The late Canadian economist Harry Johnson, who came at the subject from the Monetarist persuasion, was correct when he wrote in 1969 (reference below) that “The adoption of flexible exchange rates would have the great advantage of freeing governments to use their instruments of domestic policy for the pursuit of domestic objectives, while at the same time removing the pressures to intervene in international trade and payments for balance-of-payments reasons.” How does this square with those who believe that even currency-issuing governments are constrained in their fiscal flexibility by an alleged balance of payments constraint. So-called progressive economists, particularly, are enamoured with the idea that Modern Monetary Theory (MMT) is flawed because it doesn’t recognise the fiscal limits imposed by the need to maintain a stable external balance. In this blog, we trace the arguments.…The post everyone has been waiting for.
Bill Mitchell – billy blog
Balance of payments constraints
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia
Ramanan responded in the comments here at MNE and developed his argument in a separate post. With "free trade" to the fore these days owing to the flurry of new trade agreements, this is a debate worth having.
The Case for Concerted Action
Neochartalism, Balance Of Payments And Mainstream Economics
V. Ramanan
My view is that there is a political dimension to trade as well as an economic one. Economics focuses in efficiencies such as comparative advantage. But from the political point of view, as well as engineering, efficiency about means and effectiveness is about goals. Efficiency serves effectiveness. This means that efficiency must be balanced with resilience.
A balance must be struck between autarchy and dependence, for example. In addition, history testifies that more growth of developed countries is benefitted by so-called free trade, whereas the growth of emerging countries has been enhanced by protecting infant industries. This was the case between Britain and the US in the 19th century, for example.
