Essays in Economic Management

Alec Cairncross

• Publisher: Routledge
• Year: 2013
• eBook ISBN: 9781136521003
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

The papers in this volume cover the following areas: * Government and Industry * The Managed Economy * Monetary Policy * Fiscal Policy * Economic Forecasting and Economic Planning * Economists in Government

1. Government and Industry¹

In May 1962 John F. Kennedy had a talk with André Malraux. ‘In the nineteenth century,’ Malraux said, ‘the ostensible issue within the European states was the monarchy versus the republic. But the real issue was capitalism versus the proletariat. In the twentieth century the ostensible issue is capitalism versus the proletariat. But the world has moved on. What is the real issue now?’ ‘The real issue today,’ Kennedy replied, ‘is the management of industrial society – a problem not of ideology but of administration.’²

The Management of Industrial Society

The phrase ‘the management of industrial society’ summarizes a comparatively new conception of the functions of government and of the relationship between government and industry. It is not so long ago that people thought economic management unnecessary and saw little scope for government intervention of any kind. The economic system was thought to be largely self-regulating and more likely to prosper under free competition than through the exertions of government departments. The state was neither a large employer nor a large spender (except in war-time) nor did it feel obliged to raise large sums of taxation. Within living memory the rate of income tax was a shilling or less and the total amount of government revenue including local rates was under £200 million.

Since these happy far-off days (from the taxpayer’s point of view at least) the role of the government has steadily expanded as it has assumed more and more control, taken an increasing proportion of the working population on its pay-roll, and enormously extended the range of its current spending and capital investment. At the height of the Second World War the government absorbed half the annual output of this country and regulated with the utmost stringency the freedom of individual consumers and producers. No one could spend as he chose or work as he chose. That was twenty-five years ago. But even today the state employs one man in four, accounts for half the total capital investment and exercises very wide powers over the whole economic life of the country.

It is natural in these circumstances for the average business man to ask himself where the process will stop and what place there will eventually be for private industry as he understands it. It is also natural for him to ask for some rationale of government intervention when he is not conscious as he was in war-time of any over-riding purpose to justify it. If he was reared on the social philosophy of the nineteenth century he may also ask whether there are not certain dangers to individual liberty in the growing power of the state and whether, even if the economic objectives involved in the management of industrial society are altogether admirable, it is not permissible to cherish some continuing suspicion of the political power exercised by the management. He may be less ready than John F. Kennedy to regard the problem as one of administration to the exclusion of ideology.

Political Dangers of Government Control

Some of you may remember, for example, the qualms expressed in a famous passage by John Stuart Mill, himself a professed socialist:

‘If the roads, the railways, the banks, the insurance offices, the great joint stock companies, the universities, and the public charities, were all of them branches of the government; if, in addition, the municipal corporations and local boards, with all that now devolves on them, became departments of the central administration; if the employees of all these different enterprises were appointed and paid by the government, and looked to the government for every rise in life; not all the freedom of the press and popular constitution of the legislature would make this or any other country free otherwise than in name. And the evil would be greater, the more efficiently and scientifically the administrative machinery was constructed – the more skilful the arrangements for obtaining the best qualified hands and heads with which to work it.’¹

There is a curiously old-fashioned ring about that passage, whatever one thinks of the fears of a new despotism which it expresses. I shall not be much concerned with those fears, which the experience of the past twenty years has not so far borne out. My theme must be a more limited one for reasons of time and professional competence. But I cannot, of course, overlook the political aspects of economic management any more than the manager of a large industrial concern can overlook the political aspects of his own powers and responsibilities.

What makes the passage that I have quoted so old-fashioned is that government control over the private sector is now far more complex than Mill and his contemporaries (including Karl Marx) could have imagined. What alarmed Mill – just as it may still alarm some of you – was the threat of a major extension of the public sector through nationalization. But nationalization has long ceased to be a live issue, whatever the outcome of the controversy over Clause 4. You all remember the battle over steel during the post-war years. Some of you may even recall Mr Cube. But what in fact has happened? With very minor reservations the nationalized sector is no bigger than it was twenty years ago. The steel industry has been nationalized, de-nationalized and re-nationalized. There is now to be a National Ports Authority. Some individual firms like Fairfields have come under public ownership. But no new major industry has been nationalized since 1950 and the only candidate in the Labour Party’s programme a few years ago was water supply.

