Meade's Analysis and Today's Global Imbalances

Lecture delivered at Cambridge University

November 21, 2006

I am greatly honored to have been invited to contribute this lecture to commemorate the life of one of the outstanding group of economists to whom I have argued (Worswick and Trevithick 1983, p. 91) we owe the prosperity of the postwar years. It was not inevitable that the economic history of the post-World War II period would be so dramatically different to, and better than, the experience of the 20-year interregnum between the two bitter conflicts of the twentieth century. As a matter of historical fact, the leading economist of that day, the creator of the set of ideas of combining microeconomic liberalism with macroeconomic management that laid the basis of the postwar prosperity, had during the war years toyed with a reversion to mercantilism that would have doomed hopes of a liberal world order. His decision to abandon, at least conditionally, these ideas is recorded in his Collected Works (vol. XXVI, p. 284) in the following terms:

if all the other countries of the world agree to fall in with the stipulations of the Commercial Union (which, in my judgement, is extremely unlikely), we shall gain more on the swings than we shall lose on the roundabouts. That we shall lose something on the roundabouts is, in my judgement, indisputable. Nevertheless, I am ready to be persuaded not to oppose the scheme, on the ground that our discretion is only restricted if others also are conforming to a strict code, and that the latter, if by a miracle it does come about, may be to our very considerable advantage.

The Commercial Union, which evolved into GATT and ultimately the WTO, was of course the brainchild of James Meade. He, along with outstanding colleagues in the British wartime economic service like Marcus Fleming, Roy Harrod, Lionel Robbins, and Dennis Robertson, remained faithful to Keynes’s interwar vision of economic policy even when the master hesitated. We should all be profoundly grateful that he and his colleagues stood up for what Samuelson subsequently dubbed the “neoclassical synthesis” against the doubts of Keynes himself. Without their steady good sense, the world might well not have experienced the 60 years of unparalleled growth that it has subsequently enjoyed.

Although I overlapped with James Meade when I was an undergraduate at the London School of Economics and he was a professor, I did not get to know him personally until the 1960s when I had finished graduate work in the United States and become an academic at the then-new University of York. But it was impossible in England in the 1950s for even an undergraduate not to be influenced by the analysis that Meade had made famous through his opus The Theory of International Economic Policy. This was among the finest expressions of the orthodoxy of that day, almost the ultimate refinement of Keynes’s international economic analysis in an era when Keynesian thought was everywhere dominant. Most of my remarks today will be related to that analysis.

Doubtless the most important parallel between the intellectual position of James Meade and me is that I find it easy to subscribe to his famous aphorism that “I have my heart to the left and my brain to the right.” I too believe that governments should try to reduce income inequalities as well as internalize externalities and regulate monopolies where they are unable to introduce competition, but otherwise leave the microeconomy to the market, while managing the macroeconomy. It is the latter subject that I am going to discuss today, asking in particular whether the analysis that he developed can help illuminate what some of us see as the dominant economic issue of the moment: adjusting the global imbalances without throwing the world economy into recession in the process.