ABSTRACT
There is no branch of economics in which there is a wider gap between orthodox doctrine and actual problems than in the theory of international trade. The aim of the traditional theory was to establish the beneficial effects of free trade. This was eagerly accepted by orthodox opinion in the country which had the most to gain from open markets for its exports. The greatest obfuscation of the orthodox theory was in its treatment of foreign investment. The concept of 'capital' as a factor of production implied that when one country lends to another it is transferring real resources to it. Capital consists of lumps of putty and the rate of interest is determined by the ratio of putty-capital to labour, being equal to the marginal productivity of putty. In this scheme of ideas, international capital flows consist of exports of putty from one country to another.
