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FT Letter To The Editor On Current Account Imbalances And War

FT has published a letter to the editor from some post-Keynesian economists arguing for regulating imbalances in the current account balance of payments, and that such imbalances make wars more likely.

One of the signatory of the letter is Dimitri Papadimitriou, who along with Wynne Godley had been warning about imbalances since the turn of the millennium.

From the letter:

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A new international economic policy initiative is therefore required to head off the threat of further wars.

A plan is needed to regulate current account imbalances, which draws on John Maynard Keynes’s project for an international clearing union.

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The current system of free trade has created a deflationary bias in the world economy. A further bias is introduced because the United States is now a large debtor of the world and till the crisis which started in 2007 it was acting as the driver of the world, a role which it still plays but is not as big as before. With such a deflationary bias, countries try to use beggar-thy-neighbour policies, as world output is limited. That creates tensions between countries and the desperation to raise output exacerbates the tensions. So a new international order: a system of regulated/planned trade.

John Maynard Keynes On Import Controls

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I was rereading the article Keynes And The Management Of Real National Income And Expenditure by Wynne Godley from 1983 (page 157 in that book, footnote 20) and he reminds us of this letter from JMK published in The Collected Writings Of John Maynard Keynes, Volume XXVI, pages 287-289, that he thought that import controls work much better than movements in the exchange rates.

To J. M. FLEMING, 13 March 1944

Dear Fleming,

Your paper on quotas versus depreciation, sent me with your letter of February 14th, raises a very interesting question. But, for my own part, I am not one of the’ most economists’, to whom in paragraph 2 you attribute the view that disequilibrium ought, so far as possible, to be corrected by movements in the rate of exchange rather than by controls over commodity trade.

There is, first of all, to the contrary the simple-minded argument that, after all, restriction of imports does do the trick, whereas movements in the rate of exchange do not necessarily do so.

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Wynne Godley On Control Of International Trade

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From Alan Shipman’s biography, Wynne Godley, A Biography, Chapter 9: Balance Of Payments, Deindustrialisation And Protection, page 151:

Of all Godley’s policy prescriptions, direct import controls were the one most roundly rejected by other economists, and least likely to be adopted by politicians with any chance of gaining power. The accusation of advocating a policy that was economically illogical, politically infeasible and inadmissible in international law hurt deeply, but never crushed his belief that import quotas should be seriously considered as an additional macroeconomic instrument. The depth of the wound emerged in an unusually personal statement to a 1978 conference on ‘Slow Growth in Britain’, convened by Oxford University’s Wilfred Beckerman in Bath. ‘I am disconcerted and distressed to find myself, together with the group of people with whom I work in Cambridge, in such an isolated position. For we seem to be the only group of professional economists who entertain the possibility that control of international trade may be the only way of recovering and maintaining the prosperity of this country; that free trade may be an enemy for the relatively weak’ (Godley 1979: 226).

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References

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Godley, W. (1979). Britain’s chronic recession—Can anything be done? In W. Beckerman (Ed.), Slow Growth in Britain. Oxford: Clarendon Press.

Keynes said that:

A study of the history of opinion is a necessary preliminary to the emancipation of the mind.

Although in the poor countries, ones colonised and which suffered because of imposition of laissez-faire, there have been a lot of opposition to free trade—and those voices aren’t heard through silencing internationally—in the advanced countries, it has been almost non-existent except from Cambridge Keynesians and maybe a few others. In recent times, we see some opposition, but not remotely like this even 40 years ago. It is important to know the history of thought to understand how hegemonic the ruling ideology has been.

For Wynne Godley, dissenting against free trade was one of the most important reasons for his dissent against the profession. In his short autobiography written in 2001 for A Biographical Dictionary Of Dissenting Economists, Godley said:

There are two aspects (in particular) of the work of the CEPG [Cambridge Economic Policy Group] which put its members into a category which may he termed ‘dissenting’. The first – a matter mainly of concern to the modelling fraternity and academic econometricians – was the unconventional view we took about how to construct and use an econometric model.

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The second, and more egregious, respect in which we became a ‘dissident’ group was that, as a result of trying to think through the possible ways in which Britain’s net export demand might be improved, we entertained the possibility that international trade should be, in some sense, ‘managed’. There might, we argued, be no way in which the adverse trends could be reversed other than some form of control of imports. Our argument (see for instance Cripps, 1978; Cripps and Godley, 1978) was never one in favour of protectionism as normally understood – that is, the selective and unilateral protection of relatively failing industries under conditions of general stagnation. On the contrary, we were most careful to lay down conditions under which the management of trade would benefit not only our own country (without making its industry less efficient) but would also increase the level of trade and output in the rest of the world. The two basic principles were, first, that trade management should reduce import propensities without ever reducing imports themselves (in total) below what they otherwise would have been; and, second, that ‘protection’ should be as minimally selective as possible (for example, through the use of market mechanisms such as auction quotas) so that industrial inefficiency would not be sponsored.

