Harry G. Johnson : Scholar, Mentor, Editor, and Relentless World Traveler - 1923-1977

American Journal of Economics and Sociology, The,  July, 2001  by Max Corden,  James S. Duesenberry,  Craufurd D. Goodwin,  J. Allan Hynes,  Richard G. Lipsey,  Gideon Rosenbluth,  Paul A. Samuelson,  Elizabeth Johnson Simpson,  LAURENCE S. Moss

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In a 1954 paper ("Increasing Productivity, Income Price, Trends and the Trade Balance") Johnson takes a critical view of a proposition about the so-called "Dollar Shortage" put forth by such wise men as Thomas Balogh and John Williams. They asserted that the chronic balance of payments surplus of the United States might be explained by the high rate of U.S. productivity growth relative to growth of money income. The factual basis of these statements is doubtful but Johnson does not question the facts; here, as elsewhere, he is mainly concerned with the logical basis of the propositions at issue.

Johnson notes that while increasing productivity may tend to improve the U.S. balance of payments by lowering the relative prices of American goods, the concomitant increase in American real income should tend to increase net imports. One cannot know whether higher American productivity growth will help or hurt the U.S. balance of payments without knowing a great deal about the income and prices, elasticities of demand, imports, and exports. Robert Solow once said, "When you first study economics you learn that everything depends on everything else. When you become a graduate student you learn that everything depends on everything else in two ways."

I now turn to "Toward a General Theory of the Balance of Payments," perhaps the most important paper in Johnson's dissertation (Johnson 1958b). The concepts of "expenditure switching" and "expenditure reduction" emphasized in the paper clarified the complementary roles of macroeconomic considerations related to fiscal and monetary policy on the one hand and microeconomic matters such as exchange rates, tariffs, and controls on the other. Those concepts have long been standard parts of the advisor's kit for less-developed countries. Johnson begins with a lucid explanation of the links between the national income accounts and the balance of payments accounts. He then uses that exposition to show that sectoral policies aimed at reducing a balance of payments deficit cannot succeed without a realistic macro policy consistent with the goal of reducing a balance of payments deficit. If there were anything wrong with that exposition, it was in the lack of discussion of the time frame of responses to policy action. N onetheless this paper influenced balance of payments theory for many years.

The 30-page essay, "Equilibrium Growth in an International Economy," constituted chapter 5 of his Ph.D. dissertation and would have got anybody else a Ph.D. all by itself if it were puffed up a bit by an extensive literature survey (Johnson 1958a, pp. 120-49). The basic idea is to put the Harrod-Domar model into an international context by adding trade to the model and then showing that the growth rate is linked to the trade balance as well as to the savings, investment, and productivity parameters of the economy. Johnson does this first for one economy whose exports are exogenous, then expands the model to include a second economy. Any one country's exports are some other country's imports. In the two-country case, the equilibrium growth rates at any time depend on the two savings rates, the two investment rates, and the two incremental capital-output ratios. But with fixed exchange rates, the equilibrium growth rates will be continually changing and trade will not be balanced. If the deficits are financed b y further borrowing, complications ensue and the differential equations become even more mind-boggling. At least they boggled my mind, though not Harry's.