Studies in Political Economy: Volume II: International Trade and Domestic Economic Policy

291 Pages·1975·25.806 MB·English

by  Donald MacDougall (auth.)

STUDIES IN POLITICAL ECONOMY
Volume II: International Trade and
Domestic Economic Policy
STUDIES IN
POLITICAL
ECONOMY
VOLUME II: INTERNATIONAL TRADE AND
DOMESTIC ECONOMIC POLICY
Donald MacDougall
M
ISBN 978-1-349-02168-0 ISBN 978-1-349-02166-6 (eBook)
DOI 10.1007/978-1-349-02166-6
©Sir Donald MacDougall 1975
Softcover reprint of the hardcover 1st edition 1975 ISBN 978-0-333-15712-1
All rights reserved. No part of this publication may be
reproduced or transmitted, in any form or by any means,
without permission.
First published 1 9 7 5 by
THE MACMILLAN PRESS LTD
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Contents
Introduction vn
Part One: International Trade and Investment 1
COMPARATIVE COSTS AND ELASTICITIES IN
INTERNATIONAL TRADE 3
1 British and American exports: a study suggested by the
theory of comparative costs (1951-2) 5
2 British and American productivity, prices, and exports:
an addendum (1962) 69
THE DOLLAR PROBLEM 79
3 A lecture on the dollar problem (] 954) 81
4 Notes on Professor Hicks's model of the dollar problem
(1957) 99
INTERNATIONAL INVESTMENT 107
5 The benefits and costs of private investment from abroad:
a theoretical approach (1960) 109
TRADE AND DEVELOPMENT 1 35
6 India's balance of payments (] 961) 13 7
BRITAIN AND EUROPE 167
7 Western European economic co-operation (1950} 169
8 Britain and the Common Market (1961) 187
Part Two: Domestic Economic Policy 203
9 Inflation in the United Kingdom (1959) 205
10 The distribution of income in Venezuela (1959) 225
11 National economic planning ( 1969) 245
12 The short-term regulation of the national economy (1970) 251
Epilogue: In Praise of Economics (1974} 264
Index 281
v
Introduction
This is the second of two volumes containing a selection of studies in
political economy made over the past thirty-five years or so. I call
them studies in 'political economy' because the majority of them
attempt to use economic analysis (and usually a quantitative
approach) to illuminate real problems of policy that have arisen both
in the United Kingdom and elsewhere during this period. I have
omitted some purely theoretical studies such as my very first article
on 'The definition of prime and supplementary costs'.1
A good many of the studies were inspired by current controversy
but I hope they will be of more than historical interest. First, many
of the problems discussed are still very live issues today. Those that
are not may well arise agc:tin; for history tends to repeat itself.
Secondly, in the course of exploring particular problems I have, I
believe, developed some techniques and methods of analysis which
have proved to be of general and lasting interest.
After a good deal of thought I decided to divide the studies
between the two volumes largely on a chronological basis. Thus,
most of the studies in the first volume were written in the 1930s and
1940s, and those in the second volume in the 1950s and 1960s.
In the introduction to the first volume I explained how, towards
the end of the war, I became interested in foreign trade questions,
and the last five studies in that volume were in fact concerned with
the particular foreign trade problem of the United Kingdom as it
appeared in the early postwar years, and with the debate about the
best form of international trade and monetary rules for the postwar
world.
The first part of this second volume reflects my continuing
interest during the 1950s and early 1960s in international economics,
and is in many ways a natural development of the last five studies in
Vol. 1. The second part is more concerned with domestic economic
and social problems. The volume concludes, I hope fittingly, with an
epilogue 'in praise of economics'.
1 Economic journal, September 1936.
Vll
Vlll Introduction
COMPARATIVE COSTS AND ELASTICITIES IN INTERNATIONAL
TRADE
This volume opens with what is perhaps my best known study:
'Britistt and American Exports: A Study suggested by the Theory of
Comparative Costs'. But, while the first part on the empirical testing
of the comparative costs theory has found its way into the
textbooks, the second part, dealing with price elasticities in
international trade and with the importance of factors other than
price in determining relative exports, is, I think, rather less well
known.