I was surprised by the hostility with which our ideas about trade were received. It seemed to me at the time, and still seems to me, that the arguments actually used against us (at their most coherent by Maurice Scott et al., 1980) did not, in practice, rest on a well-articulated theoretical position but on very special assumptions about behavioural relationships and international political responses. (I have, to the best of my ability, answered these particular points in Christodoulakis and Godley, 1987.)

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The ‘dissident’ argument in favour of managed trade is well summarized in Kaldor (1980), where he points out that the modern theory of international trade is based on the assumption that all production takes place according to the conditions described by the neoclassical production function, with constant returns to scale. Kaldor postulated instead, and he was surely right to do so, that the principle of circular and cumulative causation leads (through dynamically increasing returns) to a process, not of convergence, but of polarization between successful and unsuccessful economies in which success in competitive performance feeds on itself and losers become immiserated by trade.

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Godley’s Major Writings

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(1978), ‘Control of Imports as a Means to Full Employment: The UK’s Case’ (with T.F.
Cripps), Cambridge Journal of Economics, 2, September.

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(1987), ‘A Dynamic Model for the Analysis of Trade Policy Options’ (with N. Christodoulakis), Journal of Policy Modelling, 9.

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Other References

Cripps, T.F. (1978), ‘Causes of Growth and Recession in World Trade’, Cambridge Economic Policy Review, No. 4.

Kaldor, N. (1980), ‘The Foundations of Free Trade Theory and Recent Experiences’, in E. Malinvaud and Fitoussi, J.P. (eds), Unemployment in Western Countries, London: Macmillan.

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Scott, M., Corden, W.M. and Little, I.M.D. (1980), The Case Against Import Controls (Thames Essay No. 24), London: Trade Policy Research Centre.

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Joan Robinson On How Free Trade Is Destructive

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Joan Robinson in her 1977 paper What Has Become Of Employment Policy on how free trade has been destructive and leads to divergence of fortunes of countries. Also in Collected Economic Papers, Vol V. Relevant text (with footnotes and quoted references in the same text) reproduced below, with my highlights:

II

Class war was not the only element of inherent vice in the free-market system to disturb the age of growth. There were also the problems generated by the unevenness of development amongst various capitalist nations and the economic and political relationships between industrial countries and primary producers, particularly those in the third world.

The pre-Keynesian theory of international trade required the balance of imports and exports for each country to be maintained by movements in relative price levels. After experiencing the attempt to return to the gold standard in 1925 (see Keynes, 1972), Keynes adopted the view that depreciating the exchange rate was much to be preferred to attempting to depress the price level. At the end of his life, feeling obliged to defend the Bretton Woods agreement against his better judgement (Kahn, 1976), he lapsed into arguing that, in the long run, market forces would tend to establish equilibrium in international trade (Keynes, 1946). He had forgotten his old crack, that in the long run we are all dead.

As it turned out, market forces generated disequilibrium. Differences in competitive power, whatever their origin, set up a spiral of divergence. A country such as West Germany, with growing exports, could maintain a high rate of investment and therefore of growing productivity, which enhanced its competitive power, and allowed real wages to rise so that workers were less demanding. In the United Kingdom, any increase in employment caused an increase in the deficit in the balance of payments so that every hopeful go had to be brought to an end with a despairing stop. Thus strong competitors grow stronger and the weak, weaker.

Because of the size and strength of the United States and its overseas economy, trade plays a small part in national income, but not a small part in the world market. The USA can move from deficit to surplus without much disturbance at home, but with a great deal of disturbance to the other trading nations. Moreover, it was able to take advantage of the dollar being the world currency to run an ever greater outflow on capital account with an ever growing deficit on income account, until President Nixon, with the dollar devaluation of 1971, suddenly tried to reverse the position with a stroke of the pen. All this laid great strains on the international monetary system.

