and Metzler. Reduced to its simplest expression, the machanism is
the following: a surplus of the foreign balanoe behaves like an
autonomous demand* through the operation of the multiplier nochanisn,
it gives rise to a larger increase in the national income which, given the propensity to import, makes possible the readjustment
of the foreign balance. Conversely, a negative foreign balance gives riso to a contraction of aggregate income which makes it possible to reduce imports, thus helping to restore the
balance.
Page 77.
The models proposed "by Machlup and Metzler take account "both of the effoets of variations in the balance of country A on
country
B and the reciprocal effects of the balance of B on that of A. Let us immediately note a very interesting case: that in which the contractions of the national incomes of the "payor" and"receiver" ax-o such that the indebted country is unable to settle its debt. Thus the possibility of international equilibrium depends
on the propensities to consume and invest in the two countries.
This "case" is particularly interesting because it ought to have put a finger on the problem: it shows that the equilibrium of the external balance only reflects a structural adjustment of the
economies concerned, whose requirements it highlights. The question of what the various "propensities" are, the reasons for their sta¬
bility and for the changes which affects them, is not a question of
"empirical fact" but a fundamental question of theory. What is meant by the structural adjustment which conditions the equilibrium of foreign payments? This adjustment is expressed precisely in changes
in the propensities, particularly the propensity to import. Hence,
we are by no means entitled to imagine arbitrarily any particular
"models". This empercist attitude is of no use because, we have to know how and why the propensities change.
Rejecting the multiplier analysis, modern writers have usually
gone back to the traditional price effect, at least with respect
to the underdeveloped countries, During a depression export prices collapse, even if the local currency is still sound
(in
the case of monetary integration forexample).
Must we then believe that the underdeveloped countries prove the possibilityoî
adirect price
effect? That in these countries the fluctuations of the balance of payments involve price fluctuations through the international
movements of money? In fact this is not so. Prices fluctuate ac¬
cording to demand both in the underdeveloped and in the developed
countries. If the export prices of the underdeveloped countries
ïhige 78.
collapse, for example during a depression, it is not "because of
the deficit in the foreign "balance, but because of the drop in
the demand for these goods, which is essentially foreign demand.
The volume and the price of exports collapse simultaneously and
for the same reason. The deficit of the balance is by no means a cause of this collapse. On the contrary it is the consequence of
it.
Therefore the conclusions we arrive at, as regards the theory of
of readjustment of the balance of payments, are entirely negative.
Firstly, despite appearances, the "price" effect does not in reality operate in the underdeveloped countries any more than in
the developed economies. Secondly, the "exchange rate effect does
not tend to bring about re-equilibrium. Frequently the changes in
. the .exchange rate, paiticularly in the underdeveloped countries, only operate during a temporary period
(until
the domestic pricerise is general and proportional to the fall in the exchange
rate)
and often in a perverse direction
(because
of the priceelasticities)
Thirdly, the "income" effect is only a trend and implies a struc¬tural adjustment which is precisely the heart of the problem. So
there is no mcchinism which automatically restores the equilibrium
of the foreign balance. All we can be sure of is that, in general, importing transfers abroad a purchasing power in a specific moneta:y
form. This transfer naturally tends to make a later export possibl e, This is a very general trend. It is similar to the way in which,
in the market economy, any purchase - if other conditions are ful¬
filled - makes possible a later sale. But just as the existence of
this deep trend does not justify the law of markets, similarly it
does not justify the construction, of a theory of automatic inter¬
national equilibrium.
Page 79.
Equilibrium rate of exchange or structural adjustment?
The real date characterizing two interrelated economic systems
can thus be such that the balance of payments can not be in equili¬
brium in the context of freely moving exchange rates. Since the
automatic mechanisms do not oporuto , it seems that in this .situation
there is no "equilibrium" exchange rate. What is in fact called
the equilibrium exchange rate would be a rate which would.make pos¬
sible the equilibrium of the balance of payments with no restrictions
as to imports or as the "natural" movement of long-term capital.
To say that the income-readjusting mechanisms are only a trend means simply to assert that such a rate does not always exist. More
specifically, since the exchange mechanisms relate to the short-term
and the structural readjustmnet to the long term, there
is
not al¬ways an equilibrium exchange rate,
still less
a"natural" and
"spontaneous" one.
Yet one has the impression that an equilibrium rate existed throughout the 19th century. To be sure, during that century
"par value" constituted from a certain point of view the
"normal"
rate of exchange between two currencies convertible into gold.
The buying and selling of gold by banks of issue at a
fixed price and
and in unlimited quantities contained the exchange fluctuations
within the narrow limits of gold points.
Convertibility into gold
made the world system sound enough to enable the mechanisms of
structural adjustment to operate. But this
structural adjustment,
accepted by the weak and imposed by the strong,has nothing particu¬
larly "harmonious" about itj on the contrary
it reflects the gra-dual
shaping of a world which has become