Chapter 13: The Plumbers’ Solution to Destabilizing International Capital Flows
13. The plumbers’ solution to destabilizing international capital ﬂows A consistent theme throughout this book has been that the logic of classical economic theory assumes away the fundamental economic problems of a market-oriented, money-using entrepreneurial economy. These aspects neglected by classical theory are particularly relevant for understanding the international payments questions involving liquidity, persistent and growing debt obligations, and the importance of instituting stable exchange rates and avoiding a freely ﬂexible exchange rate system. An example of the sanguine classical response to those arguing against freely ﬂexible prices and exchange rates is Professor Milton Friedman’s reply to me in our ‘debate’ in the economic literature. Friedman stated: ‘A price may be ﬂexible . . . yet be relatively stable, because demand and supply are relatively stable over time . . . [Of course] violent instability of prices in terms of a speciﬁc money would greatly reduce the usefulness of that money’.1 It is nice to know that as long as prices or exchange rates remain relatively stable, or ‘sticky’ over time, then there is no harm in permitting them to be ﬂexible. The problem arises when there are volatile movements in exchange rates. Should there be a deliberate policy to intervene in the market to maintain relative stability or should a laissez-faire market be permitted to determine the price? Keynes helped design the Bretton Woods agreement to foster action and intervention to ﬁx exchange rates and control international payment ﬂows. Friedman sold the public on the beneﬁcence of government inaction and the free market...
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