James Meade

James Edward Meade (June 23, 1907 - December 22, 1995) was an English economist. He was joint winner of the 1977 Nobel Prize in Economics with the Swedish economist Bertil Ohlin for their breakthrough work in developing the theory of international trade.

Meade developed his interest in economics with the desire to improve human society, which at the time was facing two major threats: mass unemployment and war. He spent a lifetime studying the economy in every aspect, seeking ways to bring about the greatest quality of life for all. His work involved the development of a model designed to show the effects of various monetary and fiscal policies on the balance of payments. He also explored the effects on economic welfare of various kinds of trade policy, including the welfare effects of regulation of trade.

Contents

Seeking to solve the economic problems of human society, Meade recognized that his studies led him to recognize the multitude of factors and issues involved in the economy. As our knowledge of each part grows we often find it more and more difficult to understand the whole and the relationship of the parts. Without a deep understanding of human nature, and a vision of the ideal human society, finding solutions to the problems that first stimulated Meade in his life's work (unemployment and war) has proved impossible. Meade's efforts in this regard led him to write about a fictitious society with a partnership between laborers and capitalists that ensured their mutual welfare. In the real world, however, such a system does not yet exist.

Life

James Edward Meade was born on June 23, 1907 in England in the city of Bath, where he also grew up. He studied at Malvern College and at Oriel College, Oxford, where he earned first-class honors in 1928.

His interest in economics was awoken largely by the high rate of unemployment in Britain during the inter-war years. In 1930 he gained a grant for Hertford College with the possibility of continuing study as a graduate student in economics, but instead he accepted the invitation of Dennis Robertson to study at Trinity College Cambridge. There he became a close friend of Richard Kahn, as well as the group that has become known as the "Cambridge Circus"—a group of economists gathered around John Maynard Keynes, which supported Keynes in discussing his work the Treatise on Money, providing the stimulus for its transformation into the General Theory.

From 1931 to 1937, Meade was a lecturer in economics at Hertford College. At that time the teaching of economics as a regular subject was still relatively new and Meade was one of a group of enthusiasts, including Eric Hargreaves, Roy Harrod, Henry Phelps Brown, Charles J. Hitch, Robert Hall, Lindley Fraser, and Maurice Allen. Meade’s task was to teach the whole of economic theory, but his interest was taken most by the economics of unemployment and international economic relations, based on the two evils confronting the world at the time—mass unemployment and the threat of war.

At the end of 1937, Meade became a member of the Economic Section of the League of Nations in Geneva and he worked as the main editor of the journal World Economic Survey.

Following the outbreak of war in April 1940, Meade left Geneva and returned to England. Up until 1947, he was a member of the economics section of the War Cabinet, becoming its director in 1946. Under the leadership of Lionel Robbins and in close cooperation with Keynes the section became an influential institution solving everyday economic problems ranging from the rationing system through to the pricing policy of nationalized companies.

In 1947, he became a professor of trade at the London School of Economics, where Lionel Robbins headed the economics department. In 1957 Meade moved to Cambridge, where he worked as the head at the Department of Political Economics and remained there until 1968, when he took a place as an independent research worker, teaching special seminars, and staying there till his retirement.

From 1974, when he retired, he chaired a commission composed of first class economic theoreticians and foremost experts in tax law, accounting and administration.

In 1977, he was awarded the Nobel Prize for economics, together with the Swedish economist Bertil Ohlin for their "pathbreaking contribution to the theory of international trade and international capital movements" (Lindbeck 1992).

Meade died on December 22, 1995 in Cambridge.

Work

Much of Meade's work on international trade is to be found in the two volumes of his Theory of International Economic Policy (Meade 1951), which became the "bible" of every trade economist. There are two volumes and, for the sake of their importance, we shall upgrade both volumes to his main works, together with his ground-breaking analyses of "internal" and "external" equilibria and bringing the term "stagflation" into general economic vocabulary.

The Balance of Payment

In the first volume, The Balance of Payments (1951b), Meade sought to synthesize elements of Keynesian and neoclassical economics producing a model showing the effects of monetary and fiscal policies on the balance of payments. He made the point that for each of its policy objectives, the government requires a policy tool, a principle developed by Dutch economist Jan Tinbergen.

One of Meade’s most important contributions was in the field of elaborating the theory of the balance of payments, where he identified under which circumstances a country can concurrently achieve an equilibrium, both internal as well as external balance in its international payments. He pointed out the conflict between the aims of ensuring full employment and bringing the balance of payments to equilibrium. He proposed resolving this conflict through an appropriate combination of various economic policy instruments leading to the concurrent attainment of both goals.

