The Ideas That Shaped Post-War Britain. Anthony Seldon

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СКАЧАТЬ Keynesian principles, even rhetorically.)

      To this there may seem to be one important qualification. Most governments in the post-war era spent about 10 per cent more of their national incomes than they had before the war – 35 per cent, rather than 25 per cent. This probably had an important effect in steadying economic activity over the cycle; or, to put it another way, making the cycle much shallower than it would otherwise have been. But although the higher level of government spending may have had Keynesian effects, it was not undertaken, for Keynesian reasons, reflecting rather the state of international relations (arms spending) and the establishment of ‘welfare states’ in post-war capitalist countries.

      ‘International conditions’ is an omnibus term, made up of a ‘conjuncture’ of market opportunities, policies and institutions. The crucial conditions for the long private investment boom seem to have been reconstruction needs, opportunities for technological catch-up with the United States, availability of cheap labour and energy, and the policies of military spending and trade and payments liberalisation associated with the Pax Americana. The war had also bequeathed a set of transnational institutions (the International Monetary Fund, the World Bank and GATT) designed to reconcile the national pursuit of full employment with free trade and stable exchange rates. The central idea inspiring the Bretton Woods system, as it was known, was that full employment should be secured by national policy; its achievement would make it safe to liberalise trade and payments.

      Or at least this was the British view, as argued by Keynes. It was never so clear that it was the American view. The Americans attached much more importance to trade liberalisation as the engine, and not just the consequence, of full employment and prosperity, and were able to impose their views on a reluctant Britain and western Europe. They looked to trade expansion rather than government spending to keep demand buoyant; this was also the economic philosophy that inspired the Common Market, which was established in 1958. Trade liberalisation was a policy decision, but it had nothing as such to do with Keynes or Keynesianism. The historical comparison is with the Cobden treaties, which helped produce a similar ‘golden age’ in the mid-nineteenth century.

      A key question we would now want to ask about the ‘golden age’ is why, until about 1968, there was a lack of serious wage inflation. The answer that is most consistent with the story told above falls into three parts. First, a high rate of real economic growth allowed the demand for rising real incomes to be satisfied out of productivity gains. Secondly, the adoption of mass-production technology allowed the labour market to be balanced without upsetting the ‘modest traditional pay relativities between industries, and between skilled and unskilled workers’.²⁵ Finally, working class incomes were still very lightly taxed, so that increases in negotiated pay were reflected in increases in take-home pay. These factors account for the moderate wage behaviour, which in turn smoothed growth. All this started to change in the 1960s.

      Nevertheless, inflationary pressure was building up right through the golden age. With hindsight, it would now be widely argued that financial policy should have been used more aggressively against inflation, with labour market reforms being used to keep down the ‘natural’ rate of unemployment. 1957 marked one turning point in British history, when the Treasury ministers Peter Thorneycroft, Nigel Birch and Enoch Powell lost the battle to rein in public spending; 1955 had been another, when prime minister Anthony Eden fail to win Cabinet support to curb trade union power.²⁶ But at the time, such ideas were instincts or prejudices, which got no support from the economic theory or consensual politics of the day. As Enoch Powell said:

      ‘we were … monetarists … pre-Friedman’.²⁷

      During the golden age, mainstream Keynesian economics became ‘normal’ science, with a ‘research programme’ based on the core Keynesian assumption that the unmanaged working of capitalist economies generated insufficient levels of demand to maintain full employment. It failed to develop the key concepts necessary to cope with, much less avert, inflation.

      Keynes had seemingly left an upside-down universe – a ‘general theory’ of employment, without money and prices. This was not, in fact, true of the General Theory of Employment, Interest, and Money. But it was the emphasis Keynes gave to his theory in the circumstances of the 1930s, which was inherited, with far less justification, by his disciples in the 1950s and 1960s. To compress a complicated story: what Joan Robinson called ‘bastard Keynesianism’ resulted from a peace treaty between Keynesian and anti-Keynesian economists – called the neo-classical synthesis – by which the anti-Keynesians (mainly Americans) accepted the possibility of short-period ‘underemployment equilibrium’ in return for Keynesian acceptance that downwardly rigid money wages were the necessary and sufficient condition of it. Thus the General Theory turned out to be a ‘special case’ of the classical theory after all, but with important implications for policy. A world in which money wages are rigid and business confidence is variable is still a world which requires Keynesian therapy. However, this ‘treaty’, which confirmed the relevance of Keynesianism as policy while leaving it bereft of any micro-theoretical underpinnings, depended to a large extent on fears of a renewed depression.²⁸

      The income-expenditure model was the main Keynesian policy construction. With wages and prices fixed, together with the capital stock, wealth and the state of expectations, the model exhibited a simple dependence of output and employment on expenditure. Further, the analysis readily lent itself to quantification and thus macroeconomic modelling, so that the task of securing the desired level of output and employment was made to seem deceptively easy. ‘Quantities adjust, not prices’ was the flag under which the early Keynesians sailed. This left them without an economic theory of inflation or, indeed, a tenable definition of full employment. There were, in the argot, no ‘supply constraints’.

      In place of an inflation theory there was an empirical observation dating from 1958, the Phillips curve, which showed a stable inverse relationship between the level of unemployment and the rate of change of money wages: a lower level of unemployment brings about a higher rate of increase of money wages, and vice versa. Policy-makers thus supposedly had a ‘menu of choice’ between degrees of inflation and of unemployment. The message of the Phillips curve for most British Keynesians was clear. Since it was considered immoral to run the country with a ‘higher margin of unused capacity’, the government should maintain unemployment as close as possible to zero, and use an incomes policy to control wage costs, either in agreement with the trade unions or by legislation. Wage-push at full exployment rather than excess demand was identified as the cause of inflation. The refusal of Keynesians to take supply constraints seriously left them with cost control as their only weapon against inflation. But this begged the question of how much power a government had, or should have, in a free society.²⁹

      It was left to Milton Friedman of Chicago University to restate the ‘classical’ theory of inflation – the quantity theory of money. As we have seen, Friedman’s work on the consumption function (one of Keynes’s own building blocks) had led him to believe that the ‘demand for money’, and therefore economic activity, was much more stable than Keynes had assumed. This meant that for most circumstances the quantity theory of money was a good predictor of inflation. Friedman’s policy rule was to ensure just enough money in the economy to finance what the economy was capable of producing: the unfettered forces of productivity and thrift would maintain a high level of activity. It could be argued that this was the ‘right kind of theory’ for the world of the 1950s and 1960s, just as Keynes’s had been for the world of the 1920s and 1930s.

      Friedman’s decisive amendment to the dominant Keynesian orthodoxy came in 1967, with his concept of the ‘natural’ rate of unemployment. His central idea was that in the long-run, labour markets clear at an institutionally-determined unemployment rate, and that any attempt, by expanding money demand, to maintain the actual unemployment rate below this ‘natural’ rate will lead only to accelerating inflation.³⁰ The seeds of this are to be found in Keynes’s own distinction in chapter СКАЧАТЬ