The Ideas That Shaped Post-War Britain. Anthony Seldon

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СКАЧАТЬ nineteen on prices. Broadly speaking, Keynes defined full employment as the maximum that could be reached by expansionary measures. If one tried to lower unemployment beyond this, one would run into inflationary problems.

      Friedman’s much sharper concept of the ‘natural’ rate of unemployment provided a theoretical explanation of the tendency for inflation to increase: governments had been trying to hold actual unemployment below its ‘natural’ rate by expanding the money supply too much. He added one argument, known in the literature as the theory of adaptive expectations. The employment-creating effects of expansionary policy depend on ‘money illusion’ – on employed workers not pressing for money wage increases to compensate them for higher prices. But once inflation is expected, money illusion disappears. The employment effects of expansionary policy become increasingly temporary, the price effects increasingly permanent.

      It has to be said that there was nothing in this which could not have been developed from the General Theory, had Keynesian economists been minded to do so. In fact, it was a fervent Keynesian, Abba Lerner, who developed a distinction between ‘high’ and ‘low’ full employment in 1951, high full employment leading to demand-pull inflation, low full employment keeping prices stable, and intermediate levels creating cost-push inflation.³¹ However, even though British unemployment for most of the golden age was less than 2 per cent, mainstream Keynesians denied the existence of demand-pull inflation, rejected the distinction between ‘high’ and ‘low’ full employment, and simply said that cost-push inflation should be prevented by controlling incomes. The point is that Keynesian theory might have been refashioned and extended to suit post-war problems, but Keynesian orthodoxy stood in the way. Keynesian economists, therefore, cannot simply blame their defeats on policy mistakes or unexpected events. Politicians no doubt wished to maintain the high levels of full employment achieved in the 1950s and 1960s. There was little in the theory they were being supplied with to tell them that this might be impossible in a free society. By the 1960s, Keynesian beliefs were held religiously, and Friedman was branded as the Antichrist.

      In the 1960s, British economic policy was set to target not inflation but growth, a growth target of 4 per cent a year for five years being announced in 1961. The object of policy became to make the economy grow faster than it had in the 1950s. David Marquand has called this a shift from arms’ length to hands-on Keynesianism.³² But to what extent did it reflect Keynesian analysis or prescription? The answer is far from clear. On the one hand, ‘growthmanship’ was a political decision reflecting the view of virtually the whole of the British ruling class that Britain was ‘falling behind’ the more successful capitalist economies like Germany and France. For the Labour Party, which took power in 1964, the fear was that slow growth would endanger the achievement of its welfare objectives within the framework of consensual politics; that is, one that vetoed higher taxes to finance higher welfare spending. ‘Economic growth sets the pace at which Labour can build the fair and just society we want to see …’³³ An important background factor was the (unjustified) fear that Western capitalism was falling behind Soviet communism. Also, there was a general fear that the spontaneous sources of post-war growth were drying up – echoing, perhaps, Keynes’s forecast of ‘secular stagnation’. But how far was the growth strategy the product of specific Keynesian analysis and recommendation?

      Orthodox Keynesians argued that growth was demand-constrained. There were two versions of this view, one emphasising the balance of payment constraint on export demand, the other the effects of ‘stop-go’ policies on investment demand. The remedy for the first was devaluation; for the second the long-term ‘planning’ of demand, in which devaluation might also figure. Kaldor’s growth model, by contrast, emphasised the supply constraints on faster growth. It was not just a matter of making demand grow faster or more smoothly, but of ensuring an appropriate supply response. Kaldor believed that the main engine of growth was growth in manufacturing output. This was because of the existence of increasing returns to scale in manufacturing industry, and because output per man was higher in manufacturing than in agriculture or services. The growth of manufacturing output in turn depended on the growth of employment in manufacturing industry. But Britain had no ‘surplus’ supplies of labour to transfer from agriculture to manufacturing: it was suffering from ‘premature maturity’. The next best thing was to transfer labour from services to manufacturing by taxing service employment more heavily than manufacturing employment.³⁴ The ‘Keynesian’ analysis found more favour with the Conservatives, the ‘structural’ analysis with Labour, and particularly with Labour’s Prime Minister, Harold Wilson, who was a devotee of Soviet planning. The core proposition, however, which emerged from both sets of argument, was that there were no supply constraints on the growth of the British economy that could not be overcome by policy. In particular, the idea that productivity growth was a function of output growth suggested that, despite an acute labour shortage, a planned expansion of output would carry few inflationary risks, especially if an incomes policy were used to restrain wage costs.

      An ‘indicative’ planning system was set up by Selwyn Lloyd in 1961, strengthened by the Labour government’s National Plan published in 1965. In fact, as we know, the planning period, which lasted from 1961–9, brought no increase in the national growth rate. The only things which ‘grew’ faster were the rate of inflation and public spending. In fact, it was in the ‘planning’ period that both took off, setting macroeconomic policy a much more difficult task in the 1970s. The economists, of course, claimed that their policies were misapplied: in particular, they blame Wilson’s ‘political’ decision not to devalue the pound on winning office in 1964. This view is hard to sustain. In retrospect, Wilson’s decision to stop the ‘dash for growth’ represents the last serious, though only partially successful, attempt for ten years to control inflation; his effort to curb trade union power in 1969 foreshadowed the eventually successful efforts of Margaret Thatcher. Wilson was not really a Keynesian. He understood that the main problems of the British economy lay on the supply-side, though his vision was clouded by his commitment to planning. By contrast, Keynesian economists of this period suffered from considerable hubris. They made unwarranted claims to theoretical and practical knowledge. Specifically, the claim that productivity growth depends on output growth is true only up to a certain point and in particular industries. Only in the Communist economies could such a claim be tested to destruction.

      It is hard to divide responsibility for policy failures in the 1960s between the economists and the politicians. Policy was more theoretically-based in the 1960s than in the 1950s, largely because the Left was mostly in power – not just in Britain – and was less sceptical of theory than the Right. But both economists and politicians were relentlessly activist. This was an almost universal mindset. Politicians wanted to do too much; but they were encouraged to do so by the Keynesian advisers. Their policies were badly conceived; but they got bad advice.

      However, although Britain may have suffered somewhat from its hyperactive policy-makers in the 1960s, the fate of the ‘golden age’ was being settled elsewhere. It was the inflationary financing of the Vietnam war, coming on top of the Kennedy-Johnson tax cuts and social spending programmes of 1963–5, which made inflation a serious world problem, and led to a destabilising sequence of events in which macroeconomic policy was called on to play a much more central – and exposed – role. Once inflationary expectations got established, policy-makers faced a rapidly worsening trade-off between inflation and unemployment. It was no longer a matter of keeping a light hand on the tiller. Policy-makers found they needed to swerve the tiller violently from one side to another, aiming first to halt the rise in inflation, then to halt the growth in unemployment. The increasing violence of these policy ‘U-turns’ contributed to the slowdown in economic growth and the tendency for structural unemployment (or the ‘natural’ rate) to rise from cycle to cycle, which made the old full employment commitment increasingly problematic.

      The full force of these problems hit the Conservative government of Edward Heath, newly elected in 1970. Heath inherited not just the Wilson, but, more importantly, the Nixon ‘Stop’ of 1969–70. When British unemployment reached the ‘magic’ figure of one million in January 1972, he decided to reflate СКАЧАТЬ