24 FEBRUARY 1967, Page 6




I argued last week that, in their politically crucial quest for an economic policy, it is not enough for the Tories to settle for the liberal platform of less state interference. The size of the public sector, the nature of the modern eco- nomy and—above all—the lessons of the 'thirties together ensure that, whatever happens, there must remain a major Government role in the management of the economy. The important question in the formulation of Conservative eco- nomic policy is what that role should be.

SO far as the short term is concerned, it is generally agreed, right across the political board, that the state should intervene at any rate to maintain full employment, to prevent undue inflation and generally to iron out so far as is possible the fluctuations in the trade cycle. Nor is there a fundamental difference between Con- servatives and Socialists about how this ought to be done. But once this short-term intervention has been achieved—and even this is a good deal easier said than done—the question arises whether it is desirable for the state to intervene further in order to influence the long-term de- velopment of the economy. A government might be tempted to do this for either of two reasons: it might wish to make the economy as a whole grow faster than it would otherwise, or it might want to shape the future growth and de- velopment of the economy in a particular way, or of course it might want to do both.

Deliberate state intervention for either of these long-term objectives is what is sometimes called economic planning, and there is, or at least there should be, a basic difference of emphasis between the two parties at this point. For the Socialists, determining the future shape of the economy is as important an objective of planning as economic growth itself. Not for nothing does Mr Wilson quote ad nauseam the Bevanite dictum that the language of priorities is the religion of Socialism. Nor is it a matter simply of priorities within the public sector or even of the balance between public and private. Within the private sector itself there tends to be a distinct Socialist pecking order, with striped toothpaste and similar decadent manifestations of the so-called candy-floss economy (such as foreign travel, shops and offices) at the end of the queue. By contrast, the Tories should insist that for them it is economic growth alone that is the overriding objective of long-term state intervention in the economy, and that consumer choice expressed through the market rather than paternalist planning should determine the actual shape of the economy.

To declare that faster economic growth should be the core of Conservative economic policy may seem somewhat bizarre. Was this not—after all —ostensibly the platform on which the Labour government climbed back into power in October 1964? So it was, but by its policies and performance since that date Labour has ceased to have any prescriptive right to call itself the growth party. Nor need the Tories be ashamed that economic growth was proclaimed the guiding principle of the Conservative govern- ment during the Chancellorship of Reginald

Maudling. The true cause for concern is that Tory economic statements since October 1964 have placed so much less emphasis on this objective.

There are some Socialists, even today, who do their best to maintain that there is somehow a natural connection between economic growth and Scicialism. The Labour economist Paul Streeten, for example, has recently written that the 'Republicans in America and Conservatives here have written an honest currency on their banner while the Democrats and the Socialists have given more weight to economic progress.' Whatever validity there may be in the trans- atlantic side of this antithesis, it is certainly a travesty of both historical truth and recent events in this country and one which the Conservative party, if it is to get back into power on its own merits, must wholeheartedly repudiate. It is abundantly clear that, quite apart from the in- hibitions it shares with the Conservatives, but more so (such as the need to placate overseas bankers), the Labour party is prevented from a total commitment to policies of economic growth by, as I have already mentioned, its obsession with the particular shape that that growth takes, as well as by considerations of so-called 'social justice,' by a desire to weaken certain institu- tions and classes and groups of men who play a large part in maintaining economic expansion and by an egalitarianism too often prompted by envy.

But Socialism apart, what is the basic obstacle at the present time to pursuing a policy of ex- panding the economy as fast as our physical resources allow? With monotonous regularity Chancellors of both parties have expressed our fundamental economic problem as one of trying to achieve expansion without inflation. If we really were dedicated to the total elimination of inflation—to prices not rising at all—then no doubt there would be a basic conflict with faster economic growth. But if, as is surely more reasonable, we are to confine. ourselves to the more modest aim of keeping the rate of inflation within tolerable bounds—creeping rather than galloping, and in particular in line with the rates of inflation among our main com- petitors overseas—then it is difficult to believe that (once we have reached a sound competitive basis to start from) this is the root of our problem.

