Who Runs the Economy? William Keegan and R. Pennant-Rea (TempleSmith £3.95) The ideal reader of William Keegan's and Rupert Pennant-Rea's excellent account of the influences and institutions behind British economic policy decisions is one of those highly intelligent scientists with a neat pointed beard, who get out of the train at Didcot. Such a paragon of a reader would have a knowledge of economic affairs gained from a casual glance at the papers, and no commitment to any particular theories, but would wonder why the handling of this area was such a mess. Such a reader ought to conclude from this modest, witty and factual study that the British economy cannot be run: that while an individual undertaking can on rare occasions be .directed according to a central strategy, it is a philosophical confusion to apply this to the system comprising the totality of all +enterprises.
Whether the authors of Who Runs the Economy? would agree with this conclusion, I am not sure. They concentrate on describing bodies such as the Treasury, the Bank of England, and the other parts of the economic establishment and then explaining how they have reacted to events. The most telling comments are highly specific: Worried about the level of Japanese car exports, the Government and the British motor car industry had secured a voluntary agreement from the Japanese industry that they would restrict the level of their shipments to the UK. But even with the agreement, and against the background of the worst recession since the war, British Leyland managed to move only a handful of Rovers off its assembly line during August 1977.
The very obvious sympathy of the authors with the plight of officials faced with impossible demands from public and politicians, makes their descriptions all the more damaging. One day Sir Lunchtime O'Corridor is saying, 'This policy will work out all right, Thank God we've got the Minister under control.' Some months later the same man complains: 'You fellows don't realise. I am entirely in the hands of Ministers.' Or he may emerge from a meeting or a particular announcement feeling that a historical decision has been taken, only to wonder six months or six years later what all the fuss was about — a fuss he might well have generated himself.
Whether or not Governments run the economy, they certainly run their own affairs in a bizarre way. After a series of Cabinet Meetings in 1976 had painfully worked out the details of a £1 billion reduction in public spending for the following year, the Chancellor, Denis Healey, doubled the size of the package 'at a stroke' by announcing to his colleagues unilaterally and at the last moment a £1 bn increase in employers' National Insurance contributions. Before arriving at Didcot our scientist will have learned that while expenditure concerns the whole Cabinet, revenue is an esoteric mystery handled by the Chancellor alone.
The diligent reader will learn about STEP — the Committee on Short Term Economic Policy — and OXY — the one On eXtemal economY, as well as the aptly named BONZO. The latter discussed the Benefits of North Sea Oil in 1975-7, during the very time that the economy was making its own decision to 'dissipate' these benefits in a consumer boom. As part of the silly game of perplexing the outside enquirer — so much more fun for the Cabinet Office than actual policy — all these committees will have been renamed after the change of Government. But they will still be there, 'superficially covering the range of options but, because of their shared assumptions, leaving out some options altogether, and ensuring that the paper they present comes down subtly in favour of their preferred approach.'
Perhaps it is riot surprising that when the Treasury discovered its impotence to influence output and employment by so-called tough or giveaway Budgets, that it turned to the misnamed industrial strategy, 'the only weapon we have left in the armoury'. Fortunately or unfortunately it was not a weapon; nobody ever explained what it was, and Eric Varley, to give him credit, was always embarrassed when he had to use the expression.
But the real heart of the Treasury's advice is still the National Income Forecast — which now attempts to forecast the effects of its own publication on the economy. So far from this being a cold-blooded scientific exercise, there are meetings and seminars at which assumptions are changed, equations altered and the message massaged. 'These are the crucial stages, when economists and officials are not too forthcoming with Ministers.' Nevertheless, 'experience suggests that even the most hardened sceptics are somehow bowled along by the excitement of the new forecasts into taking them more seriously than they may subsequently wish they had. This applies to Ministers, officials and commentators.'
It is incidentally not much use newly elected Conservative Ministers simply say ing that they are sceptical of such forecasts, unless an alternative method of taking decisions is provided. An illustration of the unpreparedness of newly elected Govern ments in this respect was provided during a recent conversation I had with some distin guished economists, who had the ability to see through the forecasts technically and provide such an alternative basis. These men had had a very enjoyable dinner with leading Conservatives when the party was in opposition. 'But', they said, 'there was one thing we did not find out : who are the economists outside Whitehall and the party machine whom Conservative leaders respect and consult?' They were astonished to hear me reply : 'You are those economists and that dinner was the consultation.' We learn too why there were no real tax cuts for skilled workers and managers in the 1978 Budget, the one occasion when the last Labour Government was in a sufficiently good budgetary position to do this without making offsetting cuts in public spending. The TUC, however, was in favour of a reduced rate band of income taxed at 25 per cent; and Callaghan and Healey were preoccupied with the next round of incomes policy which, in the words of a Treasury official, meant 'keeping the TUC happy'. Thus we did not have the tax cuts Ministers and officials would really have preferred, but those the TUC wanted. Nevertheless incomes policy still broke down in a spectacular fashion last winter — which led • straight to the election of the present Conservative Government. So now not even the TUC is happy.
Those who think that things would be better if Central bankers had more power relative to politicians and union leaders are reminded that 'the full weight of the Bank of England's technical expertise was thrown behind magnificent technical rationalisa tion, that things were really not so bad' during the Heath-Barber monetary explo sion of 1970-3. Nevertheless after the even tual adoption of monetary targets by Mr Denis Healey nota berie, not any Conserva tive Chancellor — the case for which 'many senior Treasury men were persuaded of with reluctance, if at all' the decision was seen as a triumph for the Bank.
