Global Finance and Global Justice

8/2/2019 Global Finance and Global Justice

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GlobalFinanceandGlobalJusticeTimothyB.Gravelle

PhDCandidateDepartmentofPoliticalScience

[email protected]

PreparedfortheCanadianPoliticalScienceAssociation

AnnualConferenceSaskatoon,SaskatchewanMay30June1,2007

Thispaperisadraft.Pleasedonotcitewithouttheauthorspermission.


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Abstract

Globalfinancialstructuresandpracticesfrequentlyhaveaprofoundimpactonindividuals

lifeopportunities.Theyarethus importantobjectsofnormativepolitical inquiry.Still,the

literature on globaljustice has (to date) had little to say about global finance. I seek to

remedythisbymorefullyarticulatingtherequirementsofjusticeinthecontextoffinancial

globalization. This papers argument is structured as follows. First, I argue that globalfinanceispartofaglobalbasicstructure;assuch,werequireatheoryofjusticethattakes

account of globalised finance. I then begin the task of developing an account of the

requirements ofjustice with respect to the key practices constituting the global financial

systeminconsideringbalanceofpaymentsadjustment.

Rsum

Lesstructuresetpratiquesfinanciresglobalesontfrquemmentunimpactprofondsurles

circonstances de vie individuelles. Elles sont ainsi les objets importants de lenqute

politiquenormative.La littrature sur lajusticeglobaleamalgrpeudireau sujetdes

financesglobales.Jessaiederemdiercettesituationenarticulantplusentirementceque

la justice dans le contexte de la mondialisation financire exige. Larticle est structur

commesuit.Enpremier,jesoutienquelesfinancesglobalesfontpartiedunestructurede

baseglobale;entantquetels,nousavonsbesoindunethoriedelajusticequitientcompte

des financesglobales.Jecommence leprojetdedvelopperuneexplicationdesexigences

de lajustice en ce qui concerne lespratiques principales constituant le systme financier

globalenconsidrantlajustementdelabalancedespaiements.


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Forsometimes,asmensmannersare,justicecannotbehadwithoutmoney....

(Hobbes1651/1994:154).

The basic facts are widely known: monetary and financial disturbances have serious

consequences for individuals welfare and basic rights. One could look back to the

economicdislocationandsocialunrestwroughtbytheGermanhyperinflationof19221924

andtheHungarianhyperinflationof19451946tomakethispoint(Fergusson1975;Hughes

1988;Siklos1991).Formorerecentcases,onecouldpointtoscholarshipdemonstratingthat

international financial institutionmandated structural adjustment programmes have in

many instances detracted from the enjoyment ofbasic human rights (Aslanbeigui and

Summerfield2000;Franklin1997;Thomas1998).Inshort,financialcrisescauserealharmto

people.The lateSusanStrange saidasmuch in theopeningofher lastmonograph,MadMoney, where she wrote: We recognise insanity, or madness in a man or a woman,by

erratic, unpredictable, irrationalbehaviour that is potentially damaging to the sufferers

themselvesor toothers.But that isexactlyhow financialmarketshavebehaved inrecent

years. Indeed, the financial markets behaviour has very seriously damaged others

(1998:1).Finance,therefore,particularlyglobalfinance,can(andoftendoes)haveaprofound

impactonindividualslifeopportunities.Globalfinanceisthereforeanimportantobjectof

normativepoliticalinquiry.

Still,therecontinuestobeadearthofsuchnormative inquiryatthe intersectionof

the

political

economy

of

global

finance

and

normative

international

relations

theory/international ethics literatures. Tobe sure, there is growing evidence of a new

preoccupation in the world of international finance a desire to engage the ethical

implicationsofglobalisation(Best2003:579).Aswell,thereisrecognitionthatanaccount

of how monetary arrangements shouldbe structured is indispensable to establishing the


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requirements of international distributive justice (Reddy 2003: 81). Nevertheless, we

continue to lack a theory of global financialjustice. I endeavour to remedy this state of

affairs in constructingan integrative theoryofglobal financeandglobaljustice.The first

step in constructing such an integrative theory is obviously a theory ofjustice. In this

regard,ItakeasmystartingpointheretheliberaltheoryofjusticeadvancedbyJohnRawls

inTheoryofJustice(1971)andsubsequentlyrevisedandextendedinotherworks,aswellastheextensionofRawlsstheorytointernationalrelationsbyCharlesBeitzinPoliticalTheoryandInternationalRelations(1979).Althoughliberalegalitarianismconstitutesmytheoreticalpoint of departure, and I accept thebroad outlines of these liberal theories of (global)

distributivejustice,Iarguethattheyrequirerespecificationandelaboration.Myaiminthis

paper,therefore,isacritique,reconstructionandextensionofRawlsandBeitzinlightofthe

factofglobalisedfinance.

IbeginbyoutlininginsomedetailrelevantaspectsofRawlsstheoryfromTheoryofJustice (1971) and its further development inPoliticalLiberalism (1993/2005) andJustice asFairness(2001).IthenturntoBeitzsextensionofRawlssthoughttointernationalrelations.

I then return to Rawls and his own international thought in Law of Peoples (1999).1 Inadvancingmy subsequent criticismsofRawlsandBeitz, Iargue thatwe mustprovidea

betteraccountoftherolemoneyandfinanceinthebasicstructureofsocietythanisgiven

by either Rawls or Beitz. Further, we must relax Rawlss assumption of autarky. Such a

reconstruction is a necessary preliminary to a theory of justice of the global financial

system.Ithentakeuponespecific issueinthepoliticaleconomyofglobalfinance,briefly

outliningwhatjusticerequiresintermsofbalanceofpaymentsadjustment.2

1. Istructuremyargumentinthisfashionfortworeasons.First,Iwishtopresentascompletelyas

possible thosecore ideas fromRawlssdomesticpolitical theorywithwhich Iplan toengageand to

demonstratetheirfixityinRawlssbodyofwork.Second,aportionofRawlssdiscussioninLawofPeoples(1999)isdedicatedtorespondingtoearlierglobalegalitarianarguments(byBeitzandothers)whichhe

disputes,thusrequiringapresentationofBeitzstheorybeforepresentingRawlssresponse.

2. Acompletetheoryofjusticeoftheglobalfinancialsystemwill,ofcourse,needtoaddressissues

relatingtocreditandglobalfinancialgovernanceaswell.Theseissuesarepartofmyongoingresearch.


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1. ReconstructingRawlsandBeitz

InTheory ofJustice, Rawlss aim is to construct a theory of socialjusticebuilding on thesocialcontracttraditionofpoliticalthought(representedbyHobbes,Locke,Rousseauand

Kant)buttakentoahigherlevelofabstraction.Theinfluenceofhisaccountofsocialjustice

has been so great as to prompt his libertarian critic Robert Nozick to remark (quite

prescientlyforthetime)thatpoliticalphilosophersnowmustworkwithinRawlstheory

orexplainwhynot(1974:183).

