Re: CJE 2001 critical review of trade theory and policy

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

Leigh Harkness wrote:
>
> > You do seem to be excessively reluctant to actually look at
> > the proposal.
>
> You are right.  My web brouser is not functioning.  I am dependant on you to
> explain your approach in a few words.

I will send the HTML copy in a separate message but I'm not
sure the multiple files would transfer well. Let me know if
you have any trouble. It will be about 280k bytes.

> > QUOTE
> > 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.
> > UNQUOTE
>
> John
>
> If we were to apply this analysis to a macro economy and if a shift from
> variable to fixed taxes where to lead to a reduction in the relative price
> of domestic products, that is to a real devaluation of the exchange rate, I
> can see that there would be an increase in employment.  But that requires
> the exchange rate to be fixed.

It has nothing whatever to do with the foreign exchange
rate. The simple change of the form of domestic taxes from
variable to fixed costs lowers the marginal [variable] cost
of production and increases the amount the unit cost of
production decreases with the rate of production by
increasing the fixed costs.

> If this same policy were to occur within the confines of a floating exchange
> rate system, I cannot understand how you could attain the change in relative
> prices necessary to raise domestic production. While the exchange rate
> mechanism is designed to ensure that international receipts and payments are
> equal, no amount of playing around with domestic prices will fix the
> problem.  You appear to neglect the exchange rate system from your analysis.

Again, it has nothing to do with the currency exchange rate
and, yes, because it has nothing to do with the analysis I
do ignore the exchange rate.

> John
>
> When I write about exchange rates, I am writing about relative prices
> between domestic products and imports.  Thus when you propose to change the
> tax system to make domestic products cheaper than imports, I see that as a
> devaluation of the the currency.  It is a technical term meaning that
> foreign goods have become more expensive relative to domestic products.

Once more, it has no effect on the exchange rate or the
prices of imported goods except as the price of imported
good that comes from the shift of what were variable cost of
domestic sales to become fixed costs. The fact that the
actual production, except for the final step of sales to a
consumer, is subject to whatever distribution of costs that
previously existed means that the change on the optimum
price of imported goods would also be reduced but only by a
much smaller amount.

The change in distribution of costs simply impels the
domestic providers to lower prices to take advantage of the
greater profit that occurs at a higher level of production
because of the shift of production costs from variable to
fixed.

> You write:
>
> > The effect of price changes on the value of money would be
> > zero IF THE MONETARY POLICY WERE ESTABLISHED TO MAINTAIN THE
> > VALUE OF THE CURRENCY.
>
> Money is only a measuring system like a number.  It has no intrinsic value
> of its own.  The only way that it has value is because it can be exchanged
> for something.  If I hold one million units of money and the price of bread
> is one unit, then the value of my money is one million loaves of bread.  If
> the price of a loaf of bread is one million units, then my money is worth
> one loaf of bread.  Prices have everything to do with the value of money or
> currency.

Yes, the price of money is the amount of goods and/or
services one must surrender to obtain it. So why do
economists insist on calling the interest rate the price of
money? It's like price of a car is the same as the leasing
rate.


> You appear to suggest that prices of domestic products can be reduced while
> maintinaining the nominal value (exchange rate) of the dollar.  As I have
> explained, that is not a valid understanding of exchange rates.  Even if it
> were, you are in effect assuming fixed exchange rates.  I am prepared to
> accept that you could raise incomes and employment by reducing prices under
> a system of fixed exchange rates.  The problem is that we have floating
> exchange rates and they do not behave like fixed exchange rates.

I have said nothing about the exchange rate, only you have.
The effect on the exchange rate, if any, has NOTHING
WHATEVER TO DO WITH THE CHANGE OF VARIABLE COSTS OF
PRODUCTION TO FIXED COSTS OF PRODUCTION DO THE SIMPLE ECON
101 TASK AS EXPLAINED AND GOVERNMENT BORDERS WILL BE SEEN TO
BE IRRELEVANT.

<<SNIP>>

--
			-- jbod

		Tax Privilege, Not People
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