Keynes worked out the structure of the General Theory mainly in terms of a closed economy. When it is extended to take in the operation of international economic relations, a missing link appears in the argument. The rate of interest was to be used to regulate home investment, and Keynes believed that a secular fall in interest rates was both necessary for this purpose and desirable in itself. Exchange rates were to offset differences in relative labour costs. Then nothing would be left to regulate short-term capital movements. Traditionally this was the function of relative interest rates. Britain, and other countries with chronically weak payments balances, could not indulge in cheap money however much home conditions required it, and had to follow the interest rates of other countries up whenever they happened to rise. This was one more turn in the spiral of weakness weakening itself.

Over and above the strains set up by the uneasy relationships amongst the industrial nations themselves, there were the strains involved in the relations of the industrial countries as a whole and the third world. The formation of prices in the free-market system is in two parts—cost-plus in manufacturing industry and supply and demand for primary products.† A rise in the level of production and consumption in industrial countries normally increases demand for all kinds of primary products. When prices of materials rise, while money wage rates are constant, real wages fall and so generate a demand for rising money wages, which adds to the original rise in costs. Thus favourable terms of trade reduce class conflict in the industrial countries and unfavourable terms exacerbate it.

Commodity prices responded sharply to the pressure of demand during the Korean war boom, but this was soon over and during the 1950s the terms of trade moved in favour of industrial countries. However, the long boom, swollen by the Vietnam war, financed by the USA on the principle of guns and butter, caused an acceleration in the rate of increase in commodity prices and finally sparked off the great inflation of 1973.

In an economic model, it is possible to analyse the consequences of any one change by keeping other things constant. In real life a lot of things happen at once. During the long boom, an excess of demand over growth of capacity led to shortages of one commodity after another. The demonetisation of the dollar in 1971 drove speculative funds into commodity markets. The Moslem oil producers, temporarily bound together by hostility to Israel, suddenly realised the extent of their monopoly power. Inflation at what now seems a mild and acceptable rate had been going on for years all over the capitalist world, setting up expectations that inflation would continue and undermining the conventional belief that a dollar is a dollar. Injected into this situation, the sudden rise in the costs of materials, especially oil, blew the inflation sky high.

This concatenation of circumstances has been described as a historical accident. But it is the inherent vice in the free-market system of international trade which creates the setting for such ‘accidents’, from which it has no means to defend itself except by destroying prosperity and depriving the primary product sellers of their favourable terms of trade.

III

The hopes which accompanied the Keynesian revolution, of reforming capitalism so as to ensure continuous prosperity with full employment, are now all but extinguished. The slide into crisis in the capitalist world has re-established the pre-Keynesian orthodoxy as the conventional wisdom in economic policy-making at both national and international levels. The inevitable consequence of this is a much higher general level of unemployment and recurrent crises, involving a massive waste of resources and considerable human misery.

Important changes in the world economy have taken place over the last two decades, which have ended the era of near-full employment and exposed the inadequacies of the conventional Keynesian analysis. One of the most important of these developments has been the relaxation of tariffs and exchange controls and the resulting large increase in international trade‡ and capital movements; this has increasingly exposed national economies to the ravages of uncontrolled capitalist competition, in the way that they were exposed before the 1930s.

While the USA remained the predominant world economic and political power, and effectively acted as the world central bank, some semblance of order in international economic relations was retained. The use of the dollar as a reserve currency and the eagerness of the USA to lend abroad allowed international liquidity to expand to meet the needs of the growing volume of trade and facilitated post-war reconstruction and structural adaptation in the capitalist world. But with the emergence of Japan and western European countries as strong competitors to the USA, and the deterioration of the USA’s balance of payments, unhindered capital movements became a major destabilising force. The IMF proved totally inadequate to its appointed task of protecting national economies from external shocks and assisting the correction of more permanent imbalances in payments. In fact, by establishing rules which threw the burden of adjustment mainly onto deficit countries, the IMF institutionalised an important element in the process of unequal development among capitalist countries.

Faced with growing international pressures, the governments of debtor countries have been obliged to adopt the deflationary policies acceptable to their creditors (including the IMF); policies which conflicted with the avowed aim of maintaining full employment and with the real-wage demands of the working class. Thus democratically elected governments of debtor countries, where the working class is well organised, have walked a knife edge between the international and internal disapproval of their economic policies. But the frequently imposed deflationary policies progressively weakened the competitive position of such economies, increasing their indebtedness and reducing the opportunities for advances in real wages. Unable to meet either internal or external demands, economic policy vacillated wildly; consequently growing economic crisis has been accompanied by increasing political instability and further destabilisation of the international economy.

The world market system has run into a second, and much more general, impasse, caught between two interlocking conflicts—the demands of workers in the industrial countries for higher real wages and the demands of the third world for improved terms of trade.

