Trade-offs and Trinities: Social Forces and Monetary Cooperation

Abstract

To what extent do intersubjective understandings shape interests in wage, price or currency cooperation? What might lead workers, firms or investors to exercise private restraint on behalf of public interests in wage, price or currency stability? Given official efforts to limit uncertainty, could such interests assume “lives of their own” and negate Phillips Curve-styled trade-offs between unemployment and inflation, or Impossible Trinity-styled tensions between openness, autonomy, and exchange-rate stability? In this chapter, I offer a constructivist theory of interests in monetary cooperation, one emphasizing the intersubjective – often self-reinforcing – bases of beliefs regarding the need for private wage or price restraint. From this vantage, a macroeconomic stimulus need not have any inevitable effects on inflation or depreciation if workers, firms, or investors exercise wage, price or currency restraint. Having developed this framework, I then apply it to explain postwar variation in monetary cooperation. I first address the emergence of an early postwar Keynesian egalitarianism which justified the use of wage and price guidelines to reconcile full employment with monetary stability. I then describe how these views yielded to a Neoclassical pragmatism which reduced the scope for incomes policies to the short run, justifying greater macroeconomic restraint. I finally address the emergence of a Classical libertarianism which would decisively undermine the use of incomes policies by the late 1970s. Over this narrative, I also highlight the implications for the rise and demise of international cooperation, contrasting the early postwar use of incomes policies as the “first line of defense” for the dollar with their later erosion as it contributed to the collapse of the Bretton Woods fixed exchange rate system. Taken as a whole, this analysis call into question notions of enduring trade-offs between growth and monetary stability: While tensions may exist between these priorities, such trade-offs are not exogenously given. Instead, intersubjective forces can themselves give meaning to macroeconomic trends, potentially altering the very slope of the Phillips Curve itself.