This article is actually a follow-up on my review of “The Age of Oversupply” by Daniel Alpert. During Alpert’s review of the Bretton Woods conference and J.M. Keynes’ proposal for an “International Clearing Union”, he referenced a research paper published by Robert Hockett in 2011. Hockett’s paper was titled “Bretton Woods 1.0: An Essay in Constructive Retrieval”, published by the Cornell Law School as part of their Legal Studies Research Paper Series.
I found myself more than casually interested in learning more about Keynes’ International Clearing Union” proposal, so I downloaded Hockett’s paper.
In recent years I have found myself increasingly dissatisfied with Keynesian Economic Theory, as I understood it. It seems clear that monetary stimulus has failed in many cases to restore the economic performance of several economies. Japan is certainly a very noteworthy 20 year example, and both the US and Europe have gone to extremes with monetary stimulus including very historically low interest rates, massive quantitive easing, and various other stimulus initiatives. Fiscal stimulus has likewise produced at best lackluster results. Countries have been accumulating massive debts in pursuit of Keynesian stimulus solutions which were at best ineffective.
Alpert’s book gave me a new perspective on the “oversupply of labor, productive capacity, and capital relative to the demand for all three”. This condition of oversupply explains why classical Keynesian monetary stimulus is ineffective, and why only massive fiscal stimulus carefully targeted at creating sustainable long lasting productive economic infrastructure can stimulate an economic back to a balanced growth condition.
Hockett’s paper digs much deeper into the historical foundations of Keynesian Economics. I was absolutely fascinated to read Hockett’s description of “bastard Keynesianism” as described by Keynes’ student Joan Robinson. American economists such as Hicks, Hanson, and others at Harvard and M.I.T. effectively simplified and distorted the original theory which Keynes documented in his “General Theory of Employment, Interest, and Money” (1936).
In many ways, the International Monetary Fund (IMF) is itself a bastardized, severely compromised implementation of the “International Clearing Union” which Keynes had originally proposed at the 1944 Bretton Woods summit.
Hockett does a great job of patiently and thoroughly explaining the core fundamentals of true “Cambridge” Keynesian Economic Theory. He explains how multiple individually rational acts of decentralized economic decision making can aggregate into recursively self-amplifying, collectively self-defeating outcomes. This is the core of the “Boom and Bust” cycle, and explains why a “collective action problem” requires a “collective agent” to act in the name of all interested parties to ensure a stable and sustainable economic outcome.
The International Clearing Union was Keynes’ recommended collective agent. The International Clearing Union would effectively be a “Central Bank for Central Banks” and would act as a countercyclical monetary and financial regulator for the world economy. Most simplistically, the International Clearing Union would regulate exchange rates to prevent individual economies from either hoarding massive Foreign Exchange Reserves, or running massive Current Account Deficits. Exchange rates would not be regulated on a bilateral basis, but rather on a multi-lateral basis, to permit more efficient exploitation of the international division of labor and comparative advantage between economies.
Hockett uses examples of the Tech Stock Bubble, the Real Estate Bubble, and the Global Contagion Bubble as examples of the costs and negative effects of unbalanced, unregulated global trade.
Finally, Hockett proposes using present day global Infrastructure including the Bank for International Settlements and the International Monetary Fund to implement Keynes’ global monetary regulatory function to restore sustainable balance to the Global Economy.
Hockett packs a lot of valuable historical information, technical explanation and analysis, and practical solutions into his 74 page research paper. His paper is well organized, well written, and very interesting and informative. I enthusiastically recommend this paper for anyone interested in macroeconomics, or just seeking a better understanding of our global economic system.
Frank T.