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International Reorganization and American Economic Policy.

These nine essays, written by Leonard A. Rapping from 1979 to 1987, deal with the unsettled times since the demise of the Bretton Woods system and with the prospects for structuring a new and stable, progressive and fair, American-led world order. The book is divided into three parts. In the first part, Professor Rapping surveys the interrelated problems facing the United States in the post-Bretton Woods era: structural trade and budget deficits; slow productivity growth and stagnant real wages; widening income inequality and mounting financial fragility; persistent inflation, unemployment, and high real interest rates; and the diminished confidence of businesses buffeted by volatile prices and beset by foreign competition. He next treats the monetary and international dimensions of these problems as manifested in high debt burdens, high interest rates, and high inflation rates. An essay on policies directed to a stable future concludes the volume. Rapping eschews abstract theories of all denominations throughout these essays. "Simple models," he states, "build cadres, not understanding." His commentaries, phrased in vivid historical-behavioral-institutional terms, are accessible to students and to policy-makers as well as to professional economists.

An enterprise economy, according to Rapping, requires credible regulation to contain the demon of uncertainty. Vital sectors of the U.S. and world economies were deregulated, however, in the 1970s and 1980s. The prices of foreign exchange and credit, of energy and transport, and, with the weakening of union power, of labor itself were increasingly exposed to the vagaries of market forces. Exchange rates and interest rates became objects of speculation and action was paralyzed by uncertainty. While a satisfactory future can only be assured by technology-driven supply side advances, not regulatory tinkering, restored confidence and renewed innovation await reregulation, particularly of finance.

Bretton Woods prosperity, in Rapping's view, rested on cheap energy and on the steady stream of new products which flowed from American industry, affording Americans monopoly rents. The oil shock up-ended this agreeable equilibrium. A period of intense conflict, of inflation and looming depression, ensued. Jealousy and suspicion supplanted consensus, domestic and international regulatory tools lost their potency, and the free market, with all of its imperfections, was the only option left for sustaining economic activity. "Market authority was growing and political authority was declining," Rapping observes. "This was blessed by President Reagan and praised by the proponents of free, unregulated markets. But these parties no more caused the rise of open markets than the morning sun." Free markets will predominate until new regulatory institutions are structured, consistent with new technologies and political realities. Policy will remain ineffective until such "stabilization in the large" is achieved.

Rapping is sharply critical of prevailing institutions. He indicts the "sclerosis and bureaucratic shortsightedness" of American corporations for channeling the high retained earnings afforded by the Reagan tax cut into "excessive" executive compensation and takeovers. He finds only mischief in the financial innovations of the 1980s. "A variety of financial activities," he advises, "like trading in stock options should be restored to their rightful place, the Las Vegas casinos." He has little regard for the burgeoning service sector of a post-industrial economy, dismissing its growth as "an ingenious social arrangement for distributing the bounty of the goods-producing sector" when jobless growth is unacceptable. His vision of a stable future prominently features renewed and bolstered institutions of the stable past, including the U.S. military R & D establishment, the Federal Reserve System, and, borrowing from an idealized gold standard, 100 percent reserve banking. Contemporary international coordinating organizations, such as the G-7 and the European Community, are absent from his vision of restored American hegemony.

Rapping is at his best when describing the nature and consequences of uncertainty. Uncertainty is a state of mind, not a state of the world, he explains in his essay "Bureaucracy, the Corporation and Economic Policy." In "normal" times, people accept a pretense of knowledge about the world and act with confidence, a confidence confirmed when their actions generate outcomes consistent with their predictions. In turbulent times, however, when confidence is shattered, any pretense to knowledge about the future is untenable and decision-making is paralyzed. The long-term relation between interest rates and capital productivity, for example, is suspended. Speculation reigns in financial markets. Interest rates and exchange rates, which fluctuate with mass psychology, are dysfunctional as guides to action. Government coordination is then needed to break the logjam of corporate decision-making. Tax penalties and strong Fed controls over money and credit are then needed to contain speculation and overcome expectational resistance to stabilization efforts.

Leonard A. Rapping died in 1991. The Lucas-Rapping supply curve, which challenged Keynesian orthodoxy and presaged the rational expectations uprising in macroeconomics, may well prove his major contribution to economic discourse. In International Reorganization and American Economic Policy, however, he strenuously opposes mechanical equilibrium theory as inappropriate to tumultuous times. "The concept of fundamentals is a chimera," he maintains, when there is no "correct position" around which consistent expectations can coalesce. He similarly rejects the Marxian view of endemic capitalist crises. "The threat of job loss debilitates labor," he observes, it does not whip it into shape, as the Marxian model insists.

In the Preface to this book, Professor Rapping cites the many diverse influences on his thought, from H. Greg Lewis and Milton Friedman at Chicago to Herbert Simon at Carnegie-Mellon to the radical school at the University of Massachusetts. He draws constructively on these sources in International Reorganization and American Economic Policy in a non-doctrinaire search for economic policies which secure and advance ideals of political liberty.

Bernard Malamud University of Nebada, Las Vegas
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Author:Malamud, Bernard
Publication:Southern Economic Journal
Article Type:Book Review
Date:Apr 1, 1993
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