Economic Policy and Theory

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Economic Policy and Theory

David Shreve

Merging in numerous ways, economic theory has often been linked to U.S. foreign policy. When the United States began its life as a fledgling exporter of raw materials vitally dependent upon connections to Liverpool merchants, crude economic theories accompanied virtually all deliberations and pronouncements on foreign affairs. As the nation grew in size, population, and wealth, this connection became less apparent and, indeed, far less critical or commonplace. By most estimates, foreign trade rarely exceeded 5 percent of the American gross national product. Moreover, after significant growth and increasing specialization in export markets in the late nineteenth century, levels of international market integration that prevailed in 1914 were equaled again only in the 1990s, albeit with far less market segmentation than in the earlier period. The information gaps of that earlier period have almost completely disappeared.

Only when it emerged as a world power following the two world wars did the United States again endeavor to combine the latest in economic theory with virtually all of its foreign policy concerns. The rise of professional economics had much to do with this resurgence; so did the demands for the cooperation and rebuilding made virtually indispensable by both economic depression and destructive and widespread conflict. Institutionalization of professional economic advice, most of which followed the Great Depression and World War II in the twentieth century, brought economic theory into the limelight, where it joined readily and quite seamlessly with heightened international concerns for peace and prosperity. Here it began by acknowledging as well the growing awareness that domestic prosperity was at least partly hinged to global prosperity.

The adaptable theories of giants such as the British economists Adam Smith and David Ricardo notwithstanding, economic theory previously had been applied only loosely to U.S. foreign policy concerns or, as it was in the early Republic, only in forms of a largely prescientific character, too amorphous and philosophical to construct a lasting bond or significant transgenerational analysis. Here it had often reflected little more than a concern for how one might either tease out the factors behind international commercial advantage or better discern both commercial limits and commercial potential in world markets. Falling loosely under the rubric of "mercantilism," such concerns seldom reflected anything approaching a scientific method or cognizance of recent or past advances in economic theory, and they seldom attracted those social scientists interested in testing the theoretical challenges of pioneers such as Smith and Ricardo. Smith's suggestion that political economists must find a theory that comports with maximum wages and modest profits, for example, along with Ricardo's critique of landlord-based economic exploitation, remained obscured by conventional analyses designed mostly to promote commercial interests.

Despite this tendency toward limited, mostly superficial economic analysis of international affairs, discussions of monetary policy in the early Republic often veered into the analysis of international factors and approached levels of sophistication unmatched by many twentieth-century analysts. In some ways, for example, late nineteenth-century U.S reliance on a gold standard with fixed exchange rates represented a departure from an earlier, more flexible bimetallic monetary policyto which the nation would ultimately return. The alteration, in 1834, of Alexander Hamilton's 15:1 silver-to-gold valuation of the dollarto a 16:1 ratiolargely kept silver dollars out of circulation, limited the worldwide potential of later Nevada silver discoveries, and signaled the advent of a more restrictive, even emasculating, U.S. monetary policy. Ceding control of domestic monetary policy to the vagaries of international gold flows, and the overall level of international commerce to the total gold supply, policymakers had essentially ignored existing economic theory, however immature, in favor of economic policy handcuffs.

But talk of trade clearly occupied the minds of far more policymakers and economic theorists than did international currency analysis. Smith's theories, principally those found in his ground-breaking synthesis published in 1776, An Inquiry into the Nature and Causes of the Wealth of Nations, focused attention squarely on international trade, proffering an analysis designed to integrate trade policy and consumer welfare. Smithian analysis of how to pay for war (taxation versus borrowing)designed to make its costs more obvious and disablingalso filtered into a great number of American foreign policy debates and was digested and considered fully by both late eighteenth-and early nineteenth-century American leaders. David Ricardo's early nineteenth-century postulates regarding comparative advantagethe notion that two nations may gain through trade even if one can produce everything more efficiently than the otherhad percolated, as well, into policy circles in both Great Britain and the United States. Few of these theories, however, found anything but temporary or comparatively insecure footholds in the policy arena until the mid-twentieth century.

From the American economists who toiled for the Strategic Bombing Survey during World War II to those serving today as consultants on currency stabilization, economic theory has now permeated virtually every conceivable foreign policy analysis and situation. It no longer remains confined principally to questions of international commercial advantage or even international trade. At the same time, its chief occupation has most often been limited to three major areas: trade policy, international monetary policy, and policies for international growth and development (for developed, developing, and undeveloped nations). Since the breakdown of the Bretton Woods system for international currency stabilization in the early 1970s, monetary policy has become much more newsworthy; much more often the subject of policy discussions, high and low; and has increasingly become the preoccupation of many skilled economists and specialized policy advisers. Likewise, growth and development policy also increased in significance in the late twentieth century, albeit mostly as a result of both increasing numbers of American, European, and East Asian multinational corporations and increasing emphasis on development that emerged along with postWorld War I and postWorld War II rebuilding efforts. As the welfare of these companies came to depend increasingly on rising prosperity abroad, and as altruism merged increasingly with self-interest in prominent rebuilding or relief efforts, more people naturally came to ask how such prosperity should be created or sustained.

Analysis of trade policy, however, continues to engage economic theorists more than any other large foreign policy concern. Indeed, a great number of international monetary policy analyses are, in effect, designed to explain how international money affects international trade.


Although Adam Smith (17231790) is regarded today as the progenitor of "laissez-faire" economic theorywhere self-interest, limited government, and the unbridled profit motive converge to produce the ideal political economyhis economic theory really began on much more limited grounds.

Beginning with the overarching belief that the best political economy produced a regime of high wages and low pricesand modest profitsSmith created what many regard as the first modern economic theory, a theory constructed squarely upon a critique of British international trade in the late eighteenth century. When Smith spoke of restraint in critical terms, for example, he most often referred to import restrictions, not restraint of the individual and his single-minded pursuit of wealth. With much of Smith's general theory lost to the questionable interpretation of his lofty, somewhat more malleable rhetoric, one is left mostly with a trenchant special theory. Like the French Physiocrats who preceded him, Smith constructed his theory upon the notion that government promotion of trade most often came at the expense of groups or individuals who were less powerful but more significant, economically, than the commercial exporters favored by such promotion. For the Physiocrats, these individuals were farmers; for Smith, consumers.

Thus began both a long-running debate on the economic merits of free trade versus protectionism and trade promotion, and on a course of theoretical formulations built partly on the criticism of policies that favored commercial interests over agricultural counterparts. Placing the consumer at the heart of his theory, rather than the producers favored in eighteenth-century British policy, Smith ensured that such consumers would always be represented in subsequent economic theory related to international trade. Favors granted by governments to resident exporters, Smith pointed out, might well benefit those producers only at the expense of resident consumers, leaving almost everyone less well off. Hereafter, these consumers would be removed from trade policy calculations only by ignoring relevant and advancing economic theory. Freer tradeperhaps anticipating the theory of the "second-best" enunciated by James Edward Meade and Richard Lipsey in the 1950s and the "scientific tariff" theories promulgated by Harry G. Johnson in the 1970s, became a means to improve domestic purchasing power for the first time under Smith's formulation.

