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  "PageContent": "<h3>The Case For Concerted Action — Post-Keynesian Ideas For A Crisis That Conventional Remedies Cannot Resolve</h3>A lot of economists—which unfortunately includes some post-Keynesians—exaggerate the effect of tariffs and quotes on prices.Marc Lavoie has a nice explanation of how these claims are inconsistent with cost-plus pricing in his book Post-Keynesian Economics: New Foundations.7.5.3 Trade ProtectionThe New Cambridge support for tariffs and quotas ⁝Norman (1996) has proposed what he calls a post-Keynesian theory of protection. He makes the following two propositions, which are derived from the post-Keynesian theory of cost-plus pricing discussed in Chapter 3. First, let us examine what happens if a tariff is imposed on foreign finished products. Norman argues that domestic firms will not change their prices, since they are based on normal unit costs. He further argues that the tariff (or the quota) will give a boost to domestic production in accordance with the size of the tariff and of demand substitutability.Second, let us examine what occurs if a tariff is imposed on imported raw materials or intermediate products. From equations (3.16) and (3.18), remembering that the ratio of unit material costs to unit direct labour costs is j = UMC / UDLC, and calling the tariff rate τ, the prices of finished products produced domestically are given by:p = UDLC{1 + θ[1 + j/(1 + τ)]}(7.17)Because tariffs on imported intermediate products raise unit costs, they will lead to an increase in the prices of domestic finished products. However, the increase is likely to be relatively small, since its impact will depend on the size of the mark-up and on the relative importance of material costs. It is also possible that the exporters of the intermediate goods will take a cut in their profit margins, or that the importers will do so, ‘pricing to market’, so to speak, thus making the impact even smaller.Summing up all this, ‘post-Keynesians contend that protection on final demand leads to higher output. Domestic firms will increase output when tariffs are raised on final demand imports because of shifting demand but will increase their prices if tariffs are leveled on intermediate imports because it is a cost increase’ (Brinkman, 1999, p.98).All this is consistent with the empirical evidence uncovered by Coutts and Norman (2007, p.1221), who show that ‘price effects of global competition on domestic markets are normally not dominant’ and ‘contrast to the core postulates of standard trade and tariff theory’. This may not be the case in semi-industrialized countries, however, where the price leaders are likely to be foreign firms, which explains why the depreciation of exchange rates in these countries is accompanied by a high pass-through rate and therefore inflation.⁝References⁝Brinkman, H.J. (1999), Explaining Prices in the Global Economy: A Post-Keynesian Model, Cheltenham, UK and Northampton, MA, USA: Edward Elgar.⁝Coutts, K. and N. Norman (2007), ‘Global influences on UK manufacturing prices: 1970–2000’, European Economic Review, 51 (5), July, 1205–21.⁝Norman, N. (1996), ‘A general Post Keynesian theory of protection’,Journal of Post Keynesian Economics, 18 (4), Summer, 509–32.",
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