ECONOMICS AND THE CITY
Revolt of the old boys' brigade
Nicholas Davenport The reason why I thought the FT equity index, having topped 350, should move up to 400 was because the institutional investors — the old boys' brigade in the City — had Clearly been moved by public criticism into buying more industrial shares "to help employment". I felt that the City boardrooms Would be particularly anxious to rePudiate the bad image left by Jim Slater who had said that the best Investment was cash — just when Unemployment had begun to mount.
The figures of market turnover Published by the Stock Exchange
for the second quarter of the year
showed that ministerial criticism had in fact stung the "institutions" Into market action. They had accounted for 42 per cent of the turnover in UK equity shares (and 39 per cent in the first quarter). The total net purchases of equities by the insurance companies, the pen funds, the investment trusts and the unit trusts had risen to £637 Million, which is nearly £50 million A week. If this aggressive buying Went on we could, I thought, be seeing a bull market and not a trading market. Unfortunately the old boys' brigade turned sour in the third quarter and stopped their aggres%ye buying. Whether this was due to the fact that they began to resent the ill-informed criticism by the left °r because they resented the fact that the prime minister was not Softening his gradual approach to the socialist state one cannot tell, but last week Lord Seebohm, the chairman of the FFI — the Finance for Industry organisation for which the Persuasive Mr Harold Lever had secured millions of City money — suddenly denounced the National Enterprise Board. He said that the NEB would open its doors to "a flock of expectant lame ducks". Behind it, he added, was the dream-like belief that private Industry could continue to support the vast overheads needed to achieve a planned egalitarian society. It is, I agree, becoming Obvious that with a budget deficit Of £12 billion and short-term debts abroad of nearly $10 billion the government cannot possibly fin
ance the overheads of a Clause 4 socialised economy, which is Labour's objective.
The importance of Lord Seebohm's outburst is that as chairman of FFI he is involved in the discussions about an equity banking operation which will come up at the Chequers 'summit' talk on the future of British industry. He put the private man's reaction to go-vernment interference in his business in blunt language. It is no use, he said, subjecting the private sector to a stream of threats and abuse while expecting it at the same time to continue delivering the goods as if nothing untoward had happened. The NEB was attempting to pick the winners to put British industry right but "could we believe that with the debris of thirty years of state planning around us the consequences could be other than ruinous"? The attack on the private sector in this country, he added, was without parallel in the western world.
This may be true but government intervention in the private sector has a long history and is not confined to this country. The IRI (Instituto per la Riconstruzione Industriale) was formed in Italy in 1930 to provide rescue finance for large numbers of lame ducks but went on to engage in all sorts of commercial and industrial enterprise and to take up speculative as well as social positions. It has become the darling of the British Left. In France the IDI (Industrial Development Institute) provides help to rapidly growing mediumsized firms, taking an equity participation for a limited period, and to whole branches of industry in depressed sectors. The French have, of course, a state-owned motor giant (Renault) and a couple of state-controlled commercial banks. Germany has not found it necessary to create a new state organisation because its government gives directions to the commercial banks which finance and have equity holdings in the big industrial companies. Japan is unique in having a Ministry of International Trade and Industry which actually directs the banks to finance the most competent firms going all out for export growth. Hence its amazing export success.
Now all these schemes of state intervention in commercial and industrial enterprise are designed to help the private sector, not to threaten it, as the NEB does under the Industry Bill. For what distinguishes the NEB from other similar bodies in other countries is that it is empowered to extend public ownership into the Profitable areas of manufacturing industry. In other words, it seeks to grab the profits in the most successful private enterprise.
The economists of Maxwell Stamp Associates — a think-tank for private industry — have produced an excellent paper which gives advice to the NEB on how to evaluate projects and select an investment portfolio. It is this latter objective which frightens me. The NEB has only limited resources — £700 million to begin with — and is already committed to finance such overweight lame ducks as British Leyland and Alfred Herbert (machine tools). As it is required under its statute to earn a reasonable rate of return on the money supplied by the Government — what on earth is a 'reasonable' return? — and as it will be immediately snowed under with losses, it will obviously be looking round to grab part of the equity in the most successful private enterprise firms paying good dividends. What, we may ask, is the net gain to the nation from that pilfering? The only gain is a political one — it extends the public sector into profitable private enterprise and so -makes a further step towards Clause 4 socialism, in other words, the communist state.
The idea that Lord Ryder is more competent to pick industrial "winners" than the private enterpreneur who is risking his own money obviously made Lord Seebohm and the old boys' brigade laugh and cry. But we shall all cry if the net result is a state grab of successful firms and a mere tinkering with the unsuccessful. NEB tinkering can never cure the British sickness which is simply a failure to get the workforce to co-operate in making new investment pay dividends. But behind that failure is another British malaise which has been exposed by two Oxford economists in the Sunday Times in the best diagnosis of 'What went wrong?' I
have yet seen. This malaise is the
steady growth under the socialist welfare state in the percentage of the national output which is not marketed and sold for cash. They put it at 61 per cent (pre-tax) and claim that it has produced wage inflation, a squeeze on investment and a decline in the balance of payments.Their detailed analysis is well worth studying. It supports the complaint made by Sir Arnold Weinstock in a letter to the Economist — that under Socialism there are too many wealth consumers and too few wealth creators. If only the Chequers summit could agree upon this vital point we might see the old boys' brigade in the City once again buying aggressively the shares of the wealth creators.
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