Although it ultimately came to be submerged within later economic theories that often ignored its most immediate postulates, Smith's analysis was highly regarded in the early American republic. Indeed, Thomas Jeffersonattracted, perhaps, to Smith's reshaping of physiocratic, agrarian-centered critiques of commercial subsidyregarded it as the paragon of contemporary political economy. Smith's trade theories would also help establish a general pattern for regional political battles in the early nineteenth century (for example, the 1828 "Tariff of Abominations"). Vice President John C. Calhoun's challenge to American protectionism, nascent despite its implicit connection to the special interests of southern slaveholders, may well have anticipated both the consumer-based populism in the American South during the late nineteenth and early twentieth centuries and the underconsumptionist economic theories of the mid-twentieth-century followers of John Maynard Keynes. His focus on the costs of effective and proposed U.S. tariffs was constructed squarely, if unwittingly, on the back of Smith's trade theory.

If Smith pointed economic theory toward the potential general benefits of freer tradecouched within a broader, somewhat more ambivalent philosophical treatisethen David Ricardo (17721823) transformed it into a more single-minded pursuit of improved economic analysis. Ricardo's masterpiece, The Principles of Political Economy and Taxation, first published in 1817, contributed greatly to the analysis of wage determination, pricing, and tax policy. But most famously, perhaps, it also gave us the law of comparative advantage. Explaining how a nation may gain by importing a good even if that good can be produced at home more efficiently (by allowing it to devote more resources to the production of goods at which it is most efficient), Ricardo revealed previously unrecognized advantages to a regime of freer trade. He also suggested the kind of rigorous analysis upon which all subsequent theory of international economics would have to rest. Indeed, few economists can yet escape Ricardian challenges, especially in the ongoing analysis of price determination and the relative importance of wage and profit levels. And though policymakers tend to conform to the characterization of the nineteenth-century British prime minister Benjamin Disraeliencouraging free trade as an expedient rather than a principleit is also likely that they can seldom avoid beginning the analysis of any trade policy regime without the admonishments of both Adam Smith and David Ricardo.


The British philosopher and economist John Stuart Mill (18061873) updated (and endorsed) much of Ricardo's analysis with his 1848 publication, Principles of Political Economy. The first to emphasize that allocation of resources and distribution of income are two somewhat distinct roles performed by modern market systems, Mill parted company with earlier classical economists by suggesting that policy could indeed shape the distribution of income. The late nineteenth-century (principally 18711877) analyses of William Stanley Jevons (18351882) in England, Karl Menger (18401921) in Austria, and Leon Walras (18341910) in Switzerland saw the emergence of the marginalist school of economic theory. Reorienting economic analysis away from theories of price determination that had relied exclusively upon supply-side factors or the costs of production, the marginalist school significantly updated the analyses of Smith and Ricardo and the classical economic theory built upon their writings. Beginning their theory of prices (and therefore of production and allocation as well) with consumer behavior and consumer choice, the marginalists moved economic theory closer to the consumercentered philosophy espoused, but never developed systematically or mathematically, by Smith. Walras would do this to great effect, for example, with his creation of demand functions, mathematical functions that for the first time expressed the quantities of a given product or service as they were determined collectively by consumer income, consumer preference or taste, product price, and product price relative to other related goods or services.

Until the assiduous efforts of Alfred Marshall (18421924) on behalf of the discipline and profession in England, however, economics was the vocation of few in academe, public policy was constructed with little or no professional economic advice, and international trade theory in particular had progressed only a little past its Smithian and Ricardian foundations. Academic chairs in political economy had been established early in the nineteenth century, but throughout much of that century most were either vacant or held as a secondary occupation. Jevons, Menger, and Walras, in fact, all worked in professions out-side of academe before being appointed to chairs in political economy at universities in England, Austria, and Switzerland. Jevons's government post as an assayer in Sydney, Australia, appears to have convinced him, in fact, that public officials required moreand more consistently offeredprofessional economic policy advice. Despite their later association with schools of free-market or even anti-government economic analyses, the progenitors of the marginalist revolution gravitated to economic theory out of concern for public policy, much of which centered on international affairs and international trade. Like Jevons, Menger, and Walras, the first professional economists found themselves holding academic chairs in political economy; the fledgling science and public policy were undeniably woven together. Until the twentieth century, however, the designation implied no distinct body of knowledge or craft. In Ireland, for example, it fell initially under the instruction of law, changing soon after into a course of study geared principally to business or industrial management.

Professor of political economy at the University of Cambridge from 1885 to 1908, Marshall began his teaching career in 1868 at St. John's College, Cambridge, as a lecturer in moral sciences. When he retired from teaching in 1908 to devote his final years to writing, he had succeeded in establishing a new honors examination (tripos) in economics and politics (1903) at Cambridge, had bequeathed to economic analysis the critical distinction between the short run and the long run (in what he called "period analysis"), and had established political economy as a distinct subject worthy of widespread study and generous public attention. The London School of Economics opened in 1895, and Oxford University offered its first diploma in economics in 1903, attesting to the rising popularity and increased relevance of economic study. Marshall's direct contribution to international trade theory was limited to his analysis of two-country trade with intersecting "offer curves" and its concomitant analysis of demand elasticity (how the increase of goods offered by one nation might affect the quantity of goods offered by a trading partner). The term "elasticity," so widely used by economists today to denote the ratio of change between dependent and independent variables, was Marshall's invention. More significantly, his attention to the professional standing of economists, his willingness to engage in policy debate and to observe real economic conditions and changes, and his conscious linking of modern economic analysis to classical foundations paved the way for the most significant twentieth-century breakthroughs in international trade theory.

Marshall's major work devoted to international trade issues, Industry and Trade, published in 1919, may well have lacked theoretical consistency or structure precisely because it considered so closely recent trends and activities in British and world trade networks. Indeed, his attention to the practical reach of modern economics led to the frequent inclusion in all of his writings of cautionary notes on what might or might not be successfully "impounded" in analytic assumptions about dynamic economic processes. These caveats remain significant today. For Marshall, any accurate depiction of dynamic economic processes required more information than was ever possible to obtain, an insight proved increasingly sound by the limitations and shortcomings of the newest and most ambitious computer-generated models.

Marshall also created a theoretical path that tended to consolidate and synthesize previous lines of economic analysis constructed upon a classical and orderly market-clearing conception of the economic world. As economic science matured and academic posts in political economy proliferated around the turn of the twentieth century, a classical consensus emerged, much of it constructed upon Marshall's edifice. With his Theory of International Trade, with Its Application to Commercial Policy, published in 1936, Gottfried Haberler introduced an expansive reformulation of this emerging consensus by fitting it with the dynamic language of general equilibrium analysis. The benefits of free trade could subsequently be viewed in terms of both direct and indirect effects, bringing free trade theory closer to real world phenomena. And though German historical economists and American institutional economists, such as Thorstein Veblen, pointed dramatically to the ways in which economic reality differed widely from the behavior predicted by classical economic theory, they offered no compelling theoretical substitute.

