16 - THEORY AND INSTITUTIONS

Summary

INTRODUCTION

In Part 3, notwithstanding occasional excursions abroad, we were essentially considering a closed economy and all the conclusions reached about the scope for policy were provisional. We must now deal explicitly with the various linkages between the British economy and the rest of the world. First of all there is the way in which changes abroad impinge on the British economy and, in particular, on employment. Then there is the fact that Britain is party to agreements with other countries, as well as being a member of a number of international economic organisations whose decisions affect the British economy. Do these agreements, and the international framework within which the economy operates, improve, or worsen, the prospects for employment? In particular, can such prospects be improved by the coordination of the economic policies of groups of countries? These are complex and difficult questions. This is partly because, just as we found in the macroeconomics of a closed economy, there are doctrinal differences. But it is also because judgements about policy are closely bound up with the particular institutional setting at the time. To give but one example: when the Bretton Woods monetary system of fixed, but adjustable, exchange rates was in operation, it was generally accepted that, as an act of policy an adjustment of the exchange rate could help resolve conflicts between the domestic and external balances of the economy.