Experience shows that wage rises (or, to be more precise, increases in take-home pay) occur because of a combination of institutional factors and the pressure of demand for labour. The first is more or less constant. Incomes policies can have a measurable short-term effect when transmogrified into short-term pay pauses or wage freezes, but in the long run voluntary in- comes policies are without economic significance and compulsory ones politically intolerable.

Many Conservative politicians, industrial 'statesmen' and City figures have therefore accepted the fashionable belief that a lasting increase in the average unemployment percentage (from the 11 per cent of 1957-64 to, say, 2 or 21 per cent) is the answer to all our problems; and this involves them in tacit and embarrassed support for what is in truth the only effecti'.e plank of Mr Wilson's economic policy. They forget that, so far from being a new idea, this was tried by previous Tory Chancellors -- Thorneycroft in 1957, Selwyn Lloyd in 1961— and failed to come off. There are many reason, (by no means all of them electoral) why pre- vious Conservative governments were unable to run the economy at a slightly higher unemploy- ment percentage without overshooting the mark and then reflating too much and too late, and there are no grounds for supposing that they are anyiless valid today. Nor, incidentally, in spite of the ingenious arguments of Professor Paish, is there any real evidence to suggest that the small rise in unemployment advocated, even if achieved and controlled, would de the trick.

The time has surely come, even from the point of view of inflation, to concentrate more on the productivity side of the equation. In spite of the rapid acceleration during 1965-66, it is a striking fact that industrial earnings in Britain in the 'sixties have in fact risen less than in France and substantially less than in Germany. Our competitors, however. have been able to more than offset this un- favourable factor by enjoying a more rapid rate of productivity growth.

No, our problem is that, taking the trade cycle as a whole, even with our present modest raze of economic growth, with an average level' of unemployment that is by no means abnormally low by European standards, and with an average rate of wage increase that is by no means inter- nationally excessive, imports have a persistent tendency to rise faster than exports. We are, a, a nation, uncompetitive in the only economical!, meaningful sense of the word-: namely, that if we are to expand our national wealth at the rate of which we are physically capable, and given our irreducible need to maintain a level —not necessarily the present one, although hardly much lower—of government military and aid expenditure overseas, then our balance of payments is in deficit. And, if anything, that deficit has been increasing from one econornc cycle to the next. It is also abundantly clear tIW. as Mr Jay has correctly implied, however we may manage to muddle along at present, we could not possibly face the cold douche of free

competition with the Common Market countries and the obligations of their common agricultural policy without a radical improvement in our underlying balance of payments position first.

It is not my purpose here to try to identify. the determinants of growth—investment, inno-

vation, incentives and so on—and assess their relative weights. My contention is merely that our balance of payments problem has repeatedly held back growth, and that therefore if this can be cured then, ceteris paribus, we should be able to expand faster. Put another way, it seems to me reasonable to suppose that government measures deliberately designed to hold back growth in the short term will, if used often enough, have a deleterious effect on growth in the long term. It is not necessary to argue here whether the long-term consequence occurs be- cause expansion is erratic, rather than steady, which is damaging to business confidence and investment; or because initially unremunerative activities like the opening-up of new export markets are the first to be axed in hard times; or because there is a tendency to a perverse and inefficient management of the economy—deflat- ing and inflating too much too late; or because government-induced recessions always hit the most dynamic and growth-minded firms most. The onus of proof rests rather with those who seek to argue that recurrent applications of the brake on balance of payments grounds have no effect on long-term expansion. In sum, I believe that it should be a central core of Conservative economic philosophy that the role. of the state is not primarily to provide an engine for expan- sion—that is inherent in man himself—but rather to remove the obstacles to faster growth; and that at the • present time the biggest obstacle is our chronic balance of payments weakness.

