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Some Wynne Godley Quotes On Planned Trade

There’s an interesting review of Jagdish Bhagwati’s book Protectionism published in the year 1988 by Wynne Godley in the journal Economica, year 1993. Without going into the review, I wanted to highlight how Wynne Godley’s views were quite similar to Nicholas Kaldor’s and Godley proposals such as planned trade and international cooperation of a new kind:

… Kaldor’s chapter, ‘The Foundations of Free Trade Theory and Their Implications for the Current World Recession’ (in E. Malinvaud and J. P. Fitoussi (eds.), Unemployment in Western Countries, 1980), which, in the context of a fundamental critique of the abstract theory of international trade, suggests that, because of the scope for dynamic economies of scale, free trade in manufactured goods leads to the concentration of manufacturing production in certain areas, what Kaldor called ‘a polarisation process’. ‘In principle such trade is of great practical benefit since specialisation between industries of different areas should enable the benefits of the economies of scale to be realised more fully. However … this … depends on the trade being balanced in both directions … But as past experience … has shown this does not come about naturally.’

These ideas were further developed in Kaldor’s 1981 article in Economie Appliquee, ‘The Role of Increasing Returns, Technical Progress and Cumulative Causation in the Theory of International Trade and Economic Growth’, where he related his concern about dynamic imbalances in trade to the ideas of Roy Harrod (himself a strong advocate of protection as a way of improving Britain’s economic performance throughout the postwar period), who had put forward the theory of the foreign trade multiplier in his International Economics (1933). As the trade imbalances constituted a growing threat to the continued expansion of the world economy, Kaldor concluded that we should not ‘stick to free trade (whatever the cost) but introduce a system of planned trade between the industrially developed countries on a multilateral basis’.

Also in an interview to the magazine Marxism Today in 1981, Wynne Godley says how he is openly opposed to free trade and the destructive aspect of it:

Let’s turn to some international questions. How do the problems of the UK economy — and your solutions to them — tie in with problems in the world economy?

Well, the general answer is that I don’t think that free trade is the best way of organising international trade. The classical theory of international trade, which appears in text books and which is extremely influential in peoples’ minds, is based on a postulate of full employment. If you assume full employment you can easily prove that free trade is mutually advantageous. But if you think, as I do, that full employment cannot be assumed, then it’s easy to make out a realistic case that free trade is extremely destructive to economies that are relatively unsuccessful. Instead of making them more prosperous and better-off, it destroys them. I think this is a general proposition; it applies to the United Kingdom at the moment because it’s a relatively unsuccessful country, and I think it is beginning to apply to the United States, which is also becoming a relatively unsuccessful country.

When you say that you think that the free trade system is a bad system, how do you think it should be changed? It’s easy enough to say Britain should have import controls, but how do you see this in international terms?

Well, the logical answer to the question which, as an academic, is what I am primarily called on to give, is quite clear to me. If all relatively unsuccessful countries protect in the way we suggest — using import controls to raise domestic output and not to strengthen their balance of payments — the system of protection can be generalised advantageously. But that assumes a high degree of international co-operation, and international co-operation of a new kind.

Thomas Palley On NATO Expansionism And The Russian Invasion Of Ukraine

Thomas Palley has written some fine stuff on the NATO/Russia/Ukraine. He had predicted a Russian invasion while at the same time identifying NATO expansionism as the root cause of the crisis, a totally rare combination!

In his latest blog post Ukraine: What Will Be Done And What Should Be Done? he is straight and accurate:

The inevitable has happened. Russia has invaded Ukraine. It was inevitable because the US and its NATO partners had backed Russia into a corner from which it could only escape by military means.

In effect, Russia confronted a future in which the US would increasingly tighten the noose around its neck by further eastward expansion of NATO, combined with military upgrading by the US of its Eastern European NATO proxies.

