Monetarism or Prosperity?

233 Pages·1981·22.05 MB·English

by  Bryan Gould, John Mills, Shaun Stewart (auth.)

MONETARISM OR PROSPERITY?
Also by Bryan Gould
CHARTER FOR THE DISABLED (with Eda Top/iss)
Also by john Mills
GROWTH AND WELFARE: A New Policy for Britain
MONETARISM OR
PROSPERITY?
Bryan Gould, John Mills and
Shaun Stewart
Foreword by
Rt Hon Peter Shore, PC, MP
M
©Bryan Gould, John Mills and Shaun Stewart Ig8I
Foreword © Peter Shore I g8 I
Softcover reprint of the hardcover 1st edition Ig8I 978-0-333-30782-3
All rights reserved. No part of this publication may be
reproduced or transmitted, in any form or by any means,
without permission
First published Ig8I by
THE MACMILLAN PRESS LTD
London and Basingstoke
Companies and representatives
throughout the world
ISBN 978-0-333-31973-4 ISBN 978-1-349-16510-0 (eBook)
DOI 10.1007/978-1-349-16510-0
Photoset in Great Britain by
ROWLAND PHOTOTYPESETTING LTD
Bury St Edmunds, Suffolk
and printed and bound ~Y
BILLING AND SONS LTD
Guildford, London, Oxford, Worcester
The paperback edition of this book is sold subject to the
condition that it shall not, by way of trade or otherwise, be lent,
resold, hired out, or otherwise circulated without the publisher's
prior consent, in any form of binding or cover other than that
in which it is published and without a similar condition including
this condition being imposed on the subsequent purchaser
Contents
Foreword by RT HON PETER SHORE, PC, MP IX
1. GROWTH AND PRODUCTIVITY
Introduction: the British Failure- Productivity and
Growth-The Importance oflnternational Trade
Shares in World Trade-Conclusion
2. THE MONETARIST CUL-DE-SAC
What is Monetarism?- What is Money?-Which
Definition of Money?- Problems ofControl-Domestic
Credit Expansion-The Velocity of Circulation-The
Transmission Mechanism-The British Monetary
Experience-Comparative Monetary Policies-Old
fashioned Deflation-The Battle against Inflation
The Appeal of Monetarism - Conclusion
3· INTERNATIONAL MONETARISM 61
The Flaws in the Monetary Analysis -The Theory of
One Price - Empirical Evidence-Conclusion
4· THE EXCHANGE RATE 79
A History of Overvaluation-The Role of the
Exchange Rate- Foreign Experience-British
Experience- Objections to Devaluation-The
Importance of Price Competitiveness-Devaluation
and Inflation- Real Wages- Retaliation-The
Multinationals-The German Example- North Sea
Oil- Techniques for Reducing the Rate
5· MEASURING INTERNATIONAL
COMPETITIVENESS 122
Defining Competitiveness-Relative Normal Unit
Labour Costs-The 'Kaldor Paradox'- Export
VI Monetarism or Prosperity?
Profitability- Import Price Competitiveness and
Relative Wholesale Prices - Relative Export
Prices-The Terms ofTrade Index-The need for
Disaggregation-The New Treasury Index- Share of
World Trade
6. FALSE TRAILS I47
Public Spending-The Trade Unions-Crowding
Out- Planning for Productivity-An Import Control
Strategy
7· MONETARISM OR PROSPERITY I78
The History of Failure-The Current Experiment
Old-fashioned Deflation-The Overvalued Pound-
Real Wages-A Strategy for Growth- Policy
Recommendations: Devaluation; Lower Interest
Rates; Increased Money Supply; Full Employment
and Increased Public Expenditure; Improved Real
Wages in Manufacturing; Selective Import Controls;
The EEC; Control over the Banking System-A Radical
Strategy
Postscript 209
Further Reading
2 I I
Notes and Riferences 2 I 3
Index 2 I8
List of Tables and Figures
TABLES
I. I Average annual percentage increase in GDP and output
per person-hour in manufacturing, 1963-79 12
1.2 Manufacturing output and output per person-hour in
the UK, 1955-79 13
1.3 Percentage increase in GDP, volume of manufactured
exports and share of world trade in manufactures,
1953-79 18
2. I Expansion of the UK money supply and domestic
credit: £m 40
2.2 Relationship between the money supply and prices,
