Economics, yesterday and today
Who are the radicals now?
re-ven took up hunting myself but not too seriously. On one hunt with the Old Berkeley I was about to take a fence when a lady, swearing loudly, rode her horse in front of mine. I pulled up, cursing also — one quickly imitated class habits — and gave the horse a kick. Before I was ready, it cleared the fence and sent me sailing over its head in a fine parabola. I heard a crunching sound and thought my neck was broken. I had landed on my top hat which was crushed flat. I was covered in mud and blood — the bridle bit had actually gone through my cheek — and was semi-conscious when I heard the loud voice of a City gentleman calling: "Take hold of your bloody horse; I can't hold it all day." — Nicholas Davenport: Memoirs of a City Radical (Weidenfeld and Nicolson).
Is there such a thingas economic radicalism, distinct from opposition to capitalism as such? Suppose one happens to believe that a market system, with a substantial capitalist element, provides the best prospect both for prosperity and freedom, is there anything left about which to be radical? The question is particularly acute if one is now more turned on about equality than about ra 011ie ownership.
There is, of course, no particular virtue in radicalism for its own sake; nor is there any a priori reason why the economic system shopld be the best outlet for reforming energies. To regard every example of man's beastliness to his fellows as just a symptom of capitalism is a convenient excuse for not fighting particular evils when they occur. I can remember a play by Arnold Wesker (was it Chips with Everything?)in which an unfortunate conscript
was subjected to sadistic punishment because, for all his efforts, he could not carry out some aspect of military routine. Friend and foe of the play, right and left alike, took it to be a metaphor about capitalism. This was a convenient evasion of the nastiness of the particular incident, which if it did have a wider moral, related to the feudal-militaristic element in British culture,' which antedates capitalism — and which is also illustrated in my opening quotation from the autobiography of this journal's distinguished City commentator.
Nevertheless many economic observers who have accepted capitalism as such, have felt that the direction of British capitalism by our rulers was so scandalously inept as to provide ample outlet for reforming zeal without their having to wander into other fields. Lord Keynes was, of course, the prototype. Mr Nicholas Davenport has thought this for more than fifty years and bemoans the continued lack of 'creative imagination' among our rulers in the near three decades which have elapsed since Keynes died.
When Davenport's book appeared last year, it received much well deserved praise for the all too human glimpses it showed of Labour politicians, City figures and academics at work and play. Dull would he be of soul who could not share in the writer's delight in his country retreat at Hinton Manor, or enjoy his comparison of its original Puritan master with the new Levellers who enjoyed hospitality there. Devoid of feeling would be anyone not touched at finding Hugh Dalton's personal wealth all invested in his own ill-fated 'Daltons' government stock issued in his cheap money drive). When he left office and Davenport took over his portfolio, Davenport sold them (Daltons) at 75; today they are at 15. But it IS now high time to look at Davenport's basic message and ask how far one can agree with it.
This is a particularly challenging question for me as I was a founder member of an economic ginger group which met in the early 'sixties. It was less City-based, much less industrious and far shorter-lived than the ones Davenport describes; but there was a very broad affinity of aim. For if there was one objective which all of us shared with each other and with the earlier groups, it was to move out of a situation in which wherever the British economy showed signs of expansion, it was held back hY restrictive financial policies. Our common bond was a sort of monetary radicalism. It was probably the 'September measures' of .Peter Thorneycroft in 1957 (which included raising Bank rate to the unheard of and monstrous height of 7 per cent), which originally sparked off the spirit of rebellion. The shock of these measures, and the accompanYing words, to a Keynesian-educated generation, if it took its teaching seriously, is novi difficult to recapture. It was not so much that Lord Thorneycroft talked about the Quantity 0' Money, then so unfashionable, but that he was proposing to depress business activity, which was already going off the boil, and prepared to let output stagnate for the sake of a symbol, 'the pound sterling'. It took, however, the subsequent restrictive package, that of SelwYn Lloyd in 1961, to get us to come together and argue over dinner with politicians, civil servants, central bankers and other hardened characters. The idea came from David Howell, then an economic journalist. Other members were Andrew Shonfield of Chatham House, William Ftees-Mogg, then not yet editor of the Times, and Nigel Lawson, then a City editor. We had two other members, Richard Bailey of PEP and Arthur Winspear of Warburgs, who were shrewd enough not to become identified with any particular doctrine. Peter Jay could not be a member of the group in its heyday, as he was a Treasury official, but spiritually he was one of US. When I was writing my book on the Treasury, Jay came to see me in my first floor room in my father's house in Anson Road to emphasise the futility of the proposed split between the Department of Economic Affairs and the Treasury. Later when Lawson was braving the wrath of the Grocer by campaigning for devaluation in this journal, Jay contributed a pseudonymous article as an ex-official showing that Britain was a suitable case for devaluation treatment.
