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Über dieses Buch

On June 1, 1990, Egon Sohmen would have reached the age of 60 had he not suffered from a fatal illness. It demanded his death at the early age of 46. If he were still with us, he would playa prominent role in the current debate on monetary arrangements and on allocation theory, perhaps in­ cluding environmental issues and urban economics. His contributions are well remembered by his colleagues and friends, by his former students, and by many in the economics profession on both sides of the Atlantic. In extrapolating his great achievements as a scholar and teacher beyond the time of his death, one is inclined to suppose that Egon Sohmen's name would figure high on many a list of candidates for honors and awards in the field of international economics. For the reconstruction of economics in the German language area Egon Sohmen was invaluable. Born in Linz (Austria), he studied in Vienna at the Business School (Hochschule fUr Welthandel, now Wirtscha!tsuniversitiit), then went to the US as a Fulbright scholar (1953), returned to Europe to take his doctorate in Tiibingen, Germany, (1954) and crossed the Atlantic again to teach at MIT (1955-58) where he obtained a Ph. D. (1958) under Charlie Kindleberger. He might have stayed permanently in the US, con­ tinuing a career that he started as Assistant Professor at Yale University (1958-61), if the US visa provisions had been applied in a more liberal fashion.





The thirteen papers in this conference volume cover a wide range of topics. They can be broadly categorized into three groups. Six of the papers deal with money and exchange rates. Five of them tackle problems of international trade theory and commercial policy. The remaining two papers examine the relationship between competition and economic growth, as well as the issues of welfare economics, economic order, and competition. Many of the ideas developed in this volume have already been treated in Egon Sohmen’s works. This demonstrates that his basic concepts and ideas are still very much alive and, moreover, can provide useful insights into the problems that economists face nowadays. Sohmen was truly a leader in the field and has inspired many economists to continue his work. Therefore, this volume can be seen not only as an attempt to apply Egon Sohmen’s most important ideas and theories to current economic issues but also as encouragement to direct additional research towards developing these ideas further. In the remainder of this introduction I will briefly summarize the different contributions to this volume.
Friedrich Schneider

Money and Exchange Rates


Free Minting

It is tempting as we honor the memory of Egon Sohmen to speculate on how he would have reacted to the current interest in “free banking.” He was, of course, Austrian by birth, and the advocates of free banking are sometimes lumped together as the “Austrian School.” He was, moreover, a fierce proponent of flexible exchange rates, and an opponent of fixed rates, strongly believing that exchange rates unaffected by intervention of monetary authorities would work smoothly — a view he might have modified had he lived to observe the rise of the dollar in the free market from 1982 to February 1985, its decline in the two subsequent years, and the gyrations since. If one had any faith in revealed preference, there would seem to have developed a revealed preference in governments for intervention after the disenchantment with free floating — not successful intervention perhaps, but some modest stability preferred to chaotic over- and undershooting.
Charles P. Kindleberger

Profitable Currency Speculation: Service to Users or Destabilizing?

The publications by Milton Friedman (1953) and Egon Sohmen (1961/1969) present to this day two of the most articulate and comprehensive statements of the case for flexible exchange rates. A part of this case is the proposition that in the absence of government intervention, speculators may be expected to stabilize exchange rates.
Herbert G. Grubel

Flexible Exchange Rates and Insulation: A Reexamination

Will a country embedded in an integrated world economy be able to completely insulate its economy from foreign economic disturbances by letting its currency float freely in the foreign exchange market? Both theoretical considerations and actual experience after the movement to flexible exchange rates among the major currencies in 1973 suggest that the answer is negative. According to conventional wisdom, however, the early advocates of flexible exchange rates believed in the ability of floating rates to perfectly insulate an economy from disturbances originating abroad. This conventional wisdom is frequently cited to show that the case for flexible exchange rates may not be as strong as it originally seemed to be, since part of the case appears to have rested on an erroneous belief.
Joachim Fels

An Institutional-Economic Analysis of the Louvre Accord

Egon Sohmen’s research in the field of international currency systems, i.e., his comparative studies of fixed and flexible exchange rates, constituted early contributions to the comparative analysis of institutions which he performed with great virtuosity. In line with the approach prevailing at that time, he concentrated upon the way in which different exchange rate systems functioned.
Rudolf Richter, Udo Schmidt-Mohr

The German Monetary Union

Though inconceivable still a year ago, the Federal Republic of Germany and the German Democratic Republic have formed a monetary, economic, and social union, which became effective on July 1, 1990. The main elements of the underlying treaty are:
the replacement of the hostmark by the DM as the common currency for both parts of Germany, under the control of the — independent — Bundesbank;
the extension of the West German economic system (based on private ownership, competition, and unrestricted mobility of labor, capital, goods, and services) to the GDR;
the introduction of a social security system in the GDR that is in line with the principles of the Soziale Markwirtschaft.
Harmen Lehment