He made breakthroughs primarily in his analysis of the impacts of the interest rate and monetary policy on the balance of payments, as well as his analysis of the importance of the exchange rate system for the effective operation of stabilization policy.

He also clarified problems that occur when countries resolve their internal and external equilibrium without regard to the situation in neighboring countries. On the basis of this he highlighted the importance and need for coordination of stabilization policies between countries.

Trade and Welfare

In the second volume, Trade and Welfare (1955a), Meade examined conditions under which free trade made a country better off and conditions under which it did not. He examined the welfare implications of multinational trade, reflecting his view that economics should be policy oriented. It culminated in his analysis of the consequences of various types of economic-political measures and institutional arrangements for international trade and the international division of work.

Although the ideal would be to eliminate all protection, Meade realized that for some countries this would not be a feasible, if not economically impossible, policy. In this case an economic policy that would add a carefully chosen dose of protectionism could improve the nation’s economic well-being. He then concluded that if such a country was already protecting one of its markets from international competition, further protection of another market could be its "second best" policy.

Meade may be considered to be the founder of the modern theory of employment in open economies. His analyses pointed out the need to ensure a corresponding level of aggregate demand for goods and services in such economies, as well as the level of domestic costs and prices at which full employment is achieved and the balance of payments bought into balance. To optimize the economic system of a country, Meade considered ways to harmonize the internal as well as the external equilibrium or "balances."

For this purpose, Meade discussed the different combinations of policy variables which would serve to reconcile what he called "external balance (equilibrium)" with what he called "internal balance." By "external balance (equilibrium)" was meant a balance in the country's international payments; and although this idea has always presented presented, especially at the time, considerable conceptual difficulties, Meade still instinctively felt that it was a worthwhile idea.

The “internal equilibrium" was a completely different matter altogether.

Internal equilibrium

Meade understood the macro-economic system as a tightly interconnected complex of internal and external equilibrium, where the attainment of internal equilibrium concurrently creates the conditions for external equilibrium. By internal equilibrium he meant concurrent full employment and price stability, and he did not view these two variables as two separate entities.

He worked from the assumption that if, within an economy, the level of effective demand, ensuring full employment, is maintained, the nominal price level would also be adequately stable.

An important precondition for this understanding of internal equilibrium is that nominal wages are either constant or changing only slowly. However, as Meade himself later stated, this seemingly rational presumption was valid only in the 1930s. A problematic element in these considerations was the danger that "trade unions and other wages-setting institutions would not allow the attainment of full employment without nominal cost-price inflation" (Meade 1955). His view was that it is possible to define the natural rate of employment as the level—in the case of the existence of the relevant institutions influencing the mechanism for determining wages—at which real wages would grow at the same rate as the growth of labor productivity.

If we assume this "natural level of employment" to be full employment, then James Meade succeeded in defining the condition for internal equilibrium for such a situation, in an economy, when both full-time employment and price stability are achieved concurrently.

Then, the issue arises as to how to achieve this in practice. If we work from the thesis that to each macro-economic political targets (external equilibrium, full employment and price stability) there should correspond a relevant economic policy instrument, then Meade categorized these instruments as follows:

  • Instruments directly influencing the level of the demand for money (monetary and budgetary policy)
  • instruments directly affecting the determination of nominal wages (such as wage bargaining)
  • instruments directly affecting the foreign exchange sphere (determination of exchange rates, foreign exchange control measures and trade policy instruments influencing the total value of the import and export).

Consequently, there are six different combinations as to how to match the three political targets with three policy instruments ready to solve them. Meade considered the following three to be the most important:

  1. Demand-regulation instruments, that is: tax and monetary policies, that would be used for influencing money expenditures to prevent too high inflation, or deflation of total financial incomes;
  2. Wages-determining institutions would be shaped to limit upward movements in nominal wages in the sectors where there is no shortage of workers and, conversely, to allow such upwards movements in the sectors into which it is necessary to attract, or retain workers to maintain full employment in the economy;
  3. Foreign exchange policy should be used for maintaining an equilibrium in the balance of payments by demand regulation instruments, leading to a limitation of monetary inflation, and through wages-influencing instruments, leading to the attainment of a realistic level of employment and output.

Thus, given the various responsibilities of institutions that execute economic policy measures, Meade considered it most appropriate that the central bank—whose role is to create the quantity of money in circulation—and the Ministry of Finance—which allows money to enter the economy—be responsible for preventing inflation and deflation.

In Meade’s view, an effective combination of full employment with eliminated inflation necessarily requires that the main criterion, that determines the level of wages, is the relationship between demand and supply in the labor market; without an undue insistence on achieving and maintaining the specific real wage income.

