Re: CJE 2001 critical review of trade theory and policy

["Leigh Harkness" <Leigh@xxxxxxxxxxx>]

Bruce wrote

> First create an arbitrary normal demand curve. Then create a
> normal cost of production curve with fixed and variable
> costs of production with falling costs to the point of
> diminishing returns and a rising cost beyond that point.
> Then find the most profitable production point on the demand
> curve.
>
> With me so far?
>
> Then when you've done this simple task find the variable
> costs of production at the most profitable production point
> and change a substantial portion of this cost to fixed cost
> of production and find the new point of maximum profit that
> falls on the same demand curve. That is, change only the
> distribution of costs between variable costs and fixed costs
> just as would occur if nominal wages collected by employers
> as taxes and never seen by employees as actual wages were
> collected as property taxes from the employer as I described
> in the original post.
>
> If you can manage to do that and honestly report the result
> as an increase in the level of production you may even
> accept the conclusion that such a change would increase
> employment to produce the greater amount of product that is
> sold more profitably at the lower price needed to obtain the
> increased demand.

Bruce, thankyou for your explanation of this essentially micro-economic
theory.  It assumes the macro-economic environment to be given or exogenous
to your model.

But unemployment is most likely to be a macroeconomic problem.

To consider this, lets us use the computer as a simple model.  The real
economy consisting of resources, people, ideas etc we call the hardware and
the monetary systems including money, banking systems, interest rates
systems, exchange rate systems etc we will call the software.

When we talk of prices (including wages), as you have in this case, we are
talking about the interface between the hardware and the software.  However,
if the software is not fully employing the hardware, the problem does not
necessarily lie in the interface.

The software could have bugs in it, or there may be problmes in the
hardware.  For example, hardware problems are likely to be quite significant
in Afganistan at this time.  No amount of software (money) could solve its
employment and production problems at this time.

Software problems include matters such as the exchange rate system.  Is the
exchange rate system making imports cheaper than local products, thereby
shifting demand away from local products and to imports resulting in
unemployment?  In other words, does the economy over-utilize foreign
resources and under-utilise domestic resources?

Also, there could be problems related to the money supply and aggregate
demand.  And they could all be inter-linked.

There is no single solution to every country's problem.  We need to study
the reality of the situation (not the theory).  Is the problem hardware of
software related?  What part of the hardware or software is responsible?
Why?  It is only when we have accurately diagnosed the problem that we can
start to consider the solution.  And even if we get the diagnosis right, we
can get the prognosis wrong.

Remember the George Washington:  in response to his complaint about a sore
throat, his doctors bled him of about 5 pints of blood.  When he died within
24 hours of this treatment, they congratulated themselves, assuming that he
would have died sooner but for their swift action.

The world is littered with economies for whom the treatment was worse than
the disease and the economic profession has been widely discredited because
of it.

So before we talk of solutions to economic problems, identify the patient
and diagnose the problem.  It is only then that we can start considering the
solution.

Leigh