Rawlsdefines theprimarysubjectofsocialjustice inTheoryofJustice as thebasicstructure of society (1971: 7). By this, Rawls means the way in which the major social

institutions distribute fundamental rights and duties and determine the division of

advantages fromsocialcooperation.Societysmajorsocial institutionsareunderstoodas

thepoliticalconstitutionandtheprincipaleconomicandsocialarrangements.Itisthese

arrangements thatdefinemens [sic]rightsanddutiesand influence their lifeprospects,

whattheycanexpecttobeandhowwelltheycanhopetodo.Itisthebasicstructurethat

governs the assignment of fundamental rights and duties and regulation of social and

economicinequalitiesaswellasthelegitimateexpectationsfoundedonthese.Thus,the

basicstructuredetermine[s]theappropriatedistributionofbenefitsandburdensofsocial

life.ForRawls,then,thebasicstructureofsocietyistheprimarysubjectofjusticebecause

itseffectsaresoprofoundandpresent from thestart.Principlesofjusticeapply to the

basic structure and regulate how its major institutions are combined into one scheme

(Rawls1971:7,54,84,274).

Thoughheconcedesthevaguenessofhisconceptofbasicstructure,admittingthatit

is not always clear which institutions of features thereof shouldbe included, Rawls

makes clear his intention to cover what would appear tobe the main elements of this

structure in his discussion (1971: 9). Rawls further writes that he conceives of thebasic

structure of society as entirely selfsufficient: I assume that the boundaries of these

schemes are given by the notion of a selfcontained national community; the basic

structureandinterstaterelationsarethereforemutuallyexclusive(Rawls1971:146,457).


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Insearchingforwhatjusticerequiresinthebasicstructureofsociety,Rawlsusesa

philosophicalmethodthatdrawsonthesocialcontracttraditioninpoliticalthought.Rather

thantakeaparticularconceptionofthestateofnatureasthestartingpointforhistheory(as

doearlier social contract theories), Rawlsbeginswith the ideaof theoriginalposition,

which is understood as a purely hypothetical situation characterised so as to lead to a

certainconceptionofjustice.Itsessentialfeaturesarethatthepartiesdonotknowcertain

kindsoffacts.Firstofall,nooneknowshis[sic]placeinsociety,hisclasspositionorsocial

status;nordoesheknowhis fortune in thedistributionofnaturalassetsandabilities....

Neitherdothepartiesknowtheparticularcircumstancesoftheirownsociety.Thatis,they

donotknowitseconomicorpoliticalsituation...(Rawls1971:137).Rawlsassumesthatthe

partiestotheoriginalpositiondo,however,knowthegeneralfactsabouthumansociety.

They understand political affairs and the principles of economic theory; they know the

basis of social organisation and the laws of human psychology (Rawls 1971: 137). For

Rawls, this original position is the appropriate initial status quo which insures that the

fundamentalagreementsreachedinitarefair(1971:17).Inthisposition,oneisbehindthe

veilofignorance.ThenextstepinRawlssschemeistoreasonasselfinterestedpersons

andtochooseprinciplesofjusticeforsociety.

A crucial intermediate step in Rawlss theory is the motivating argument for the

specific conditions that constitute the original position and that lead to a particular

conceptionofjustice.Workingtowardanaccountoftheinitialsituationandtheprinciples

ofjusticethatfollowfromitis,forRawls,aniterativeprocess:weworkfrombothends

(Rawls1971:20).Thisinvolvesstartingwithadescriptionoftheinitialsituationsothatit

representsgenerallysharedandpreferablyweakconditions.Wethenseeiftheseconditions

are

strong

enough

to

yield

a

significant

set

of

principles

(Rawls

1971:

20).

Additional

reasonableconditionsareaddedtothedescriptionoftheinitialsituationifwedonotarrive

atasignificantsetofprinciples.Whenouraccountoftheinitialsituationandtheprinciples

derivedtherefromdonotmatchourconsideredmoralintuitions,wearepresentedwitha

choice:


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Wecaneithermodifytheaccountoftheinitialsituationorwecanreviseour

existingjudgements,foreventhejudgementswetakeprovisionallyasfixed

pointsareliabletorevision.Bygoingbackandforth,sometimesalteringthe

conditions of the contractual circumstances, at others withdrawing our

judgementsand conforming toprinciple, Iassume thateventuallywe shall

findadescriptionof the initialsituation thatbothexpressesourconsidered

judgements duly pruned and adjusted. This state of affairs I refer to as

reflectiveequilibrium(Rawls1971:20).

The end point of this iterative process, then, is what Rawls refers to as a reflective

equilibrium.Henotes,however,thatreflectiveequilibrium isnotstable:It is liable tobe

upsetbyfurtherexaminationoftheconditionswhichshouldbeimposedonthecontractual

situationandbyparticularcaseswhichmayleadustoreviseourjudgements(Rawls1971:

2021).There

are

therefore

many

possible

interpretations

of

the

initial

situation

with

the

choice of a particular conception requiring that one demonstrate that there is one

interpretation of the initial situation whichbest expresses the conditions that are widely

thoughtreasonabletoimposeonthechoiceofprinciplesyetwhich,atthesametime,leads

to a conception of justice that characterises our considered judgements in reflective

equilibrium(Rawls1971:121).ThusRawlsleavesopenthepossibilitythattheconception

of the initial situationmay requireadditionaloramended conditions (whichwould then

leadtonewprinciplesofjustice),thoughheregardshispresentationoftheinitialsituation

as satisfactory for his purposes: we have done what we can to render coherent and to

justify our convictions of social justice. We have reached a conception of the original

position(Rawls1971:21).

TheresultofRawlssthoughtexperimentisaconceptionofjusticeasfairness.Rawls

arguesthattwoprincipleswouldbechosenintheoriginalposition.First,[e]achpersonis

tohaveanequalrighttothemostextensivetotalsystemofequalbasiclibertiescompatible

withasimilarsystemof libertyforall.Second,[s]ocialandeconomic inequalitiesareto

bearrangedsothattheyareboth:(a)tothegreatestbenefitoftheleastadvantaged,[and]

(b) attached to offices and positions open to all under conditions of fair equality of

opportunity.Inotherworks,socialandeconomicinequalitiesarejustifandonlyifthey


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workaspartofaschemewhichimprovestheexpectationsoftheleastadvantagedmembers

ofsociety(Rawls1971:75,302).Withspecificreferencetothesecondprincipleofjustice

thedifferenceprincipleRawlswritesthatitapplies,inthefirstapproximation,tothe

distribution of income and wealth and the design of organisations that make use of

differences inauthorityand responsibility... (1971:61). In short, frombehind theveilof

ignorance and therefore not knowing ones religion, one would opt for a principle of

religious toleration togovernsociety.Likewise,notknowingonessocialclassorwealth,

one would choose principles that guarantee fair (not simply formal) equality of

opportunity.