The irony of it is that the financial press is itself part of the system. As Keegan and Pennant-Rea write, `the life-blood of the economic commentator is his contact with the economic policy machine', against which I have written in the margin — 'and trap'. One Treasury official is quoted as saying, 'When I talk to an economic journalist, everything I say is written with an awareness of its effect on the gilt-edged and foreign exchange markets', against which I have scribbled 'We know this'.
As the authors pay a generous tribute to my own role as a fly in the ointment, perhaps I may make a minor correction. Where the text says that I became 'increasingly sceptical of the Heath-Barber growth experiment', I have crossed out the word 'increasingly'. More seriously, they write that Peter Jay and I 'Would be the first to admit that their essential contribution was not so much original diagnosis, as the giving of prominent support to the ideas of their mentor, Milton Friedman'. This is not in the least how I conceived my role. It may seem arrogant to say this, but Friedman's writings were of value to me mainly as an aid in forming my own diagnosis, which I always thought through for myself.
Who Runs the Economy? ends, refreshingly, not with a set of policy proposals, but a cyclical theory of who does influence policy. In the early phase of a Government manifesto commitments (and in the case of a Labour Government, union influence too) are paramount. As things begin to go wrong, the official machine acquires more influence. In the final phase, it is overseas financial opinion, often but not always manifested through the IMF, which becomes paramount.
This is as good a theory as we are likely to find and a vast improvement on simpleminded conspiracy explanations. Two reservations may be expressed. First, union influence is understated. The TUC may have failed to persuade Chancellors `to go for growth' — an option they po longer have, in any case. But it has been a dominating role in union law and labour market policies — who may employ whom and on what terms. Such policies having done more to raise unemployment than any Treasury refusal `to expand demand'.
Secondly, what will take the place of the IMF now that, partly because of North Sea oil, Governments are more likely to worry about the strength of sterling than its weakness? This brings me to my major criticism : the uncritical acceptance of the establishment views that something called the 'balance of payments' — by which is meant the current overseas trading account — is the main constraint on growth. This was never true. The whole balance of payments, of which the current account is only part, balances in the foreign exchange market every day; a problem only emerges when the authorities spend (or gain) reserves to try to establish a rate for sterling different from the market-clearing one.
The mythical nature of the balance of payments constraint is becoming more obvious with the great increase in the inter national private capital markets and the willingness and ability of national govern ments to use them. IMF approval is now little more than a good housekeeping badge enabling governments to tap the much grea ter resources of the private market — fed among other things by the reinvested surpluses of the oil producing countries. The decision whether to borrow (or lend) over seas by governments is now much more akin to the borrowing and lending decisions of individuals and companies than it used to be. If there is no net lending or borrowing overseas, and a huge improvement in the oil account, then the UK balance in manufac tures is bound to deteriorate as almost an accounting fact, and this is not a constraint on anything. (The real constraint on policies for putting more 'demand' into the economy is the justified fear that they would produce not more jobs, but only more inflation).
If we do not like a non-oil current deficit, the remedy lies in net overseas lending —not borrowing. This could be achieved by abolishing exchange controls or, if that fails to do the trick, by the Government using its domestic borrowing to buy up a portfolio of overseas assets.
But from the point of v.iew of Who Runs the Economy? the balance of payments obsession is a good fault, because it is shared by nearly all the policy-making bodies and advisory institutes. It would be almost impossible for someone who thoroughly disbelieved in it to explain the thinking of economic policy makers, as he would want to argue with them all the time Bank of England publications are still trotting out the fallacy even as this review is published. Such fallacies are moreover by no means confined to governmental bodies. How many times, when nodding in lazy agreement with businessmen's strictures on say the Treasury, has it not occurred to me how very much worse our affairs would be if such critics were themselves in charge? The fallacy that economic advice depends on being able to forecast the future in any precise way is held more virulently by so-called practical men than by any Treasury official. This is brought home by the following incident: Some economic forecasters deserve to be treated with compassion. They do not regard themselves as competent to quantify the future, but are bullied to do so by non-economists who expect them to give a numerate performance. In the summer of 1975 I delivered a seven-hour presentation in London on the outlook for the UK economy to a group of mainly non Richard Clogg's Short History of Modern Greece', reviewed on 30 June by Taki Theodoracopulos, is published by Cambridge at £3.95 in paperback. British executives who had paid for this dubious pleasure. As the evening approached the audience became restless. It was pointed out to me that I had not yet predicted the future exchange rate of sterling in terms of the US dollar. I replied that 'if the UK inflation in the next 12 months would rise by a given percentage, if the volume of marketed North Sea oil would reach a prescribed level, if . then sterling in one year's time would be x dollars'. Some of my listeners could not conceal their disgust. Several stood up to say that they had come specifically to this meeting, and had waited patiently all day, in order to hear a 'scientific' currency forecast which would culminate in the unveiling of one future exchange rate. I was accused of not living up to their expectations by engaging in the barren exercise of outlining several options and predicting a number of future exchange rates. On that uncomfortable day I appreciated the lamentation of a financial editor: 'An economist without a forecast to his name is a sad thing to contemplate.' (Alex Rubner, The Price of a Free Lunch, reviewed by Robert Skidelsky on 30 June).
Adam Smith remarked: 'Them is an awful lot of folly in a nation', but the reader must decide for himself just how much his particular nation can stand. Maybe Who Runs the Economy? would have made more chereful reading if it had chronicled the development of the 'black' or 'unofficial' economy, whose achievements go unrecorded in the official statistics. ,