Reforming International Economic Institutions

Kahn was always concerned about the capacities of the existing international institutions to perform their task of generating virtuous behaviours and opinions in the markets. The role of these institutions should be to create the right conditions for decisions to be arrived at which are ‘virtuous’ from the point of view of the community, given that the individual pursuit of maximum profit or utility is not always able to generate the optimal outcome for society, nor indeed, over the long period, for the individual. To this end, Kahn was involved in designing and establishing new institutions which could foster international cooperation and trade.

In the 1950s, Kahn started to write a monograph for the FAO on the instruments required to curb commodity price volatility. In this report, Kahn analysed in great detail the causes of the price fluctuations of raw materials, which were damaging both for producers, who could never rely on a constant source of income or adequate price signals for their investments, and for consumers, who were subject to sudden price variations. Since both demand and supply of commodities are generally inelastic or adjust only slowly to the conditions of the market, small variations in quantities imply large variations in prices. The causes are therefore structural and policies must be devised to mitigate their impact without resorting to restrictive measures. Kahn advocated the establishment of an international buffer stock agency for each commodity. By buying or selling the commodity on the market, the agency could stop or at least alleviate otherwise excessive increases or decreases in prices. The agency was supposed to be managed by a supranational board, made up of experts chosen not as national representatives but for their knowledge and skills. Under their guidance, the price determination of raw materials, unlike under a quota system, would be ‘not a matter of bargaining strength, but of judgement based on scientific enquiry and expert experience’ (RFK/2/12.3).

Although Kahn explicitly built on Keynes’s proposal for a buffer stock scheme (Keynes 1938),^[1] his approach to the use of buffer stocks was entirely original, differing also from other schemes which were being put forward in those years, according to which the managers of the buffer stock were obliged to intervene whenever the price of the commodity hit given limits. Indeed, Kahn’s analysis and experience of the workings of commodity markets persuaded him that the managers of buffer stocks could only be successful if they were endowed with much greater freedom of action than Keynes had envisaged, without following any predefined rule. A buffer stock with limited resources could exploit speculation to its own advantage only if speculators were left permanently in doubt about the next decisions of the buffer stock managers. Being subject to no automatic rule for intervention, these managers should aim at increasing the uncertainty under which speculators acted and stabilize prices by influencing market expectations and exploiting bearish or bullish sentiments (the similarity with the arguments developed in Kahn’s liquidity preference article is undeniable). In other words, the managers of buffer stocks should become speculators among other speculators, not for their own profit, but in the general interest. Kahn’s monograph, never completed nor published, for reasons that have yet to be clarified, is a good example of his approach to economics, where mastery of Marshallian partial equilibrium analysis, Keynesian interest in rational decision making under uncertainty, and direct observation of markets are combined into an original analysis with relevant policy implications (Rosselli 2012).

Kahn addressed the institutional aspects of the international payments system extensively years later, working from 1965 to 1969 as a member of the UNCTAD team of experts. He took a hand in the drafting of four reports on the reform of the monetary system to cope with the economic growth needs of both the developing and the developed countries. He contributed to these issues with important papers, reconstructing the design and implementation of the new international monetary system that came into being in the aftermath of the Second World War. His essays ‘International Regulation of Trade and Exchanges’ (Kahn 1952b), ‘The International Monetary System’ (1973), ‘Remarks’ (Kahn 1974), and ‘Historical Origins of the International Monetary Fund’ (Kahn 1976d) offer examples of his rare ability to combine detailed knowledge of institutional arrangements and accuracy of historical reconstruction with concern for the policy implications of institutional choices.

• [1] In 1938, Keynes put forward the first buffer stock scheme to curb the volatility of commodity prices,which he refined over and over in the early 1940s (see Fantacci et al. 2012) as part of his more generalendeavour to help stabilize the international monetary system.