Who are the guilty men?
Ralph Harris
Suppose we take a break from the Party political shadow-boxing that Passes for a mature democracy in action and ask who, if anyone, is responsible for the latest economic assault perpetrated on the poor old pound — with at least 15 per cent inflation generally expected this year. There would be a number of Charges on the sheet but all are subordinate to what might be summarised as economic arson — the setting light to the powder trail of inflation. A full-scale court °I inquiry would take time. Meanwhile, at the preliminary hearings any competent judge would dismiss from the case several popular suspects such as property speculators and oreigners, and put the trade union bosses on bail as accessories before or after the fact. On circumstantial evidence, the most hkely-looking incendiaries to be hauled up for questioning would certainly be Mr Heath, his ChanCellar Anthony Barber, and that unqaenchable prophet of boom, Peter Walker. ,There are now very few expert Witnesses who would seriously Challenge the empirical evidence Milton Friedman has assembled tr°111 many countries over long Periods of history, irrespective of trade union power or government controls, that 'nflation is always and everywhere a th2obetary phenomenon in the sense 'fiat it is and can be produced only by a More rapid increase in the quantity of Money than in output.
After consulting his customary advisers Mr Heath might plead that in the past when money supPly was momentarily cut back, prices went on rising; but his obtection would be over-ruled by reference to any standard monetarY text which emphasises under sorne such heading as 'lagged resP°Pse' that the first impact of a Change in the quantity of money is (ni the level of real output for up to nine months with the major effect on the rate of inflation tfaking nearer eighteen to twenty°Ur months to work through the economy. At this stage, the plight of the defendants would look distinctly shaky. After all since 1972, the Chancellor allowed the money Per to increase by more than 20 ,Per cent a year and yet was taken QY surprise eighteen months later When inflation started escalating beyond 10 per cent. Indeed, the 4, three leading exponents of the
gamble on growth can be shown by copious quotations to have gone on denying the danger signals up to December when the oil crisis gave them a temporary alibi for all that has followed.
By the autumn all the classic symptoms of inflation were plainly visible. Abroad, there was the sinking pound (which, please note, raised the sterling prices of im ported raw materials, etc) and the record balance of payments deficit (which, pray ponder, moderated the domestic inflation by export ing excess purchasing power to our overseas suppliers). At home, witness after witness called atten tion to spreading shortages, unfilled vacancies; lengthening delivery dates, quickening pace of price increases, and other familiar evidence of over-heating. Faced with the record, and remembering he is under oath, Mr Heath might go for a strong plea of mitigation. Had not his motive been of the purest? Faced with statistical unemployment approaching the million mark and anxious to dodge the old 'stop-go,' he decided to 'reflate' the economy in the hope that increased output would match the massive injection of purchasing power wnich culminated in a 'borrowing requirement' (i.e. over-spending) of £4,000 million in the Budget a year ago. Even when businessmen complained of labour shortages, Mr Heath remained mesmerised by the macro-statistics of unemployment. Hence, his oftrepeated grouse that the grand strategy for perpetual growth was being sabotaged by feeble industrialists who failed to expand output, investment and employment to keep ahead of inflation. The significance of this line of defence is that Mr Heath's misjudgement was shared by a large number of other accessories. For a start, Mr Wilson and his most vocal colleagues are immediately removed from the spectators' gallery into the dock. After exaggerating unemployment in 1972, they had welcomed the 'commitment to growth' — as had a very long list of gullibles headed by Mr Campbell Adamson and the CBI, to say nothing of such other weather-vanes as Lord Vic Feather and the combined TUC, Sir Fred Catherwood and NEDC, the ever-expansionist NIESR, Andrew Shonfield, Roger Opie and endless participants in The Money Programme and similar TV phoney inquests. Little better can be said of most leader writers (including, alas, the Economist), Michael Stewart and other trendy authors of Penguin Specials, and similar hindsighted pundits now shaking their heads over the collapse of the umpteenth experiment in forced growth.
Indeed, it is easier to single out the comparative handful of witnesses innocent of what Lord Robbins dignified as a 'crisis of intellectual error.' Among journalists, the most persistent warnings came from Graham Hutton, Paul Bareau, Samuel Brittan, Peter Jay (who wrote "The boom that must go bust" last May), and Patrick Hutber, with the Daily Telegraph, the Banker and The Spectator keeping their heads. When one outstanding independent banker, Walter Salomon, repeated a year ago his urgent warnings against inflation as the "arch-disintegrator of society," his book One Man's View was loftily ignored by the Times and Financial Times.
Among MPs the unwavering voice of Enoch Powell was echoed audibly only by Nicholas Ridley and a handful of Tories with some muted mutterings on the Labour benches. Among professional economists, a relatively small if growing number mostly associated with the Institute of Economic Affairs and the Economic Research Council have maintained a spirited campaign against monetary excesses, led by such outstanding champions as Alan Walters, Gordon Pepper and Harry Johnson.
When so few appear wholly exempt from blame and so many (including all three party leaders) seem still to need to learn the full error of their ways, the detached observer is bound to search deeper for the tainted source of 'intellectual error' which appears no less rampant among the Treasury knights than among the Oxbridge peers (Balogh and Kahn).
The trail would lead us back to the followers of Keynes who taught that governments could always mop up unemployment by 'fine-tuning' the economy and failed to see that insofar as the unemployed are immobile, have the wrong skills, live in the wrong place, insist through monopoly trade unions on uneconomic wages, or are better-off 'resting' between jobs, then increased monetary demand will drive up prices more surely than it will draw idle resources into production.
Confusers of counsels include the whole tribe of so-called 'labour economists' led by Hugh Clegg who have mostly shrunk from exposing the rigidities and restrictions of trade unions or the mechanism by which monopoly wage bargaining can price workers and firms out of business — unless governments obligingly float them off on a tide of rising inflation. Their sins of omission were inflamed by leader writers who beat their breasts about 'a million on the dole' when the lEA's How Much Unemployment? would have shown Mr Heath that it was largely a phantom army which could not be conscripted by old-fashioned Keynesian-type monetary expansion.
With so many guilty men, a strong plea for mercy might temper the verdict on the Conservative inflationists to a suspended sentence. Next week I shall review some of the far-reaching changes necessary to put an end to inflation. And you, dear reader, will have to judge what relevance the three parties' policies have to this central issue for the stability of our economy and society.
Ralph Harris is Director of the Institute of Economic Affairs.
Nicholas Davenport is abroad, but denies he is the rat that left the sinking ship.
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