This must, in his view, be the result of domestic labor productivity, international trade, taxation, and other issues that influence the division of income between the net wage and other net (post-tax) incomes.

External Equilibrium

As regards to external equilibrium, Meade worked from the fact that there should exist a certain separation of powers between national governments and international institutions. National governments should be responsible for national monetary, fiscal and wage policy, and for ensuring full employment and price stability. External equilibrium should be maintained through foreign exchange policy under the supervision of international institutions. For example, in the form of adjustments of exchange rates between national currencies; naturally in combination with free trade and payments.

Special regulatory mechanisms under the supervision of the respective international institutions are necessary; in particular when there is a deformation of international transactions and limitation of free movement of goods and capital. For example, when there are sudden changes in international capital movements, or if there exist marked differences between national tax regimes.

In fact, the postwar arrangement of the international monetary system and the creation of institutions such as the International Monetary Fund, the International Bank for Reconstruction and Development, and the General Agreement on Tariffs and Trade, led to a remarkable expansion in international trade, just as Meade foresaw. However, this system had at the beginning one weak point: inflexible exchange rates, though this was later successfully removed through a transition to flexible exchange rates.

Despite this, in Meade’s view, there is still one major problem remaining in international affairs. It is the import of products competing with domestic sectors in which there already exists significant unemployment. As Meade stated, this occurs because many national governments of industrially developed countries have been unsuccessful in searching for an appropriate national institutional procedures for linking employment with price stability.

In case of full employment and price stability within a country, the harmonizing of the balance of payments could, automatically, be left to the flexible exchange rate mechanism. Meade considered a change in the approach of advanced countries towards wage policy principles as one of the most important factors upon which the improvement should be based.

The reform of institutions involved in regulating the formation of wages, in his view, requires the retention of market regulation of wage rates. Based on the agreements between businesses and unions would, concurrently, create the institutional basis for the social regulation of wage rates, again, to achieve the highest possible employment with the help of independent salary commissions or arbitration panels. These commissions should, according to Meade, resolve disputes and determine wages (and/or their increments), so that the government forecasts of wage-growth rates would be respected.

Meade’s "New Keynesianism" and the theory of "stagflation"

At the turn of the 1970s and 1980s, James Meade developed a new understanding of inflation and its other by-products. The most important ideas about the persistent drawback of their international impact is in the work Stagflation (1982, 1983), which he wrote together with D. Vines and J. Maciejowski.

The starting point for Meade’s "New Keynesianism" is his understanding of stagflation in the 1970s. In his view its direct cause was a reduction of the rate of profit brought about by growth of wage costs and imported material costs. The two most important factors contributing to the emergence of this situation were:

  1. The generally over-extended use of traditional Keynesian policies using the increase in total money expenditures—via budgetary, monetary and credit policy—for any level necessary to achieve full employment.
  2. The existing monopoly structure of market economies at that time; this refers mainly to the role of unions; especially due to their concentrated pressure to increase wages.

Meade emphasized that under these conditions it was no longer possible to employ the traditional recommendations of Keynesian economic policy, since they were not able to address, let alone contain, inflation. It is because these new conditions, together with the development of international trade, significantly influenced relationships between supply and demand in wage determination.

In his view, if international trade develops adversely for a given industrial country—for example due to a rise in a world oil prices, or imported raw materials—this has the same results as if labor productivity and other factors of production were to decline in the country. For instance, there is the fact that maintaining real wages—in consequence of an adverse influence of international trade—is not compatible with full employment. The spiral nature of repeating pressure for a fall in profit margins, consequent pressure for a growth in domestic sales prices, growth in nominal wages, further pressure on profit margins and so on, yields to stagflation, where the level of employment is below that of full employment, and is connected with inflation of nominal prices.

As a remedy, he emphasized that the effective combination of full employment without inflation necessarily requires that the main criterion for determining the level of wages be the relationships between supply and demand in the labor market; without an adverse insistence on attaining a specific real wage income. This must be a combined result of: domestic productivity, international trade, tax, and other measures, taken by the state towards influencing the distribution of income between usable wages and other incomes.

To sum it up, Meade’s concept of “New Keynesianism” differs from orthodox Keynesianism in the fact that it combines traditional budgetary, monetary, and credit policy instruments with policies aimed at regulating foreign exchange rates, in the interest of achieving a permanent moderate growth in aggregate money expenditures on home-produced goods and services.