A brief attempt was made to revive the group in the late 'sixties at the behest of the Treasury, which wanted to establish informal contacts with economic writers; but the past could not be recreated. The common ground which had united us was largely exhausted with the achievement of the 1967 devaluation. Special issues such as sterling, the East of Suez presence or British support of President Johnson in Vietnam, which drew people together across party lines, had given way to the old drearily familiar left-right issues, and there was little we all wanted to press together. Of course, even in our heyday, we differed, in emphasis. Lawson and Jay had been philosophy sPecialists in Oxford who had later turned to economic writing. They were moved mainly by 'the absurdity of not applying what seemed known and obvious remedies for a payments deficit out of regard for arbitrary numerical latios such as the exchange rate or the price level. This was basically my •own attitude, although I am Oxford only by incomplete acloPtion. Shonfield, Rees-Mogg and Howell were more positive, the first two condemning st°13-g0 policies more for their effects on investment than on demand in general. R ees-Nlogg and Howell were least keen to dethrone sterling and I remember Rees-Mogg ,r,eillarking that he was "less inflationist" than ;ne rest of us. Shonfield was less `macro' and L°ved to ridicule free market doctrine. But we Were all against everything that was summed iun, quite unfairly, by the name of `Selwyn LJoyd'.
Who would have thought that, with perhaps °ne exception, all the writers and talkers in this __1'°11P would have switched in less than a decade to the 'sound money' side? By this I and that we no longer see a road to growth Ind high employment through expanding money demand; and although our views on the Pros and cons of living with inflation' may M..tfer, we would recognise that a tight control °It government borrowing and credit creation is atee. necessary merely to prevent inflation accelerating out of control. This means that the hostile attitudes to `dear money', which reverberate t_ltr.cligh Davenport's memoirs would no longer strike an echo with a younger but less robust groliP of ex-monetary radicals. While Davenport maintains that high interest rates are not a cure for inflation, modern _Monetary doctrine maintains that inflation the symptoms high interest rates; and to suppress symptoms would make the disease worse. Then, while it is easy to agree with Davenport '" condemning the cycle of economic 'stops'
followed by excessive `go', most of us would now say that the underlying error since the war was too much monetary expansion, and doubt if any kind of understanding With the TUC on incomes would have compensated for this bias.
If some version of monetary orthodoxy is correct, why then did it take so many of us so long to see the light? Or, to put it the other way round, why has the flirtation with monetary radicalism of a post-Davenport generation proven so transitory?
In sketching an answer, I can speak only for myself. Irrationality and a desire to stifle criticism persisted for many decades as unappealing characteristics of English sound money men and thoroughly put me off. Davenport recounts how opposition to Montagu Norman's ill-fated return to gold at the pre-war parity in 1925 was 'not on' for City gentlemen and tells of a dinner over thirty years later at which in 1987 'Foxy' Falk, an old-time City radical, argued, "Better fifty years of inflation than a cycle of decay." The late Sir Leslie Rowan, the visiting Treasury knight, was so shocked that the meeting broke up abruptly. One of my earlier journalistic memories is a press briefing in the winter of 1958-9 when sterling became 'convertible' (for foreigners not for British residents — which is still the position). A colleague who asked what we gained by the operation was greeted with an embarrassed silence.
