The Ideas That Shaped Post-War Britain. Anthony Seldon

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СКАЧАТЬ that ‘the attempt to reduce unemployment so quickly would be dangerous because it would lead to inflationary shortages and bottlenecks’ – a sound Keynesian warning, but by now inadequate to the total situation.³⁵ Nevertheless, tax cuts and spending increases went ahead in Barber’s 1972 budget. At the same time, the decision was taken to withdraw the pound sterling from the European ‘snake’ and abolish credit controls. The Bank of England’s idea was to allow interest rates rather than quantitative credit restrictions to control the volume of private borrowing. The problem was that politicians then blocked the rise in interest rates. So a private sector boom was superimposed on the public sector boom. The money supply rose by 25 per cent in 1972–3, and although unemployment came down by 400,000 (in two years) the inflation rate rose from 6 per cent a year in 1972 to 13 per cent a year later.³⁶ The whole episode is a good example of the interaction between technical and political mismanagement. The Keynesian economists gave politicians lame advice. The Bank of England concocted a policy which presumed that the market would be allowed to set interest rates. All this was before the OPEC oil price shock.

      The analytical weakness of Keynesian economics at this point was that it could offer no theoretical explanation of the acceleration of inflation between 1968 and 1973. The worldwide explosion of the money supply was attributed to monopoly pricing by labour unions and firms rather than to the financial policy of government. It was considered sufficient refutation of Keynes’s own view that, at full employment, a further increase in the quantity of money is inflationary, to point out that employment was no longer full – or at least as full as it had been in the 1950s and 1960s. This ignored Keynes’s own distinction between ‘voluntary’ and ‘involuntary’ unemployment, as well as Friedman’s much sharper concept of the ‘natural’ rate of unemployment. Ironically, the Barber boom of 1972–3 was the first and last attempt to use full-blooded Keynesian policy to maintain what was then regarded as full employment. When it failed – and when the quadrupling of oil prices gave another savage twist to the inflationary spiral – all governments, including Britain’s, started to give priority to inflation reduction. Rhetorically, as well as analytically, they needed monetarism.

      On 22 July 1976, the Bank of England publicly announced the adoption of money-supply targets, though it had already started using them. Fiscal policy needed to be made consistent with the goal of reducing the rate of growth in the money supply. In 1976, public expenditure started to be ‘cash limited’ and for the first time since the Second World War was cut during a major recession. In October 1976, James Callaghan made a speech at the Labour Party conference announcing that the government no longer believed Britain could ‘spend its way’ back to full employment. This is widely taken to be the year when ‘monetarism’ was adopted and the Keynesian full employment commitment abandoned. In fact, the situation was more complicated. The reason given for the public expenditure cuts was to ‘free’ resources for export and private investment as the only means of ‘restoring and maintaining full employment’. This was consistent with a ‘Keynesian’ analysis of Britain’s problem, such as had been presented by Bacon and Eltis.³⁷ What the Labour government retreated from was the commitment to maintain ‘high’ full employment, accepting that in the 1970s Britain was already in a state of ‘Keynesian full employment’. Finally, an incomes policy was used until 1979 alongside monetary targeting, as part of the inflation-reduction strategy. The reluctance to put the whole burden of the fight against inflation on monetary policy reflects both a vestigial political commitment to full employment and an analytic commitment to the cost-push theory of inflation. It was the collapse of incomes policy in the ‘winter of discontent’ in 1978–9, leading to the election of the much more ideologically intransigent Conservative Party under Mrs Thatcher, which finally put policy Keynesianism to sleep. But not too much should be ascribed to parochial British ideology, since the demise of policy Keynesianism proved to be worldwide.

      IV

      A number of conclusions emerge from this, admittedly opinionated, survey. The most important is that Keynesian economics failed to renew itself intellectually during the golden age. It was therefore assaulted from outside and was severely damaged in the process. Friedman’s quantity theory of money approach fitted the emerging ‘stagflationary’ data better than the standard Keynesian models that predicted a stable ‘trade-off’ between inflation and unemployment. Specifically, his theory of ‘adaptive expectations’ explained why successive attempts to stimulate the economy had decreasing effects on output and increasing effects on prices, even with quite high unemployment.

      Friedmanism was not formally inconsistent with the General Theory. Keynes agreed that the quantity theory of money is valid at full employment. Friedman’s ‘natural rate of unemployment’ was an analytically more precise analogue of Keynes’s ‘voluntary’ unemployment. Keynes did not highlight these aspects of his ‘general’ theory because he did not require them to explain the depression of the 1930s. Friedman’s monetarism is thus not the logical opposite of Keynes’s General Theory, but of his ‘special theory’, developed to explain the Great Depression of the 1930s, in which interest rates are ruled by liquidity-preference and investment demand is interest-inelastic. Hicks’s ‘generalised’ statement of the General Theory retains its value as providing a logical way of thinking about a variety of macroeconomic situations. Had it been interpreted in this way from the start, the Keynesian-Monetarist controversy might have produced less heat and more light.

      Though both the Keynes and Friedman ‘special cases’ can be subsumed in a more ‘general theory’, there is a different feel to them, which reflects differing political and social values, and different assumptions about the political process. Keynes’s ‘special case’ implied the perversity of markets and the benevolence of governments; Friedman’s, the benevolence of markets, and the perversity of governments. Keynes’s quantity adjustment mechanism was designed to establish the case for discretionary government interventions to maintain full employment; Friedman’s assumption of self-adjustment at full employment was designed to get the government out of economic life. Friedman attributes this difference of approach to the fact that Keynes grew up in an aristocratic society with a strong tradition of public service, whereas he grew up in America where it was assumed that the political process would be dominated by political and bureaucratic self-interest.³⁸ But other characteristics of the situation in which the two economists found themselves were very different. Keynes was diagnosing, and prescribing for, the ills of a laissez-faire economy; Friedman for the ills of a state-managed economy. The behavioural patterns – the virtues and vices – of the two kinds of system are likely to be very different; it was only natural that the two economists should overemphasise the vices of the system they knew, and exaggerate the virtues of the system they proposed. There are evidently long swings between collectivism and individualism, into which both the Keynesian revolution and the monetarist counter-revolution can be slotted.

      The second major conclusion, which follows from the above discussion, is that Keynesian economics cannot be absolved from responsibility for the failures of government policy. The crude monetarist view that Keynesianism ‘caused’ inflation cannot be sustained. But it failed to develop an adequate theory of inflation, which might have helped governments combat it at an earlier stage, and with far less cost. The view prevailed in the 1960s that anything could be managed or fixed with the existing tools. The hubristic mood of the Keynesian economics profession is captured in Paul Samuelson’s testimony before a Congressional Committee in 1961: a community could have ‘full employment and absence of demand inflation, at a rate of capital formation it wants … with the degree of income distribution it desires’.³⁹ A starker invitation to activist politicians to mismanage the economy can scarcely be imagined. It may be said that politicians choose the advisers to give them the advice they want to hear. But choice requires competition: if all the advisers are saying the same thing, it requires extraordinarily strong political nerves to go against it. A breakdown in the conventional wisdom in economics was thus a necessary condition for a shift in economic policy.

      At the same time, certain features of policy, decided on non-technical grounds, СКАЧАТЬ