Only the economic dislocations of World War I and the onset of the Great Depression compelled economists to urge greater caution and to force the construction of new theoretical pathways, many of which highlighted and served questions of international trade. That levels of international trade had declined so precipitously during the Great Depressionby two-thirds in nominal dollar terms and by one-third in real, inflation-adjusted termsmade it virtually impossible to consider new economic ideas without an unwavering focus upon international trade.

The principal economists of this interwar period nudged theory onto different planes and punctured much of the prevailing orthodoxy regarding general economic adjustment, unemployment and investment, and the influence of money and interest rates. Free markets were judged increasingly as artifacts of the imagination and as abstractions toward which behavior was often inclined but seldom made manifest without significant gyrations, fits and starts, or failings of even the simplest economic prophecy. Free trade orthodoxy, however, proved to be something else; it depended in part upon a free market framework for much of its explanatory power, yet it also came to be viewed increasingly as a sphere of potentially unrestricted behavior existing atop a large assortment of thoroughly regulated or more artificially cultivated domestic economic affairs. In the face of rising skepticism toward the usefulness of the free market abstraction, and rising trade protectionismthe first significant departure from freer trade since the beginning of the nineteenth centurythe tenets of the prevailing free trade orthodoxy emerged virtually unchanged.

In 1921 the American economist Frank Knight (18851972) published Risk, Uncertainty, and Profit, in which he distinguished between insurable risk that could be mostly ascertained and uninsurable uncertainty that proved impossible to predict. Almost ten years later the Swedish economist Gunnar Myrdal (18981987) published Monetary Equilibrium (1930), in which he introduced the terms "ex ante" and "ex post," underscoring both the distinction and the relation between expectations and outcomes and the unpredictable ways in which savings equaled investment. And in 1936 the British economist John Maynard Keynes, a former student of Alfred Marshall's, published The General Theory of Employment, Interest, and Money, in which he questioned both the microeconomic and the automatic and instantaneous market-clearing foundations of inherited classical theory.

Yet, despite increasingly numerous challenges of this kind, the implications and tendencies of inherited theory on questions of international trade remained virtually untouched. After extensive involvement with the German reparations question after World War I, as well as the debate surrounding the British return to the gold standard in 1924, Keynes had surely proven his interest in international affairs. Later in his career he looked increasingly to the United States for the most practical and noteworthy application of his increasingly refined economic principles. And Keynes's General Theory did carry implications for how nations might best effect freer trade and how domestic policy formulation should account for the dislocations and perturbations introduced by an increasingly open and free international trade network. But these implications were in no way an assault upon the general free trade consensus. Indeed, few direct theoretical challenges to free trade emerged in the late twentieth century, despite recurring offensives launched by politicians and various labor movements, and the relatively desperate reaction to economic recession.

From the General Agreement on Tariffs and Trade (GATT), signed in Geneva, Switzerland, on 1 January 1948, through the seven GATT revisions and negotiating rounds beginning in 1955 (and within World Trade Organization negotiations after 1994), free trade resumed its ascent in policy-making circles. Crafted as a means to expanded multilateral trade in the postWorld War II era, GATT began with nine signatories (including Cuba) and expanded to include 128 by 1994; in 1995 it was subsumed under the newly formed World Trade Organization. Pausing only for the briefest moments during late twentieth-century recessions that paled in comparison with the calamity of the 1930s, free trade-centered theory found itself with fewer and fewer detractors and policy once again conformed generally to theory.

Implications of The General Theory Despite the perceptible ascendancy of Keynesian economics in the second half of the twentieth century, many of the questions raised by Keynes in The General Theory remain unsettled. His own followers, for example, continue to argue over whether Keynes described an economy that commonly achieved equilibriumalbeit at unacceptably low levels of output from time to timeor one characterized by continuous oscillations around a stable point or plateau. Few would argue, however, that Keynes did not describe an economy that converged on equilibriumwhether it could ever reach that point or notby means of changes in income and output rather than through rapid and responsive price adjustments. Indeed, as Janos Kornai later explained, such tendencies may well be universal in modern, mass-production economies, whether capitalist or not. In Kornai's formulation, when confronted with underutilization and excess capacity, Western capitalist economies produced unemployment, whereas the command economies of the East, former and present, produced shortages of consumer goods. Under both schemes, price adjustments played no significant role. This may explain in part why officials in the People's Republic of China have in recent decades been so eager to learn Keynesian economics. Although Keynes left much of the explanation of sticky prices to his successors, he noticed the obvious way in which interest rates, wages, and commodity prices responded in Great Britain and abroad. And since they moved too slowly, haltingly, or imperceptibly to clear markets effectively enough to secure full employment, this led Keynes to his revolutionary conclusions regarding effective demand and the causes of economic stagnation or recession.

Ironically, regarding trade among nations, Keynes had first overlooked this kind of adjustment. The Swedish economist Bertil Ohlin (18991979) did much to establish his reputation by disputing Keynes's rendering of the postWorld War I German reparations problem, which Keynes had couched solely in terms of relative price changes. Although prejudiced somewhat by his belief that geographic endowments ordained Germany to lead the European economy, Keynes also believed that Germany faced a double burden under its requirement to pay reparations as determined under the armistice. First, it had to tax its citizens to pay for reparations, and second, it had to cheapen its export prices relative to its import prices by lowering wages at home (to effect export surpluses needed to transfer marks to foreign reparations creditors). Ohlin noted that the first burden would likely remove all necessity for the second; new German taxes sent abroad would simultaneously lower German demand and increase the demand of Germany's foreign creditors. And this would effect higher levels of German exports and lower levels of German imports without any relative change in the levels of German wages or export goods.

While Keynes eventually termed the debate "muddled" due to his insistence on the genuine possibility that creditor nations might entomb the German payments in hoarding or newly erected import barriersa possibility largely ignored by Ohlinthe latter's argument had made its mark. Indeed, not long afterward, Keynes moved swiftly through a series of theoretical gyrationsbuilding on and then dispensing with the quantity theory of money; finishing his Treatise on Money (1930) by reemphasizing in part his reparations policy argument and, at the same time, orienting himself more toward a general theory built upon a closed, static economy that underscored Ohlin's emphasis upon output or demand changes. Here, currency transfer and associated international trade problems diminished in importance and could be solved with less restricted currencies or special taxes on income from foreign lending. Free trade theory could march on not because it guaranteed the most efficient placement of all resources or global full employment, but because it only helped, and could largely be ignored if one could both loosen the "furtive Freudian cloak" of the gold standard-based, fixed exchange rate regime and focus instead on the stabilization of demand at home. Within a few years of the publication of the Treatise, Keynes encouraged President Franklin D. Roosevelt to make the currency and exchange policy of the United States "entirely subservient" to the aim of raising output and employment.

