Re: CJE 2001 critical review of trade theory and policy

["John O'Donnell" <jackodonnell@xxxxxxx>]

Leigh Harkness wrote:
>
> John and Bruce
>
> Sorry for the confusion in authorship.
>
> John wrote:
>
> >  but the macro level of employment is the sum of
> > the micro employments. Provide a change to the macro
> > environment [i.e. -- Change variable costs of production to
> > fixed costs of production.] in a way that causes the micro
> > employer to lower his asking price to obtain greater profit
> > and he will hire the extra people to produce that greater
> > production. As explained in the full analysis, because this
> > effect would, if left as the only change, cause an increase
> > in the value of the currency relative to all the things now
> > becoming lower in price
>
> John
>
> You have just argued for a devaluation of the currency (lowering relative
> prices of domestic goods and services relative to import prices) and for an
> increase in the money supply (the real value of money has increased while
> the total nominal money supply has remained the same implying a real
> increase in the money supply).

No, I have simply recognized the need for a monetary policy
to prevent deflation as well as inflation. With the
deflationary impetus of the proposed change in the form of
taxes that something is the reason for the chapter "Sharing
Nature" has the title it has.

> If these are the solutions to reducing unemployment, we must ask ourselves
> why our current macro-economic systems are producing the wrong outcomes.

That is the point of recognizing that monetary policy does
not provide a direct causal relationship to employment. It
is only as a consequence of markets attempting to correct
for the disruptive effect on the value of the currency that
may, OR MAY NOT, affect the level of employment. Once one
accepts this reality one is free to search elsewhere for a
controllable cause for the level of employment. That is why
I emphasized the two conclusions from demonstrating the
causal relationship between money quantity and its value.
That is, the relationship is (1) immediate and only the
difficulty of obtaining immediate measures of the effect
hides this immediacy; and, (2) one must look elsewhere for a
cause for economic malaise.

> As proponents economic policy, we cannot rely on direct intervention in the
> market to achieve our economic goals.

I probably agree with this statement but, because I'm not
certain what you mean by "direct intervention" I can't say
for certainty. If you mean addressing the symptoms and not
the causes then I agree. If you mean addressing the
environment that economic actors respond to then I must ask
-- How else do you affect the economy?

> This approach is too slow and subject
> to all types of political intervention.

I suggest the purpose of economic analysis is to find the
causes of economic conditions and to then educate the public
or, if there is a dictator, the dictator on the consequences
of policy choices. Just because the economics profession has
in the past, and continues in the present, to promote
actions that do not resolve the problems at hand does not
alter the need to find and promote those actions that do
accomplish desirable ends.

Continually advising actions that do not fix the problem
sounds like the definition of insanity -- Doing the same
thing repeatedly while expecting a different outcome each
time. How many failures of monetary policy intended to "pump
prime," or whatever else economists expect monetary policy
to do, does it take to admit that that is not the solution?

> We need to establish stable
> macro-economic economic systems that achieve the desired outcomes despite
> the numerous and varied interventions (such as changes to the tax system).

Yes, that is the reason I put forward the analysis that
demonstrates that it is the form of taxes and not the amount
that has most to do with macro economic performance. In
doing so, I have also demonstrated that the amount can be
optimized to cause the greatest rate of growth in capital.
That is growth in real corporate value, not the bubble
valuations that so often result in the so-called "business
cycle." In fact, the method can be shown to actually prevent
bubbles from forming.

> So:
> 1.    why doesn't the floating exchange rate system ensure that the exchange
> rate (the relative price domestic products and imports) is appropriate to
> generate full employment; and

Because the value of a currency does NOT have a causal
relationship to employment. It is only the uncertainty in
its value caused by inappropriate monetary policy that
affects economic decisions that may lead to greater or
lesser economic activity as actors act on their experience
or expectations. This was demonstrated by Keynes with his
"propensity" arguments that showed the point of stability in
an economy does not guarantee maximum production/employment.

> 2.    why, despite the vast amount of money that our banks create each year,
> it is never enough to generate sufficient demand to provide full employment?

It is not the amount of money [i.e. -- dQ/dM = 0] that
affects demand, it is the distribution [i.e. -- Keynes
"propensity to consume"] of the purchasing power that
establishes the point of market stability, as temporary as
that stability may be.

I addressed this problem in the chapter titled "Sharing
Nature" by showing that the demand can be affected by macro
policy that alters the distribution of production costs from
variable costs to fixed costs and that a second method [i.e.
-- after all taxes are so changed] is to reduce the nominal
level of wages while concurrently increasing the standard of
living by providing a government stipend to all.

--
			-- jbod

		Tax Privilege, Not People
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