Prosperity and Depression.pdf

47 2 Recent Developments in Trade Cycle Theory Part IIIAnother difference between the "classical" analysis and the "modern"approach is this: In traditional theory, capital movements are usually regardedas an active, autonomous, factor which induces a change in thetrade balance. In the modern view this relationship is almost reversed:It is assumed that if exports rise (or imports fall) the gap is likely tobe filled by induced capital movements. The trade balance does notbecome favorable because there was a capital export, but the other wayround: there was a capital export because the trade balance becameactive.lIn certain circumstances and within limits, (e.g., under a sterlingexchange standard) this is clearly possible: Foreign balances maybe piled up by the banks or clearing offices of the country with thefavorable trade balance, or private individuals may be induced bychanges in interest rates to acquire foreign assets. It should, however,not be forgotten that this is never a purely automatic process, but theresult of a deliberate policy: somebody, private banks, central banks,government, stabilization funds, clearing offices or private individualsmust decide to hold the foreign assets. The situation will be differentunder different institutional arrangements and policies. These mattershave been widely discussed; much can be said about them, but easy andsweeping generalisations as those underlying a mechanical multiplieranalysis are rather a step backward than forward.The concept of the marginal propensity to import seems to have beenintroduced first by Mr. PAISH.2 The underlying idea is, however, anancient one. An increase in imports induced by a rise in incomes is anintegral part of the classical model of the international trade mechanism.3 The modern innovation consists essentially in the assumption ofa fairly constant and predictable relationship between changes in incomeand imports. The traditional theory, on the other hand, does not tryto establish a stable relationship but insists that the rate at which income1 This was very clearly brought out by Mr. Keynes in his famous discussionwith Professor Ohlin on the transfer of reparations.2 See reference on page 410 above. See also Hayek, Monetary Nationalismand International Stability, 1937, and Imre De Vegh, "Imports and Income in theUnited States and Canada" in Review of Economic Statistics, Vol. 23, August 1941.3 Again it must be said that many writers have overemphasized the role ofgeneral price changes and have overlooked the possibility of equilibrating incomechanges without any price changes whatsoever. The view which stresses thispossibility is called by Mr. Carl Iversen in his well-known study, InternationalCapital MovementJ (1st ed., 1935), the "modern theory" as against the "classicaltheory." But Mr. Iversen himself is able to trace the modern theory almostas far back in the history of economic thought as the classical theory.