The Consolidation of Dollar Hegemony after the Collapse of Bretton Woods: Bringing power back in

Collapse, ma non troppo!

New IDEAS Working Paper on the alternative views of the collapse of Bretton Woods. From the abstract:

Contrary to conventional views which suggest that the collapse of Bretton Woods represented the beginning of the end of the global hegemonic position of the dollar, the collapse of the system liberated American policy from convertibility to gold, and imposed a global fiat system still dominated by the floating dollar. The end of Bretton Woods and the set of regulations that imposed capital controls were part of the agenda of many powerful groups within the US, and led to the creation of a more dollarized world. The challenge to the dollar might arise, eventually, from the decline in the United States’power to determine the pricing of key commodities in global markets; but it is premature to think about the demise of the dollar. The limitations of the dominant views about Bretton Woods are ultimately tied to mainstream economics.

Read it here.

The economics of New Developmentalism

New versus Classical Developmentalism

New paper by Tom Palley, titled “The Economics of New Developmentalism: A Critical Assessment” which has been published in Investigacion Economica. Palley argues that "the issues raised will be a key element in the 2022 Brazilian presidential election that will likely pit Ciro Gomes versus Lula in the first round. Gomes aligns with New Developmentalism. Lula inclines to Classical Developmentalism. Of course, economic analysis is just part of the development problematic. It must be reconciled and integrated with the political reality of Latin America’s unethical economic elite, its corrupted political class, and the omnipresent threat of US intervention against change that challenges the economic status quo."

The Price of Peace by Zachary D. Carter

Each era gets its own version of Keynes. The post-war era got the sanitized biography by his disciple and friend Roy Harrod. It emphasized the somewhat late Victorian values of what he called the presuppositions of Harvey Road, Keynes’ birth place at Cambridge, representing the ethical principles that he received from his parents. Not only it avoided any discussion of Keynes' sexuality, that was verboten at that time, and not just because Keynes’ mother was still alive, but also it was well suited to the moderate Neoclassical Synthesis version of Keynesianism that came dominate American academia and the profession with its emphasis on wage rigidities and imperfections. Lord Robert Skidelsky famously argued that Harrod’s biography was “an exercise in covering up and planting false trails” (Skidelsky, 1983: xxv).

 Skidelsky had the advantage of time, and his biography – the three volumes that came out after the publication of Keynes’ Collected Writings, one might add – was more direct and truthful about his subject. Yet, the biography was published between the 1980s and the early 2000s, the period in which the crisis of Keynesian economics was complete, and his ideas forgotten, or worse, as famously noted by Robert Lucas Jr., simply ridiculed. In many ways, Skidelsky’s biography, which broke new ground on the personal life of Keynes, was defensive and did not challenge the notion that his theory relied on imperfections.

 Zachary D. Carter’s book is not quite a biography in the same way that the two cited above, or the one by Donald Moggridge, one of the co-editors of Keynes’ Collected Writings. There is little need for another detailed speculative analysis of the lesser known aspects of Keynes’ life and how these affected his economic views. Carter does something better. He provides a lively discussion of the rise and fall of Keynesian ideas, beginning with how Keynes’ developed his analytical framework, from his theoretical struggles of the 1920s, with some retrospective analysis of his previous life and work, to his premature death in 1946. He also discusses the apogee and the fall of Keynesian economics after Keynes’ death, and the rise to dominance of neoliberal ideas, at least until the last crisis. In that respect, the book has two parts. The first twelve chapters that discuss Keynes’ life and the intricate dance between economic policy debates and rapidly changing economic ideas that eventually propelled the Keynesian Revolution, and a second part from chapter thirteen to seventeen, where John Kenneth Galbraith and Joan Robinson pick up Keynes’ mantle as the proselytizers of the true Keynesian gospel. They battled not only with avowed neoliberals and anti-Keynesians like Milton Friedman and Friedrich Hayek, but also against the brand of Keynesianism that came to dominate academia, and the “greatest prophet of this ‘New Economics,’ as it would come to be known in the John F. Kennedy years, … Paul Samuelson” (p. 399).

