Tag Archives: joan robinson

Paul Krugman And Free Trade As Mercantilism

In a recent article How The West Is Strangling Putin’s Economy for The New York Times, Paul Krugman makes this point about international trade:

One final point: The effect of sanctions on Russia offers a graphic, if grisly, demonstration of a point economists often try to make, but rarely manage to get across: Imports, not exports, are the point of international trade.

That is, the benefits of trade shouldn’t be measured by the jobs and incomes created in export industries; those workers could, after all, be doing something else. The gains from trade come, instead, from the useful goods and services other countries provide to your citizens. And running a trade surplus isn’t a “win”; if anything, it means that you’re giving the world more than you get, receiving nothing but i.o.u.s in return.

That’s quite a deceit!

Now, he has some caveats but tries to minimise them. But the main point about imports, not exports being the point of international trade is something top corporations claim since they want to open markets in poor countries. This reminds of Joan Robinson’s quote that free trade is a subtle form of mercantilism. A poor country needs protection from foreign competition. In Post-Keynesian theory, exports/success of corporations in international markets is quite important. As Anthony Thirlwall in the paper Kaldor’s 1970 Regional Growth Model Revisited says about Nicholas Kaldor’s model (which I believe):

The first proposition of the model is that regional growth is driven by export growth. Kaldor regarded exports as the only true autonomous component of aggregate demand, not just at the regional level but also at the national level because consumption and investment demand are largely induced by the growth of output itself …

So that’s quite the opposite view from mainstream economics.

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

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

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

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

Keynes, Robinson And Mercantilism

Here’s an interesting insight from Joan Robinson on free trade. According to her, when Keynes rose to popularity, the thing that worried economists the most was actually that it was against free trade.

Keynes had a chapter on mercantilism in the General Theory, but is the most ignored. Perhaps economists don’t want you to find out!

The book The New Mercantilism (a lecture from 1965, first published 1966) starts off like this:

I began to read for the Tripos in the last decade in which the doctrine of the universal benefits of free trade was still dominant. It was imposed upon our young minds as a dogma. We were being received into the fraternity of economists, who knew that free trade is right, unlike the silly plain man who supposed that protection might do his country good, and the misguided politician who supported the vested interests of particular industries. In the dark age before the light of Adam Smith dawned, there had been mercantilists who were both misguided, because they thought it proper for a government to operate in favour of the economic interests of its own country, though at the expense of others, and silly because they thought that it was in a country’s interest to build up a trade surplus by restricting imports. When Keynes attacked the dominant orthodoxy, one of the things that grieved my teachers most was that he should try to rehabilitate the mercantilists, thus damaging the claim of the free-traders to superior benevolence and wisdom.

What is the “new mercantilism”? Joan Robinson says:

Nowadays governments are concerned not just to maintain employment, but to make national income grow. Nevertheless, the capitalist world is still always somewhat of a buyer’s market, in the sense that capacity to produce exceeds what can be sold at a profitable price. Some countries have experienced spells of excessive demand, but this corrects itself only too soon. The chronic condition for industrial enterprise is to be looking round anxiously for prospects of sales. Since the total market does not grow fast enough to make room for all, each government feels it a worthy and commendable aim to increase its own share in world activity for the benefit of its own people.

This is the new mercantilism.

Joan Robinson On The Importance Of International Trade For Economic Dynamics

A few important things to understand macroeconomics/political economy are: national accounts/flow of funds, fiscal policy, endogeneity of money—the financial system in general, the role of demand (or the reverse Say’s Law), behaviour of firms such as pricing, decisions to produce, decisions to hire labour, and international trade and globalisation.

After the economic and financial crisis which started in 2007, economists have conceded to some extent that they have been wrong and accepted some heterodox positions except the most important one: international trade.

Joan Robinson was in my opinion the first economist to truly understand all the issues need to make someone an economist of rank one.