Rawls thusoffersajustification for the familiarsetofcivilandpoliticalrightsbut

alsoasignificantredistributionofeconomicresources.Hefurthergroundshisargumentfor

redistribution using a heuristic he calls the maximin solution to the problem of social

justice.AsRawlssrelates it,themaximinprincipletellsustorankalternativesby their

worst possible outcomes: we are to adopt the alternative the worst outcome of which is

superior to the worst outcomes of the others. Behind the veil of ignorance, then, the

rationaldecision(inthefaceofuncertaintyovertheoutcomeandwithoutknowledgeofthe

probabilitiesofparticularoutcomes)istoselectthedistributionofresourceswiththebest

worstoutcome:themaximinruledirectsourattentiontotheworstthatcanhappenunder

anyproposedcourseofaction,andtodecideinthelightofthat(Rawls1971:152154).As

an illustrationof thisprinciple,Rawls takes the reader throughanexample inwhich the

partiesbehind the veil of ignorance are faced with a choicebetween three hypothetical

situations,eachwithadifferentdistributionofmonetarygainsandlosses(Rawlsstableis

reproduced in Table 1). Denied knowledge of which set of circumstances maintain, the

maximinrule

directs

us

to

the

third

decision,

as

5>7

>8.

Though

one

stands

to

gain

more

underthefirstandseconddecisionsthanunderthethird(14>12>8),onealsorisksaloss;

d3/c1isthereforethebestworstoutcome(cf.Rawls1971:153154).


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Table1:RawlssGainLossTable

Circumstances

Decisions c1 c2 c3

d1 7 8 12

d2 8 7 14

d3 5 6 8

Rawlss subsequent work recast the argument presented in Theory of Justice inimportant respects,but in those respects most relevant here, his theoretical framework

remained unchanged (most notably his description of the basic structure.)3 Rawls, for

example,madeseveralchangesintherevisededitionofTheoryofJustice(originallyrevisedin1975 for theGerman translationbutdidnotappear inEnglishuntil1999)designed to

addresscriticismsoftheoriginalarticulationofhisargument,mostnotablythoseadvanced

by H.L.A. Hart, and to further clarify his argument. He did not, however, revise his

explicationofthebasicstructureofsociety(seeRawls1999:610,47,7374,242).

The same is true of Political Liberalism (1993/2005), which otherwise involved asignificantrecastingofRawlsstheoryofjusticeasapoliticalconceptionofjustice,bywhich

hemeansaconceptionofjusticelimitedinthescopeofitsapplicationtothebasicstructure,

and which can form thebasis of an overlapping consensusbetween reasonable persons

affirmingdifferentcomprehensivedoctrines(orcompletemoralandphilosophicalsystems)

andwhichcaninturnunderwritethebasicprinciplesofaconstitutionaldemocracy.Justice

as fairness, then,asapoliticalconceptionofjustice,hasamuchnarrower remit than the

comprehensive doctrines capable of endorsing support it (cf. Rawls 1993/2005: 1115).

Despite thisrecastingofhisargument inPoliticalLiberalism,hisaccount thereof thebasicstructure itself is nearly identical. He writes, for example, that the basic structure is

understoodas theway inwhich themajorsocial institutions fit together intoonesystem,

3. IemphasisethispointherebecausethecontentRawlsassignstothebasicstructure(andwhathe

doesnot)isanimportantpartofmyargumentbelow.


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andhowtheyassignfundamentalrightsanddutiesandshapethedivisionofadvantages

thatarisethoughsocialcooperation.Thusthepoliticalconstitution,the legallyrecognized

formsofproperty,and theorganizationof theeconomy,and thenatureof the family,all

belongtothebasicstructure(Rawls1993/2005:258).

Thisunderstandingof thebasicstructure isalsoconsistentwith thatpresented in

JusticeasFairness(2001),aworkthathastheoverallaimoffurtherclarifyingandcorrectingerrorsinTheoryofJustice.4InJusticeasFairness,Rawlssimilarlydefinesthebasicstructureofsocietyasthewayinwhichthemainpoliticalandsocialinstitutionsofsocietyfittogether

intoonesystemofsocialcooperation,andthewaytheyassignbasicrightsanddutiesand

regulatethedivisionofadvantagesthatarisesfromsocialcooperationovertime.Thebasic

structure is therefore thebackground social framework within which the activities of

associations and individuals take place. Ajustbasic structure secures what we may call

backgroundjustice(Rawls2001:10).

ThoughRawlssprojectfromTheoryofJusticethroughPoliticalLiberalismandJusticeas Fairness is to articulate principles ofjustice for a selfcontained society in essence adomestic political theory Charles Beitz has sought to extend Rawlss analysis into

internationalpolitics.InPoliticalTheoryandInternationalRelations(1979),Beitzarguesthatastrongcasecanbemadeoncontractariangroundsthatpersonsofdiversecitizenshiphave

distributiveobligationstooneanotheranalogoustothoseofcitizensofthesamestate.He

thusseekstoprovideaphilosophicalgroundingforthemoraltheintuitionthatitiswrong

to limit the application of contractarian principles of social justice to the nationstate;

instead,theseprinciplesoughttoapplyglobally(Beitz1979:128).

In making this argument, Beitz first notes that even assuming the absence of a

regular pattern of interactionbetween societies (as Rawls does with his assumption of a

closedsociety), thedistributionofnatural resourcesbetweenstateswouldstillcommand

4. OneshouldnotethatRawlssdiscussionofthebasicstructureinpartIVofJusticeasFairnessisunfinished:Rawlswasunabletorevisethemanuscriptbecauseofillness(2001:xii).


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theattentionofjustice (Beitz1979:137).Beitzobserves that, forRawls, thedistributionof

resources is analogous to the distribution of natural talents. Rawls writes of natural

endowments,whichareneitherjustnorunjust;norisitunjustthatmen[sic]areborninto

societyatanyparticularposition.Thesearesimplynatural facts.What isjustorunjust is

thewaythatinstitutionsdealwiththesefacts(Rawls1971:102).BeitzarguesthatRawlss

analogybetweennaturalresourcesandnaturaltalents isflawed:resources found inones

environmentarenotpartoftheselfinthewaythatonestalentsare.Whatismore,thereis

theproblemofscarcity:Theappropriationofvaluableresourcesbysomewillleaveothers

comparatively,andperhapsfatally,disadvantaged.Thosedeprivedwithoutjustificationof

scarce resources needed to sustain and enhance their lives might well press claims to

equitableshares(Beitz1979:139).Beitzscontentionisthatjusticeasfairnesseveninthe

hypotheticalcaseofselfsufficientstatesleadstoaresourceredistributionprinciple(1979:

141).

Beitznotes,however, thatRawlssselfsufficiencyassumption is farremoved from

thefactsofinternationalpolitics:theworldisnotmadeupofselfsufficientstates.States

participate in complex international economic, political and cultural relationships that

suggesttheexistenceofaglobalschemeofsocialcooperation(Beitz1979:143144).What

is more, international interdependence, understood as a global scheme of social

cooperation, producesbenefits andburdens that would not exist if national economies

were autarkic (Beitz 1979: 149).5 Given that social cooperation is the foundation of

distributive justice, then, Beitz argues that it is worth exploring the notion that

internationaleconomic interdependencelendssupporttoaprincipleofglobaldistributive

justicesimilartothatwhichapplieswithindomesticsociety(Beitz1979:144).