This will not be cured, and certainly not within the desperately short time available to us, merely by the remedies of the last Conservative mani- festo—encouraging competition and reforming the trade unions. (Conservatives above all others should devise policies that assume that people will behave as they have always behaved, not as the government would like them to behave. Radi- cal polices will only work if they are conceived in terms of a conservative people ) Nor, again, will it be cured by the panaceas of the present Government—whether the wage-price circus or the Selective Employment Tax. It will not even be cured by unemployment, which can only achieve a breathing-space until expansion is once more resumed—and a breathing-space, moreover, which for electoral reasons will never be long enough to enable the structural changes which some people expect from it to occur.

Of course, -a great many directly 'structural' measures are possible to improve efficiency at every level. The list has long been a political commonplace: it includes industrial training, investment incentives, trade union reform, in- dustrial mergers, company law reform, measures against restriotive practices, less featherbedding of unprofitable industries, and others of that kidney. These appear with monotonous predict- ability in every worthy economic document from the National Plan to Tory election manifestoes, .-ind the Tories have nothing to lose from ad- mitting that a large part of this field is common ground to both parties, and that many of the present administration's industrial policies are the same policies, prepared by the same civil servants, as those carried out by the last Con- servative government.

The important point about all these very long- term structural reforms is that they cannot hope to provide within even the life of a single Par- - liament any answer to the problem of reconciling proper expansion with a healthy balance of pay- ments, and that meanwhile the structural reforms themselves are inhibited by the balance of pay- ments straitjacket. Thus the present Govern- ment urges higher productivity but is obliged to outlaw productivity agreements, begs trade unions to take a more enlightened attitude to labour-saving and then makes them hang on to every job they can by creating 600,000 unem- ployed, and exhorts businessmen to invest more while squeezing them so hard that they invest less.

In our present condition it is clear that 'long haul' policies are not going to help us. There are only two ways out, and both are in conventional terms radical.

One way is to take positive and discriminatory measures to help exports and to control the entry of manufactured imports. This may even be the way the present Government will eventually, very gingerly, move—especially if it fails to get into Europe. It is, however, open to the serious objection that, if import controls are purely temporary, the trouble will reappear as soon as they are lifted; while, if they are per- manent, they are not only (like export subsidies) illegal, but also undesirably protectionist and harmful to world trade. Moreover a backdoor policy of selective Government intervention, even (or perhaps especially) if it is successfully tailored to get round the international rules, is likely to introduce distortions, anomalies, dis- economies and nonsenses of all kinds into the economy. In addition, the experience of the present Government has already shown that, where such policies are tried, the results are invariably, in the event, much less significant than was originally expected. It is surely clear, too, that politically a policy of controls, even if advocated as the alternative to devaluation, will inevitably sound more convincing in the speeches of Labour politicians than in those of their Tory counterparts, and that therefore this is a particularly difficult wicket for Conservatives to bat on.

But if the present administration should move in this direction, Conservatives cannot justly attack them for doing so unless they themselves

'Well, if you know of a better 'ole . . are prepared to advocate the alternative solution, that of traditional liberal market economics.

Without paying excessive homage to their inheri- tance of liberal economic beliefs, Tories today may wish to accord them somewhat greater merit than many were inclined to do in the aftermath of the great depression of the 'thirties. Conservatives, in other words, may feel that this is a field in which market forces and the price mechanism may ultimately be preferable to dis- criminatory state intervention, however well in- tentioned and by whomever conducted. They may feel, in short, that the chronic imbalance in our international payments is best dealt with by altering the price of the pound in the foreign exchange markets of the world. In this way the resulting increased profitability of ex- ports and (unless otherwise offset) the reduced competitiveness of imports would be allowed to achieve their own balance as the textbooks —not to mention the rules of the International Monetary Fund—indicate and as the French, in 1958, so successfully demonstrated. Any such move could well be combined, moreover, with a compensatory unilateral cut in British tariffs to eliminate any vestige of protectionist feather- bedding.