So long as unemployment and slow growth continue, the relative prices of raw materials are kept down and this somewhat mitigates inflation in industrial countries. As soon as a revival begins, prices of raw materials and foodstuffs begin to go up and real wage demands become harder to resist; the authorities nervously pull back and the revival is checked. The orthodox economists, still repeating incantations about equilibrium, encourage the authorities to pursue these deflationary policies—the very same that Keynes in the thirties used to describe as sadistic.

It is ironic that after the great technical achievements brought by the age of growth, all we are offered is a return to large-scale unemployment and poverty in the midst of plenty, in an age of frustration. Kalecki was right to be sceptical; the modern economies have failed to develop the political and social institutions, at either domestic or international level, that are needed to make permanent full employment compatible with capitalism.

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† See Robinson (1962); K. J. Coutts, W. A. H. Godley and W. D. Nordhaus, Industrial Pricing in the United Kingdom, Cambridge, CUP, forthcoming.

‡ Exports of OECD countries as a whole increased from 11% of GDP in 1954 to almost 17% of GDP in 1973.

References

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Kahn, R. 1976. The historical origins of the IMF, in Keynes and International Monetary Relations, ed. H. P. Thirlwall, London, Macmillan

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Keynes, J. M. 1946. The balance of payments of the United States, Economic Journal, vol. 56

Keynes, J. M. 1972. The economic consequences of Mr Winston Churchill, in Collected Writings of John Maynard Keynes, vol. 9, Essays in Persuasion, London, Macmillan

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The Cambridge Keynesians And The “Bastard Keynesians”

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Since the publications of Keynes’ GT, economists have been trying to overthrow the true interpretation of Keynes. To complicate the matter, Keynes himself committed a lot of errors in the book despite having a great colleague in Joan Robinson who truly was beyond the errors. Keynes also underestimated the power of vested interests:

… But apart from this contemporary mood, the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas. Not, indeed, immediately, but after a certain interval; for in the field of economic and political philosophy there are not many who are influenced by new theories after they are twenty-five or thirty years of age, so that the ideas which civil servants and politicians and even agitators apply to current events are not likely to be the newest. But, soon or late, it is ideas, not vested interests, which are dangerous for good or evil.

Marjorie Turner in Joan Robinson And The Americans explains Robinson’s views:

Robinson had no doubt about where the bastard Keynesian doctrine came from: it “evolved in the United States, invaded the economics faculties of the world, floating on the wings of the almighty dollar. (It established itself even amongst intellectuals in the so-called developing countries, who have reason enough to know better.)” She thought the worst part was that while “Keynes was diagnosing a defect inherent in capitalism … the bastard Keynesians turned the argument back into being a defense of laisser-faire, provided that just the one blemish of excessive saving was going to be removed.” Robinson condemned Samuelson’s alleged role in spreading bastard Keynesianism. The Samuelson textbook Economics in the 1970 edition committed this offense, she said, but by his 1976 edition, “Samuelson’s faith in macroeconomic policies (but not in the verities of microeconomics) had been badly shaken.” Regarding the alleged affection of the bastard Keynesians for laissez-faire and microeconomics as received, she admitted feeling “helpless.”

[Title borrowed from a paper of Marjorie Turner]

Joan Robinson On Michal Kalecki’s Claim To Priority

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Keynesian policy is popular again. Many fiscal hawks are now arguing for stimulus, although they want to do it only temporarily. I came across this 1976 article Michal Kalecki: A Neglected Prophet by Joan Robinson where she argued once again for Michal Kalecki’s originality.

Robinson:

He told me that he had taken a year’s leave from the institute where he was working in Warsaw to write his own General Theory. (When his early Polish essays were published in English, it became clear that he had worked out the main points by 1933.) In Stockholm someone gave him Keynes’s book. He began to read it—it was the book that he had intended to write. He thought, perhaps further on there will be something different. No, it was his book all the way. He said: “I confess, I became ill. Three days I lay in bed. Then I thought—Keynes is better known than I am. These ideas will get across much quicker with him and then we can get on to the interesting question, which is of course the application of these theoretical ideas to policy-making. Then I got up.”
Kalecki did not make any public claim to his independent discovery of what became known as Keynes’s General Theory. I made it my business to blow his trumpet for him, but I was often met with skepticism. In the US, only Lawrence Klein recognized (in The Keynesian Revolution, 1947) that Kalecki’s system of analysis was as complete as Keynes’s and in some respects superior to it.