Accompanying that militarization was the prospect of a ramped-up propaganda war in which western media fanned the flames of public animus against Russia. Side-by-side, US government financed entities (such as the National Endowment for Democracy and the German Marshall Fund) would seek to influence European and Russian politics with the goal of regime change.

At this stage, there are two questions. What will be done? And what should be done?

Thomas Palley had predicted all this in two previous posts:

  1. A Crisis Made In The USA: Why Russia Will Likely Invade Ukraine, written Jan 16th,
  2. American Exceptionalism And The Liberal Menace: The US And Ukraine, written Feb 13th.

In Brazil, Lula’s Worker Party had initially blamed NATO expansionism but soon withdrew the statement. It’s not easy saying such things. And the sort of culture also discourages independent thought. Hence it’s important to denounce NATO expansionism if you really are anti-imperialist.

Marc Lavoie — Godley Versus Tobin On Monetary Matters

The fourth Godley-Tobin lecture was by Marc Lavoie on February 2021. The video of the talk is on YouTube.

There is now a paper by the same title published with ROKE (Review Of Keynesian Economics).

It’s interesting how James Tobin had a lot of things right but yet his model has a lot of neoclassical economics.

In the paper Marc Lavoie argues how Tobin seems to get a lot of things right but those were just weapons for criticisms of extreme views such as of Friedman. Tobin didn’t actually believe in them. Wynne Godley’s models are quite successful in escaping old ideas, if you remember the ending line of the preface of the GT.

Houthakker And Magee On The Importance Of Income Elasticity Of International Trade

There’s a 1969 paper Income And Price Elasticities In World Trade by H. S. Houthakker and Stephen P. Magee where they realise that nations may have a balance-of-payments constraint:

In the econometric analysis of international trade the emphasis has traditionally been on price elasticities. The practical and theoretical importance of price elasticities is beyond question, and we shall have something to contribute to their estimation, but it has also been increasingly realized that income elasticities are at least as important, especially in a growing economy. Thus Harry Johnson [7] has pointed out that under certain conditions the direction in which the trade balance moves over time depends critically on each country’s income elasticity of demand for imports and on the rest of the world’s income elasticity of demand for each country’s exports.

Johnson showed that if trade is initially balanced in a two-country model, if prices are constant and if income growth is the same in both countries, then the trade balance between them can still change through time if their respective income elasticities of demand for the other’s exports differ. In this case, the country with a higher income elasticity of demand for its imports than the foreign income elasticity of demand for its exports will experience more rapid import growth than export growth, a deterioration in its trade balance and eventual pressure on its exchange rate. For this country, even relatively slow domestic income growth may be insufficient to cure payments imbalances if the relative income elasticities are sufficiently adverse.

We shall show, in fact, that disparities in income elasticities appear to be significant in the case of certain countries whose balance of payments performance is either much worse or much better than might be expected on other grounds. The United Kingdom and Japan are polar examples; the United States is also in this category.

References

  1. Johnson, H. G., International Trade and Economic Growth (Cambridge: Harvard University Press, 1958).

That’s not quite as sharp as Nicholas Kaldor’s work but yet some neoclassical economists acknowledging it is quite something.

Roy Harrod On The Balance-Of-Payments Constraint

I am always interested on how close economists come on a full model of how the world works. And so I found this passage from John McCombie in his article Harrod, Economic Growth And International Trade on Roy Harrod in the book Economic Dynamics, Trade And Growth: Essays On Harrodian Themes interesting:

Harrod, through the development of his open economy model, implicitly saw the fallacy of Keynes’s argument. On the basis of a model with no government sector, Harrod (1948, p. 103) noted that ‘the balance of trade depends upon whether the ratio of the volume of exports to the volume of home investment is greater or less than the ratio of the propensity to import (viz. imports represented as a fraction of income) to the propensity to save’. But there was no reason why, at full employment, these ratios should be equal and why the balance of payments should be in equilibrium. If there was initially a balance-of-payments disequilibrium, and it was impossible to finance perpetually the deficit, there would be a financial crisis and ‘investment would come tumbling down’. It is here that we perhaps have the first reference to the possibility of a balance-of-payments constraint, where conditions in the external markets dictate the level of domestic activity. Harrod also appreciated early on the deflationary bias which the balance-of-payments imposed on the international system, with the burden of adjustment falling on the deficit countries and where there was little to force a surplus country to expand its level of economic activity.