Here’s the opening of a 1973 article:

Joan Robinson on international trade

In this article she tells the reader about how this problem leads to polarisation in the fortunes of nations:

We are now in the era of modern capitalism when every industrial country has a national economic policy of near-full employment and growth of GNP. Every industrial country wants a surplus on income account. ‘Export lead growth’ is the most convenient way of running modem capitalism. Who succeeds at any moment is accidental, largely depending upon historical circumstances and political and psychological influences. Success leads to success and failure engenders failure.

The most important point is that market mechanisms fail to resolve imbalances and this leads to divergence instead of convergence and causes a deflationary bias to the whole world. So in the absence of a market mechanism, an official mechanism is needed.

Link

Joan Robinson In NYT From 1976

This is an unbelievably good profile (thanks to Carolina Alves on Twitter) of Joan Robinson in The New York Times from 1976.

One of the best things in the article is about bastardisation of Keynes/Keynesian economics. Bastardisation is the process of intentionally misinterpreting a theory or an ideology to suit one’s political purposes. The economics profession largely bastardised Keynes to dilute his message. But the best thing is that Keynes himself allowed this bastardisation. He had it right but then said a lot of wrong things which allowed economists to do that. Like by doing: “what do you mean, Keynes himself said that”.

According to the article:

In essence, she concedes, “this was Keynes himself enunciating the Bastard Keynesian doctrine.” Clearly this side of Keynes frustrates her. “We, the younger chaps working with him, were to his left,” she remarked.

Joan Robinson On Central Banking And Deficits

Jo Michell reminded everyone in a tweet of a quote from Joan Robinson with the comment: “Joan Robinson covered pretty much all of MMT in half a page in 1937.”

😉

It’s a passage from her book Introduction To The Theory Of Employment, pages 72-74 (in the second edition):

CREATION OF MONEY THROUGH A BUDGET DEFICIT

A budget deficit financed by borrowing from the Central Bank has effects similar to those of gold-mining. We have already seen how a budget deficit influences incomes. If there is an increase in government expenditure without any corresponding increase in tax receipts there will be an increase in incomes and activity. This is true equally whether the government borrows from the public or from the Central Bank. If the borrowing is from the public there is no further effect to be considered. But if borrowing is from the Central Bank, then on top of the direct effect of the deficit upon income there is the effect of an increase in the quantity of money. For the Central Bank, in lending to the government, increases the ” cash” of the banks, just as it does by buying securities or by buying gold. The direct effect of the deficit comes to an end as soon as the budget is balanced, but the effect upon the quantity of money remains as a permanent legacy.

The increase in the quantity of money, which takes place cumulatively as long as the deficit is running, will tend to produce a fall in the rate of interest and (unless confidence has been badly shaken) the effects of an increase in investment, induced by lower interest rates, will be superimposed upon the direct effects of the budget deficit in increasing consumption.

At first there will be a drag upon the fall in the rate of interest because the direct effect of the budget deficit in increasing incomes raises the demand for money, since the requirements of the active circulation depend upon the level of income. But the increase in demand for money will be very slight (so long as money wages do not rise) compared to the increase in supply, and it is a once-andfor-all effect, while the increase in the supply of money is cumulative.

The whole difference between a budget deficit financed by creating money and one financed by ordinary borrowing lies in this reaction upon the rate of interest.

Joan Robinson On How Free Trade Is Destructive

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.

† 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

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

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

The Cambridge Keynesians And The “Bastard Keynesians”

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 How The Economic System Has A Deflationary Bias

I was checking this video by John Eatwell on Joan Robinson, in which he says that Joan Robinson had figured that the international economic system has a deflationary bias. He refers to her 1965 writing The New Mercantilism but I didn’t find her explicitly saying this.

@34:33 in the video, but rewind to your liking for the context.

However in an article The International Currency Proposals published in The Economic Journal, Vol. 53, No. 210/211 (Jun. – Sep., 1943), pp. 161-175, she is quite explicit on this:

The basic rule of the gold-standard game, or of any system of multilateral international trade with stable exchange rates, is that a country which has a favourable balance of trade on income account must lend abroad on long term at a more or less commensurate rate; alternatively, a country whose citizens and Government are not prepared to lend abroad must not have a surplus on income account. Any slight and temporary failure of trade balances and rates of lending to keep in step can be provided for by movements to and fro of gold and short-term funds, but a large and continuous disequilibrium puts a strain upon the system which it cannot bear.