Heckscher-Ohlin, Factor-Price Equalization, and Real Free Trade Patterns If the abstract economic advantage of free trade had been well established by the late 1930s, the way in which free trade actually worked required additional explanation. Building upon "The Influence of Trade on the Distribution of Income," an article written in 1919 by his teacher, Eli Heckscher (18791952), Bertil Ohlin undertook analyses that would consolidate more completely the preeminence of the free trade persuasion in the process. Heckscher, under whom Ohlin had studied from 1917 to 1919 at the Stockholm School of Economics and Business Administration, and whom Ohlin succeeded in 1930, envisioned his article as a minor updating of classical Ricardian theory, which had, like Ricardo's Law of Comparative Advantage, done nothing to address the reasons for the existence of such advantage. Using both Heckscher's paper and his own graduate research, Ohlin staked out a theoretical position that began to explain the existence of comparative advantage, suggested the stringent real world requirements for the exploitation of free trade principles, and in part revived location theory, a substantial part of Adam Smith's cosmology that had been lost to most economists outside of the German historical school. Walter Isard's subsequent work in the economics of location and in regional economic studies, reflected principally in his 1956 publication Location and Space Economy, followed in part this theoretical pathway reopened chiefly by Bertil Ohlin.

As illustrated in Ohlin's Interregional and International Trade (1933)for which he won the 1977 Nobel Prizethe Heckscher-Ohlin theorem explained how a nation will tend to have a relative advantage producing goods that require resources it holds in relative abundance (and an advantage importing those goods that require relatively scarce resources). If a nation possesses a relatively greater abundance of labor than its trading partners, for example, it will most frequently export products derived most intensively from labor, rather than capital, inputs.

In 1922, Ohlin had submitted a paper to Francis Edgeworth (18451926), Drummond professor of political economy at Oxford and Keynes's coeditor of the Economic Journal, in which he introduced the mathematical outlines of what would become the Heckscher-Ohlin theorem. Though Keynes responded to Edgeworth's request for comment with a curt "This amounts to nothing and should be refused," it was one of Keynes's foremost American disciples, Paul Samuelson, who further refined the Heckscher-Ohlin theorem. It soon became a staple of virtually all general economics texts, including Samuelson's own best-selling work, first published in 1948.

Samuelson's Economic Journal article, "International Trade and the Equalization of Factor Prices," also published in 1948, underscored and refined Ohlin's theoretical work. In this article, Samuelson exploited Heckscher-Ohlin to provide a polished mathematical explanation for how free trade might well serve as a substitute for the free mobility of capital and labor. He extended the theorem to reveal how the change in price of an internationally traded commodity effects a similar change in the income of the factor (labor or capital) used most intensively in producing it. From this followed what he termed the factor-price equalization theorem: as free trade narrows differences in commodity prices between nations, it must also, under the same conditions, narrow differences in income accruing to the factors of production. Thus, free trade naturally lessens the differences and resulting imbalances introduced by immobile or relatively immobile workers, factories, or natural resources.

By dropping one modifying assumption of Ohlin's theory after another (zero transportation costs and import duties, flexible exchange rates, immobile capital, etc.), Samuelson revealed both the positive force and efficiency of a hypothetical free trade regime and the stringent conditions necessary to carry out such a regime. Indeed, as the empirical work of Wassily Leontief revealed, Heckscher-Ohlin did not always fit the real world. Building on his groundbreaking work in input-output studies, Leontief noted in his "Domestic Production and Foreign Trade: The American Capital Position Re-Examined" (1954) that American exports tend to be labor intensive while American imports are mostly capital intensive, results in direct opposition to those suggested by the Heckscher-Ohlin theorem. Likewise, when put to the test, the purchasing power parity theorydeveloped principally by another of Ohlin's Swedish professors, Gustav Cassel (18661945)appears to have equal difficulty fitting real world conditions. Relating free trade flows to international currency matters, purchasing power parity suggests that the purchasing powers of currencies in equilibrium would be equivalent at that rate of exchange. The exchange rate between any two national currencies should, in other words, adjust to reflect differences in price levels in the two nations.

The chief factors that account for the breakdown of purchasing power paritycurrency speculation in foreign exchange markets, an abundance of goods and services that are not traded internationally, the extensive trading of financial assets, and the difficulty with which both general domestic and comparable international price levels are determinedalso account in part for the potential invalidity of the Heckscher-Ohlin theorem. That Leontief found an apparent contradiction in the U.S. example may only suggest that its economy is both more varied and complex than that of most other nations, and that its behavior consistent with the Heckscher-Ohlin pattern may simply be more readily found within its regional, as opposed to international, trading networks.

Such theoretical insights proved to make Samuelson a virtually indispensable economic policy adviser. Indeed, as chairman of the task force advising president-elect Kennedy in 19601961 on economic policy (and Kennedy's first choice for chairman of the Council of Economic Advisers), Samuelson may well claim paternity of Kennedy's efforts on behalf of free trade. The Trade Expansion Act (TEA) of 1962, the first significant American legislative sponsorship of free trade since the 1934 Reciprocal Trade Agreements Act, bore the stamp of Samuelson's theoretical work and policy advice. Well aware of the elusive conditions under which an ideal free trade regime might be enacted, Samuelson provided a sound theoretical footing for the pragmatic approach reflected in the TEA, one of President Kennedy's few major legislative victories. Giving rise to the so-called Kennedy Round of GATT negotiations, which reduced import duties on industrial goods worldwide by approximately 35 percent (and by a remarkable 64 percent for American-produced goods), the TEA also included new restrictions on textile imports. A historic mile-post on the road to greater trade liberalization, the TEA nonetheless reflected a pragmatic appraisal of real-world economic conditions and policy limitations. Trade liberalization for manufactured goods was likely impossible without the textile industry protections.

Lingering Theoretical Challenges Appointed to teach international economics at the London School of Economics in 1947, James Edward Meade (19071995) launched a book project to help him better grasp the ideas he hoped to convey to his new students. The resulting Theory of International Economic Policy, published in two volumes (The Balance of Payments in 1951; Trade and Welfare in 1955), attempted to integrate domestic and international policy, pre-Keynesian price effects with Keynesian income effects, and abstract free trade patterns with real world tendencies that often included or necessitated trade control. Recognizing and underscoring the notion that legitimate government assistance (international market research, for example) is often difficult to distinguish from subsidized trade protection, Meade discovered the "theory of second best." In Meade's formulation, abstract free trade models may well produce less than optimum outcomes, given real world conditions or tendencies. His theory of the second best revealed how a free trade regime might countenance alternative policies that diverged from absolute free trade principles, protecting the authentic gains from freer trade in the process. Subsequent to Meade's discovery, few criticisms of free trade outcomes found anything but a loose theoretical foothold, especially so if the free trade regime itself became the object of criticism. After Meade, few of these criticisms represented broad theoretical challenges to the growing free trade orthodoxy but were, instead, reminders that imperfect conditions and irrational economic behavior had to be accommodatedor isolated and marginalized within the prevailing regime.

