Abstract
Meade’s assumption that the domestic economy operates under conditions which he defined as ‘modified laissez-faire’ does not reflect reality. Probably one the greatest weaknesses of neoclassical economic analysis is its assumption that competition is effective and pervasive, so that output is produced with minimum inputs and/or at minimum cost. In terms of the traditional argument for free trade, this failing would not be important, since foreign competition will presumably always have a beneficial effect on any imperfections which exist in the domestic economy. For example, a domestic monopoly can only be weakened, and its distorting effect only reduced, by foreign competition. In addition to the assumption of modified laissez-faire, Meade’s analysis, like all those cited in the preceding chapter, is set in static equilibrium so that historical time is not allowed to intrude upon the analysis. The exclusion of historical time effectively excludes the possibility of reversible disturbances from the set of conditions to which the free-trade argument applies.
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Notes and Reference
As will be shown in the next chapter, the concept of conditional protection can also be applied to applications of phase-out protection.
Note that the wage premium will not be achieved if the industry is constrained by import competition.
Always assuming the X-inefficiency at Ford is not equalled in all other activities: see an anticipation of this point in ‘industry modifiers’ in Gray (1976a, pp. 40–3).
Note that, for international trade purposes, the concept of X-efficiency must be transformed to an industry instead of a firm attribute. All the other causes of domestic inefficiency are, by definition, industry-wide.
In April 1982 the Reagan Administration announced the imposition of a tariff increase of tenfold, and will raise the price of imported large motorcycles in the US by more than 10 per cent. The Japanese price before the protective action was about $1500 to $2000 less than that of American-made motorcycles of this kind. The increase in protection is, ostensibly, temporary.
It is important to distinguish between lack of managerial effort (which is one aspect of X-inefficiency) and managerial mistakes, which can be coupled with maximum effort. These are not an example of X-inefficiency, they are plain and simple errors. Compare analysis of the US television industry’s failure to combat Japanese competition in that industry (Tsurumi and Tsurumi, 1980).
Clearly the speed with which the cooperation between labour and management will be achieved depends upon the climate of antagonism between them. Cooperation will come much more slowly in the US than in Japan. The strength of the argument for a hands-off policy is, therefore, related to the country’s culture.
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© 1985 H. Peter Gray
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Gray, H.P. (1985). ‘Domestic Inefficiency’ and Conditional Protection. In: Free Trade or Protection?. Palgrave Macmillan, London. https://doi.org/10.1007/978-1-349-06983-5_3
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DOI: https://doi.org/10.1007/978-1-349-06983-5_3
Publisher Name: Palgrave Macmillan, London
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