The end is in sight

Ralph Harris The economic situation is of course a good deal worse than the three partY leaders let it be known during the election. Not that they were — nil this occasion — deliberately Acnncealing the truth, because evi • ly none of them has grasped ,t,ne full measure of the reckoning mat lies ahead. Even Mr Heath, W110 was dubiously thought most srte jaillistic, talked as though it were Possible to master inflation Without a sharp rise in the phoney 11,11, employment figures which he 'unwed his party political broadcasters to to throw in the face of Mr Wilson.

r_Certainly, poor Mr Foot has no of the realities which, if he survives at the Department of ErnPloYment, must earn him the title as Minister of Unemployment. The plain fact is that an effective ,.13„eY against inflation must '-uuce total spending which will in 6`"rn reduce demand for output at TSing prices and so for the chief

41Ptit which is labour. There is no

c• ape from this dilemma along Mr aley's road of "reflation" since cannot stimulate demand for 'a0our without unleashing more -neY that must drive prices and "ages still higher. 6 So I take heart that the end is in Zgnt. At long last there is the

nsPect of killing off the post-war

Luillsion that politicians can man'Odle the economy to hit their full el11413,_loyment targets indefinitely j3k7`,Lnout paying a rising price in lance of payments deficits, a nking pound and accelerating Illation. There have been plenty of Warrii

ngs along the way, but with

• help of two devaluations, mas,8us7e foreign borrowing, worsening W„cies of go-stop, successive Tory st"u Labour governments have k_aggered on, forever promising uelter things after each election. cht cannot have escaped post-war la,,a,ncellors that what James Calr.„.611an once boasted as "finger-tip

of the economy" was not

tiltilire Yielding the intended results. tiL11` there was always the hope Wool at some new deus ex machina a cd do the trick. So we witnessed se'ertile and increasingly feverish atrch for novel spells, each with its pi`enclant magician: Macmillan's G,,ateau, Selwyn Lloyd's Neddy, w-iPrge Brown's National Plan, w.,_10 s technological revolution, va —4gWood Benn's IRC, and every n a ?t of incomes policy —volun4,7' involuntary and now imagin

The most reckless experiment — because its disastrous failure was predicted from the start — was Mr Heath's gamble on growth from 1971 which laid the power trail that led inexorably to the present explosion of prices and wages. By far the most depressing feature of the latest election was not only that Mr Heath and his colleagues (with one magnificent exception) failed to acknowledge the responsibility of their own monetary excesses for inflation, but that neither Mr Wilson nor Mr Thorpe grasped the chance to put the blame where it belonged. Mr Heath's refusal to see that a 20 per cent inflation in 1974 had anything to do with a 25-30 per cent expansion in the money supply in 1972 — after the customary two-year lag familiar in monetary textbooks — may owe something to a human tendency for protective self-deception. But since no one would attribute delicacy of feeling to Mr Wilson, we may conclude he refrained from blaming today's inflation on yesterday's monetary incontinence only because he fails to see the connection.

Unhappily, Mr Healey cannot look to his Treasury advisers to correct this fatal flaw in Labour's grasp of the causation of inflation. Indeed, one of the most striking lessons in Jock Bruce-Gardyne's impressive post-mortem on the Heath Government* is that Sir Douglas Allen, Sir Donald MacDougall and the other mini-mandarins persisted against repeated failure in thinking they could steer the economy between inflation and unemployment in the flickering light of short-term macro-forecasting. But even if the faltering Keynesians were replaced tomorrow by immaculate monetarists, there is no advice that could now help Mr Healey bring inflation under control without unpleasant withdrawal symptoms in the form of increased unemployment.

Thus the inherent contradictions in post-war policy, which has periodically surfaced in the alternations of go-stop, look like coming to a head in the biggest stop of all. It may be briefly delayed by "reflation" but only at the price of faster inflation which will compel a still more drastic shake-out. If all this seems like bad news, let me try to point to the victory we may yet snatch from the jaws of disaster.

'Whatever Happened to the Quiet Revolution? (Charles Knight £3.50).

So long as we understand how we sot into this mess, the end that is in sight need not be of the economy but of a dream, now turning into a nightmare. This dream — which for most of thirty years has diverted policy from reforming the market economy to make it responsive to changing needs — is nothing less than the notion that politicians, given enough power, can manipulate levels of employment, prices, investment, foreign trade, along a growth path leading all the way to what Dennis Robertson used to mock as a state of bliss.

Pursuit of this dream was always bound to require severe curbs over freedom for entrepreneurs, spreading as we now see to employees and consumers; but that did not worry the apparatchiks so long as the:, could select some statistic or other to show that success might be just around the corner. At last, believers in economic freedom can rejoice that by every test of rising prices, falling employment, sinking pound, crumbling standards of living and shifting shortages, their theoretical and empirical critique of collectivists control is being vindicated.

It is fitting that a Labour Government should preside over the rude awakening from Mr Heath's dream of perpetual growth because the policies he pursued were all profoundly, indelibly, collectivist measures which displayed no faith in the ability of lesser mortals to resolve economic problems within a stable, competitive market framework. Of course, the unions made things difficult and Labour was always ready to claim that there was a primrose path through the economic swamp by keeping left. But Conservative leaders who had understanding and faith in the market economy could have resigned — as Sir Keith did in effect retrospectively — and Labour would have reaped the whirlwind all the sooner.

In my view the electorate has got it about right. Labour at least believes it can square the circle with the help of its trade union allies. If — I would say when — they fail, the way will be opened up for a radically different approach from theirs — or Mr Heath's. The vast majority of thoroughly bemused electors can be forgiven for suspending judgement in the hope that one last resort to magic spells will achieve what all previous incantations have failed to do. For the advance guard who have seen through the illusion, there are a number of hopeful straws in the wind which may stand us in better stead for the future. The basic. ground for hope is that all the well-meant errors of postwar economic policy have not been confined to Britain and do not reflect the peculiar incompetence of British politicians. They stem from a single idea of J. M. Keynes, that Government could cure mass unemployment by regulating the level of demand in the economy. It was also Keynes who declared that ideas rule the world, and so it has proved with his original idea as perverted by his false followers into a prescription for a centrally directed economy which he explicitly denounced as the "homogeneous or totalitarian state." So we may take heart.

If ideas have legs, some may run into the sands and thereby make way for better ideas to take over. Thus ten years ago, Milton Friedman and his monetarists were mocked —in the Times I seem to recall — as "Friedmaniacs"; yet anyone who saw his recent BBC Controversy programme must have observed that he made mincemeat of the pseudo-Keynesians from Cambridge and the NIESR. Likewise, throughout the post-war period, Hayek has been ignored as the outmoded philosopher of the free market order; yet this very month he was elevated to the unexpected eminence of Nobel prizewinner.

Evidence that such unorthodox ideas were winning the intellectual ascendancy has for some time been visible in their impressive advocacy by such leading journalists as Samuel Brittain, Peter Jay, Patrick Hutber. Now we have Sir Keith Joseph following Enoch Powell in retailing them for wider consumption in the Tory Party and beyond. And, wonder of wonders, the penny has dropped with Tack Jones who last week stumbled on the essentially classical truth that unemployment could result from wages being too high, that is to say being above the competitive market level consistent with the avoidance of inflation.

Might we yet see Mr Healey embrace monetary discipline in place of the doomed social contract, and restore profitable employment prospects by abandoning price control and cutting taxation and government spending? If not, we may at last hope that his successor will be forced to adopt the free market as an idea whose time has plainly arrived, Ralph Harris is Director of the Institute of Economic Affairs.