In this environment it took time to appreciate that there was a snag in the radical case which had nothing to do with the sacredness of sterling or good behaviour in the City. The real answer to the monetary radicals is that you do not avoid a cycle of decay or obtain a cycle of prosperity through fifty years inflating. To this day most `self-confessed monetarists' have failed to explain why not. Not surprisingly; since the arguments were only stated — in a form which could persuade a post-Keynesian generation — by Milton Friedman in the late 'sixties, and the basic contention is referred to by such off-putting names as the `accelerationist hypothesis', the 'natural rate theory', the `vertical Phillips curve' or the `expectationsaugmented Phillips curve'. Yet if people in bodies such as the Centre for Policy Studies and the Institute of Economic Affairs are to understand their own case they must come to grips with the Friedmanite theory of unemployment and inflation. Perhaps it should be called the 'new-old' orthodoxy. Although counter-revolutionary in character, it aims to retain some of the insights of the Keynesian revolution without the fallacies.
One of the conclusions of the new-old orthodoxy is that there is little or no permanent gain to output and employment from unsound finance — and probably much eventual loss. But once folly has been committed and we are landed with a higher or more rapidly rising cost level than our competitors, we compound our folly if we try to prevent the exchange rate from falling. The financial establishment was right about the dangers of inflationary finance; but the radicals were right about the danger of pegging the exchange rate and the long term damage this might do to British competitive power. Yet the radicals succeeded in gaining control over domestic finance, while the older establishment has for long periods succeeded in preventing or delaying the required depreciation of sterling. So we have had the worst of all worlds. Indeed, many so-classed Keynesians have now abandoned Keynes's own belief in floating exchange rates and made common cause with the old establishment to form a new orthodoxy based on incomes policy and
propping up the external value of the pound, which is a very depressing prospect indeed. So perhaps there is still something to come together to oppose.
By concentrating on overall economic management, I am, however, in danger of neglecting other ,hreads which loom larger in Davenport's own critique. For decades he campaigned for a 'National Investment Board' to make the private sector "more efficient as welll as more prosperous". 1 can see how there might be gaps or periods of crisis in the capital market. But 1 cannot see why such a board should be able to spot investment opportunities which have escaped people with a financial interest in finding them. Davenport's own draft proposals of 1932, reprinted at the end of his memoirs, nevertheless seem very mild and permissive compared with the brief of the National Enterprise Board.
Much more interesting to my mind is Davenport's concern to heal the alienation of the manual working classes from the profitmaking system. His proposed state unit trust might help to publicise the opportunities for equity investment already provided by the existing funds, yet would hardly revolutionise the situation. It is surely far better than the fashionable proposal to give workers a stake in their own concern. Mixed equity holdings would avoid the danger of putting people's wage and property eggs in a single basket and creating even further pressures towards protection of industrial lame ducks. If there is to be a legal redefinition of property right in favour of wage-earners, it would be far better to give workers a dispersed interest in the success of the whole private enterprise economy than to make them shareholders in their own companies. Either kind of transfer of ownership would, let us not forget, be a legalised confiscation of existing shareholders' rights and should not be provided without something in return — which I suggest should be a diminution in union monopoly privileges, reversing the recent legislative trend.
Yet although 1 am all for trying any available expedient to reduce conflict and tension, I cannot see a competitive capitalist system ever becoming a popular cause. To understand how a high (relative) price can set in motion' forces which will remedy a shortage, or that jobs 'lost' in a particular sector will be automatically recreated elsewhere, given a sensible monetary policy and a competitive labour market, requires a rare intellectual and imaginative effort which most people do not have the incentive to make. The case for competition and the price system — as distinct from private ownership and traditional differentials — is as alien to most conventional middle-class Conservative voters as it is to trade unionists. It is only in very occasional periods, such as that of the Anti-Corn Law agitation, that the case presents itself in a way easy for electorates to grasp.
Indeed, the whole virtue of decentralised markets — compared with five-year plans, or incomes policies, or workers' co-ops — is that they do not require mass enthusiasm to operate. The absurd results of intervention, whether of the Heath, Wilson or Jack Jones variety, provide the best, if fragile safeguard for freedom in the economic sphere. If the blinkered ruling `establishment' which Nicholas Davenport denounces early in his memoirs and the sub-Marxists whom he denounces in the last few pages are to be defeated, it. will be through their own absurdities and failures rather than through enthusiasm for a rational system.