This is the latest in the series of Ohlin lectures delivered in Stockholm over the years by a number of distinguished economists to honor the work on the theory of interregional and international trade pioneered by Bertil Ohlin and Eli Heckscher. Leamer's lectures that form the basis of this book cover both the theoretical foundations of the Heckscher–Ohlin (HO) model as well as its empirical applications. But what is unique about the lectures is that he has used the opportunity to reflect on the ways in which theoretical and empirical economists have ‘crafted’ their research, the limitations of the implications and conclusions that have been drawn, and the ways in which research might be more fruitfully designed to build on the central features of the HO model.

In commenting on the craft of economics in his introductory chapter, Leamer is concerned (p. 1) with ‘what we think we know, how we learned it, how we teach it to others, how much is valid, how much is sound, how much is useful, and most important what we are doing right and what we can hope to do better’. While the mathematization of the model has focused on issues of precision and validity, Leamer questions whether this has been necessarily ‘useful’. He acknowledges the drawbacks of Ohlin's mostly prose and informal style, but he is nonetheless skeptical of formal theory and formal data analysis and urges that more emphasis be placed on a combination of formal and informal thinking and applications. He recognizes that formal data analysis has raised questions about the pertinence of the HO framework. Nonetheless, he points out the significance of the HO model in explaining, for example, the observed international specialization and trade of countries endowed with relatively abundant natural resources and with abundant and less educated work forces, and the fact that international competition from low-wage countries has greatly impacted labor-intensive industries in the United States and other high-wage countries.

In Leamer's view, the goal of economic modeling is to assist in the design of government policies, and, in the context of international trade, to identify the winners and losers from changes in trade policies. He takes issue with the usefulness of the Stolper–Samuelson theorem in identifying winners and losers associated with changes in trade, because the theorem assumes that factor supplies, tastes, and technology are fixed and factors are assumed to be perfectly mobile across sectors. He is critical of cross-country studies insofar as there may be an inconsistency between how change takes place across countries and over time, making it difficult to interpret the results of studies carried out at a point in time. He argues that, rather than trying to identify winners and losers from changes in trade, it would be more useful to design policy advice to enhance more fundamental economic and social objectives such as improvements in education, the economy's infrastructure, and the quality of life so that even scarce factors can gain from trade.

In reflecting on the craft of economics, Leamer characterizes economic theory as ‘fiction’ and data analysis as ‘journalism’ and recommends how important it is to ask qualitatively with regard to both theory and data analysis: ‘What did we learn, and was it worth the effort?’ In carrying out research, he emphasizes that it is imperative to state clearly the question to be addressed, to use a theoretical framework appropriate to the question, and to employ a variety of data sets most suited to the framework being used. Leamer himself is a great proponent of careful data analysis, which he says should include depiction of the data, tables of numbers that summarize the data, and stories that ‘memorialize’ the findings of the analysis. He is critical especially of graduate training that overemphasizes the mathematics of logic checking and devotes too little time to encouraging students to choose significant problems and to formulate models that are interesting and appropriate for the problems to be addressed.

In his Chapter 2, ‘The Heckscher–Ohlin Framework as Economic Fiction’, he notes how the framework has evolved over the years, from the use of spoken and written words coupled with a bit of algebra, reliance on graphic analysis, and currently using mathematics as the language of choice. As mentioned above, he views mathematics as a means of sorting valid from invalid arguments but questions its usefulness in not necessarily providing insight into the ways in which an economy operates. What Leamer argues is important then in evaluating the HO framework is what it offers in terms of its policy implications in the context of general equilibrium thinking.

Leamer addresses the mathematics, the stories, and the messages of the HO framework, taking into account Samuelson's influential contributions and referring to what is commonly labeled as the HOS framework. He explores here the three main theorems of the HOS framework in the 2-good, 2-factor model: Stolper–Samuelson on trade and real wages, factor price equalization, and Rybczynski on changes in factor supplies and outputs. While he calls attention to the assumption that labor and capital can be treated as homogeneous, which seems at odds with the form and variations that factor supplies may reflect in reality, he proceeds in any event to use the 2 × 2 model to show graphically how an increase in the labor force leads to an amplified increase in output in the labor-intensive sector and an absolute decrease in output in the capital-intensive sector. In the process, both capital and labor are shifted toward the labor-intensive sector, so that wages overall remain unchanged. Leamer then uses the Lerner diagram to demonstrate the Stolper–Samuelson theorem. He also provides some intuition in further explaining how the main theorems of the HOS framework can be interpreted and offers some extended commentary that is critical of the excessive use of mathematical reasoning by Samuelson and others as applied in the HO framework, including that factor-intensity reversals are unlikely.

Leamer considers the Lerner diagram to be his all-time favorite economics figure and uses it to analyze the equilibria with two traded goods and one nontraded, the implications of heterogeneous talent levels and heterogeneity of worker effort that affect productivity in a capital-intensive sector, and the effects of outsourcing. In each of these cases, he relates the analysis to how wages and product prices may be affected in the United States. Leamer further resurrects and analyzes Ohlin's views on why full factor price equalization is unlikely to occur, because of the existence of product-market specialization, technological differences, and trade costs. He analyzes each of these cases using Lerner diagrams. For the more technically inclined reader, he further presents a general model with n products and m factors and explores several implications of the HO framework with regard to product specialization and factor returns.

Leamer next considers ‘empirical work,’ or what he calls ‘the econometric journalism’ of the HO framework in Chapter 3. His comments are mainly methodological, asking: ‘What are we doing right, and what can we do better?’ He recommends, in particular, greater use of visual data displays, more effort in linking the theory with the data, and the fundamental question of the HO framework, which is: ‘What should governments do to capture the gains from trade and to ensure that the gains from trade are broadly shared and the greatest benefits accrue to the most deserving’ (pp. 104–105). Four central ideas in designing policy are offered, based on the HO framework, with regard to the effects on factor returns of changes in trade barriers, educational and infrastructure investments, changes in the composition of trade, and technological change. Leamer further indicates the public policies suggested by the HO framework for countries that rely on exports of manufactures and countries with abundant natural resources.

Leamer expresses a number of concerns that arise in translating the HO theoretical model into an empirical model, including the absence of a time dimension, constraints on the internal movement of factors of production, and the importance of distance. Also, as already noted, technology, tastes, and factor supplies are taken to be fixed. In addition, the level of aggregation of the data poses serious difficulties in designing and interpreting empirical modeling. Leamer is critical of the pertinence of factor-content studies since they may not address the consideration that scarce factors may lose due to global competition. He offers evidence, based on his own work, in which the patterns of trade organized by commodity groups and countries bear out the compelling message of the HO model that factor supplies affect trade. Leamer is struck by the vast wage differences that exist among countries that are suggestive of a multi-cone model of trade and specialization, especially in China, with consequent impacts on apparel trade. He then uses the HO framework to determine how trade may affect US wages, with an emphasis on the effects of changes in the relative price changes of the traded goods. He takes issue here with research by labor economists, concluding that skill-biased technological change in the United State has been shifting production in favor of skilled, nonproduction jobs. Rather, he argues that what is going on is the effect of globalization that has been manifested in the movement abroad of both production and nonproduction US apparel jobs and the virtual collapse of the US apparel industry in the 1990s.

Leamer is truly a master of the ‘craft’ that he presents in his Ohlin lectures. His book is must reading for advanced specialists, students, and others seeking knowledge and insights into international trade theory and related empirical research using the HO framework that is designed to enhance the understanding of how differences in national factor endowments shape trade and returns to factors of production.