References

Harrod, R.F. (1948), Towards a Dynamic Economics, London: Macmillan.

Marc Lavoie’s New Book — Post-Keynesian Growth Theory: Selected Essays

Marc Lavoie’s has a new book Post-Keynesian Growth Theory: Selected Essays with a collection of his essays on some of his important papers on growth. The cover features Michal Kalecki, Nicholas Kaldor, Joan Robinson and Luigi Pasinetti. Will be out soon.

In the same series, there’s also a book from 2020 Post-Keynesian Monetary Theory: Selected Essays. You can preview the introduction to this book on Google Books. So even if you’ve read all the papers, don’t miss the detailed introduction which gives an idea of his thoughts through the years. It also has a foreword by Louis-Philippe Rochon. And an interview with him on that book.

There are also two more separate videos you might be interested: Introduction To Post-Keynesian Economics For The Post-COVID Era and The Importance Of Michal Kalecki.

Biographies Of Nicholas Kaldor

There’s a new short biography of Nicholas Kaldor titled Nicholas Kaldor’s Economics: A Review by Luis Gomes. The author reminds of Kaldor’s proposals for the world as a whole, something which is highly needed today more than ever (and something I regularly refer to):

In 1984 Nicholas Kaldor gave a series of lectures in Italy, which become a posthumous book in 1996. These lectures [“Causes of Growth and Stagnation in the World Economy” … ] presented an integrated set of policies with which to tackle economic problems. In this series of lectures, Nicholas Kaldor commented on the four basic principles for good macroeconomic administration: (i) it is needed a coordinated fiscal action which include a set of targets for a balanced balance of payments and a full employment budget; (ii) the interest rate should be the lowest possible: (iii) it is important to prevent the volatility of international commodity prices (via stocks and via an international currency) (iv) it is necessary to overcome chronic inflation trends under full employment, due to the system of adjusting wages via sectoral collective agreement …

There are many biographies (from short articles to full papers) and I thought I should list them:

  1. A short article titled Portrait: Nicholas Kaldor by Luigi Pasinetti, published in 1981 published in Challenge.
  2. Luigi Pasinetti’s Nicholas Kaldor: A Few Personal Notes, published in 1983.
  3. Anthony Thirlwall’s 1987 book titled Nicholas Kaldor,
  4. Anthony Thirlwall’s 1987 article Nicholas Kaldor 1908–1986. Republished 1991 in the book Nicholas Kaldor And Mainstream Economics Confrontation Or Convergence? and again in 2015 in the book Essays On Keynesian And Kaldorian Economics.
  5. Geoffrey Harcourt’s article Nicholas Kaldor, 12 May 1908–30 September 1986 published in 1988 in Economica and republished in the book Post-Keynesian Essays In Biography by Harcourt himself.
  6. Ferdinando Targetti’s 1992 book Nicholas Kaldor: The Economics And Politics Of Capitalism As A Dynamic System.
  7. Marjorie Shepherd Turner’s book Nicholas Kaldor And The Real World published in 1993.
  8. Anthony Thirwall’s section Nicholas Kaldor, A Biography in Nicholas Kaldor’s book Causes Of Growth And Stagnation In The World Economy published posthumously in 1996.
  9. Adrian Wood‘s entry Kaldor, Nicholas (1908–1986) in The New Palgrave Dictionary Of Economics published in 2008.
  10. John E. King’s book Nicholas Kaldor published in 2008.
  11. Luigi Pasinetti’s chapter Nicholas Kaldor (1908–1986): Growth, Income Distribution, Technical Progress in his book Keynes And The Cambridge Keynesians: A ‘Revolution in Economics’ To Be Accomplished, published in 2009.
  12. John E. King’s chapter Nicholas Kaldor (1908–1986) in the book Handbook On The History Of Economic Analysis Volume I published in 2016.
  13. John E. King’s chapter Nicholas Kaldor (1908–1986) in The Palgrave Companion To Cambridge Economics published in 2017. (h/t Marc Lavoie).

