General panaceas
Nicholas Davenport
The University of Oxford has just appointed a new Professor of Morbid Anatomy for 1975-76. The National Institute of Economic and Social Research has assumed the professorship of Morbid Economics in its latest Bulletin, which is describes as the most depressing since the review was launched in 1959. Its forecast is "high unemployment, high inflation with a mere hint of further slowdown, substantial current balance deficits and high public sector borrowing requirements". And it concludes: "Even if we look to the very end of 1977 there are few hints of an improvement on any of these fronts."
Next to civil servants, I suppose, professional economists are among the most objectionable to the business world. The forecasts they make are usually couched in algebraic terms and when they prove to be wrong they always have an abstruse explanation for their mistakes. Their intellectual arrogance is often nauseating. This cannot be put against the National Institute, whose editors usually confess humbly to their mistakes. I was delighted to see that their outgoing editor, Mr J. A. Bispham, who now retires to the Bank of England, has attacked the New Cambridge school of economists in his farewell article. At the heart of the New Cambridge economics, he says, lay the notion of an equation between the whole public sector deficit (borrowing requirement) and the deficit on the balance of payments. This equation, he proves statistically, has now broken down "massively". The earlier "fit of the equation", which had little theoretical backing, was "probably simply a fluke." He refers somewhat scathingly to Professor Nield's "elegant paradox" under which the exchange rate would be used to regulate the level of employment and the budget deficit to regulate the balance of payments. This, he says, was little more than a play with words. When there are several policy instruments and several targets of policy it is arbitrary to assign one instrument to one target. Even Mr Healey has got wise to that absurdity. He told the bankers at the Mansion House feast: "The economy is far too complex a vessel to be navigated with only one single instrument, whatever that instrument may be."
The monetarists, I am glad to say, also get a knock in another article in the National Institute review. I have always thought it ridiculous for the monetarists to claim that the sole cause of inflation is an excessive expansion of the supply of money and that the Government alone is therefore responsible for the inflation we have suffered. This argument appeals strongly to the Cambridge economists who are Marxist-orientated, such as Professors NeiId and Kaldor, because it absolves the trade unions of all responsibility for a cost-push inflation. The inflation we are suffering from has a complex of causes, one being the monetary inflation of Tory and Labour governments, another being the shift in power to the big trade unions who can get the wages they want at the point of a gun, that is, by the threat of a national strike. The National Institute rightly concludes that some form of social control over incomes is required to offset the implications of the shift in the balance of economic power. The "painless" monetarist cure for inflation is not a real alternative when the trade unions have the whiphand.
The trouble about economic theories today is that the real world has been turned economically upside down. As the Economist has pointed out, we have today slump and inflation simultaneously, we have falling living standards and record personal savings, we have productivity growth and falling output, we have record public over-spending and record rising unemployment. There is no conventional economic policy applicable to such a topsyturvy world. In any case economics without pyschology has always been an impossible science. What we have to to understand is the pyschology of the so-called working class. As I have so often argued, the working class has become alienated from our society by what seemed to them the hostile economic policies of different "national" governments. Fortunately we have now got Jack Jones who has suddenly dropped his sense of alientation and has identified himself with a mixed-economy Labour government. The fact that a workers' leader induced an alienated trade union movement to co-operate with a non-Marxist government in the application of a £6 a week limit for wage rises was nothing short of a miracle. But what follows?
The problem is how to educate Jack Jones to make the correct move. At the moment he has got hold of a lot of wrong ideas. He believes that the savings movement has been starving industry of investment capital and has been misapplying its funds. The truth is that his trade union movement by not identifying itself with capital profit has made a lot of industrial investment unremunerative. Constant unofficial strikes have virtually destroyed the British motor industry. If only we could get Jack Jones to take up the idea of a public unit trust and thereby identify workers with the capital as well as the dividend rewards of remunerative industrial investment.
For the further education of Jack Jones 1 would ask him to drop the neo-Marxls; Cambridge school and take up the new Oxfer° school whose diagnosis of Britain's industrial decline seems to me much more realistic. Walter Eltis and Robert Bacon have lately —ifl the Sunday Times — made an analysis of the economy, dividing it into a marhet sector which actually sells goods and services and a non-market sector which produces goods and services paid for by taxation or by printing money. The market sector produces all the investment, exports and consumer goods which people, including foreigners, buy. 1-10' fortunately the market sector base has been declining — from 56 per cent of the GNP in 1961 to 39 per cent in 1974. Hence Britain's world decline. It has been due to the diversion of too much labour into the non-market sector. To arrest this trend we must abandon a lot of socialist-nationalisation ideas which Jack Jones may find it hard to do. But if he wants to keep Harold Wilson in office he will have to do so, even if it splits the Labour Party.
Here is the sort of deal which Jack Jones should try to get out of the Wilson government. If the Chancellor would cut income tax or raise allowances next April and prevent that refla" tionary move becoming inflationary by cutting government expenditures and postponing", further nationalisation then the TUC weulu continue its voluntary wage restraint after August and even agree to a smaller percentagef rise if prices had started to fall. Any prospect 0. such a deal would send the equity share marke' spinning upwards. It would be the ideal time 1° set up a public unit trust for the workers.
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