 Read rest here.

Laissez-faire policies, self-adjusting market system, and neoliberalism

Classical political economics was in part a discourse for the rising bourgeoisie, and as such most of its members – that accepted some version of the labor theory of value and that distribution was conflictive – were for laissez-faire policies. That was certainly the case of the Physiocrats, and of Adam Smith and David Ricardo, the two most accomplished of the British political economists.

However, the classical analytical scheme did not assume full employment of labor or that the economic system was self-adjusted. Competition meant that market prices fluctuated around the natural prices, but those did not imply efficient allocation of resources. The notion that markets are self-adjusting with a tendency to full employment was a development of the last quarter of the nineteenth-century, and part of the so-called Marginalist Revolution. Marginalism also implied that each factor of production, capital and labor, received a share of income in accordance with the services rendered in production. Distribution was harmonious and not conflictive.[i] However, that did not imply that marginalist authors were all for laissez-faire.

It is clear that laissez-faire policies – leaving markets to its own devices without government intervention – could theoretically lead to efficient outcomes in the new theoretical scheme. But many marginalists authors believed that imperfections were relatively common in the real world and that under these circumstances some degree of government intervention was required. Market imperfections were a central reason for government intervention, before the Keynesian Revolution. In addition, most marginalists believed that economics was a science, technical in nature and not an art that required understanding of political factors, like class interests, wage bargaining, the power of capitalists, etc. These were imperfections, and they required government intervention. That was certainly the dominant view within marginalism associated with Cambridge University in England, and with its main academic figure Alfred Marshall.[ii]

Marginalists were part of a late nineteenth-century trend that believed in the power of experts, technocrats, in a period in which economics was becoming professionalized, and independent of the moral sciences. They were policy advisors. Simplifying considerably, one may say that classical authors were for laissez-faire, but not for the self-adjusting nature of capitalism, while marginalists were for the notion that markets are self-regulated, but less keen on hands-off governments. The conjunction of the two, the notion that laissez-faire capitalism is self-adjusting, was a distinctive feature of some of the marginalist authors, in particular the ones associated with the Austrian school, with Ludwig von Mises and his disciple Friedrich Hayek. That is, it is only with the rise of neoliberalism that laissez-faire and the self-adjusting nature of capitalism become associated.[iii]

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[i] The notion that distribution is harmonious and not conflictive as assumed by classical authors precedes marginalism or neoclassical economics, and was fundamentally developed in the period after the abandonment of Ricardian economics by pamphleteers and political economists that were afraid of the social implications of the work by David Ricardo, and the development of Socialist theories. Nassau Senior is probably the key author, and Frédéric Bastiat and Harriet Martineau the popularizers of the new dogma. Karl Marx referred to these post-classical authors as vulgar economists, and the term seems fitting.

[ii] Arthur Cecil Pigou, Marshall's main disciple, and John Maynard Keynes' teacher, was concerned exactly with the imperfections caused by externalities that required some sort of government intervention. These would be taxes or subsidies, depending on the nature of the externalities.

[iii] Later, in the 1940s after encountering insurmountable problems with his theory of cycles and the notion of capital, when he distanced himself from economics, Hayek exposed a different argument in favor of laissez-faire policies based on complexity and unintended consequences of government intervention. In this case, the argument was that government failures were worse than market failures or imperfections.

The Demise of Bretton Woods

ROPE will be hosting a special Zoom Webinar, hosted by Lilia Costabile. The webinar is on August 13, 2021, at 1 pm, NY time (Bretton Wood collapsed on August 15, 1971) . To register, please use the following link.

Impact factor

The Review of Keynesian Economics (ROKE) Clarivate impact factor has gone up again. The five year one is a bit higher at 1.397. For a critical discussion of the role of impact factors and journal rankings see this old post from when ROKE was just 3 years old and was ranked for the first time. Next year it will be the 10th anniversary of the journal.