Inarguingforprinciplesofglobaldistributivejustice,Beitzdeniesmoralsignificance

to nationalboundaries: Sinceboundaries are not coextensive with the scope of social

5. Beitzdoesnotbasehisargumentonanempiricalclaimofanyparticulardistributionofbenefits

andburdensresultingfrominternationalinterdependence:Allthatisrequiredisthatinterdependence

producebenefits andburdens; the roleofa principle ofdistributivejustice, then, wouldbe to specify

whatafairdistributionofthosebenefitsandburdenswouldbelike(Beitz1979:152).


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cooperation, theydonotmark the limitsofsocialobligations.Rawlssconceptionof the

original position must therefore be extended to reflect the broader scope of social

cooperation,sincethepartiestotheoriginalpositioncannotbeassumedtoknowthatthey

aremembersofaparticularnationalsociety,choosingprinciplesofjusticeprimarilyforthat

society(Beitz1979:151).Onthisbasis,Beitzfindsnoreasontothinkthatthecontentof

theprinciples [ofjustice]would changeasa resultofenlarging the scopeof the original

position so that the principles would apply to the world as a whole. So, if Rawlss

differenceprinciplewouldbe chosen in theoriginalposition, itwouldbe chosen in the

globaloriginalpositionaswell(Beitz1979:151).

Whatform(orforms)ofredistributionwouldberequiredbysuchaglobaldifference

principle? Beitz argues that it would likely require reductions in interstate inequalities

eventhoughtheultimateendofsuchredistributionisthemaximizationofthepositionof

theglobally leastadvantagedpersons(Beitz1979:153).Thus,the interstateredistribution

of wealth functions as a proxy for the interpersonal redistribution required by the

differenceprinciple.Inrecognisingthatstatesareoftenmoreappropriatelysituatedthan

individual persons to carry out whatever policies are required to implement global

principles,Beitzadmitsthatredistributionbetweenstatesisasecondbestsolutionthat

mustsufficeintheabsenceofabetterstrategyforsatisfyingaglobaldifferenceprinciple

(Beitz1979:153).

Having made his case for global redistributive obligations in ideal theory, Beitz

turns to thequestionofredistribution in thenonidealworld.He firstarguesthat foreign

assistanceshouldnotberegardedasavoluntarycontributionofaportionofastatesown

wealth,but rather as a transfer of wealth required to redress distributivejustice (Beitz

1979:172173).Beitzgoesontoarguethatnonidealtheoryshouldalsospecificallyexamine

internationaleconomicrelations,asthe institutionsandpracticesof international finance

and trade influence the distribution of global income and wealth and canbe adapted to

help compensate for the unjust inequalities that arise under the institutional status quo

(Beitz 1979: 174). Though eschewing any detailed proposals, Beitz notes that potentially


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desirable redistributive policies include preferential terms of trade for poor states and

improvedaccesstospecialdrawingrights(SDRs)throughtheInternationalMonetaryFund

(Beitz1979:174175).

While Beitz has developed an account of the requirements of global distributive

justicegroundedinRawlssthought,Rawlshimselfhastakenhisinternationalthoughtina

surprisinglydifferentdirection.AlthoughRawls concludes inTheory ofJustice (1971) thatjustice entails significant redistributive obligations within societies, he makes the

unexpectedargumentinLawofPeoples(1999)thatthesametypeofobligationsdonotexistbetweensocieties.Rather,wellorderedsocietiesare thesubjectofadutyofassistancethat

stops well short of the kind of redistribution that a global application of the difference

principlewouldrequire.ItremainstobeseenhowRawlsreachesthisconclusion.

Rawlss aim inLaw ofPeoples (1999) is to articulate a realistic utopian vision ofinternationalpoliticsthatis,anachievablesocialworldthatcombinespoliticalrightand

justiceforallliberalanddecentpeoplesinaSocietyofPeoples.TheLawofPeoples,then,

is developed within political liberalism and is and extension of a liberal conception of

justiceforadomesticregimetoaSocietyofPeoples.Rawlssprojectisthustoworkout

theidealsandprinciplesoftheforeignpolicyofareasonablyjustliberalpeople(Rawls1999:910).

InworkingtowardstheprinciplesoftheLawofPeoples,Rawlsagainemploysthe

ideaoftheoriginalposition,thoughtheactorsbeingmodelledarenottheindividualsina

closedsociety,buttherationalrepresentativesofliberalpeoples(Rawls1999:32).These

freeandequalrepresentativesofliberalpeoplesaresubjecttoaveilofignoranceproperly

adjustedforthecaseathand:theydonotknow,forexample,thesizeoftheterritory,orthe

population, or the relative strength of the people whose fundamental interests they

represent.Further,theydonotknowtheextentoftheirnaturalresources,orthelevelof

economicdevelopment, or other such information (Rawls 1999:3233).This secondlevel


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thoughtexperiment leadsRawlstoarguethattherepresentativesofwellorderedpeoples

wouldchoosethefollowingprinciplestogoverntheirrelations:6

1. Peoplesare freeand independent,and their freedomand independencearetoberespectedbyotherpeoples.

2. Peoplesaretoobservetreatiesandundertakings.3. Peoplesareequalandarepartiestotheagreementsthatbindthem.4. Peoplesaretoobserveadutyofnonintervention.5. Peoples have the right of selfdefencebut no right to instigate war for

reasonsotherthanselfdefence.

6. Peoplesaretohonourhumanrights.7. Peoplesaretoobservecertainspecifiedrestrictionsintheconductofwar.8.

Peoples

have

a

duty

to

assist

other

peoples

living

under

unfavourable

conditions thatprevent theirhavingajustordecentpoliticaland social

regime(Rawls1999:37).

One should note that Rawlss principles of the Law of Peoples do not include a

principle of distributive justice analogous to the difference principle that applies

domestically.7 Rawls does argue, however, that wellordered societies have the duty to

assistburdenedsocietiesthatlackthepoliticalandculturaltraditions,thehumancapital

and knowhow, and, often, the material and technological resources needed tobe well

ordered.Still, it isnot thecase, inRawlssview,that theonlyway,or thebestway, to

carryoutthisdutyofassistanceisbyfollowingaprincipleofdistributivejusticetoregulate

economic and social inequalities among societies (Rawls 1999: 106). Rather, the duty of

6. RawlsnotesthatdecentnonliberalpeoplesthosepeopleswhosebasicstructureRawlsdescribes

asadecentconsultationhierarchyalsopossesscertainfeaturesmakingthemacceptableasmembers

ingood

standing

in

areasonable

Society

of

Peoples

and

would

choose

the

same

principles

for

the

Law

of

Peoplesasreasonableliberalpeoples(Rawls1999:5).