I came to the subject by a number of routes. First, when arguing
after the war with those who said that Britain could never compete
with the U.S., 1 I used to point out that, according to Rostas's
famous calculations,2 American output per head varied from little
more than the British, in some industries, to four or five times the
British in others. With American money wages so much higher than
British, surely there must be quite a wide range of products where
Britain could compete successfully.
Then again I found of doubtful value such statements as that in
The Times for 23 September 1949: 'before devaluation British goods
had been 25% higher in price than American'. It seemed to me likely
that some British prices would normally be higher than American
prices, some lower. The important question was how many were
higher, how many lower, and by how much. Even if British and
American prices were, according to some form of average, equal, this
would not necessarily result in international equilibrium.
Finally, when teaching undergraduates economic theory I always
liked to give practical examples where possible and, when we came to
the theory of comparative costs, I used to give a_few examples from
Rostas's productivity figures and the U.S. and U.K. trade returns.
For example, before the war American productivity in the manufac
ture of radio sets was 3% times the British, and the U.S. exported far
more than the U.K.; whereas American productivity in woollen and
worsted was only a little above the British, and the U.K. did
extremely well in export markets while the U.S. exported virtually
nothing.
It was only after I had been giving these odd examples to
undergraduates for several years that I thought of looking at all
Rostas's sample of products and found to my astonishment how well
his productivity figures, when combined with export figures and
1 See, for example, Economic Journal, March 1948, p. 92-3 (Study 6 of Vol. 1).
2His first results were published in the Economic Journal, Aprill943.
Introduction
lX
figures of relative wages, accorded with the labour theory of
comparative costs. (This is, I think, quite an interesting example of
how teaching can lead to fruitful ideas for research.)
Out of twenty-five products there were only five which did not
obey the rule that, where U.S. productivity was more than twice the
British (U.S. wages were twice the British before the war), the U.S.
exported more than the U.K. and vice versa. I was interested to hear
recently from Professor C. Major Wright his conclusion that four of
these exceptions could be explained by restrictive business practices
in international trade, and the fifth by differences in quality. The
exceptions thus seem to prove the rule.
Another interesting finding was the 'scientific' nature of the U.S.
tariff. So far as U.K. imports into the U.S. were concerned, U.S.
import duties seemed to be carefully designed to offset America's
apparent disadvantage in the various products. This was before the
war (1937) and it was gratifying to find that, when the figures were
redone for 1950 (see Study 2), this feature had disappeared, for
three reasons: (a) U.S. wage costs per unit of output had in general
risen in relation to the British, after allowing for the devaluation of
sterling; (b) the incidence of U.S. tariffs generally had been reduced
by cuts in rates of duty and by the effects of inflation on specific
duties; (c) most interesting, the reduction in the incidence of the
U.S. tariff was particularly marked in products where she had a
comparative disadvantage. As a result of this third change, whereas in
1937 the U.S. tariff was in general much higher on such products
than it was on others, in 1950 there was no such tendency.
The original findings naturally raised a lot of questions. What
about variations between industries in relative wage rates, indirect
labour, other costs, relative export prices, the Ohlin theory,
imperfect markets? These are all discussed in the Study. Relative
export prices (U.S.: U.K.) were found to be as expected given relative
labour productivities. Moreover, when relative prices were plotted
against relative exports, on a double-logarithmic scale, the points
tended to lie about a straight line. This got me excited, for it
suggested a possible new way of throwing light on price elasticities in
international trade, using a cross-section 'commodity comparison'
approach rather than traditional time-series analysis. Moreover, the
slope of the curve seemed to suggest rather a high elasticity, and I
had always been sceptical of some of the very low elasticities found
by analyses of time series, some of which were in any case known to
involve serious biases.