That this course has its problems it would be foolish to deny. To pretend that there is an

easy and painless solution to our economic crisis

is, in any case, palpably absurd. What Is im- portant, however, is to be clear that a change

in the sterling exchange rate (and there is, of

course, more than one way in which this could be done) is one of the options open to the Tories, and that their only other option, if they are to

maintain—as they must—economic growth as the fundamental objective of Conservative economic policy, is to embrace the dangerous doctrine of selective export subsidies and import controls. Certainly, whichever method is chosen might be regarded as an unneighbourly act overseas.

But whatever the animosity that would be caused among our trading partners by a devaluation of

the pound, it would be considerably less intense than the hostility likely to be engendered by the alternative of subsidised exports and physical control of imports. This last would be a breach of GATT and of all the rules of international trade, whereas the articles of the International Monetary Fund specifically prescribe devaluation as the correct remedy for a country in funda- mental balance of payments disequilibrium. Indeed, most foreign governments (as against central bankers) ultimately regard the question of the sterling exchange rate as our own busi- ness. Moreover, if we are to join the EEC we must bear in mind that the rules of the Rome Treaty forbid any artificial aids or barriers to trade: an honest-to-goodness devaluation be- comes the only solution left.

Not that our good international behaviour in sacrificing the British economy to the pound sterling has gone unappreciated : indeed, we have been rewarded by being lent increasing amounts of international money on a scale un- precedented in economic history. (For this reason, if for no other, we are the last country that can complain of an international liquidity shortage, or ascribe our own difficulties to a world money crisis.) We have earned the right to become the world's record debtor, an object of pity and derision overseas and a cipher in world affairs while General de Gaulle struts across the international stage. But the time has surely come—indeed, it is long overdue—to put the national interest first, above the bogus internationalism of keeping up appearances as we allow the substance of our economic strength to waste away.

Nevertheless, there are almost certain to be two objections to this point, one economic and the other political. In the first place, even if the Tories were to adopt this policy, how can they ensure that it will bring about a lasting cure to the nation's balance of payments, and not turn out to be a temporary palliative soon cancelled out in higher wages and prices?

Plainly any increase in demand—even one as officially sanctified as an increase in demand for British exports—is ipso facto inflationary, and an export boom induced by devaluation is no exception. But this only means, first, that the abandonment of the present sterling parity should be accompanied by unilateral tariff cuts wherever this would help to keep down wage demands; and second, even more important, that it should be implemented at a time when there is ample space capacity in the economy to accommodate the extra export orders without causing infla- tionary pressures. In 1949 the then Labour government was unfortunate in running full tilt into the Korean rearmament boom. But, even so, to have devalued at a time when unemploy- ment was a mere 1.3 per cent was simply asking for inflationary trouble. By contrast, the present conjuncture, with unemployment at 2 per cent and rising, is the ideal backcloth for a really effective devaluation.

It is frequently said that devaluation does not go to the root of the British sickness—by which is usually meant antediluvian attitudes in board- rooms, shop floors, government departments and so on. This is an astonishing objection to come from Conservatives, embodying as it does the endemic left-wing fallacy that a couple of dozen cabinet ministers can in a few years transform by some magic wand deeply-rooted habits, atti- tudes and institutions. Admittedly, not even an effective devaluation could achieve this kind of miracle. But at least it would raise the threshold of what is possible with existing human beings and institutions, which should always be the principal objective of any Tory policy.

And it would also make the task of future economic management easier. There would be that much less reason to doubt the ability of the Treasury to run the economy in a responsible

manner on sound Keynesian lines. For it would be able to do so free for once from the need to distort the timing of its regulatory measures to conform with the vagaries of confidence in the pound. It would be able, too, to enjoy at last the benefits of what some economists like to call the `virtuous' circle—an export boom leading busi- nessmen to invest in new capital equipment ready to meet the next export boom—in con- trast to the vicious circle of payments crisis, deflation, investment cutbacks, incapacity to deal with the next boom, payments crisis and so on which we have known for so long.