7. RawlsalsoexploresanumberofimportantissuesinLawofPeoples(1999)suchasthedemocraticpeace,theextenttowhichliberalsocietiesoughttotoleratenonliberalsocieties,thephilosophicalbasisof

humanrights,justwarandimmigration thatInonethelesssetaside inordertofocusonhisarguments

relatingtoobligationsofdistributivejustice(orthelackthereof).FordiscussionsofRawlssthoughton

theseother issues,see,e.g.,Beitz (2000);Benhabib (2004);Buchanan (2000);Kokaz (2000);Pogge (2004,

2001).


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assistance requires wellordered societies to assistburdened societies for a finite period

duringwhichburdenedsocietiesestablishjustbasic institutionsandchangetheirpolitical

cultures,eventuallyjoiningtheSocietyofPeoples(Rawls1999:106112).Thus,thedutyof

assistance is a principle of transition, in much the same way that the principle of real

savingovertimeindomesticsocietyisaprincipleoftransition;itisassistancemeantto

laythefoundationforajustbasicstructureofsociety,atwhichpointitmaycease(Rawls

1999:118).

Rawls advances a set of related arguments for rejecting principles of global

distributivejustice.His firstobjection toarguments forglobalredistributiveobligations is

thattheydonothaveadefinedgoal,aim,orcutoffpoint,beyondwhichaidmaycease

(Rawls1999:106).Rawlsdoesadmit theattractivenessofprinciplesofglobaldistributive

justicegivenactualglobalinequalities:ifsuchprinciplesaremeanttoapplytoourworld

as it is with its extreme injustices, crippling poverty, and inequalities, its appeal is

understandable.Still,he seesno reason for theirapplicationcontinuallywithoutend

withoutatarget,asonemightsayinthehypotheticalworldarrivedatafterthedutyof

assistance is fully satisfied... (Rawls 1999: 117). He goes on to present two hypothetical

cases involving two liberal or decent societies. In the first example, one chooses to

industrialise (increasing its rate of real saving) while the other does not. In the second

example,onesocietyplacesgreaterstressonpopulationcontrol than theother,resulting,

over time, in greater per capita wealth (Rawls 1999: 117118). For Rawls, redistribution

between these societies taxing one to raise the per capita wealth of the other is

objectionable:

Given thatboth societies are liberal or decent, and their peoples free and

responsible,and

able

to

make

their

own

decisions,

the

duty

of

assistance

does

not require taxes from the first, now wealthier society, while the global

egalitarianprinciplewithout targetwould.Again, this latterpositionseems

unacceptable(Rawls1999:118).


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14

Thus, forRawls, there is a pointatwhich apeoplesbasic needs (estimated in primary

goods) are fulfilled and a people can stand on its own and beyond which no

redistributionbetweensocietiesisjustified(1999:118).8

Having outlinedboth Rawlss and Beitzs theoretical frameworks, it is clear that

neitheraddressesthetopicofmoneyandfinancedirectlyorindetail(whichisnotinitselfa

substantive criticism). The more important issue is this: do their international political

theoriesneverthelessprovideabasisforatheoryofglobalfinancialjustice?Myanswerisa

heavily qualified one. Though thebroad architecture of their theories maybe taken as

sound,theycannotbeextendedinastraightforwardfashiontoglobalfinance.Keyaspects

require respecification and elaboration. First, the conceptions of the basic structure of

societyofferedbyRawlsandBeitzareunderdevelopedinthattheyneglectthecrucialrole

playedby money and finance in distributingbenefits andburdens in modern societies.

Second, Rawlss autarky assumption (as I shall refer to it) is indefensible even as a

simplifyingassumption.Third,Rawlssdutyofassistanceisinadequateunderconditions

ofglobalisedfinance.AsIshalldemonstrate,acknowledgingtheroleplayedbymoneyand

finance in thebasic structure and relaxing the autarky assumption lead necessarily to

principlesofglobaldistributivejusticethatpertainspecificallytofinancialpractices.

Monetaryandfinancialpracticeshavelongbeenrecognisedashavingimporttothe

subjectofjustice.Aristotle(1981)wasthefirsttopointustothecentralityofexchangeinthe

creationofcommunity,andthecriticalimportanceofmoneyinfacilitatingexchange.Hume

(1777/1889),Smith(1776/1976;1766/1987)andKeynes(1941;1923)alertustotheprofound

8. AcorollaryreasonRawlsgives forendorsing thedutyofassistanceandrejectingprinciplesof

globaldistributivejusticeisthateconomicdevelopmentisafunctionofdomesticpoliticalcultureanda

matterofpoliticalchoice.Rawlsmakestheassumptionthatthecausesofeconomicgrowthofasocietyarefoundintheirpoliticalcultureandinthereligious,philosophical,andmoraltraditionsthatsupport

the basic structure of their political and social institutions, as well as in the industriousness and

cooperativetalentsofitmembers,allsupportedbytheirpoliticalvirtues(Rawls1999:108).Asaresult,

thearbitrarinessofthedistributionofnaturalresourcescausesnodifficultyforRawls(1999:117).Iwill

notdiscussthisreasonforrejectingprinciplesofglobaldistributivejustice;instead,Ifocusmydiscussion

onRawlssdutyofassistance,althoughI,likeBuchanan(2000)andothers,findRawlsscontentionthat

economicdevelopmentisstrictlyendogenoushighlyimplausible.


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15

effectson individual lifeopportunitiesexertedby themanagementof themoneysupply,

interestrates,exchangeratesandadjustmentsinpricelevels.Thesepracticesare,ineffect,

partofthebasicstructureofamodernsocietyaccordingtoRawlssowndefinition:theyarepartoftheprincipaleconomicandsocialarrangements(Rawls1971:7).Thisassertionis

supportedby Reddy (2003: 81): The existence of money and credit is an integral and

probablyunavoidablepartofmodernsocieties.

Still,neitherRawlsnorBeitzprovideanadequateaccountofmoneyandfinanceas

partofthebasicstructure.Writinginabstractterms,Rawlsdoesdiscussincomeandwealth

astwooftheprimarysocialgoodsthatthebasicstructurefunctionstodistribute(1971:62).

However, he goes on to refer to the stock ofbenefits and collection ofgoods tobe

divided (Rawls 1971: 88; emphasis added). Rawlss defence of the difference principle

framesthequestionofsocialjusticeintermsofitsapplicationinallocatingmoneyandother

resources (Rawls 1971: 150161). He does not extend his discussion to consider the

applicationofthedifferenceprincipletotheeconomicprocessesthatthemselvesfunctionto

allocateandredistributemoney;Keynessdiscussionofthedistributiveeffectsof inflation

anddeflationinhisTractonMonetaryReform(1923)oughttoberecalledhere.ThisistosaythatRawlssconcerniswiththedistributionoftheproductsofeconomicprocesses,notthe

distributive effects of the full range of economic processes themselves financialflows

included.Thisneglectofmoneyand finance isevident inhis conceptionofaneconomic

system.9Hewrites thataneconomicsystemregulateswhat thingsareproducedandby

whatmeans, who receives them and in return for which contributions, and how large a

fraction of social resources is devoted to saving and to the provision of public goods

(Rawls1971:266).Moneyandcredit,therefore,appeartohavelittleplaceinRawlssideal

ofan

economic

system.

