Economic theory

Fashions in folly

Russell Lewis

That very wise old Tory, Sir Kenneth Pickthorn, once remarked that one of the main duties of the Conservatives was to oppose whatever was intellectually fashionable. It was another more pointed way of putting Burke's pronouncement that a passion for innovation is the character of small minds. Conservatives should be sufficiently anchored in tradition not to be washed overboard by every passing wave. Yet, sad to relate, in recent times, they have not.

The passion for novelty — what Christopher Booker has called

— has afflicted the Conservatives as much as everyone else. Indeed, the whole political establishment has never been more eager to be swinging and 'with it' especially in economic affairs. As our economic troubles have grown, so the prescriptions of the gurus, the pundits and the economic witch doctors have attracted ever More eager buyers. And so we have arrived at our present state at which that sober body the OECD has pronounced ours the most inflationary, the most debt-prone and the second most stagnant of the major economies of the West.

Yet this is only the culmination of a record of relative economic failure too wearisome to catalogue, in which the only safe rule has been that the more bold and trendily radical the measures which the government (of whatever political persuasion) has taken the worse our condition has become, The road to hell has been paved, so to speak, with dud inventions.

Easily the most pervasive general policy idea has been that the government can create all the jobs it likes just by printing money. This is a classic case of economists seeking like generals to defeat their old enemy, which was the 1930s slump, and which was indeed due largely to lack of demand. Unfortunately the post-war problem has not been unemployment and the hurry to cure even mild doses a it by slushing in government cash has led to inflation, which is now accelerating so fast that if any more of the unemployment 'cure' is applied it couldve Even in well run away.ven in its early stages full employment policy was running us into debt with our neighbours, while each attempt to curb home spending in aid of the overseas balance led to the notorious stopgo dilemma. The only answer to this, said the Pundits, was to devalue.

Unhappily each devaluation only produced temporary relief and then left us like the drug addict with our last condition (measured in terms disease) worse of the inflationary

than the first. Devaluation having signally failed, expert opinion switched as it so often does to the view that there was nothing wrong with the medicine but that the dose had not been strong enough. What was needed was not devaluation now and then, but, if necessary, devaluation all the time through the mechanism of a floating exchange rate. This would free the economy from international constraints. No longer would an expansionist policy find itself at the mercy of the overseas trading account. No longer would we need to worry about the state of our international reserves or our ability to borrow abroad in order to sustain the official exchange rate.

Yet oddly enough we found that after adopting a floating exchange rate in June, 1972, by the following year our overseas deficit -was the worst ever. Further, the need to stop the rate falling catastrophically by attracting foreign funds drove us to raise interest rates so as to attract foreign investment in industry and in housing. Thus, instead of bringing in its train an economic miracle as confidently predicted by the Economist, the floating pound appears if anything to have made the British economic situation worse.

This is a suitable point to men

tion two more collectivist fashions — both of them chic foreign imports. Number one was 'indicative planning' — a Parisian model supposed to display all the sexy attractions of state-directed economic expansion without inflicting the cruel discomforts of Stalin-style steel corset. The government guarantee of growth on the label was supposed, of itself, to create the confidence needed for business success. Conservatives flirted with this growth planning fashion under Mr Maudling, but at least they were not as besotted with it as the then Mr George Brown, whose National Plan, though unveiled as the highlight of Labour's 1965 collections, was scrapped in the July crisis of 1966.

It then seemed to government economists that if none of these novelties would catch on it was because of a flaw in the industrial system, which they identified as the monopoly powers of jumbo-size companies and unions whose conflict could only be resolved by prescription number two, an incomes and prices policy (that is, state control of prices and wages). In the event, incomes controls led to more conflict culminating in the three-day week, while profits controls have brought stagnation and the spectre of bankruptcy.

Let us now look at some of the more specific wonder drugs on offer which have still failed to restore our ailing economy. More investment was said to be the key to prosperity, so investment allowances should do the trick. Yet the value of any investment

depends on how useful it is — it won't do much good in an airport like the proposed, but happily now defunct, Maplin, which probably very few would use. Then there was the notion that the Government should channel national resources into more research and development, especially in advanced technological industries. Yet if statistics mean anything the countries which spend most on R & D, like the US and Britain, have low growth rates, while the fast growers, like Japan, Hong Kong and Brazil, spend least.

Besides, the products growing most rapidly in world trade are not highly technological; the champion sellers are furs and watches! Or again, there is the idea that high expenditure on education would result in a surge of national prosperity. The result? We now spend more on education than on defence and the standards in the 3 Rs are now lower than they were in 1914.

It is almost cruel to disinter some of the other fads: e.g. the idea which has conferred a perverse fame on Professor Kaldor, that the key to growth and higher exports lies in the transfer of workers from services to manufacturing, an idea which runs directly counter to the trend of modern economics. For we all know that Marks and Spencers (services) are far superior in efficiency to British Leyland (manufacturing). Moreover, if the balance of payments is the worry the import content of services is only half that of manufactures. So on this basis Professor Kaldor's selective employment tax should have been put into reverse and services fiscally favoured at manufacturers' expense.

Why are British politicians such suckers, so easily conned by every rascal who offers them a cheap gold brick? The fault, I fear, lies in ourselves. It is because we, the democratic public, demand of them as the condition for their election what it is impossible for them to deliver. It is we who make them promise to provide what they cannot fulfil. It is we in whom resides the ultimate and culpable superstition, the belief that there is no limit to the competence and the benevolence of the state. And for as long as we cling to this childish error, so long shall we go on having the policies and the politicians we deserve.

Russell Lewis is Director of the Conservative Political Centre