1968-7719 48
2.3 Relationship between the money supply and prices,
1949-62 50
2.4 Increase in money supply, output and prices, and the
ratio of money to output and prices, 1960-70 and
1970-8 51
3· Increase in consumer and export prices as a percentage
I
of wholesale prices, 1952-78 72
4· Changes in private consumption, government consump-
I
tion and gross investment as a percentage ofGDP in
1973 and 1978 compared to 1968 I 16
5· Indices of competitiveness, UK, 1963-80 124
I
5·2 UK terms of trade and relative volume in 1979, manu-
factured goods 139
5·3 Key indicators for the terms of trade 141
5·4 IMF and Treasury indices of relative normal unit
labour costs 143
6. I Taxes in 1977 showing (a) per cent of GNP at factor
cost, (b) origin of tax, (c) impact on personal incomes
and (d) growth since 1970 149
6.2 Government final consumption expenditure as per cent
Monetarism or Prosperity?
Vlll
ofGDP in 1978 at 1975 prices and exchange rates, and
growth, 1969-78 150
7. 1 Percentage change in wages and salaries per unit of
output, 1953-75 204
FIGURES
4· 1 Changes in real and nominal exchange rates compared
with changes in UK share ofw orld trade in manufactures,
1950-24 Oct. 1980 85
4.2 USA share of trade in manufactures compared with real
and nominal exchange rates, 1950-80 94
4·3 Manufactures- relative export prices and relative
volume, UK, 1976-24 Oct. 1980 97
4·4 Percentage change in the effective exchange rate and in
the rate of inflation: annual rates 105
5· r Relative export prices and relative normal unit labour
costs for manufactures, 1963-79 and quarterly 1976-8o 126
5.2 Terms of trade and relative volume: manufactures,
1955-79, and finished manufactures, quarterly,
1978-8o 136
Note References to 'us', 'our country' and so on throughout refer
to the UK.
Foreword
by Rt Hon Peter Shore, PC, MP
I believe this book will be widely read and that it deserves to be.
That British economic policy has lost its way in a Hampton
Court Maze of monetarist dogma and half-truth, few will dis
pute; nor that to find the way out is the essential precondition for
a new start.
But escape from our present follies will not be enough. Once
we have regained some measure of sanity and realism, we must
look afresh at the central and abiding objectives of economic
strategy and how we can best achieve them. Above all we have to
arrest the continuing decline in our fortunes- a trend clearly
established long before the present Government took office and
took leave of its senses.
Both these tasks, the short-term rescue and the long-term re
vival, are vigorously engaged in this book. And it begins with a
refreshing candour and simplicity in addressing itself to the
central purpose of economic policy: the expansion of national
wealth, the growth of the economy. Of course there may come a
time when we would consciously wish to give lower priority to
the creation of wealth. But, as the authors point out, with so
many unsatisfied demands, that is certainly not the case now:
and the attempt to present other goals (while they should not be
neglected, particularly in the environmental field) is mainly a
rationalisation of the past and present failure.
Low growth in the rgsos and rg6os; nil growth in much of the
rg7os and now minus growth in the rg8os both record and stress
what has been the great problem of our country. Its cause should
be the main focus of serious enquiry and its remedy the main
objective of economic policy. Economic expansion, not inflation,
not the exchange rate, not the size of the public sector borrowing
requirement, not the level of public expenditure and certainly not
the fulfilment of paper targets for the growth of the money
supply, should be the central purpose of economic policy.
For, with growth, comes higher productivity, more employ-