What

ismissing

from

the

above

description

of

an

economic

system

ishowfinancialcapital(i.e.,credit)enablesproduction,towhomcreditismadeavailable,

andatwhatcost.

9. Trade,ofcourse,isalsoleftasideasaconsequenceofRawlssautarkyassumption.


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16

Onealsosees thisneglect inRawlssdiscussionofjustsavings.Here,Rawls treats

thequestionofintergenerationaltransfersofwealthasoneofcapitalaccumulation,where

capital isdefinedasproductive (industrial)capitalandhumancapital,andwherecapital

accumulation is a simple function of domestic savings (Rawls 1971: 284292). Financial

capital isnotpartofhis conception.There isalsonoborrowingno credit.10Aswell, in

putting forward his understanding of the different functionalbranches of government,

Rawlsidentifiesadistributionbranch,whosetaskistopreserveanapproximatejusticein

distributive sharesby means of taxation and the necessary adjustments in the rights of

property (Rawls 1971: 277). Monetary policy, though not specifically mentioned, would

appear tobelong to thestabilisationbranchofgovernment,whichstrives tobringabout

reasonablyfullemployment...(Rawls1971:276).Rawls thereforefailstoacknowledgeor

explore the distributive effects specific to the exercise of monetary policy namely the

distributive consequences associated with the expansion and contraction of the money

supplythat,forexample,soconcernedKeynesinhisTract(1923).

Though Beitz recognises global finance as part of an evolving global basic

structure (1979:202),hedoesnotarticulateprinciplesofjustice foraglobalised financial

system.Hiscentralconcernremainsthedistributionofnaturalresources,andhedoesnot

extendhisdiscussionofthekindsofredistributionrequiredbyaglobaldifferenceprinciple

beyondavagueprescription for larger interstate transfersofwealth (1979:137141,153).

Beitzsconceptionofthebasicstructureisthereforealsoincomplete,andasaconsequence

soishistheoryofglobaldistributivejustice.

What accounts for this neglect of money and financeby Rawls and Beitz in their

respective theoretical frameworks? Part of the answer is that neither Rawls nor Beitz

appreciate the full range of economic practices constituting thebasic structure. Neither

offersanextensivemotivatingargumentforwhattheychoosetoincludeaspartofthebasic

structureandwhattheychoosetoleaveout.Itisimportanttoobserveaswellthatsetting

10. Rawlsmakesonlyapassingreferencetoeducationloans(1971:307).


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17

aside (or ignoring)moneyand financealtogether isequivalent to taking theposition that

they do not have real effects on the economy or human welfare an assertion that is

demonstrably false.AnotherpartisthatbothRawlsandBeitztreatmoneyandfinanceas

separate from ideal theory; it is not an issue they consider tobe relevant at a level of

abstractionhigherthanconcretepolicyinitiatives.Beitz,forexample,onlymakesapassing

referencetoSDRsandtheIMFinthecontextofadiscussionoftheapplicationofprinciples

of global distributive justice to the nonideal world (1979: 174175). Rawls similarly

consignsalldiscussionofglobaldistributivejustice tononidealtheory (Rawls1999:16).

Neither approach is defensible. Again, there are no motivating arguments for treating

moneyandfinance inthiswayasatopicfornonidealtheorybydefinition.Indeed,the

example of modern macroeconomic theory shows us that money and finance can be

conceivedinhighlyidealisedterms.Thecorrective,therefore,isanapproachtomoneyand

financebetween the highly stylised (and some would saybarren) approach of modern

macroeconomics and the ethicallymotivated policy work of NGOs in Rawlss terms

realisticallyutopianapproachtoglobalfinancialjustice(cf.Reddy2003).

AnotherproblematicaspectofRawlss theoryofjustice (thoughnotBeitzs) is the

assumptionofnationalselfsufficiency,orautarky.Again,thebasicstructureofsocietyand

the law of nations are, according to Rawls, mutually exclusive concepts, and only the

formerwouldbeinterpretedasthepropersubjectofjusticefromtheoriginalposition(1971:

146).Thiscanonlybecorrect if theassumptionofautarky,ora closedsociety, is indeed

plausible.Rawlssautarkyassumption(asIrefertoit)hasbeenroundlycriticisedbyBeitz

and others. Beitz, writing in the 1999 afterword to his Political Theory and InternationalRelations,arguesthat[t]hegrowthoftheworldeconomysincethisbookwaswrittenand

theelaboration

of

global

financial

and

regulatory

regimes

only

strengthen

the

impression

of

anevolvingglobalbasicstructurewithconsequencesforindividuallifeprospects...(1999:

202).Helateraddsthat[t]hisworldcontainsinstitutionsandpracticesatvariouslevelsof

politicalorganisationnational,transnational,regionalandglobalwhichapplytopeople

largelywithout theirconsentandwhichhave thecapacity to influence fundamentallythe


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18

coursesoftheirlives(1999:204205).AllenBuchananisevenmoredirectinhiscriticismof

Rawls, disputing the contention that the basic structure (Rawlss primary subject of

justice) is strictly national, asserting that [t]here is a globalbasic structure with the

regimes for international trade and finance amongst its constitutive parts, and with

undeniabledistributiveeffects(Buchanan2000:705706).ForBuchanan,then,itis

unjustifiable to ignore the global basic structure in a moral theory of

international law to proceed either as if societies are economically self

sufficient and distributionally autonomous (so long as they are well

governed)orasifwhateverthedistributionaleffectstheglobalstructurehas

are equitable and hence not in need of being addressed by a theory of

internationaldistributivejustice(Buchanan2000:706).

One

should

observe,

however,

that

the

autarky

assumption

is

presented

by

Rawls

as

a simplifying assumption for theorybuilding, not as an accurate depiction of interstate

relations:itisadevicetoassistintheconstructionoftheorybyparingdownthenumberof

relevantconcepts.11Asameanstowardstheorybuilding,suchassumptionsaredefensible.

Macroeconomictheory,forexample,beginswithaclosednationaleconomytounderstand

the relationshipsbetween gross domestic product, the money supply and interest rates

before international trade and international capital mobility are introduced. One should

note,though,thattheassumptionofaclosednationaleconomyisintheendrelaxed.Rawls,

however,nevermakestheanalogousmoveinrelaxingtheautarkyassumption,nordoeshe

contemplatetheimplicationsoffailingtodoso.