The chief ongoing quarrel with increased trade liberalization appears to be a criticism of theorists and policymakers who conflate international free trade with domestic free markets, or international trade with international capital flows. With the recent advent of policy initiatives such as Trade Related Investment Measures (TRIMs), it has become easier to make such a conflation. Promulgated by the World Trade Organization, TRIMs are measures that force nations to compensate foreign investors for rules imposed after their initial investment (such as minimum wage increases). But free trade need not imply a policy of strict noninterference on the part of national governments (or even international organizations); some, like Charles Kindleberger, have suggested that government-sponsored domestic prosperity may even be a prerequisite for the enlargement of free trade networks abroad. If such enlargement requires that one prosperous nation serve as a lender or buyer of last resort, and be willing to sacrifice parts of some internationally exposed markets in the process, then this may well be the case.

As free trade theory and policy burnished their standing among policymakers worldwide in the last quarter of the twentieth century, economic circumstances continued to raise nagging questions. The distributional effects of trade often appeared to undermine general prosperity; protectionist regimes often appeared beneficial if introduced skillfully enough to avoid retaliation; free trade appeared to undermine environmental protection in developing nations. The Prebisch-Singer theory arose directly in response to rising distributional problems, particularly those that surfaced in the southern hemisphere. Named for Raul Prebisch (19011986), professor of economics at the University of Buenos Aires and the first director-general of the UN Conference on Trade and Development, and Hans W. Singer, German-born UN economist who had trained under both Joseph Schumpeter and Keynes, the Prebisch-Singer theory suggested that international free trade reinforced harmful economic development practices in the developing and least developed countries. Because colonialism had produced unsustainable economic structures in these nations based on the encouragement of exportsmost of which were inexpensive raw materialsPrebisch and Singer argued that trade protection and import substitution strategies were necessary if these developing nations were to strike out onto a sustainable path of growth and prosperity.

An agreement to set up a common raw materials price support fund of $750 million, after deliberations at the fourth UN Conference on Trade and Development, came as a direct result of Prebisch-Singer. Prebisch later suggested, however, that he was motivated primarily by the promise of industrialization, well suited to policies of import substitution but not, perhaps, to the labor surpluses so evident in the developing economies. Noticing later that increased wealth and increased demand for imports in developed nations might well improve the terms of trade for developing countries, Singer also modified his theoretical conclusions and policy recommendations. The slow maturation of the Latin American economies in the early postWorld War II period, combined with rising American and European prosperity in the 1950s and 1960s (especially the latter decade), perhaps masked the ways in which protectionism and import substitution may have easily become self-defeating strategies. These developing nations matured and came to depend increasingly upon external markets and capital only a few years before the stagflation, oil price hikes, and higher interest rates of the 1970s obliterated gains on both sides.

The apparent success of East Asian protectionist regimes in the late twentieth century and the onslaught of developing world environmental crises also cast doubt upon the superiority and applicability of free trade theory. But here, as well, theorists have largely acknowledged that protectionist regimes can flourish only when foreign sources of prosperity offer forbearance and accommodation in place of retaliation or increasing autarky. Absent undemocratic political systems and regressive fiscal and monetary policies, most theorists have also inferred that global free trade need not prevent environmental stewardship, just as it need not prevent lessened inequality within or between nations. Most have concluded that it is economic growth itself and the associated capital intensity that bring pressure on the natural environment. Free trade has essentially been implicated, then, in environmental crises as little more than the handmaiden of economic growth. If free trade is not distinguished from the absolute free market, however, such theoretical conclusions often remain opaque and virtually incomprehensible. And since the theoretical gains from freer trade tend to be as regressive as the theoretical gains from economic growth in general, the conflation of free trade with laissez-faire only serves to make trade theory even more ambiguous. Linking trade theory to development and growth theory, Gunnar Myrdal and others urged deliberate policy initiatives, without which lessened inequality and growth would prove unattainable. Failing to make that distinction, they argued, would place "second best" policy and the progressive, compensatory measures it often required beyond reach and would render free trade incapable of fulfilling its modest theoretical promise.


International monetary policy attracted few economic theorists before the twentieth century. Only when historic mercantilist concern for the accumulation of specie, and the rapid adjustment of interest rates under the gold standard, gave way to greater concern for mass unemployment did it begin to garner much theoretical attention. Before that, few who suffered at the hands of recurring gold outflows and restrictive domestic monetary policy were in any position of influence to either arrest such trends or call for new policies and theory with which to assail or question the prevailing regime. Exchange rates and gold reserves were defended at almost any cost, interest rates moved precipitously to reverse potentially large capital outflows, and investment planning could proceed under the assumption of minimal or virtually nonexistent exchange rate risk. However secure it rendered investment planning, this approach often proved that it would require, above all else, the willingness to sacrifice output in the name of exchange rate stability. As industrialization reconstituted American and European labor markets, this approach also implied recurring episodes of mass unemployment.

Much as it had with international trade theory, the shock of world war and the Great Depression gave great impetus to change. And just as these events compelled economists to rethink the theories that had somehow prevented them from capturing or explaining real world tendencies in international trade, so they forced economists to train their sights anew on questions of international money. The Baring-Argentine financial crisis of 1890 and the U.S. depression of 1890s had also focused much attention on international currency problems, but economic theorists were as yet unequipped to respond directly or forcefully. It was not until the later crises and the even more widespread economic calamity of the 1930s that economic theory began to respond with analyses directed at international monetary policy. It was at this time that the United States, for exampleclosely following its European counterpartsbegan to compile international balance of payments accounts, records of its transactions with the rest of the world. It was also at this time that Keynes and others began to urge new ways of conducting international monetary transactions, actively seeking theoretical insights by which changes could be guided and accommodated. "To close the mind to the idea of revolutionary improvements in the control of money and credit," Keynes warned, "is to sow the seeds of the downfall of individualistic capitalism."

To Keynes, the early twentieth century had proven the extent to which nations would resort to currency devaluation as a lever to improve their balance of trade, seldom improving in the process either their own terms of trade or the opportunities inherent in a flourishing and expanding trade network. As balance of payments accounting had become more common, many Western nations had come to believe that unilateral currency devaluation would, in the absence of reciprocal action, improve the terms of trade. It would make a nation's own exports cheaper in terms of foreign currency and would, of course, make imports equally more expensive. It was not uncommon to find, however, the price of imports rising under such an initiative to the point where the aggregate value of imported goods continued to outpace the value of the higher, newly attained level of exports. Abba Lerner, in his 1944 publication The Economics of Control, introduced what eventually came to be called the Marshall-Lerner criterion, a theoretical rule with which one could determine the positive or negative outcome of such a devaluation. Assuming that factors such as supply constraints do not enter into the picture, Lerner showed that if the price elasticity of exports plus the price elasticity of imports is less than 1, then the increased cost of the imports exceeds the value of the growth in exports. Moreover, if a nation began with a large sum of foreign liabilities denominated in foreign currency, devaluation of its own currency might well add terrific sums to its net interest payments. With competitive devaluation added to the mix as a likely outcome, perhaps only after an interval of unilateral manipulation and worsening results, the terms of trade could seldom be rendered any more reliable or propitious. Global trade diminution became an increasingly likely outcome.