So, with the help of a number of loyal assistants (this was before
the days when all self-respecting economists expected access to
X Introduction
computers), a much larger sample of products was taken (leaving
productivity behind and concentrating on relative prices), covering a
long run of years, and also other pairs of industrial countries besides
the U.S. and the U.K. After allowing for bias due to errors of
observation, the conclusion was reached that, so far as U.S. and U.K.
exports in the later thirties were concerned, a difference of 1 per
cent in relative prices may well have been associated with a difference
of 4-4Y2 per cent in relative quantities. After discussing other
possible causes of bias, and adjusting downwards for the difference
between what I call 'product' and 'total' elasticities of substitution
(using a concept which I christened the 'index of similarity'), I
hazarded the guess that the elasticity of substitution between total
U.S. and U.K. exports of manufactures might be of an order
approaching -3. This was about ten times as high as the figure of
-0.3 obtained by Mr. Chang- often quoted by 'elasticity
pessimists'- and much more in line with the results of, for example,
Professor A. J. Brown.
I was careful not to place too much weight on this precise
result -it was only suggestive of an order of magnitude (nearer -3
than -0.3 or -30) but concluded:
While it is dangerous to apply the results obtained to future
changes, I believe that the evidence gives some grounds for
thinking that, at least in conditions resembling those of the later
30's (an important proviso), changes in the relative prices of
British and American exports of manufactures should lead to
comparatively large changes in the relative quantities demanded in
third markets, at least after a period of years.
The last phrase, and other passages in Study 1, hint at the likelihood
that elasticities in international trade will be larger in the long than in
the short run. This was brought out much mor¢ clearly in The World
Dollar Problem, 3 which concluded that the responsiveness of trade
to relative price changes was fairly small in the short run but
moderately (though only moderately) large in the long run; also that
it would take a good many years for the full effects of exchange-rate
changes to become apparent. This, I believe, was one of the earliest
hints of the existence of the now fairly widely accepted ']-curve',
and of the long lags which are now appearing in more and more of
the econometricians' export and import equations.
Coming back to Study 1, the method of analysis used also enables
3 See especially Chapters XIV and XV, including Appendix XVB, which attempts to
quantify long-run price elasticities in trade between the U.S. and the rest of the world.
Introduct£on
XI
one to study the effects on export performance of factors other than
price. One interesting result for the later 1930s is that, in the case of
exports to Commonwealth countries, the U.K. sold far more of a
product than the U.S. when their prices were equal, whereas in the
case of exports to non-Commonwealth countries the U.S. sold more
than the U.K. when prices were equal. Calculations suggested that it
was unlikely that more than a small part of this striking difference
could be attributed to Commonwealth Preference, leaving the major
part to be explained by commercial and political ties and other
non-price factors.
I think this finding is interesting in showing the importance of
non-price factors. But false deductions must not be drawn from it. It
is often claimed that the importance of such non-price factors means
that relative price changes are unlikely to bring significant changes in
relative export performance. But this does not necessarily follow at
all. A purchaser may be prepared to buy from A rather than B, even
though A's price is, say, 5 per cent higher; but if the margin rises to,
say, 7 or 8 per cent he may well switch the bulk of his purchases to
B. Thus I believe both that trade is quite responsive to relative price
changes, at least in the longer run, and also that, at any moment in
time, non-price factors can be of great importance in determining the
pattern of trade. These two views are not inconsistent.
In 1961 and 1962, with the help of a number of assistants, I
brought the analysis in Study 1 up to date using, among other more
recent data, postwar estimates of relative productivities in the U.S.
and U.K. prepared by Deborah Paige and Gottfried Bambach. As this
work was nearing completion I discovered that, unknown to me, Mr.
Stem in the U.S. had been similarly engaged. His results were
published in the Oxford Economic Papers for October 1962. I
published in the same issue an addendum which was limited to
substantially different and additional results. This is reprinted as
Study 2. By and large the original results were confirmed, apart from
the changed nature of U.S. tariffs described above.
THE DOLLAR PROBLEM
In 1951, at about the time I was finishing the comparative cost
study, Churchill again became Prime Minister and once again asked
Lord Cherwell to be Paymaster-General. I in tum found myself
spending another two years in Whitehall, where I was deeply involved
in economic policy, particularly on the international side. When I left
in 1953, I decided to write a book on British economic policy in
general. I started with a chapter on the dollar problem which was
obviously relevant to British policy but which I expected to be