A Publication of the Egon-Sohmen-Foundation Herbert Giersch (Ed.) for the Egon-Sohmen-Foundation

Money, Trade, and Competition

Essays in Memory ofEgon Sohmen

With 19 Figures

Springer-Verlag Berlin Heidelberg New York London Paris Tokyo Hong Kong Barcelona Budapest Prof. Dr. Herbert Giersch Past President Kiel Institute of Wodd Economics P.O.Box 4309 W-2300 Kiell, FRG

This book was produced with financial support of the Egon-Sohmen-Foundation

ISBN-13: 978-3-642-77269-6 e-ISBN-13: 978-3-642-77267-2 DOl: 10.1007/978-3-642-77267-2

This work is subject to copyright. All rights are reserved, whether the whole or part ofthe material is concerned, specifically the rights oftranslation, reprinting, reuse ofillustrations, recitation, broadcasting, reproduction on microfilms or in other ways, and storage in data banks. Duplication of this publication or parts thereofis only permitted under the provisi• ons ofthe German Copyright Law ofSeptember9,I965, in its version ofJune 24,1985, and a copyright fee must always be paid. Violations fall under the prosecution act ofthe German Copyright Law. © Springer-Verlag Berlin· Heidelberg 1992 Softcoverreprint of the hardcover 1st edition 1992 The use of registered names, trademarks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. 214217130-543210- Printed on acid-free paper Preface

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. Fortunately for quite a few people in Germany, Egon was offered a chair at the young Saar University in 1961, after the faculty had been persuaded to waive the traditional Habilitation requirement. We were glad that he accepted. It gave us new opportunities to strengthen our ties with MIT and Yale, with Austrian economists like Gottfried Haberler and Fritz Machlup, who had become Egon's friends and mentors, with Willy Fellner, and with the international economists of Egon's age cohort. Many stu• dents at the Saar University were deeply impressed by his teachings, including his later wife, our best female student, and quite a few who now hold prestigious posts in economics and public life. I can frankly say without hesitation that Egon's influence was particularly strong among vi Preface those bright collaborators who went along with me in 1964 to establish the German Economic Expert Council (Sachverstiindigenrat) and who - in 1969 - helped strengthen international economic research at the Kiel Institute. No economist teaching in Germany would have deserved the Kiel Institute's Bernhard Harms Prize more than Egon. This acknowl• edgement must serve as a posthumous substitute. Egon was not afraid of controversy; perhaps he even liked it. Great controversies developed in Saarbriicken over the exchange rate issue, with Wolfgang Stiitzel defending fixed rates, Egon propagating flexibility, and some -like myself - pondering for a while until circumstances demanded a system switch in the interest of domestic price level stability. In May 1969, when action was needed, Egon and I drafted a memorandum that we sent to the government. When we went to the public it aroused a political turmoil when more than a hundred economics professors in Ger• many openly joined forces with us. A few months later, exchange rates became the main issue in the general elections. In stormy periods, one needs friends with a strong character. Egon was a true friend. He had an instinctive sense of the needs of others, notably his family. Without his good advice and the generous financial support he diverted from his salary as a young professor in his early thirties, much of the scope for productive human capital formation in the Sohmen family would have remained unexploited, as I gather from remarks by his sister. From his brother, Helmut, Egon quickly received high intellectual returns. Those who have read the preface to the first edition of "Flexible Exchange Rates" will remember that he thanked his brother for having acted as Dr. Wong, meaning Jacob Viner's Chinese draftsman who turned out to be an excellent amateur economist by discovering a mistake in Viner's reasoning about "Cost Curves and Supply Curves." It so happened that Helmut Sohmen, as if Egon's reference had had predictive power, made his way to the top of the world business commu• nity in the Chinese cultural and ethnic environment of Hong Kong with such success that he acquired the means for creating the Egon-Sohmen• Foundation. Should sociologists have doubts about the viability of the family in a cosmopolitan environment, they would become more confident by looking at this example. Egon surely was a father figure, and economics is now benefiting from it in a roundabout way. The papers for this memorial conference cover the main areas of Egon's interest and research during the largest part of his academic life, i.e, ex• change rates and adjustment problems; welfare economics and allocation theory; trade and factor movements; competition and economic growth. The perspective is international, except for the paper on German monetary unification, a subject which Egon would have found fascinating. Preface vii

There was no planning behind the allocation of subjects to participants. It just worked out this way by my calling upon persons who were known to have been influenced by Egon's teachings and writings in one way or another and vice versa. No jawboning was necessary to support the invisible hand. What was left for correction and coordination was mostly achieved in the free discussion during two pleasant conference days at Tegernsee in the Bavarian Alps. The participants enjoyed the presence of the Sohmen family: Egon's wife and brother, his sister, and sister-in-law. A verbatim record of the discus• sion would have shown that their intellectual contribution was not minor. Bob Mundell had unanimous support when he recognized this at the end of the conference, after having expressed his opinion on the future role of the Egon-Sohmen-Foundation in the field of international economics. The Egon Sohmen Memorial Conference was the second symposium organized by the Egon-Sohmen-Foundation. The first one had taken place half a year before in Laxenburg, Austria, on "The Economic Transforma• tion of Central and Eastern Europe." The papers were published in 1991 under the title "Towards a Market Economy in Central and Eastern Europe," edited by Herbert Giersch for the Egon-Sohmen-Foundation (Berlin: Springer-Verlag). The third symposium was held on "Economic Evolution and Environmental Concerns" in late summer 1991 in Linz, Austria, Egon Sohmen's hometown.

Herbert Giersch Contents

Introduction Friedrich Schneider 1

Part I: Money and Exchange Rates

Free Minting Charles P. Kindleberger 11

Profitable Currency Speculation: Service to Users or Destabilizing? Herbert G. Grubel ...... 23

Flexible Exchange Rates and Insulation: A Reexamination Joachim Fels ...... 39

An Institutional-Economic Analysis of the Louvre Accord Rudolf Richter and Udo Schmidt-Mohr ...... 59

The German Monetary Union Harmen Lehment ...... 87

Financial Liberalization in Developing Countries Bela Balassa ...... 105

Part II: International Trade

Fiscal Policy and the Theory of International Trade Robert Mundell ...... 125

Wage Agreements and Optimal International Factor Flows Stephen T. Easton and Ronald W. Jones ...... 151 x Contents

Protection and Exchange Rates John S. Chipman ...... 167

Aggressi ve U nila teralism Jagdish Bhagwati ...... 201

Theory and Practice of Commercial Policy: 1945-1990 Anne O. Krueger ...... 233

Part III: Competition

Welfare Economics, Economic Order, and Competition Manfred E. Streit ...... 255

Competition and Economic Growth: The Lessons of East Asia Wolfgang Kasper ...... 279

List of Contributors ...... 305