Apart from the above, following are useful to know about Nicholas Kaldor, although can’t be described as biography:

  • Introduction by Ferdinand Targetti and Anthony Thirlwall to the book The Essential Kaldor, a collection of papers of Kaldor, published in 1989.

Have I missed any?

Gunnar Myrdal And Circular, Cumulative Causation

The practical triumph of the free trade doctrine is the fact that even the severest critics of the general policy line of noninterference usually find it difficult to free themselves from its fascination.

– Gunnar Myrdal

I was reading this book The Dynamics Of Poverty: Circular, Cumulative Causation, Value Judgments, Institutions And Social Engineering In The World Of Gunnar Myrdal by Mats Lundahl, which is a sort of an intellectual biography published in 2021.

Gunnar Myrdal was the first to apply his own idea of circular, cumulative causation to international trade and success and failure of nations. Roughly it means: success breeds further success and failure begets more failure, in the words of Nicholas Kaldor.

Although the idea was original to Myrdal, the detailed mechanism was first formulated by Nicholas Kaldor in 1970 in his paper The Case For Regional Policies.

According to Lundahl’s book Myrdal’s genius can be found in the following works (page 82):

Gunnar Myrdal also spent much of the 1950s working on problems related to poverty and inequality on the international level and on the relation between polarization between regions within a country and polarization between countries. This resulted in a ‘trilogy’: An International Economy, Development and Under-Development: A Note on the Mechanism of National and International Economic Inequality, usually referred to as his Cairo lectures, and Economic Theory and Under-Developed Regions (or Rich Lands and Poor).18

18Myrdal (1956a, 1956b, 1957a, 1957b).

References

  • Myrdal, Gunnar (1956a), An International Economy: Problems and Prospects. New York: Harper & Brothers Publishers
  • Myrdal, Gunnar (1956b), Development and Under-Development: A Note on the Mechanism of National and International Economic Inequality. Cairo: National Bank of Egypt
  • Myrdal, Gunnar (1957a), Economic Theory and Under-Developed Regions. London: Gerald Duckworth & Co
  • Myrdal, Gunnar (1957b), Rich Lands and Poor: The Road to World Prosperity. New York: Harper & Brothers

You can find the first and the third/fourth book (which are the same but just different names in the UK and the US) at Internet Archive in this link. “Cairo Lectures”, seems difficult to obtain, but the important part Trade As A Mechanism Of International Equality can be found in Gerald M. Meier’s book Leading Issues In Economic Development.

Neochartalists On Turkey, Part 2

This is in continuation of the post Neochartalists (“MMTers”) On Turkey, written three days ago and which didn’t discuss what neochartalists (“MMT” people) have to say about the crisis. I am looking specifically a blog post Turkey Tells Us Nothing About MMT – But MMT Tells Us A Lot About Why Turkey Is In Trouble by Bill Mitchell written yesterday.

Bill Mitchell is responding to critics and he describes their criticisms as follows:

I have noticed a lot of Internet traffic about Modern Monetary Theory (MMT) and the situation in Turkey at present. Apparently, as the narrative goes, MMT is finally being revealed as a fraud because Turkey’s economy is going backwards and its currency is depreciating rapidly. The logic, it seems, is that if a nation enters rough economic waters and the financial markets sell its currency (although remember someone has to be buying it simultaneously) then that proves MMT is false. An extraordinarily naive viewpoint if you think about it.

