Laffer took up an assistant professorship at the University of Chicago Graduate School of Business in the fall of 1967. His dean was George P. Shultz, the future presidential Cabinet member. On leave his first year at the Brookings Institution, working with his adviser Emile Despres and the Institution’s Walter Salant, Laffer wrote the central paper of his early career in economics. This was “An Anti-Traditional Theory of the Balance of Payments Under Fixed Exchange Rates.” The paper countered the “tradition” of arguing that economic growth leads to a “deterioration” in a country’s balance of payments.
As Mundell had introduced in “Growth and the Balance of Payments” (1966), if one country grows more than others, it will both demand more goods from other countries as imports as well as demand more money from the global money system, because savings are higher. Laffer took this insight and elaborated it into a full model.
The consequence was a series of equations showing that the relative growth of a country will lead to more imports over exports, to be sure, but as well a rush of capital and investment into the growing country. It will import more money and capital than it will send abroad via new import spending. This paper, which though presented only in “workshop” form in seminars at Chicago and elsewhere, and never published, occasioned a school of thought in the 1970s. This was the “monetary approach to the balance of payments” as surveyed in Laffer’s colleague Harry G. Johnson’s book here.
Find the “Anti-Traditional Theory” paper of Laffer’s here.