Confronting the Trilemma: Culture, Institutions, and Macroeconomic Disequilibria

Abstract

Although the fundamental trilemma of open-economy macroeconomics has been a popular framework for analyzing the effects of various policy combinations, it ignores how policy regimes change. Drawing from Post-Keynesian Institutionalist theory, this article considers this process in democracies as a type of technological change in which progress may be limited by insufficient knowledge and actions by vested interests. A case study of interwar France shows that these barriers often delay or weaken stabilization programs, which increase both political and economic uncertainty that further lowers aggregate demand and inhibits the attainment of macroeconomic equilibria. Although we should not generalize these observations, they suggest that understanding and addressing cultural and institutional factors may be necessary for successful countercyclical policymaking.

Keywords:

• Post-Keynesian institutionalism
• culture
• institutions
• trilemma
• macroeconomic policy

JEL Classification Codes:

• B22
• B52
• E12
• E63

Notes

1 Mankiw (2010) points out that the word “trilemma” first appeared in the seventeenth century to describe situations in which one is faced with a choice of three equally undesirable alternatives.

2 Young and Darity (2004) survey the evolution of this model and its subsequent variations.

3 See Bordo and James (2015) for an overview of several trilemmas.

4 The protective response also addressed the commodification of land and money. Moreover, Polanyi notes that all of these were “fictitious” since commodities by definition must be produced before they are used in the production process.

5 The term “financial conservatism” was first used by Sen (1998).

6 Although this article focuses on transitions from financially conservative policy regimes to pro-labor programs, Polanyi’s double movement also works in the other direction. See Blyth (2002) for this more on this point and on the role of ideas in these transformations.

7 Although France left the gold standard at the start of the war, the Treasury and Bank of France intervened throughout the conflict to manage the franc’s depreciation.

8 France maintained a bimetallic system until 1864.

9 French law permitted the Bank of France to advance 3100 million francs to the government when the war began. This was increased to 21,000 million by the end of the war. The statutory ceiling peaked at 58,500 million in November 1925. (Mouré 2002, 32).

10 Note that increasing income or wealth taxes may have prevented these problems.

11 Many French leaders disliked Keynes for his position on war reparations. Robert Boyer (1985) notes that the translation of The General Theory (Keynes 1936) into French did not appear until World War II.

12 Piketty includes interesting anecdotal evidence of this plight, which includes a 30% decline in those employed as domestic servants from 1914 to the 1930s, and disappearance of the “rentier” category from the 1946 census questionnaire.

13 Mark Cleary (1990) points out that it is misleading to aggregate rural citizens into a single class since this group’s membership ranged from large absentee property owners to landless farmers.

14 Other factors may have contributed to the decision to devalue. Julian Jackson (1985, 2–3) points out that French economic policy contributed to changes in the balance of power in Europe in the 1930s. For example, France failed to react to the German incursion into the Rhineland in March 1936 partly because of concern over the value of the franc, and its cuts in military spending to address problematic budget deficits from 1931–35 left her ill-prepared to defend herself against a significantly rearmed Germany. These developments heralded a diminution of French power in Europe. Relatedly, Paul Hallwood, Ronald MacDonald, and Ian Marsh (2007) argue that the prospect of war played a significant role in the decision to devalue the franc.

15 Eichengreen (1992, 261) notes that lending from the United States and Britain in 1931 was one-third less than throughout the previous year.

16 Using M2 data from Pierre Villa (1993), Paul Beaudry, and Franck Portier (2007) calculate the per capita M2 money stock normalized in 1929 (value = 100). This index declined from 110.5 in 1931 to 95.5 in 1935, and then rose to 98.1 in 1936.

17 J. Peter Ferderer and David Zalewski (1999) provide empirical evidence that doubts about credibility increased uncertainty about a country’s commitment to maintain gold parity, and this in turn helped depress investment spending. The statistical results are especially significant for France in the 1930s.

18 Beth Simmons’s (1994) econometric results show that leftist politicians throughout Europe supported the gold standard during the interwar period until unemployment rose to intolerable levels.

19 Quote is from Kenneth Mouré (1991, 4).

20 Farmers in France and elsewhere experienced economic decline in the 1930s as a result of both decreased demand for their goods and technological changes (Feinstein, Temin, and Toniolo 1997, pp. 178). Besides the collapse of aggregate demand in the 1930s, agriculture in Europe faced adverse long-term trends in dietary preferences and increased competition from imports. Compounding the problem were increases in productivity, primarily from the development of more effective fertilizers and the diffusion of tractors across the continent. Collectively, the result was falling commodity prices and farm incomes. Rather than seek work in other sectors, many European farmers decided to remain on the land and seek government support.

21 Comparing the Popular Front program with the New Deal, Temin (1989), 124 quipped: “The NRA convinced Americans to invest at home; the Matignon agreements led the French to invest abroad.” Kindleberger (1986, 252) also remarked: “It was as if the Popular Front had been dealing with a closed economy.”

22 Mayhew (2017) reports similar attitudes among the working class in the United States.

23 See Heather Boushey, et. al. (2019) for several other fiscal policy proposals in the same spirit as these.

Additional information

Notes on contributors

David A. Zalewski

David A. Zalewski is professor and chair of the Department of Finance, School of Business, Providence College. The author thanks Charles J. Whalen for his valuable comments and suggestions.