Adjustment and Income Analysis

Abstract

Although the part played by income changes in balance-of-payments adjustment is Keynesian in approach and method, Keynes himself took no direct part in its formulation or development. Uneasiness as to the explanation given by classical economists dates from the early twenties. Keynes in his controversy with Ohlin argued on conventional classical lines that the transfer of German reparations payments could only be made by a reduction of the German price level relative to those countries to which transfer was to be made. Scepticism of the older approach came first from other writers. Although a number of empirical studies of the working of the price adjustment mechanism¹ appeared to confirm the working of the classical process, they revealed at the same time so swift and complete an adjustment as made observers sceptical that it could have been affected by price changes alone. Some other equilibrating mechanism might be at work to speed up and augment the changes made by price movements. At the same time (in the 1920s and early 1930s), the efforts of statisticians to measure elasticities of demand in international trade seemed to show that such elasticities were so low that the Marshall-Lerner condition must surely impose some constraint upon adjustment by price movements alone.