At the end of his life Michal told me that he felt he had done right not to make any claim to priority over Keynes. It would only have led to a tiresome kind of argument. Perhaps people have been skeptical of Kalecki’s contribution to the history of economic theory precisely because he did not demand recognition himself. Such dignified behavior is rare in this degenerate age. The only reference Kalecki ever made to the question is in the preface to a selection of essays, published, alas, posthumously. “The first part includes three papers published in 1933, 1934, and 1935 in Polish before Keynes’ General Theory appeared, and containing, I believe, its essentials.”3

3Michal Kalecki, Selected Essays on the Dynamics of the Capitalist Economy, 1933-1970 (Cambridge University Press, 1971), p. vii.

There are many other by Joan Robinson where she argued this, especially this.

Picture credit: Poland Today

Roy Harrod by Esteban Pérez Caldentey

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If you’ve worked with Post-Keynesian models of the open economy, you’ll see the expression X/μ often. This, or the “foreign trade multiplier” was first discovered by Roy Harrod in the early ’30s.

Esteban Pérez Caldentey has a new biography of Roy Harrod.

Description:

This landmark book describes and analyzes the original contributions Sir Roy Harrod made to fields including microeconomics, macroeconomics, international trade and finance, growth theory, trade cycle analysis and economic methodology. Harrod’s prolific writings reflect an astounding and unique intellectual capacity, and a wide range of interests. He became Keynes’ biographer and wrote a volume on inductive logic. At the policy level, Harrod played a central role in the formulation of the Keynes´ Clearing Union plan for international monetary reform. He also actively participated in British politics and government and gained recognition as an expert in the field of international economics. Yet, until now, Harrod has remained an underrated economist, commonly misunderstood and misrepresented. This is the first major intellectual biography of Harrod to be published.

I found an interesting bit from the book. From page 259:

He [Harrod] also introduced the asymmetry of adjustment between creditor and debtor which was pivotal to Keynes’s Clearing Union proposal.

The asymmetry of adjustment is in my view one of the most important concepts to understand in economics. From The Collected Writings Of John Maynard Keynes, Volume XXV: Shaping The Post-War World: The Clearing Union, Chapter 1, The Origins Of The Clearing Union, 1940-1942, pages 27-30:

III. The Analysis of the Problem

I believe that the main cause of failure (except in special, transient conditions) of the freely convertible international metallic standard (first silver and then gold) can be traced to a single characteristic. I ask close attention to this, because I should argue that this provides the clue to the nature of any alternative which is to be successful.

It is characteristic of a freely convertible international standard that it throws the main burden of adjustment on the country which is in the debtor position on the international balance of payments,—that is on the country which is (in this context) by hypothesis the weaker and above all the smaller in comparison with the other side of the scales which (for this purpose) is the rest of the world.

Take the classical theory that the unlimited free flow of gold automatically brings about adjustments of price-levels and activity between the debtor country and the recipient creditor, which will eventually reverse the pressure. It is usual to-day to object to this theory that it is too dependent on a crude and now abandoned quantity theory of money and that it ignores the lack of elasticity in the social structure of wages and prices. But even to the extent that it holds good in spite of these grave objections, if a country is in economic importance even a fifth of the world as a whole, a given loss of gold will presumably exercise four times as much pressure at home as abroad, with a still greater disparity if it is only a tenth or a twentieth of the world, so that the contribution in terms of the resulting social strains which the debtor country has to make to the restoration of equilibrium by changing its prices and wages is altogether out of proportion to the contribution asked of its creditors. Nor is this all. To begin with, the social strain of an adjustment downwards is much greater than that of an adjustment upwards. And besides this, the process of adjustment is compulsory for the debtor and voluntary for the creditor. If the creditor does not choose to make, or allow, his share of the adjustment, he suffers no inconvenience. For whilst a country’s reserve cannot fall below zero, there is no ceiling which sets an upper limit. The same is true if international loans are to be the means of adjustment. The debtor must borrow; the creditor is under no such compulsion.

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… Thus it has been an inherent characteristic of the automatic international metallic currency (apart from special circumstances) to force adjustments in the direction most disruptive of social order, and to throw the burden on the countries least able to support it, making the poor poorer.

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I conclude, therefore, that the architects of a successful international system must be guided by these lessons. The object of the new system must be to require the chief initiative from the creditor countries, whilst maintaining enough discipline in the debtor countries to prevent them from exploiting the new ease allowed them in living profligately beyond their means.