Theautarky assumption also underwrites Rawlss rejection of principles of global

distributivejusticeinLawofPeoples,whereheclaimsthatthedutyofassistancesatisfiesthedemandsof fairness.However,Rawlssdutyofassistance isessentially foreignaid

(with aid taking the formofboth foreign exchange and knowledge). It is agnostic about

potentially maldistributive financial practices such as abalance of payments adjustment

11. It is worth noting that autarky also has a profoundly illiberal intellectual pedigree, and is

suggestiveofaneconomicnationalismthatRawlsmayhavefoundunpalatablehadhebeeninclinedto

interrogatethisassumptionfurther.


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19

thatplacestheburdenofadjustmentwhollyonthedebtor(recallKeynesscriticismofthis

formofpriceleveladjustmentdiscussedabove)orahighlyunequaldistributionofcredit.

Rawlssdutyofassistancewouldnotrectifywhateverinequitiesthatmightariseoutofthe

operationofthosemonetaryandfinancialpracticesthatconstitutepartoftheglobalbasic

structure.Ineffect,itisadutyofperpetual,ineffectualassistance:maldistributivemonetary

andfinancialpracticeswouldpreventusfromreachingthekindofcutoffpointRawlshas

in mind. Rawlss burdened societies would consequently remain burdened by

maldistributiveglobalmonetaryarrangements.

Insum, thebasicstructureofanymoderneconomy includessomearrangementof

monetary and financial practices without with economic life would come to a halt. It is

undeniable that they are a constitutive part of thebasic structure. Since movements of

financialcapitalacrossborders (implyingmovements in thebalanceofpayments),global

markets forcreditand formalstructuresofglobal financialgovernanceareallpartof the

extantglobalbasicstructure,inquiringintowhatjusticerequiresofthesearrangementshas

a place as part of ideal theory. Still, neither Rawls nor Beitz provide an answer to this

question.

So, how to go about reconstructing Rawls and Beitz, then? I submit that Rawlss

concept of reflective equilibrium shows the way forward. For Rawls, the process of

achievingreflectiveequilibriuminvolvesworkingiterativelybetweenourpremisesandour

consideredconvictionsofjustice(1971:20).Whereourconvictionsdonotfitourpremises,

one or the other mustbe revised. Rawls himself leaves space for such revisions of the

account of the initial situation and the principles ofjustice derived therefrom, admitting

that reflective equilibrium is not necessarily stable. It is liable tobe upsetby further

examinationoftheconditionsthatshouldbe imposedonthecontractualsituationandby

particularcaseswhichmayleadustoreviseourjudgments(Rawls1971:2021).Thisisthe

situation we find ourselves in as a consequence of having identified a number of

shortcomingsinRawlssdescriptionoftheinitialsituationnamelythefailuretoaccount

formoneyand financeaspartof thebasic structureand theassumptionofautarky.The


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20

substantive principles of justice that flow from these premises thus fail to match our

considered convictions namely that a conception of justice that is silent as to the

distributive (and maldistributive) consequences of monetary and financial practices is

perverse.Toreestablishareflectiveequilibrium,then,wemustmodifyouraccountofthe

originalposition.Specifically,wemustacknowledgetheimportanceofmoneyandfinance

inthebasicstructure,andwemustrelaxtheautarkyassumption.Thesetwoamendments

combine to introduce international capital mobility into our conception of the initial

situation.Icontendthatthis isaweakerandmoredefensibleassumptionthanautarky in

lightofglobalisedfinance.12

Starting from this amended initial situation leads to the following argument:

Assumingthatthepartiestothecontractaredeniedcertainfacts,includingfactsaboutthe

situationoftheirsociety,whichinturnincludesfactsabouttheirsocietysfinancialposition

whetheritisacreditorordebtorinthebalanceofpayments,itslevelofforeignexchange

reserves, its ability to obtain or create credit, or the ability of the societybear the social

strains associated with inflation or deflation, etc. the contracting parties will agree to

structure international financial relations such that no society is unduly burdened by

internationaleconomicflows.13Theywillthusputinplacefinancialstructuresandpractices

thatsatisfythedifferenceprinciple.Moresuccinctly,ifthechoiceofprinciplesofjusticeis

relativetothesetoffactsknowntothepartiesintheoriginalposition,thenpermittingthe

parties to have knowledge of a global economy characterised by international capital

12. Still, one needs to ask whether the parties to the initial contract would in fact endorse

international capital mobility in principle, or whether they would opt for some form of inconvertible

currencies (implying no crossborder capital flows). I contend that the parties to the contract would

endorseinternational

capital

mobility

in

principle:

denied

knowledge

of

the

economic

condition

of

their

society (specifically theircapitalendowmentand theircapacity toaccumulatecapital throughastrictly

endogenousprocess),theywouldchoosetoallowcrossborderflowsofcapital,includingforeigndirect

investment.Thus, thequestionwith respect to internationalcapitalmobility isnot ifbuthow that is,

howarethebenefitsandburdensthatcomewithinternationalcapitalmobilitydistributed.

13. Itisnotpertinenttomyargumentwhetherthepartiestothecontractaretherepresentativesof

wellorderedsocieties(asinRawlssschemeinLawofPeoples)orallpersons(asinBeitzs):theprinciplesofjusticethatwouldbechosenfortheglobalfinancialsystemwouldbethesame.


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21

mobilitywillleadtoaconceptionofjusticerequiringglobalfinancialstructurestoadhereto

thedifferenceprinciple.

Insum,myattemptatreconstructingRawlsandBeitzcanbereducedtoaseriesof

postulates. Given that (1) monetary and financial practices constitute part of thebasic

structureof society,and (2) finance isglobalised, it follows that (3) thebasic structure is

global. Given that (4) the (global)basic structure is theprimary subject ofjustice, (5) we

requireprinciplesofglobalfinancialjustice.

2.AJustBalanceofPaymentsMechanism

Inanysystemcharacterisedbycrossbordercapitalmobility,thereneedstobeamechanism

wherebydomesticprice levelsadjust inresponse tomovements incapital (i.e.,balanceof

payments adjustment). But who adjusts? Whobears the costs of adjustment? As Strange

wasapttoask,cuibono?Thisisasmuchanormativequestionasapositiveone(whichishowStrangeandothershaveapproachedit).Itakeadifferentapproachinaskingwhatisa

justbalance of payments adjustment mechanism. Specifically, whatbalance of payments

mechanismwouldbeendorsedinthe(modified)originalposition?

Answering this question requires a short review of basic openeconomy

macroeconomics.Balanceofpaymentsaccounting,likeallaccounting,involvesasystemof

doubleentries:acredit(ordebit)inthebalanceofpaymentsentailsacorrespondingdebit

(or credit) elsewhere.14 In other words, thebalance of payments always (by definition)

balances.TheconventionalbasicbalanceofpaymentsidentityisgivenasBP=CA+KA+R

=0,whereCAisthecurrentaccount,KAisthecapitalaccount,andRisreserves.Thus,a

deficit inoneaccountmustbeoffsetbyasurplus intheotheraccountorbyadecrease in

reserves,sinceCA+KA=R(thedomesticcurrencymustbepurchasedfromabroadusing

14. Mytreatmentofthebalanceofpaymentshereisageneralone.Itisconventionalininternational

economicstodisaggregatetheelementsofthebalanceofpaymentsfurtherthanIdohere,thoughdoing

sowouldonlyservetoobscurethetheoreticalclaimsIwanttoadvance.Foramoredetailedandtechnical

treatment (including a discussion of alternative approaches to thebalance of payments), see Pilbeam

(2006).