With a little prodding from Bertil Ohlin and others, Keynes's theoretical insight here was to recognize that in modern industrial economies, monetary policy would simply have little effect in restoring balance through price deflation. It would regulate external balance, instead, by causing unemployment, lower incomes, and decreased imports. He then seized upon the notion that exchange rate mechanics mattered far less than international liquidity. Though gold, the pound sterling, and the U.S. dollar had all proved somewhat useful in attempts at securing substantial international reserves with which to conduct increasing levels of trade, even the highly regarded British and American currencies remained vulnerable to the deflationist tendencies Keynes so abhorred.

Bretton Woods and the Triffin Dilemma As the end of World War II approached, Keynes and many of his American counterparts began planning for the postwar period. The Bretton Woods conference of 1944 convened with a sharp focus on both the monetary fragility of the interwar period and the theoretical prescriptions of Keynes and his growing legion of American disciples. The conference proved successful in reorienting the world's economic exchange system away from the constraints of the gold standard. Exchange rates were fixed and pegged, and could be adjusted within limits only during periods of "fundamental disequilibrium." Because Keynes and the head of the U.S. delegation, Treasury assistant Harry Dexter White, hoped to insulate government domestic policies from the misdeeds of currency speculators, Bretton Woods called for explicit capital controls. It also created the International Monetary Fund (IMF), an organization designed to provide a cushion of international reserves to nations caught in a persistent current account deficit. The IMF would also serve as the final arbiter of fundamental disequilibrium.

In the end, however, Keynes's preoccupation with international currency reserves gave way to the overriding American concern for exchange rate stability. His proposal for an International Clearing Union, under which international liquidity could be expanded without reliance upon a single currency, never came to pass, mostly due to widespread fears that it would prove to have an inherent inflationary bias. It included provisions for bank "credits," extended to surplus states, and an artificial bookkeeping currency he called a "bancor," to maintain exchange rate stability. Overdraft provisions (up to $26 billion initially for member states) were proposed as well, to prevent contractionary domestic policy measures or competitive devaluations undertaken in the defense of embattled currencies. The IMF, however, acknowledging part of Keynes's theoretical contribution, did arrange for lending quotas (based mostly on the relative value of recent trading levels). In theory, these might have been utilized for both reconstruction and investment, and like the Clearing Union, could become a means to increased international liquidity. Unprecedented inflation in the immediate postwar years, however, altered the real value of IMF quotas to the point that short-term currency stabilization proved to be the only feasible activity. And since the Bretton Woods system came to be anchored upon the U.S. dollar (pegged to gold at $35 per ounce) rather than any type of new reserve asset, international liquidity would also depend in large measure upon worldwide confidence in a currency destined to wind up in a precarious overhang or glut position. Indeed, generous Marshall Plan assistance, combined with larger than anticipated Cold War military outlays, quickly transformed a dollar shortage expected to last for some time into a dollar glut. By about 1953 the dollar gap or shortage had disappeared.

Although the modest U.S. payments deficits of the mid-1950s represented little more than a sensible response to varying levels of worldwide savings and investment requirements, Yale economist Robert Triffin noted that the dollar's unique position in the fixed exchange rate Bretton Woods system posed a fundamental dilemma. As the anchor of the system and the chief reserve asset, the flow of dollars into foreign accounts would necessarily outpace the flow of other currencies into American hands. Yet, despite the salutary effect such reserves would have on international trade in general, Triffin speculated that confidence in the dollar as a store of value would decrease as its numbers and its role as a reserve asset increased. Dollar accumulations overseas would engender an increasingly risky situation governed by a self-fulfilling prophecy. The implication of this dilemma was that international liquidity depended upon either a return to the Keynesian approach and a new independent reserve asset, or an end to fixed exchange rates pegged to the dollar value of gold.

Although the Lyndon Johnson administration tried to move in the direction of the former option, by introducing special drawing rights (informally, "paper gold") into IMF operations, they failed to catch on as a source of genuine, dayto-day international liquidity. Previously, John Kennedy's undersecretary of the Treasury for International Monetary Affairs, Robert Roosa, had arranged for a series of mostly stopgap measures designed to ease the dollar overhang and stanch the attendant gold outflow. Negotiated offsets (purchase of U.S. goods by nations receiving U.S. military aid), swap arrangements (U.S. agreement to exchange U.S.-held foreign currencies for dollars at a future date to protect foreign banks otherwise reluctant to hold large sums of dollars), and the December 1961 "General Arrangements to Borrow" (a large, short-term borrowing arrangement that gave Great Britain and the United States additional IMF resources to avert a speculative currency crisis) were among the measures employed by Roosa and his successor in the Johnson administration, Frederick Deming. Afterward, the only remaining questions concerned the way in which the world would manage the departure from the Bretton Woods system and the nature of the floating exchange rate system certain to take its place. The end came quite abruptly after a decade of patchwork revisions, holding operations, and stopgap measures. President Nixon's decision of 15 August 1971, to end the guaranteed conversion of U.S. dollars into gold at $35 per ounce, announced after a series of Camp David meetings with top-level economic advisers, effectively ended the Bretton Woods international monetary regime.

Floats, "Dirty Floats," and the Tobin Tax While floating exchange rates theoretically promised greater scope for expansionary domestic policiespart of Keynes's hope for the Bretton Woods blueprintlarge, speculative movements in currency value and rapid, unsettling episodes of capital flight remained distinct possibilities. Indeed, financial transactions soon dwarfed those in goods and services in the postBretton Woods era; potentially large and rapid movements became all the more likely. But the demand for reserves did diminish along with the adoption of floating exchange rates, and increased capital mobility opened up the potential for other, more varied types of reserves in general. Nations also adapted, instinctively, by accepting floating exchange rates but with currency management intact. Few currencies were ever allowed to float freely, and instead central bankers most often practiced a "dirty float"; large swings were to be checked by rapid central bank buying and selling in currency markets. This is why Barry Eichengreen has suggested that the Mexican peso crisis of 19941995 was "the last financial crisis of the nineteenth century," resembling in a fundamental way the Baring crisis of 1890. In both cases, central bankers rallied around the system by rallying around a besieged currency (and, coincidentally, a Latin American nation).

With ample room for speculation and capital flight, however, theorists have more recently come to question the stability of the prevailing system. Currencies have likely become more volatile, capital flight has become an increasing malady, and trade has lost ground to multinational production due to the increasing currency market volatility. It is in this context that economists have debated the potential for capital controls and, as James Tobin often described it, the means by which policymakers might potentially throw a little "sand in the gears," reducing volatility in the process. Chief among the theoretical contributions or policy proposals here is the international currency transactions tax, or "Tobin tax." Proposed initially by the Yale economist James Tobin, such a tax would be small (typically proposed at 0.1 percent) and placed upon all international currency transactions. Theoretical debate on the Tobin tax has thus far focused upon the potential for offsetting effects. Would a transactions tax decrease volatility by increasing the costs to speculators, or would it increase volatility by reducing the total number of transactions, producing "thinner," more vulnerable markets in the process? Because it would not distinguish between speculative transactions and those conducted on behalf of trade, would the transactions tax reduce levels of trade as it reduced speculation, or would it increase trade by reducing currency market volatility? If introduced, could the tax be applied widely enough (that is, fairly and equitably) by wedding it to the policies of developed nations, or would it be difficult to enforce uniformly, and therefore conducive to avoidance and resulting misallocation?