Financial Liberalization in Developing Countries

Egon Sohmen had an abiding faith in, and an uncompromising dedication to, free markets. While he devoted his life’s work to the application of the liberal credo to developed countries, it also has relevance to developing countries. This is shown in the present paper, which examines the need for financial liberalization in these countries.
Bela Balassa

International Trade


Fiscal Policy and the Theory of International Trade

Introduction and Summary
This article integrates key aspects of fiscal policy into the theory of international trade under classical assumptions in which purchasing power parity holds, fiscal policy is perfectly anticipated, and the basic choice affecting individuals, besides the holding of transactions balances, is between present and future goods. The analysis is conducted under the assumption of three alternative monetary rules accompanying a given fiscal policy: (1) fixed exchange rates with passive monetary adjustment; (2) flexible exchange rates with fixed money stocks; and (3) fixed exchange rates with active domestic credit policies designed to hold international reserves constant. It is shown that the effect of fiscal policy on interest rates and the exchange rate is determined less by the method by which government spending is financed than by the division of government spending among the present and future periods. It is shown that, under certain circumstances, derived in the paper, a country may be able to put the entire burden, and more, of domestic government spending on the rest of the world. Retaliation, however, could cancel this result; nevertheless, it is shown that, under certain circumstances, reflecting economic power, one country could gain by nationalistic fiscal policy even if the other country retaliated, provided it did so in an “optimum” way with no intention to damage the aggressive party. The assumption that the rest of the world is monolithic is then dropped, and the rest of the world is divided into partner and rival countries, leading to the important real-world result that some countries are always helped by a country’s fiscal policies, whereas other countries are hurt. In the final section the possibility of cycles in the age-profile of the population at home and abroad are taken into account and the effect on interest rates and trading patterns noted.
Robert Mundell

Wage Agreements and Optimal International Factor Flows

Pronounced disparities in wage levels among countries signal the possibility of gains to be obtained by allowing a (temporary) transfer of workers from low-paid regions to high-paid areas. Of course such a possibility presupposes that wage rate differentials reflect not innate skill differences, but rather are a consequence of asymmetries in technology or in endowment composition. If no impediments are imposed on labor mobility, workers would move until wage rates are equalized.1 Nations rarely allow free access, but not infrequently do permit a regulated flow of labor. But which country collects the “rents” reflected in the international disparity between wage rates? In particular, we ask what the consequences are for a host country’s demand for foreign migrants if the source country stipulates a minimum wage rate that must be paid for all such labor flows.
Stephen T. Easton, Ronald W. Jones

Protection and Exchange Rates

The theme of this paper is the relation between exchange rates and trade restrictions. Usually, these topics are confined to different compartments, trade restrictions belonging to the realm of “real” trade theory and exchange rates to “monetary” theory of the balance of payments. However, applied economists working in the field of international economics, especially in relation to problems of developing countries, have for some time felt compelled, and rightly so, to deal with these questions in a unified way rather than in isolation. On the other hand, relatively little theoretical research appears to have been carried out combining these topics in a unified and rigorous manner.1 The aim of this paper is to try to make some progress in this direction and to clarify some of the basic issues that have been discussed in the literature.
John S. Chipman

Aggressive Unilateralism

On May 25, 1989, the United States used “Section 301” to name Japan, India, and Brazil as “priority “countries to be put through the process of high-pressure mandatory-deadlines tactics designed under the 1988 Omnibus Trade and Competitiveness Act to dislodge, if necessary by retaliation, the trading practices designated by the United States as unacceptable to it. This jolted America’s trading partners into fuller awareness that the American trade policy had changed so as to embrace aggressive unilateralism.
Jagdish Bhagwati

Theory and Practice of Commercial Policy: 1945–1990

Since the Second World War, thought and practice pertaining to commercial policy have proceeded along very divergent paths in the developed, and in the developing, countries.
Anne O. Krueger



Welfare Economics, Economic Order, and Competition

The observable breakdown of socialist systems represents a severe blow for those who still believe in historical materialism although historicism must be considered refuted already on logical grounds (Popper, 1957). And it provides a new answer to the old question: “Do communist and free economies show a converging pattern?” (Tinbergen, 1961). To economic policymakers as well as to economists the breakdown of socialist systems, including so-called market socialism, comes as a challenging surprise.
Manfred E. Streit

Competition and Economic Growth: The Lessons of East Asia

In a celebrated article in the American Economic Review, Egon Sohmen (1959) made the case — in the then unfashionable spirit of what he called “19th century economic liberalism” — that the remarkable West German growth record during the 1950s 1 was mainly the result of competition within a framework of tight monetary discipline. This earned him hostile comments that pointed to more proximate but quantifiable “causes” of growth, such as a growing labor force or high capital formation. In the subsequent exchange with his critics, he managed to dismiss their criticism convincingly with the riposte asking what explained the growth of labor or capital inputs in the first place — if not competitiveness and monetary stability!
Wolfgang Kasper


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