Secondly, the question must inevitably arise whether it is practical politics for the Tory party to advocate an economic policy of this contentious kind, however distinctive and effec- tive it may be. The answer is that, in this world of ignorance and irrationality, in which the pound (as befits the local emblem of Mammon) has become the national symbol of a materialist age, it would not be prudent for the Conservative party openly to advocate devaluation. But this does not mean that it cannot make the spear- head of its policy 'setting the pound free'; and if a free pound should initially float downwards, then this would merely measure one dimen- sion of the harm done during Labour's steward- ship of the economy. Certainly it would ill become Mr Wilson, who daily proclaims the pound's strength, to argue that the foreign ex- change markets of the world would not, on cold commercial calculations, reckon the pound to be worth its present parity. And those bankers and economists who maintain that the pound is not overvalued today provided we avoid overfull em- ployment can look forward to the chance of proving their theory in the one forum they claim to respect—the market-place.

But it is not simply a matter of political presentation. There are sound practical reasons —which reach beyond the scope of this article —for preferring to allow the pound to find its own level, at least initially, rather than moving to a new fixed rate by an orthodox devaluation. So if the Tories really believe that Conservative freedom works, let them stand four-square for setting the pound free. Let Mr Maudling and Mr Powell cease arguing over incomes policy and find common cause in this—for they are both on record as at least theoretical believers. But it would not really be a case of setting the pound free. It would be setting the economy free of the tyranny (as in 1925-31) of an over- valued pound.

And let the Conservative party ponder, too, the alternatives. The present Government has been explicit on this matter. If the pound is sacrosanct, then—ministers do not tire of point- ing out—the choice is between stop-go and government control of prices and incomes. Rightly, the Tories will reject the road publicly chosen by Labour—the second of these alterna- tives. But of course the present Government has chosen the first as well.

A little more than two years ago the editor of the National Institute Economic Review wrote : 'the figure of 4 per cent [growth] is now established in the public mind. Neither the Conservative Party nor the Labour Party could now state a growth target lower than this.' Sancta simplicitas! Within months Labour had come out with a target of 3.8 per cent. This has now been abandoned as over-ambitious and the Government's economists are at this very moment beavering away to produce a new 'realistic' National Plan with a lower assumed growth rate still. No doubt this will not fall below the 3 per cent actually achieved over the decade 1954-64. Realism has its limits, and even Mr Wilson might be hard put to present a plan for slower growth as an inspiration to the nation. Yet this is what stop-go means. If the Tories really believe in incentives at all, they can scarcely connive in suppressing the greatest in- centive of all—the exhilarating prospects of a more rapidly expanding economy and all the benefits that can bring.

There are some—very few—governments that aim high and achieve their objectives. There are others that aim high and in the event fall short. But deliberately to compel itself to aim low as the present administration is doing; de- liberately to curtail and limit the horizons and ambitions of the people—this is the greatest crime of all.

The Labour administration has, in the eco- nomic field, presented the opposition—and the nation—with an unpalatable choice : either price and wage control or stop-go. So long as the Con- servative party continues feebly to accept the choice but to shrink from choosing, it will remain neglected by the public. The right response is to reject the very framework—selected by the Prime Minister—in which the question is put; the only framework in which such a choice has to be made: the framework of an immutable pound.

There is, therefore, a clear and distinctive Con- servative economic policy for the asking. It is a policy, moreover, which, however radical in conception, is consistent with the general em- phasis on freedom in Tory economic thinking and which provides the only escape from a Morton's fork of two equally intolerable alterna- tives. In next week's concluding article I shall endeavour to indicate how this might be com- bined with the non-economic objectives of Conservative policy to produce a coherent and imaginative programme.