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22

foreign exchange reserves). A current account deficit mustbe offset eitherby a capital

account surplus or a fall in reserves. Conversely, a capital account deficitmustbe offset

eitherbyacurrentaccountsurplusorfallinreserves.Theidentityofthecurrentaccountis

CA = X M + U, where X is exports of goods and services, M is imports of goods and

services, and U is net unilateral transfers from abroad (receipts minus payments). The

capitalaccountisgivenasKA=KIN+KOUT,whereKINiscapitalinflows(oranincreasein

nonresidentsholdingsofdomesticassets)andKOUT iscapitaloutflows (oradecrease in

nonresidentsholdingsofdomesticassets).

Toclarifytheissuesatstake,considerthecaseofcapitalflightoutofaneconomy(or

more precisely, out of its currency and assets denominated in that currency): capital

outflowcreatesabalanceofpaymentsdeficitwhichmustbeoffsetby: (1)drawingdown

reserves(R

0, M 0). This is how balance of payments adjustment is

conventionallydepictedasrequiringdownwardsbalanceofpaymentsadjustmentbythe

debtor. Alternative courses of action exist, however. The creditor can: (1) increase its

reserves(R>0),appreciateitscurrency(X0),orloweritsdomesticinterestrate

(KOUT>0).Isonemechanismpreferablefromthestandpointofjustice?

I submit that the parties to the contract would in fact endorse a principle that

creditors and debtors ought to share in theburden ofbalance of payments adjustment

according to theirsocietiesrespectiveability to inflateanddeflate.AsRawlswrites,the

partiesintheoriginalpositionareassumedtoknowthegeneralfactsabouthumansociety.

Since this knowledge enters into the premises of their deliberations, their choice of

principles isrelativetothesefacts(Rawls1971:158).Giventhatthereconstructionofthe

originalpositioninvolvedbroadeningthedefinitionofthebasicstructuretoincludemoney

and finance, and that the autarky assumption was relaxed, the set of facts known to

individuals has changed. Permitting knowledge of a global basic structure marked by


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23

international capital mobility thus leads to a conception ofjustice that requires creditors

anddebtorstoshareintheburdenofbalanceofpaymentsadjustment.

This principle ofjustice forbalance of payments adjustments under conditions of

international capital mobility is consistent with the maximin principle that underwrites

Rawlssdifferenceprinciple.Thiscanbedemonstratedby imaginingascenariosimilar to

that presentedby Rawls in which the parties to the initial contract are presented with a

choicebetweenthreealternativebalanceofpaymentsadjustmentschemes.Forthisscenario

towork,weshouldalsoconceiveoftwoindicesonemeasuringthedebtorsocietysability

towithstanddownwardmovement intheprice level(deflation),andtheothermeasuring

creditorsocietysabilitytowithstandupwardmovementinthepricelevel(inflation).15The

first adjustment mechanism (d1) would require the debtor to deflate in order to achieve

balanceofpaymentsequilibrium(thenumbersinthetablebelowrepresentthedistribution

of costs associated with increasing or decreasing the price level to achieve balance of

paymentsadjustment).Ineffect,thismechanismplacesallofthecostsofadjustmentonthe

debtor with no adjustment (or cost) for the creditor. This, of course, is howbalance of

payments adjustment actually operates at present. The second adjustment mechanism

wouldrequirethecreditortoinflate(d2).Here,thesituationisreversed,withnodownward

adjustment (or cost) to the debtor. This situation is reminiscent of international financial

system of the late nineteenth century centred in London, which, as Keynes notes,

transferredtheonusofadjustmentfromthedebtortothecreditorposition(Keynes1941:

XXV,21).Duringthisperiod,aflowofgoldimmediatelytranslated itself,notinthefirst

instance into a change in prices and wages,but into a change in the volume of foreign

investmentbythecreditors....Thisinturncausedtheburdentobecarriedbythestronger

shoulders(Keynes

1941:

XXV,

30).

The

third

adjustment

mechanism

would

require

both

15. My argument heredoesnothinge on the specifics of how such indicesare madeoperational,

thoughwecan imagine that indicatorssuchasofficialreserves,aggregate levelofeconomicandsocial

developmentand theavailabilityofsocialwelfareservicesmightbe included.Whatmatters is that the

ability to measure a societys ability to deflate (or conversely inflate) in factbe measurable in some

fashion.


26/30

24

creditor and debtor to share in the costs of adjustment (d3), thisbeing reminiscent of

Keyness proposal at Bretton Woods for an International Clearing Union that would

requirethechiefinitiative[forbalanceofpaymentadjustment]fromthecreditorcountries,

whilst maintaining enough discipline in the debtor countries to prevent them from

exploiting theneweaseallowed them in livingprofligatelybeyond theirmeans (Keynes

1941: XXV, 30). So which mechanism would parties to the agreement choose? Denied

knowledge of their respective circumstance whether creditor (c1) or debtor (c2) in the

balanceofpaymentsthepartiestotheinitialcontractwouldchoosethethirdadjustment

mechanism (d3), as this decision represents the maximin solution under the conditions

described by the (amended) original position: it reflects the best worst outcome. This

hypotheticalscenarioissummarisedinTable2(cf.Rawls1971:153).

Table2:BalanceofPaymentsAdjustmentMechanisms

Circumstances

Decisions Creditor(c1) Debtor(c2)

Debtordeflates(d1) 0 100

Creditorinflates(d2) 100 0

Bothdebtor

and

creditor

adjust

(d3)

50

50

One should note that the difference principle does not require the creditor and

debtor to share the absolute costs ofbalance of payments adjustment perfectly equally.

Rather,itrequiresthattheycontributetoadjustmentaccordingtotheirrespectiveabilities

todoso.Thismeansthattheproportionofthecostsofadjustmentbornebythecreditoror

debtor wouldbe contingent upon theparticular circumstancesof the two societies i.e.,

howtheyscoredonthesocietalcostsofdeflationandsocietalcostsofinflationindices.We

canthereforeconceiveofsituationswherethecreditormakesthelargestadjustment,where

thedebtormakesthelargestadjustment,andwherethecreditoranddebtoradjustequally.

ThesedifferentscenariosaredepictedinFigures1,2and3,respectively.


27/30

Fig.1:Balanceofpayments

adjustmentwherethe

creditormakes

thelargestadjustmen

t(ABO>BCO)

Fig.2:

Balanceofpayments

adjust

mentwherethedebtormakes

thelar

gestadjustment(ABO

Documents

Global Finance and Global Justice