The book also says that Roy Harrod was a life long believer of free trade. It’s a bit shocking!

… In short, we repudiated all versions of the doctrine of original sin, of there being insane and irrational springs of wickedness in most men. We were not aware that civilisation was a thin and precarious crust erected by the personality and the will of a very few, and only maintained by rules and conventions skilfully put across and guilefully preserved. We had no respect for traditional wisdom or the restraints of custom. We lacked reverence, as Lawrence observed and as Ludwig with justice also used to say— for everything and everyone. It did not occur to us to respect the extraordinary accomplishment of our predecessors in the ordering of life (as it now seems to me to have been) or the elaborate framework which they had devised to protect this order. Plato said in his Laws that one of the best of a set of good laws would be a law forbidding any young man to enquire which of them are right or wrong, though an old man remarking any defect in the laws might communicate this observation to a ruler or to an equal in years when no young man was present. — John Maynard Keynes, in The Collected Writings Of John Maynard Keynes, Volume 10: Essays In Biography, Part VI – Two Memoirs, Chapter 39: My Early Beliefs, pages 447-448:

Cambridge University Press link. Quote h/t Ann Pettifor.

Misinterpretation Of Joan Robinson’s Quote On Dropping Rocks

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In her famous 1937 article, Beggar-My-Neighbour Remedies For Unemployment, Joan Robinson made this famous remark about dropping rocks into our harbours, i.e., imposing tariffs as retaliation:

The popular view that free trade is all very well so long as all nations are free-traders, but that when other nations erect tariffs we must erect tariffs too, is countered by the argument that it would be just as sensible to drop rocks into our harbours because other nations have rocky coasts.6 This argument, once more, is unexceptionable on its own ground. The tariffs of foreign nations (except in so far as they can be modified by bargaining) are simply a fact of nature from the point of view of the home authorities, and the maximum of specialization that is possible in face of them still yields the maximum of efficiency. But when the game of beggar-my-neighbour has been played for one or two rounds, and foreign nations have stimulated their exports and cut down their imports by every device in their power, the burden of unemployment upon any country which refuses to join in the game will become intolerable and the demand for some form of retaliation irresistible. The popular view that tariffs must be answered by tariffs has therefore much practical force, though the question still remains open from which suit in any given circumstances it is wisest to play a card.

6 Beveridge, op. cit., p. 110. [Tariffs: the Case Examined]

[bolding and italics mine]

Joan Robinson

Joan Robinson, left. Picture credit: Nationaal Archief

This quote however gets misinterpreted often as a recent Financial Times article did:

… All these complications are real, but they do not change the fundamental nature of the argument about trade, which was best summarised by the British economist Joan Robinson. In 1937 she pointed out that, except as a narrow negotiating ploy, it made little sense to meet tariffs with tariffs: “It would be just as sensible to drop rocks into our harbours because other nations have rocky coasts.”

This quote makes it look like Joan Robinson was a free trader, whereas Robinson was opposed to it from the very beginning to the end and her stand free trade was far ahead and louder than John Maynard Keynes.

But what Robinson is saying is that according to the arguments of those for free trade, retaliation is wrong. But as Joan says, it has a practical force. Robinson is saying that if you retaliate you don’t believe in free trade.

Michał Kalecki, 1933 – Stimulating The World Business Upswing

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Michał Kalecki in “Stimulating the World Business Upswing,” in Collected Works of Michał Kalecki, vol. 1, Capitalism: Business Cycles and Full Employment, ed. Jerzy Osiatyński, trans. Chester Adam Kisel (Oxford: Clarendon, 1990), 156–64 (possibly ahead of John Maynard Keynes):

We very often encounter the argument against building new factories while the old ones are still unemployed. This simple truism shares the fate of many of its fellows—it is false. In order for existing capital equipment to be fully employed, it must be continually expanded, since then accumulated profits are invested. If they are not invested, profits fall and, along with the fall in profits, there is a decline in the capacity utilization of existing factories.

Let us assume, as often happens in the USA, that two competing railway lines run between two cities. Traffic on both lines is weak. How does one deal with this? Paradoxically, one should build a third railway line, for then materials and people for construction of the third will be transported on the first two. What should be done when the third one is finished? Then one should build a fourth and a fifth one … This example, as we warned, is paradoxical, since unquestionably it would be better to undertake some other investment near the first two railway lines rather than build a third one; nevertheless, it perfectly illustrates the laws of development of the capitalist system as a whole.

Michał Kalecki

Michał Kalecki, picture credit: PWN

quote h/t Jan Toporowski