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The Balance of Payments and Growth: From Mercantilism to Keynes to Harrod and Beyond

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Economic Dynamics, Trade and Growth

Abstract

This essay discusses and analyses how the balance of payments impinges on the growth performance of countries. This is important because mainstream growth theory still largely ignores the balance of payments. In classical growth theory, the balance of payments was assumed to look after itself through internal or external price adjustment, thereby severing any possible link between the state of the balance of payments and the use or accumulation of resources for economic growth. Harrod’s growth model (Harrod, 1939) was a closed economy model, and so was the neoclassical growth model (e.g. Solow, 1956) with the added objection that the demand side of the economy was completely ignored. Savings determine investment and aggregate demand equals aggregate supply. ‘New’ growth theory, or endogenous growth theory (see Romer, 1986; Lucas, 1988) is also supply-orientated — in which there are no demand constraints, either internal or external. Many of the ‘new’ growth models are closed economy models, and in those which are not, the focus is on growth and trade, not growth and the balance of payments. In the history of economic thought, the only school to have emphasized the importance of foreign exchange and a strong balance of payments for economic growth were the Mercantilists.

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Authors
  1. A. P. Thirlwall
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Editor information

Editors and Affiliations

  1. University of Genoa, Italy

    Giorgio Rampa  & Luciano Stella  & 

  2. University of Kent, Canterbury, UK

    A. P. Thirlwall

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© 1998 Palgrave Macmillan, a division of Macmillan Publishers Limited

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Thirlwall, A.P. (1998). The Balance of Payments and Growth: From Mercantilism to Keynes to Harrod and Beyond. In: Rampa, G., Stella, L., Thirlwall, A.P. (eds) Economic Dynamics, Trade and Growth. Palgrave Macmillan, London. https://doi.org/10.1007/978-1-349-26931-0_7

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