The Need for a New Theory of International Payments Adjustment

This book is predicated on the belief that the existing state of balanceof-payments theory does not provide national economic authorities with a sufficiently pragmatic frame of reference for international payments policy formulation. As a result the international payments mechanism has not been functioning smoothly and efficiently during recent years. Social costs — such as unemployment and the adverse side effects of stop-go macropolicies — that might have been avoided with a more effective system of international payments and adjustment, have been commonplace. The lack of pragmatism of the theory of balance of payments derives from three main shortcomings: an unwillingness to acknowledge the possibility that any self-correcting tendencies might be deliberately nullified by national authorities; a reliance upon general equilibrium analysis; and the failure to integrate into the body of the theory, transactions on capital and transfer accounts. These shortcomings have become increasingly important since about 1950 as macro-stabilisation policies have been used more and more effectively for the solution of domestic problems, as economic interdependence among the developed nations of the world has grown, and as transactions on the capital and transfer accounts have assumed increased quantitative significance.