Although free trade remains a contentious political idea, economists have increasingly devoted their attention to the related problems of capital flows, currency speculation, and international monetary instability. And though many economists predicted at the time that the end of fixed exchange rates would give nations the freedom to create fiscal and monetary policies of their own choosing (unencumbered by exchange rate parity concerns), few remained as sanguine by the end of the twentieth century. Introducing foreign trade and capital movements into a closed economy model, Robert Mundell described in the 1960s and 1970s how a floating exchange rate regime would, by connecting government fiscal stimulus with higher interest rates, capital inflows, and currency appreciation, automatically render fiscal stimulus ineffective. The currency appreciation, he argued, would lower net exports to the point where any fiscal stimulus that gave rise to them in the first place would be completely eliminated. Despite its less suitable conformity to large, as opposed to small, open markets, the apparent lack of correlation between government deficits and interest rates, and the numerous real world examples of currency appreciation tied to comparatively low interest rates, Mundell's pessimistic appraisal of modern fiscal policy remains the dominant analysis for floating exchange rate regimes.


Economic growth theory remains the most difficult to master of all modern economic theories. It requires advanced mathematical skills (differential calculus) and, as a result, also introduces assumptions and limitations very difficult to account for or envision. Even if one excludes the possibility of perpetual disequilibriumhowever close it may come to a precarious balancethe passage from one equilibrium state to another typically excludes any notion that underlying conditions may change with time as external variables exert change upon them. To do otherwise would be to require mathematical reasoning so complex and fragile that it would likely render all resulting models completely impractical by exposing them to the hidden, often increasing feedback effects of the most minute errors.

Although he was a leading biographer of John Maynard Keynes and a promoter of Keynesian economics, Roy F. Harrod was also among the first to leave behind Keynes's theoretical focus on a static economy. Although Keynes avoided taking a similar step on his own because he wanted to focus on existing problems of underutilization rather than apparent ongoing cycles of growth and recession, Harrod was more interested in the latter, effectively inventing growth economics in the process. His 1939 Economic Journal article, "An Essay in Dynamic Theory," gave rise to growth theory by introducing the notion of a steady-state equilibrium growth path from which actual growth most often diverged. Harrod also revealed how such a divergence fed upon itself, widening the gap between steady-state and actual economic trajectories.

Recognizing only a few years later (1946) that investment created additional productive capacity capable of being exploited only when further increments of investment gave rise to new income, Evsey D. Domar developed a simple model corroborating Harrod's theory. Known thereafter as the Harrod-Domar model of dynamic equilibrium, this model and accompanying theory were adopted by the International Bank for Reconstruction and Development (World Bank) immediately after World War II, setting the stage for the pending marriage of growth theory and third world economic development. Although intended for use in the analysis of advanced, developed economies like that of the United States, the World Bank quickly adopted it as a way to determine the amount of aid required to lift poor nations onto a more prosperous growth path. Aware in the 1950s that his model was being applied without questioning the relationship between aid and investmentor inequality, consumption, and investmentDomar disavowed its use. As decolonization proceeded apace after World War II, however, it was inevitable that growth theory would come to be employed in this fashion.

Nicholas Kaldor and Joan Robinson, both, like Harrod, among the first in the Keynesian camp, endeavored to highlight the importance of income distribution to economic growth. Mostly due to his 1960 presidential address to the American Economic Association, "Investment in Human Capital," Theodore W. Schultz publicized the work begun in the 1950s by Jacob Mincer and popularized the notion that education and training were as critical to development as technology and industrialization. Hollis Chenery, Simon Kuznets, and Irma Adelman all questioned the notions that growth depended solely upon industrial development and that growth automatically engendered greater equality, lessened poverty, and promoted a self-sustaining pattern of development. Kuznets's famous "inverse U relationship"between national income per capita and inequality, positive in poor nations and negative in advanced national economiessparked numerous rounds of debate, including Adelman's study of semideveloped nations that contradicted Kuznets's assertion.

Until Raul Prebisch, Hans Singer, Dudley Seers, and others criticized the assumption that poor nations were simply primitive versions of their more advanced, wealthier counterparts, however, few of these theoretical developments questioned the theoretical claim that investment in machinery, however effected, automatically engendered growth. Although Prebisch in particular seemed enamored of the possibilities for industrialization of the developing world and import substitution policy, he placed equal, if not overriding, emphasis on the elimination of unemployment, poverty, and inequality as a prerequisite for industry-led growth. Developing world debt crises of the 1970s and 1980s, evident in nations that had adopted the Prebisch-Singer theory and government intervention designed to implement it, spawned an even more vigorous countermovement marked by criticism of government intervention.

The "total factor productivity growth" approach, developed principally out of Robert Solow's groundbreaking work in capital theory in the 1950s, also questioned the primacy of capital formation in general or investment as a simple means to economic growth. Solow developed, for example, "vintage" models of growth that underscored not just the size of a given nation's capital structure, but also its age or vintage. The newer the technology, the greater its productive capacity, andfollowing Albert O. Hirschman on the "unbalanced" character of economic growththe greater its linkage to key industrieson both the input and output sides. Research and development, scientific advances, and the processes of technology diffusionall seemingly outside the scope of economic policyevidently played as significant a role as policy itself. Vigorous debate on this issue ensued, most notably due to the emergence of empirical studies suggesting that government policy and high investment often appeared to spell the difference between nations that grew more or less rapidly. Joseph Schumpeter's earlier suggestion that oligopoly allowed firms to compete on the basis of technological innovation rather than price hinted at the role conceivably played by policy and burgeoning investment. Much like Kindleberger's lender of last resorta nation that could afford to liberalize trade and share the wealthSchumpeter's oligopoly capitalist could provide room for full employment and rising shares to labor as well as produce the profit margins with which to assume risky research or investment outlays. Unmitigated free market competition, it seems, would be incapable of the same. Amartya Sen posed theories of development, social choice, and inequality that suggested similar conclusions. Clarifying the conditions under which collective decisions can best reflect individual values and stressing the way in which poverty and inequality restrict economic choice and freedom, Sen forced economists and policymakers to consider general welfare and development in terms beyond reported changes in per capita income or gross national product.

Economic theory has for centuries remained a significant part of foreign affairs related to trade, money, and development. This is especially so for the foreign affairs of the United States, less dependent on international trade than many other nations but connected vitally to all by virtue of its dominant currency and ascendant role in international economic institutions. Since the emergence of stagflation in the 1970s, its history of adapting foreign policy to advances in theory has been marked by both indecision and a willingness to countenance only the most confident and simplistic versions of new economic theory. The debt crises of the 1980s and monetary turmoil of the 1990s did little to alter this course. And though heterodoxy remained distant and beyond the ken of most policymakers, the foreign affairs of the United States remained wedded integrally to the counsel of economists, both active and defunct.