In the text-book account of the gold standard, gold movements of themselves set in train a mechanism to restore equilibrium. If the surplus of exports of a country exceeds its surplus of lending, gold flows to it from the rest of the world. Consequently, according to the text-book account, prices in that country rise, while they fall in the rest of the world. Exports from the surplus country to the rest of the world are therefore reduced, and its imports from the rest of the world are increased, until its surplus and the world’s deficit are wiped out. Outside the text-books matters do not go so smoothly. First, the country receiving gold is under no necessity to check the inflow, while those who lose gold are under an obligation, so long as they struggle to maintain the gold standard, to check the outflow, and they must set about doing so the more quickly the smaller their reserves. Thus the mechanism is not symmetrical, but has an inherent bias towards deflation, which is the more severe the smaller is the amount of gold possessed by deficit countries. Secondly, a loss of gold does not lead automatically and directly, as in the text-books, to the fall of prices which is required to stimulate exports from a deficit country and foster its home production at the expense of imports. The process of adjustment is much more painful. To check the outflow of gold the authorities in a deficit country must restrict credit and encourage a fall in activity and incomes. This, indeed, reduces imports, but it reduces imports not only from the surplus country, but from others as well, so that countries formerly balanced are thrown into disequilibrium and have to join in the process of deflation. And it reduces not only imports, but also consumption of home-produced goods. The total loss of income is a large multiple of the reduction of imports which it is designed to bring about. If unemployment and business losses continue long enough to bring about a sufficient relative fall in money wages, relative costs are reduced, and the text-book story is completed. But meanwhile the surplus country is also suffering from unemployment through its loss of export markets. There is pressure there also to lower wages; and much else, including the gold standard itself, may give way under the strain long before equilibrium has been restored.

Of course, the discussion is on the Bretton-Woods system but the system of floating exchanges hasn’t led to a system where imbalances are resolved by market mechanism, so the problem still remains.

Also deflationary bias doesn’t mean that the world is always in deflation but that there is a bias and that it prevents economic activity to be far less than what it could have been and that economies are crisis-prone.

Joan Robinson On International Trade In Times Of International Crisis

Nick Johnson has some good quotes from Joan Robinson’s book Freedom & Necessity — An Introduction To The Study Of Society from 1970.

One for the current times, Chapter 9, The New Mercantilism, page 92:

The national egoism of modern capitalism is clearly seen in the sphere of international trade. The capitalist world (except in a major war) is a buyer’s market. Productive capacity exceeds demand. Exports yield profits and imports (apart from necessary raw materials) mean a loss of sales to competitors. Moreover internal investment is easier to foster, inflation easier to fend off and the foreign exchange easier to manage in a situation of a favourable balance of trade — that is, an excess of exports over imports. Thus every nation competes to achieve ‘export-led growth’, while each tries to defend itself from the exports of the others. The combination of national quasi-planning with international chaos (which the agreements on trade and finance made after the war have not succeeded in mastering) flares up from time to time in an international crisis.

Joan Robinson was one of the first economists to be against free trade.

In the book Aspects Of Development And Underdevelopment, 1979, Chapter 6, Dependent Industrialisation, page 102, she says:

The most pervasive and strongly held of all neoclassical doctrines is that of the universal benefits of free trade, but unfortunately the theory in terms of which it is expounded has no relevance to the question that it purports to discuss. The argument is conducted in terms of comparisons of static equilibrium positions in which each trading nation is enjoying full employment of all resources and balanced payments, the flow of exports, valued at world prices, being equal to the flow of imports. In such conditions, there is no motive for resorting to protection of home industry. Since full employment of given resources is assumed, there is no need for protection to increase home industry, and since timeless equilibrium is assumed there can never be a deficit in the balance of payments. Moreover, since all countries are treated as having the same level of development, there can be no question of ‘unequal exchange’.

Of course one of the best is the 1937 article Beggar-My-Neighbour Remedies For Unemployment.