problem of determining the effects of speculation on stability. It possesses the incidental but substantial advantage of not requiring the direct measurement of speculative profits and losses.

In recent years there has been a systematic exploration of the implications of relaxing the strict assumptions of the textbook version of the Heckscher-Ohlin theory of international trade. Some of the bestknown propositions have turned out to be highly vulnerable to changes in assumptions. Thus if the assumption of constant returns to scale is relaxed, one must be prepared to sacrifice the Stolper-Samuelson and Rybczynski theorems (see Ronald Jones, 1968, and Kemp), and one must accept the possibility that commodity prices and outputs are negatively associated (see our 1969 paper). And if factor-market distortions are admitted, one must be prepared for the possibility that the ranking of industries by value factor intensities may be opposite to the ranking by physical factor intensities, implying in turn that outputs and prices may be negatively associated and that the Stolper-Samuelson and Rybczynski theorems must be rephrased and then cease to be dual to each other (see our paper with Stephen Magee; Jones, 1971). Against the background of traditional results, the new findings have been viewed as perverse and paradoxical.

In a recent paper in this Journal J. Bhagwati and M. C. Kemp considered the question of ranking tariffs in the presence of monopoly power in trade.' Under the assumption that the exportable goods in the tariff-imposing country were not inferior, the following proposition was established: the country could raise its welfare monotonically by raising tariffs up to a certain maximum (corresponding to the optimum tariff), and beyond this point a further tariff increase would monotonically reduce welfare to the point where protection was prohibitive. The demonstration was based on the implicit assumption that the foreign offer curve faced by the tariff-imposing country was well-behaved. This, however, need not be the case. Even if we assume (in the spirit of the Bhagwati-Kemp paper) that there are no internal commodity price distortions, factor price distortions, or imperfections in the redistribution of income, the foreign country may have a tariff. It then becomes possible, in the presence of inferior goods, for the foreign offer curve to yield multiple equilibria at given terms of trade. In this case it is easy to show that the Bhagwati-Kemp theorem no longer holds. Assume that the foreign country has a tariff and that its export good is strongly inferior. Then its offer curve will have all the properties described by Bhagwati and Kemp in their discussion of the tariff-imposing or country. This is illustrated in Figure I. With the home country's offer curve intersecting it from above in the backward-bending part of the curve, welfare will decline if a small tariff is imposed. As drawn, welfare continues to decline for tariffs up to a rate t, and then increases between the tariff rate t, and tariff rate t2 (while remaining below the free trade level). The welfare level then declines steadily for higher rates until at rate t, the tariff becomes just prohibitive. The corresponding tariff welfare curve is shown in Figure II. Note that, rather than impose