Bordo, Michael D., and Barry Eichengreen, eds. A Retrospective on the Bretton Woods System. Chicago, 1993. A collection of essays examining the origins, operations, and legacy of the Bretton Woods international monetary system.

Dornbusch, Rudiger, "Expectations and Exchange Rate Dynamics." Journal of Political Economy (December 1976). Influential article examining the potential volatility of a regime of floating exchange rates.

Gardner, Richard N. Sterling-Dollar Diplomacy: The Origins and Prospects of Our International Order. New ed. New York, 1980.

Haberler, Gottfried. Theory of International Trade, with Its Application to Commercial Policy. Translated by Alfred Stonier and Fredric Benham. London, 1965. First work to place Ricardian trade theory in a general equilibrium framework.

Harrod, Roy. The Dollar. 2d ed. New York, 1963. History of the postWorld War II transition from dollar shortage to dollar glut.

James, Harold. International Monetary Cooperation Since Bretton Woods. Washington, D.C., and New York, 1996. Detailed history of international monetary affairs from the 1970s.

Keynes, John Maynard. The Collected Writings of John Maynard Keynes. Edited by Donald E. Moggridge. 30 vols. London and New York, 19711989. Although other volumes in this set are also relevant to studies of international economic policy and theory, volumes 5, 7, 25, and 26 are particularly useful.

Kuznets, Simon. Growth, Population, and Income Distribution: Selected Essays. New York, 1979. Essays on the origins of inequality, including the inverse-U relationship theory.

Lerner, Abba. The Economics of Control. New York, 1970. Reprint of 1944 publication in which Lerner introduced the Marshall-Lerner criterion for analyzing the effect of exchange rate changes on the balance of payments.

Marshall, Alfred. Industry and Trade: A Study of Industrial Technique and Business Organization and of Their Influences on the Conditions of Various Classes and Nations. London, 1919. Influential British economist's last work. Less well organized than his more famous text, but brimming with questions and observations that became critical parts of modern trade theory.

Meade, James. Theory of International Economic Policy. 2 vols. London, 1966. British economist's Nobel Prize-winning study of international trade that integrates Keynesian and pre-Keynesian analyses, domestic and international economic policy. First published in 1951 and 1955.

Myrdal, Gunnar. International Economy: Problems and Prospects. Westport, Conn., 1978. Analysis of international trade and money with an emphasis on developing world economic problems. An update of Harrod's analysis of departures from equilibrium and their essentially cumulative effects.

Ohlin, Bertil. Interregional and International Trade. Cambridge, Mass., 1967. Work in which the Nobel prize-winning economist introduced the Heckscher-Ohlin theory of international trade.

Pitchford, John D. The Current Account and Foreign Debt. London and New York, 1995. Concise analysis of international payments operations and problems.

Ricardo, David. Works and Correspondence: Principles of Political Economy and Taxation. Vol. 1. Edited by Piero Sraffa. First volume of a ten-volume collection of Ricardo's writings. Edited over 30 years by an influential Cambridge economist whose fear of teaching was so profound that the editorship of this series and other smaller tasks had to be invented (principally by John Maynard Keynes) to keep him on the Cambridge faculty.

Samuelson, Paul. "International Trade and the Equalization of Factor Prices." Economic Journal (June 1948). A corroboration and updating of the Heckscher-Ohlin theory of international trade.

Sapsford, David, and John-Ren Chen, eds. Development Economics and Policy. New York, 1998. Recent survey of development economics theory and related policy applications.

Seers, Dudley, and Leonard Joy, eds. Development in a Divided World. New York, 1970; Harmondsworth, U.K., 1971. Collection of essays documenting developmental economic problems unique to developing nations.

Singer, Hans Wolfgang, and Sumit Roy. Economic Progress and Prospects in the Third World: Lessons of Development Experience Since 1945. Aldershot, U.K., and Brookfield, Vt., 1993.

Smith, Adam. An Inquiry into the Nature and Causes of the Wealth of Nations. Edited by Kathryn Sutherland. New York, 1998. Arguably the first scientific analysis of domestic and international economic affairs, first published in 1776.

Thomas, Brinley. Migration and Economic Growth: A Study of Great Britain and the Atlantic Economy. 2d ed. Cambridge, 1973. History of the U.S. trade network with Great Britain, with emphasis on European demography and migration.

Tobin, James. "A Proposal for International Monetary Reform." Eastern Economic Journal (winter 1978): 153159. Seminal article in which the Tobin international currency transactions tax was first proposed.

Treverton, Gregory F. The Dollar Drain and American Forces in Germany: Managing the Political Economics of Alliance. Athens, Ohio, 1978. History of U.S. efforts to manage the postWorld War II dollar glut in one European country.

Triffin, Robert. Gold and the Dollar Crisis: The Future of Convertibility. New Haven, Conn., 1961. Influential book examining the unique and potentially troublesome role of the U.S. dollar in the Bretton Woods system. Introduced the "Triffin dilemma."

See also Foreign Aid; International Monetary Fund and World Bank; Tariff Policy .


Although the area around Bretton Woods, New Hampshire, possesses one of the least reliable climates anywhere in the United States, it was chosen as the site of the 1944 international conference for postWorld War II international economic planning precisely because it promised a potentially pleasant climate. "For God's sake do not take us to Washington in July," wrote the British economist John Maynard Keynes to the American Harry Dexter White in May 1944, "which would surely be a most unfriendly act." White, who had joined the Treasury department in 1934 and had become Treasury Secretary Henry Morgenthau's chief planner for postwar international economic policy was Keynes's chief intermediary with the Roosevelt administration. The "White Plan" for postwar international economic cooperation, leaked by the London Financial News in April 1943, became the principal blueprint which guided postwar planning in general and the Bretton Woods conference in particular. Lord Keynes was the chief British spokesperson, a confidant of White's, and, as it turned out, chiefly responsible for choosing the site of the conference.

Convened on 1 July 1944, and held at the Mount Washington Hotel at Bretton Woods, this groundbreaking conference opened only a short distance from the peak of the highest summit in the American Northeast. On 12 April 1934, the weather observatory on its summit recorded a sustained wind gust of 231 miles per hour, a record that has yet to be equaled anywhere on the planet. It is a place reckoned by many to be one of the windiest places on earth, and attracts a multitude of visitors today, many drawn by the strange lure and challenge of unpredictable conditions. Snow has fallen on the peak in every month of the year, and temperatures below freezing are not uncommon at any time.

There is little doubt that Keynes, who suffered from heart ailments and who would die of a heart attack in 1946, preferred the chance of a blustery climate in July to the potential for oppressive heat and humidity in the nation's capital. And though the conference concluded by eschewing Keynes's plea for both an international reserve currency (that he had given the name "bancor") and an international overdraft fund, it was the masterful British economist who ensured that the more than seven hundred delegates from forty-four nations would meet to plan the postwar international economic order in the Presidential Range of New Hampshire's White Mountains.

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