Tackling Britain's False Economy: Unemployment, Inflation, Slow Growth

184 Pages·1997·12.367 MB·English

by  John Mills

TACKLING BRITAIN'S FALSE ECONOMY

Tackling Britain's
False Economy
Unemployment, Inflation, Slow Growth
John Mills
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© John Mills 1997
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Contents
Preface vii
1. Introduction 1
Does Poor Economic Performance Matter? 6
False Trails 9
What is Wrong with Economics? 12
Policy Options 17
2. The Historical Context 22
The Workshop of the World 27
The Great Depression 32
The 1920s and 1930s 36
The Post World War II Period 40
3. The Monetarist Blind Alley 49
The Theory of Monetarism 52
The Weaknesses of Monetarist Theory 55
The Labour Government 1974-9 59
The Thatcher Years 1979-90 62
In and Out of the Exchange Rate Mechanism 65
4. The Way to Economic Growth 71
The Exchange Rate 73
Free Trade versus Protectionism 76
Import-Saving and Export-Led Growth 79
Continuing Competitiveness 84
High Return Investment 88
Reflation 90
Changing the Exchange Rate 92
Is Sterling Overvalued? 97
5. Back to Full Employment 100
Fal se Arguments 102
The Supply Side Fallacy 106
Public versus Private Sector Job Creation 113
The Missing Demand 117
The Key to Competitiveness 121
European Economic and Monetary Union 128
v
VI Tackling Britain's False Economy
Inflation and the Standard of Living 132
Exchange Rate Changes 135
Leading Sector Inflation 139
Inflationary Shocks 142
Bottlenecks and Overheating 146
Wage and Salary Inflation 149
Conclusions 154
The Politics of Change 157
International Implications 162
Widening Choices 166
Notes 170
Index 171
Preface
It has taken many years for the ideas and proposals in this book to develop
into their present form. During almost all this period I have worked closely
with Shaun Stewart, and this book is dedicated to him.
Shaun Stewart is a remarkable man. He started life with few advantages.
Aged nineteen, he was shipped to North Africa in 1941 in the infantry to
fight his way through the Tunisian, Sicilian and Italian campaigns. He
emerged from the war, having been wounded twice, with a unique combination
of decorations. He was awarded the Military Cross three times and, while
serving with the US Fifth Army, the Distinguished Service Cross of the United
States. This is the highest American military decoration which can be granted
to a non-United States citizen. It is awarded rarely and only in cases of quite
exceptional bravery and courage.
After the War, Shaun Stewart took a degree in economics at London
School of Economics, and then joined the Civil Service in the Board of Trade.
His first assignment was to take part in negotiations on the Marshall Plan.
He then spent the next twenty-six years dealing with a wide variety of trade
and industry policies. His postings abroad included three years in Paris from
1952 to 1955 as a member of the UK Delegation to the Organisation for
European Economic Co-operation, and two years in 1964-6 as Economic
and Commercial Counsellor at the British High Commission in Ottawa. A
year's sabbatical in 1960 was spent visiting 175 firms in the United States
studying the effect of import competition. These experiences, as well as years
spent in London at the Board of Trade (subsequently the Department of Trade
and Industry), provided him with a series of unusually good vantage points
from which to form conclusions about Britain's economic performance.
He disagreed with increasing conviction with much of the policy which
successive governments promoted, and took early retirement in 1974.
Remarkably shrewd investment of the severance payment he received left
him in considerable comfort, with twenty years and more of highly productive
work ahead, much of it spent working with Bryan Gould, Austin Mitchell
and, luckily, myself on monetary and exchange rate policy. During these years,
he achieved an unparalleled mastery of Britain's trade figures, and of the
detail of what was happening to the British economy. I have been extremely
fortunate and privileged to have been able to draw very extensively on all
this labour of love. Shaun has been a wonderfully generous and stalwart friend.
Acutely intelligent and well informed, he has been able and willing to devote
vn
Vlll Tackling Britain's False Economy
endless time to exchanges of view, constructive criticism and suggesting
drafting amendments. I hope this book reflects the standards he has set.
I have certainly tried hard to make sure that it does. In a number of
respects, this objective has influenced both the way in which the research
has been done, and how the text has been organised. Endnotes have been
kept to a minimum. All the important arguments are in the main text, and
the endnotes have been used primarily to allow acknowledgements of points
made in other people's books or writings on which I have drawn, and which
I have assumed to be accurate. The main arguments in this book, however,
are not based to any great degree on other people's opinions or historical
anecdotes, but much more on facts and statistics and their interpretation. For