As if someone having to be buying it simultaneously is some kind of owning of critics!

Anyways, Mitchell straightforwardly denies there’s some issue with neochartalism in the conclusion:

What is clear, an MMT understanding leads one to worry intensely about a nation that has built a growth strategy on vast amounts of foreign currency debt and expanding exports. The two arms of this sort of growth strategy leaves a nation highly vulnerable to changes of circumstances in world export markets.

Add in a central bank that is also borrowing foreign currencies and showing it intends to use their stores to defend the lira.

Add in a deregulated banking sector that is flooded with foreign debt to maintain profits.

Result: disaster pending.

So at least he accepts there’s a crisis rather than dismissing the whole thing as meh!

I don’t think his point about over-reliance on exports is correct but his main points is the holding of foreign currency debt by the government (or the central bank).

The important point however is that an external crisis will always go through a phase where the government has negative open positions in foreign currency. Neochartalists can always claim that neochartalism is right but that’s useless to anyone. Neochartalists fail to understand why such a thing happens from a monetary theory/finance perspective.

The idea that some governments have to necessarily issue debt in foreign currency comes as counterintuitive but the alternative is shutting down of the foreign exchange markets and economic activity with the rest of the world. When the exchange rate is falling, the government must sell foreign exchange to stabilise. Like buying foreign exchange has an depreciating effect on the currency, selling has the reverse. The sale of foreign exchange shifts foreigners’ portfolio from assets held in the domestic currency to assets held in foreign currency, bringing about a reduction in order flows to sell. But the amount of foreign exchange to be sold can be large. And the above illustrates how governments/central banks would need to obtain foreign currency to sell and in the process become indebted in foreign currency. It’s as simple as that!

Of course the government/central bank can also obtain foreign exchange from purchases in the foreign exchange markets, when exports are high compared to imports, and build reserves this way without affecting the exchange rate too much and many countries’ governments do that, but it’s not always possible as exports depends on competitiveness in world markets and general demand conditions.

Ronald McKinnon—although a neoclassical economist—understood this problem and had a fine description of problems governments face because of the foreign exchange market in his paper Money And Finance On The Periphery Of The International Dollar Standard, published in 2002. See Section 6 on various options available via fixing or floating exchange rates and banking/finance regulation and limitations. You need to filter out the wrong stuff to extract the good parts!

So blaming the government for having government debt in foreign currency isn’t helpful. It’s just like neoclassical economics: the theory goes wrong, blame the actors instead of wondering if your theory might be wrong.

Neochartalists (“MMTers”) On Turkey

In recent days, the Turkish Lira ₺ has been depreciating a lot. In fact, the President ordered interest rate cuts as he thought it would stop the crash but that made the problem worse. The central bank has sold foreign reserves to try to stop the fall but it doesn’t have enough reserves.

For now, I just wanted to record a ridiculous proposal by Warren Mosler to cut the policy rate to zero, something he has been advocating for every country with floating exchange rate since forever.

On August 31st this year, he tweeted:

I’ve proposed that Turkey cut the policy rate to 0 to reduce inflation and firm the lira.

Randall Wray, in a chapter What A Long, Strange Trip It’s Been: Can We Muddle Through Without Fiscal Policy? in the book Post-Keynesian Principles of Economic Policy written in 2006 made this claim:

… for such a country [a sovereign nation with a floating currency] (even Turkey), both a budget deficit and a current account deficit are indefinitely sustainable.

Clearly, the neochartalists should accept the shortcomings in their theory. There’s a good literature in Post-Keynesian theory about external constraints.

Neochartalists start with a wrong claim “imports are a benefit, exports a cost”. In that they make it look like mainstream theory is for restriction of international trade whereas in reality it’s just the opposite. By starting completely wrong, they reach the most ridiculous of conclusions. Turkey has to improve its balance of payments and international investment position by improving its trade balance. Zero interest rate won’t help.