In accordance with this, the money income should also grow, by means of ensuring stable growth of the money supply. In a modern economy the volumes of money in the economy can quickly rise and fall. Consequently, at the same time, the speed of money circulation can change substantially. Therefore, Meade proposed that responsibility for monetary regulation should lie with an institution not directly dependent upon the government, but such, which would be statutory bound to achieving a stable, though moderately growing, money income. This monetary institution (the central bank) would be charged with the duty of independently and autonomously choosing a monetary policy for maintaining overall money incomes on their assigned course (Meade 1982).

In Meade’s view, the wage determination has also a considerable influence on all sectors of the labor market. This requires the reform of wage-regulating institutions. That, in turn, requires the retention of the decentralized market regulation of wage rates on the basis of agreements between businesses and unions. Concurrently it would create the institutional conditions for the social regulation of wage rates, aimed at achieving the highest possible employment, with the help of independent salary commissions and arbitration (Meade 1986).

Legacy

James Meade made contributions in many areas of macroeconomics, international trade, and international capital movement. During the Nobel prize awards ceremony in 1971, Assar Lindbeck, a member of the Swedish Royal Academy of Sciences, stated that this prize could have been granted to him also for his contribution in the field of national accounts, or for developing the theoretical foundations of Keynesian economic policy (Lindbeck 1992). Six years later, Meade did receive the prize jointly with Bertil Ohlin for their work work in developing the theory of international trade.

For 60 years, from the early 1930s to his death in 1995, James Meade studied the economy. The whole of the economy. He studied production, distribution, money, tax and benefits, the welfare state, and the economy's international dimensions. His interests spanned economics, history, social policy, and politics. Although his thought developed in line with a changing political consensus, he consistently pursued themes established early on in his career: the need to stimulate demand in the economy in order to reduce unemployment; administrative and economic efficiency; the market as the efficient way to produce and distribute goods and services; the reduction of economic inequality; and (particularly latterly) the importance of individual freedom.

We shall also find that the "everyone's ultimate welfare and/or equal 'social dividend' idea" is occurring over and over again as one of Meade's major interests. In several of his books (Meade 1964, 1989, 1995) Meade actually presented a fictitious island-nation, Agathotopia, whose economy is based on a type of firm in which capitalists and laborers both hold shares which received equal dividends. Other matters described include taxes, the treatment of the environment, and the way in which Agathotopia might fit into an international union such as the European Community.

Like Milton Friedman in the United States, Meade wanted to use economics to help make the world a better place, and believed that government regulation often harmed an economy. Unlike Friedman, though, Meade believed that government should take strong measures to promote equality of income. His writing, in short, suggests that recent trends toward increased labor-management, profit sharing, and stock ownership plans may make the labor-capital partnership a serious, and maybe the only, alternative in the future.

Main publications

  • Meade, J. E. 1936. An Introduction to Economic Analysis and Policy. Oxford: Clarendon Press.
  • Meade, J. E. 1944. National Income and Expenditure. Oxford University Press, London.
  • Meade, J. E. 1951a. The Theory of International Economic Policy. London: Oxford University Press.
  • Meade, J. E. 1951b. The Balance of Payments. ISBN 9780192145536
  • Meade, J. E. 1952. Geometry of International Trade. London: George Allen & Unwin.
  • Meade, J. E. 1955a. Trade and Welfare. London: Oxford University Press.
  • Meade, J. E. [1955b] 1980. The Theory of Customs Unions. Greenwood Press. ISBN 9780313223792
  • Meade, J. E. 1958. The Control of Inflation. Cambridge University Press.
  • Meade, J. E. 1965-1976. Principles of Political Economy. London: George Allen & Unwin.
  • Meade, J. E. 1964. Efficiency, Equality and the Ownership of Property. London: George Allen & Unwin. ISBN 978-0043301517
  • Meade, J. E. 1982. Wage-fixing. London: Unwin Hyman, London. ISBN 9780043390245
  • Meade, J. E. 1986. Alternative Systems of Business Organization and of Workers' Remuneration. London: Unwin Hyman. ISBN 9780043311127
  • Meade, J. E. 1989. Agathotopia: The Economics of Partnership. Aberdeen: Aberdeen University Press. ISBN 9780080379678
  • Meade, J. E. 1993. Liberty, Equality, & Efficiency: Apologia Pro Agathotopia Mea. Washington Square, NY: New York University Press. ISBN 9780814754917
  • Meade, J. E. 1995. Full employment regained?. Cambridge University Press. ISBN 9780521553278

References

  • Lindbeck, Assar, (ed.) 1992. The Meaning of "Internal Balance" Nobel Lectures, Economics 1969-1980, Singapore: World Scientific Publishing Co. Retrieved April 24, 2008.

External links

All links retrieved March 19, 2018.

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