John Wood on a major economic fallacy
Why England Sleeps John Cockcroft (Arlington Books £2.25) Britain's Economic Prospects Reconsidered edited by Sir Alec Cairncross (Allen and Unwin £3.25) The ball and chain which has hobbled the British economy since the end of the war has, without doubt, been the so-called balance of payments.' It is therefore surprising how little is known about the bits and pieces that go to make up the whole. Largely because so many economists have fallen into the habit of 'thinking big,' i.e., in macro economics, or in terms of large aggregates, the BoP remains one vast undifferentiated lump.
As the source of our economic difficulties, the whole BoP problem is generally regarded as the inevitable result of Britain's steady loss of competitive strength since the relative decline of the economy began around the 1880s. Commentators naturally busy themselves composing their own favourite variations on the popular theme of 'What's wrong with Britain?' These two books are only the most recent from a long line of similar productions, all equally serious-minded, responsible, depressing — and wrong.
Let us pretend, for a moment, that this presumption of economic deline, is incorrect. Suppose that it reflects no more than a mistaken interpretation of British history, resting pn inadequate and misleading official statistics. Suppose, further, that once the figures are sorted out Britain appears in its commercial transactions with the rest of the world to have achieved not a deficit, but a handsome surplus, year in, year out, since the end of the war. This, we may imagine, could have been brought about by a substantial increase in invisible and investment income, and also by covering with our exports a larger proportion of our import bill than ever before. Thus the deficit on the whole BoP — effectively hidden by the official figures — would be not a commercial deficit, but a political and military one. This in turn would mean that the source of weakness in our BoP was not the private sector, which has nevertheless been notoriously restricted and prevented from expanding, but the government sector, which has not.
All this, if true, would of course make a powerful difference to the way one assessed Britain's growth and BoP record — and her economic policy. And it happens to be true. The analysis above is a crude summary of some of the findings of a recent book (reviewed by Mr Powell in The Spectator last week), Britain in Balance by Mr W. A. P. Manser, in which he re-examines the figures of Britain's trade and payments back to 1694. The results are a real step towards understanding Britain's position; they are also encouraging.
The sub-title of Mr Manser's book, 'The myth of failure,' inlikeic a revealing contrast to Mr CockCroft's sub:-title 'The economic decline and fall of Great Britain.' for which no evidence is offered, apart from the inefficiency of the London telephone service and the baggage system at Heathrow, and all that old stuff about British exporters not answering letters and writing them in English.
Preoccupation with such trivia does not establish the impending fall of the UK economy and spoils Mr Cockcroft's otherwise welcome plea for more competition, less taxation, fewer nationalized industries and an all-round reduction in the power and influence of the state. When, however, Mr Cockcroft says by way of summing up that "the present signs are clear: within a generation . . . at the most Britain will be poorer in income per head than almost all of Western Europe. Quite possibly it could be poorer even than Eire or Southern Italy" — then the reader is likely to suspect exaggeration. Why England Sleeps is a journalist's book, long on insight but short on analytical technique.
In contrast, the distinguished group of economists from both sides of the Atlantic who met in the summer of 1970 to reconsider Britain's economic prospects are long on analytical techniques but short on insight, to the point of myopia. This informal conference to review the findings of the Brookings Report on the British economy, originally published in 1968, was attended by the official economic establishment from London and Washington. Six senior economic advisers to the British government were present. The papers and the discussion which followed, edited by Sir Alec Cairncross, are now available in book form. They make disturbing reading. (With advisers like these, some will ask, who needs economic problems?) The central concern, of course, is the failure of Britain to grow and, throughout, the constraint is taken to be the balance of payments. The discussion of trade and payments, however, is particularly alarming. There is little sign of any intellectual curiosity to discover which parts of the balance of payments have behaved unsatisfactorily. They almost fall into the error of identifying Britain's merchandise account with the whole of the balance of payments. There is little reference to Britain's invisible income, no understanding that Britain runs a commercial surplus, and no discussion of the exchange rate as a possible constraint on growth. In his summing up Professor Cairncross blandly states, " The trade statistics, for example, confirm all too plainly the shortcomings of British industry in comparison with its Continental competitors." But do they? Where is the evidence? Or, is this assertion derived merely from the ridiculous concept (which this group takes seriously) of the declining share of Britain's trade in world manufactures? Is it really supposed that we shall manage to combine growing industrialization in other countries with an increasing share of world trade for ourselves? Disraeli showed the insight and foresight that these economists still lack when he pointed out "the Continent will not for long suffer England to be the workshop of the world," and that was 133 years ago.
Those of us who have lived through long years of spring, autumn, summer and winter budgets, controls on, controls off, endless variations of credit restrictions and purchase tax — inother words, all the nonsense of stop-go — may find it a touch complacent when the group concludes that demand management (for which many of them were responsible) has probably been just about right. That being their judgement, of course, it follows inevitably that since it wasn't them, then it must have been us. So there are the routine criticisms of the inadequacy of British management and the unsatisfactory behaviour of the unions etc. A report of one of the sessions reads, "It is clear that British industry has a problem of poor quality management." There are references elsewhere to lazy and inefficient businessmen. Government intervention is urged on the grounds that it is useful to put industries in the pillory. Unions are discussed in terms of bloody-mindedness. Public opinion and the press also come in for criticism. In his summing up Professor Cairncross says they "were often remarkably unsophisticated in their assessment of the situation" — a breathtaking comment, coming as it does just two sentences after his admission that "the picture that we have now of 1959 and 1964, for example, is very different from the picture that was current when the budget of those years took shape."
Many subjects are ignored. There is no discussion of money supply, of the distribution of investible funds, or of the level at which foreign trade might be expected to balance. Much is made of the central issue of the trend of productivity here and elsewhere. But the analysis is restricted to industrial productivity, thus excluding well over half the labour force and in particular those sectors such as distribution, farming, banking, and other services in which productivity has probably risen fastest.
Two final extracts convey some of the flavour of the conference, and explain why the book throws no fresh light on Britain's economic problems: "McDougall judged the little Neddies useful; at least people were still prepared to sit on them" (p. 199). And how should the British public, wearily trying to cope with inflation, react to this glimpse of post-war economic policy? " Price stability " — surely part of any consideration of Britain's economic prospects — "was not the object of policy in the sense that anything was done to bring it about" (p. 171).
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