all the figures in the book, I have relied exclusively on original sources, updated
to September 1996.1 have checked as carefully as possible to make sure that
every one of them is accurate, and that the choices of dates and data are fair
and unbiased. The arguments in this book do not need the support of selective
figures, carefully chosen to fit in with preconceived explanations of events.
The case made, in my opinion, stares out for anyone who wants to see it from
all the statistics which are printed regularly in official publications.
There is a vast amount of statistical information available, and I have drawn
heavily on a wide range of sources. The thesis put forward in this book is
essentially quantitative as well as qualitative, thus requiring a strong numerical
base. I would like to express a real debt of gratitude not only to the organisations
which have produced all the figures I have used, but also to the people
within them who have helped me to find the material for which I was looking.
The sources for all the statistics quoted are not cited individually, but it may
help the reader to know where I found the figures which are in the text, and
where they are available to anyone who wants to follow up any particular
points. Inevitably, I have relied heavily on the publications produced by the
Office for National Statistics (previously known as the Central Statistical
Office) for many of the figures which are quoted on the British economy,
particularly the National Income and Expenditure Blue Books, Economic
Trends, and the Monthly Review of External Trade Statistics. The World Trade
Organisation (successor to the General Agreement on Tariffs and Trade
(GATT)), the International Monetary Fund, the United Nations Organisation,
the Organisation for Economic Co-operation and Development and the
European Commission all produce excellent statistical material, which I
have used widely. I have also relied extensively on figures from a publication
produced by The Economist called Economic Statistics 1900-1983, which
provides long and revealing runs of statistics for most of the world's major
economies going back to the beginning of the twentieth century.
Preface IX
There are many other people who need to be thanked for helping in
different ways to bring this project to completion. My wife, Barbara, has played
a substantial role not only in tolerating the many hours of work I have put
into it, but also, much more positively, by reading and rereading the text,
and insisting on corrections and changes. Charles Starkey has played a
similar role. From the beginning, the intention has been that this book should
be fun to read, and easily intelligible, so that anyone interested in current
affairs would be able to understand what it says. You do not, in my opinion,
need to be a trained economist to follow the basic arguments with which
economics is concerned. Turning these worthy objectives into practice,
however, has involved endless rewriting to reduce jargon to a minimum, to
shorten sentences, to cull superfluous adverbs, and to make tables
comprehensible, to meet my wife's and Charles Starkey's standards. Neither
of them are economists. The test applied was that anything either of them
could not understand the first time they read it had to be rewritten. I have to
say that this is a process which I think might be used with advantage on a
fair proportion of other writings on economics.
Much of the initial drafting of this book was done away from all the usual
distractions at the house belonging to my sister Eleanor and her husband
Stephen in the South of France during the spring of 1996. No one can fail
to be grateful for their hospitality. A good deal of the rewriting was done
over successive weekends at my mother's homely and welcoming house near
London. My office has put up, without complaint, with endless use of
computer equipment, printing and photocopying, not to mention many phone
calls and much letter writing, to complete this book. Inevitably, a good deal
of this extra load fell on my secretary, Jan Dean. All need to be thanked for
their assistance and support.
A number of other people have read the text as it went through a succession
of drafts, and have contributed helpful criticism. I would like to thank them
all most warmly. Nearly all of them started off fairly or very sceptical of the
case being made. I was pleased that most of them appeared to find the
arguments in the drafts more persuasive than they thought they would be. I
hope this is a good sign for the future. The comments they made, particularly
on points which they found unconvincing, were very useful in exposing
presentational weaknesses, and the text has been substantially modified in
the light of what they had to say. Norman Thacker was kind enough to read
two drafts and to produce a large number of detailed suggestions, most of
which I have tried to take on board, as well as suggesting some important
and more major points of criticism. Geoffrey Gardiner, Maggy King, Austin
Mitchell, Michael Moore and Peter Moyes all produced more suggestions
and criticism, which I have tried my best to meet. So did one or two other