Economic Ends and Means
By NICHOLAS DAVENPORT
MR. F. T, BLACKABY, the new editor of the economic review •
£ of the National Institute of Economic and Social Re- £ search, is a man of much common sense, being anti- Treasury and pro-expansion, and I hope his address to the British Association meeting at Manchester on 'The Per- formance of the British
Economy' will command a wide reading. It is written with great wit, force and fair- ness and it is silly of the Economist to treat it as just another anti-Establishment turn from the current vogue in satire. It is far too serious a criticism to be dismissed so lightly. If the British national product had risen as fast as that of Holland from 1955 onwards—and Holland was the slowest growing of the industrial continental countries—the UK would have had some £2,500 million more resources at her dis- posal in 1961. That, as Mr. Blackaby says, is not a little sum. If we are to go on sacrificing sums of this order, at least we need to be very clear just what we are getting in exchange. But the Treasury, financial guardian of the British myth, will never be explicit on this vital point.
For a long time I have been trying to expound two simple truths—first that the Treasury estab- lishment always puts the fixed exchange value of the £ before economic growth, secondly that in practice the Treasury officials never take the right steps to achieve price stability. Their theory is misconceived; their practice is inept. There is really a confusion at the Establish- ment level between economic ends and means. The end I take to be consumer welfare, the stan- dard of living of the British citizen, and usually without economic growth this cannot be raised. Now growth is not necessarily a materialistic concept. As Mr. Blackaby points out, growth does not have to imply an increase only in noxious motor-cars or time-wasting television sets; it can just as well mean an increase in social, educational and cultural services. The French Fourth Plan for 1962-65, for example, deliberately puts social objectives before private consumption; it allows for a 23 per cent. increase in private consumption but calls for a 50 per cent. increase in social investment—mainly in educational and health services.
If consumer welfare—in the finest and broadest sense—is given economic priority, then we must regard a satisfactory balance of payments as a means to that end, not as an end in itself, for without it the flow of goods and services to the home market would be inter- rupted. And if we cease to give the balance of payments economic priority as an end in itself, still less can we allow the preservation of a particular fixed rate of exchange to be an end in itself. A satisfactory rate of exchange is simply a means to economic expansion, for without it we cannot expand exports. If the rate were to cramp or stifle exports it would have to be changed, as we found in 1949 and as the French found in 1958, and the whole con- cept of sterling as a reserve currency for the convenience of world traders would have to be handed back to the dear IMF for revision. To quote Mr. Blackaby again: 'This confusion between ends and means—or between the objectives and the instruments of economic policy—has been one of the bugbears of both the British and American conduct of affairs in recent years. One could say, exaggerating a little, that we have had an economy devoted t3 the fetish of the strength of sterling; the Americans have had one devoted to the fetish of the balanced budget.' This explains why the American and British economies have been continually up and down and lacking in vitality and why their respective rates of economic growth have been at the bottom of the league tables of the industrial nations. Yet the countries with slow growth rates have not on the whole had any more stable prices than the countries with a more rapid rate of expansion.
There is no denying that the British economic performance is poor compared with that of our continental rivals. Mr. Blackaby analyses growth rate comparisons and can find no simple excuse for the British feebleness. The arguments that we have suffered from old-fashioned management or from too many trade union restrictions or from inadequate investment do not carry us very far towards a solution of our problem. Mr. Blackaby finds that the advanced countries which have grown the slowest have actually invested more in relation to their rise in output than the countries which have grown the fastest. From 1955 to 1960 there were 71 units of additional fixed capital formation in the UK for each additional unit of output whereas in Germany and France the figures were 4 and in Italy only 3. So Mr. Blackaby rightly concludes that the British shortcoming is due to the continual restraint of demand which the Government has enforced for the sake of the balance of payments. No other European country has done this to the same extent except Denmark, which has also had a slow rate of growth. Restraint of demand, says Mr. Blackaby, almost quoting the Spectator, undermines business confidence, checks desirable private investment and encourages manufacturers to put up prices when wages rise because they have no faith that output will increase fast enough to mop up the extra wage cost through higher productivity. The increase in prices of manufac- tures in turn checks exports and in turn worsens the balance of payments. He contrasts this vicious circle of slow growth with the virtuous circle of rapid growth of the countries with rising internal and export demand. 1 he picture, as he draws it, may be oversimplified but it is broadly true that, in order to get more rapid growth, demand has to be kept rising and business people have to expect that it will continue to rise.
The change in Chancellors implies, of course, that Mr. Macmillan has accepted the force of this argument, that he is anxious to set up a higher growth rate for 1963 and that he is mov- ing away from demand restraint as a viable economic policy and towards expansion with a sensible incomes policy. It is to be hoped that the Trades Union Congress will at last decide to help by producing an incomes policy of their own better adapted to the times than Mr. Lloyd s old-fashioned ideas. When Mr. Maudling and Mr. George Woodcock finally agree upon the right economic ends and means there will be a wonderful prospect before the British economy
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