The Postwar Economic Order: National Reconstruction and International Cooperation

Published by EH.Net (August 2023).

Albert O. Hirschman. The Postwar Economic Order: National Reconstruction and International Cooperation. Edited by Michele Alacevich and Pier Francesco Asso. New York: Columbia University Press, 2023. viii + 342 pp. $30.00 (paperback), ISBN 978-0231200592.

Reviewed for EH.Net by Richard Pomfret, Adjunct Professor of International Economics at Johns Hopkins University SAIS Europe and Professor of Economics Emeritus at the University of Adelaide.

This volume reproduces 21 reports that Hirschman wrote from 1947 to 1950 while employed as economist in charge of the Western European desk of the research branch of the Board of Governors of the Federal Reserve System. The reports are lightly edited by Michele Alacevich (Professor of Economics at the University of Bologna) and Pier Francesco Asso (Professor of History of Economics at the University of Palermo) and preceded by a 44-page introduction based on the editors’ recent paper on Hirschman (Alacevich and Asso, 2023).

The collection is interesting on several levels. First, it illustrates key developments in Hirschman’s thinking, building on his pre-war experiences and education in Europe and on the opportunity to comment on post-war developments in Europe from an American perspective. As the Introduction states, “this book shows how Hirschman became Hirschman” (p. 35). Second, it provides insightful analysis of these developments by someone present at the origin of the current international economic order. Hirschman was a valuable commentator because he understood the long-term goal of non-discriminatory market-based international economic relations as well as the political constraints, especially in France and Italy, where he had personal pre-war experience, that justified short-term deviations from these ideals.

The drawback of the format is that the details of, say, Italian exchange rate policy changes in January 1947 may be tedious for the non-specialist. The Introduction provides a more concise guide than the original papers and has, of course, the benefit of hindsight and 75 years of historical analysis. What I missed was critical assessment of Hirschman’s views, which were sometimes controversial. Although most of the reports were “Confidential” or “Restricted”, several were published in academic journals after only a short lag (in a golden era of rapid acceptance and publication) and contributed to active debates.

The advantage of the format is the contemporary nature of the analysis. In addressing the macroeconomic challenges facing France and Italy in 1946-47, the papers in Part One capture the urgency and immediacy of challenges such as inflation, coal shortages, balance of payment deficits, and so forth. These papers also remind the reader of the ubiquity of economic controls as countries recovered from total war and of the reluctance of European policymakers to surrender their controls – to an extent difficult to recognize for anybody born after the 1950s. Indeed, the frustration of Part Two on the Marshall Plan is that Hirschman is analyzing a situation that is second-best in so many ways (high tariffs and non-convertible currencies are just the start), as well as dealing with a reconstruction process that varied considerably from country to country and rudimentary economic forecasting tools. He recognizes the difficulty and accepts the possibility that long-term suboptimal policies may have been justified in the short term in the late 1940s. The lessons for the last half century, when the extreme distortions have been removed, are unclear.

One topic covered in depth is economic integration (Part Three). Hirschman first mentions the topic in a Report from February 1949 which finishes with a one-page section on “Cooperation” as proposed in an Organization for European Economic Cooperation Report. Cooperation is desirable but difficult and must start with coordination of European countries’ investment policies and current production, to be accompanied by a considerable cooperative effort with respect to employment, manpower and migration policy (pp. 159-60). This has some resonance with the European Coal and Steel Community that would be formed a few years later but is out of touch with the more market-driven integration that would follow the 1957 Treaty of Rome and lead to the European Union.

By March 1950, however, Hirschman was arguing the benefits of free trade within Europe (Chapter 17). The prediction was that the benefits of trade creation among European countries would outweigh the costs of trade diversion due to discrimination against non-members, notably the USA. Hirschman’s analysis proved to be empirically valid, although the theory is set out more clearly and elegantly in Jacob Viner’s 1950 book The Customs Union Issue.

The creation of the euro was still half a century in the future when Hirschman wrote in November 1949 about a European monetary authority. It is, however, striking where he saw the limits to be:

“It is quite correct . . . that a common currency requires, among other things, the abandonment of fiscal sovereignty and is, therefore, inconceivable in the absence of political federation.” (p. 196)

Similarly:

“The creation of a European bank of issue would be called for only if and when a regular federal European government comes into being.” (p. 201)

The limits proved to be wrong in the 1990s, when the European Central Bank was established and the euro was created, before political federation. Nevertheless, by August 1950 (Chapter 18) Hirschman was acknowledging the potential of the European Payments Union to erode the costs of bilateralism, despite being far from general convertibility and being resisted by the United Kingdom, with its attachment to the Sterling Area.

The last two Reports from 1950 (Part Four) shift the focus from Europe to the impact of economic development abroad on the USA and the impact of US economic conditions on the rest of the world. The editors suggest that the first Report foreshadows Hirschman’s later thinking on economic development, but Hirschman (1958) was on a grander scale. What is interesting is Hirschman’s confident contrast between European governments that were fearful of competition from new industrializing countries and the positive US attitude towards development abroad, with the USA hoping to benefit from growing world markets. Thirty years later the USA would lead the protectionist response to the challenge from Japan and other Asian industrializing economies; that protectionism would be reversed in the 1990s, only to reappear after another thirty years in concerns about the challenge from China.

The evolution of his thinking on a customs union and on monetary cooperation illustrate Hirschman’s flexibility and the rapid pace of change in European institutional arrangements for trade and finance in the years 1948-51. However, the book can be tedious and sometimes repetitive. Non-specialists may find the succinct Introduction by Alacevich and Asso to be enough.

References

Alacevich, Michele, and Pier Francesco Asso (2023). “Albert O. Hirschman, Europe, and the Postwar Economic Order, 1946–52.” History of Political Economy 55 (1): 39–75.

Hirschman, Albert (1958). The Strategy of Economic Development. New Haven: Yale University Press.

Viner, Jacob (1950). The Customs Union Issue. New York: Carnegie Endowment for International Peace.

Richard Pomfret is Adjunct Professor of International Economics at Johns Hopkins University SAIS Europe, Bologna, Italy, and Professor of Economics Emeritus, University of Adelaide, Australia; email pomfret48@gmail.com. His books include The Age of Equality: The Twentieth Century in Economic Perspective (Harvard University Press, 2011), The Central Asian Economies in the Twenty-first Century: Paving a New Silk Road (Princeton University Press, 2019) and The Economic Integration of Europe (Harvard University Press, 2021).

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