It is also increasingly difficult to tell the difference between a large undertaking in the private sector and a large undertaking in the public sector. The same kind of speeches are made by Lord Stokes as by Lord Robens – perhaps Lord Robens is rather more forceful in his criticisms of government policy. The same kind of pronouncements on pricing and investment policy are made by the National Board for Prices and Incomes, when it is called upon to make pronouncements, whatever the status of the industry concerned. Much the same regard to commercial advantage and much the same technique of investment appraisal are held up to approval in the government White Papers on the nationalized industries as in Neddy’s reports or in the textbooks used by the business schools.

Semi-Nationalization

The real issue, in fact, is not nationalization but semi-nationalization: not whether there should be a private sector but how private the private sector can hope to be. The issue of ownership has been largely superseded by the much more subtle issue of control. Why should the government bother about ownership when it already gets half the profits in corporation tax and most of the other half in income tax and surtax on dividends? The government may have good reasons for wanting control but for this purpose ownership is not indispensable. Indeed, governments have sometimes found that ownership may diminish, not increase control (you may remember the dictum: ‘if you want freedom from government control, get yourself nationalized’). But the government does not need unlimited control and there are good reasons why it should have no more than is necessary. There is a limit to the advantage that central control confers on a Government and this is as true in economics as in politics. Beyond that limit control is self-defeating because it squeezes out initiative and discretion and all the scope for the incessant urge to innovate that lies behind economic growth and development.

I doubt whether there is anything to be gained by discussing the relations between government and industry in terms of a sharp antithesis between the public and the private sector. It is more fruitful to ask what forms of government intervention are involved in managing the whole economy and what types and degrees of control this may require. In pursuing this question I propose to leave almost entirely on one side those aspects of government intervention which are summed up in the phrase ‘the welfare state’. I shall not be much concerned with what is done by the state to promote greater equality, to ensure a minimum standard of living for all, or to improve the quality of life by providing health, education and other services. My concern will be rather with those forms of intervention that are prompted by dissatisfaction with the outcome of market forces, and may involve limitations on the discretion of individual enterprises in their dealings with one another, with their customers, or with their workers.

Government Intervention and the Limitations of Market Forces

Economists have been very much alive for at least two centuries to the virtues of market forces in bringing about an allocation of resources in keeping with consumer preferences and in maintaining a competitive drive towards greater efficiency. But they have also been diligent in cataloguing the weaknesses of these forces and the ways in which administrative action might be used to supplement or short-circuit them. They have sometimes been so carried away by the scope for improving the price mechanism by administrative measures that they have hardly stopped to look at things the other way round, and ask whether the use of administrative devices is not also subject to inescapable weaknesses.

The Aims of Economic Management

The inadequacies of market forces can be said from one point of view to provide the main justification for government intervention. For example, it can be argued that without such intervention the economy might be subject to an intolerable or unnecessary degree of inequality; the level of activity might be too low or too unstable; the distribution of economic activity between different parts of the country (or between different industries) might be unsatisfactory; and the rate of economic growth might be too low. But one might well ask: Why put things so negatively? Once it is accepted that the government’s job is one of economic management is it not sufficient to ask to what ends the economy is to be managed? The answer can then be put in positive terms: to reduce inequality within acceptable limits: to maintain a high and stable level of activity: to pursue an active regional policy: and to seek to accelerate economic growth.

Put this way round there is no reference to market forces: no presumption that government action should be stigmatized as ‘interference’ and kept to a minimum. The emphasis is on management, government behaviour being looked at through the rosier spectacles with which managerial activities in business and businesslike forms of organization are normally viewed.

Merely to list some of the objectives of economic management does not justify government intervention in pursuit of those objectives. Justification must depend on how things work out in practice. Governments constantly profess what they cannot perform; and it does not make it easier to bear the whips and scorns of bureaucracy if all that is offered in justification is an incantation to the purposes of economic management. We should never hesitate to ask what evidence there is that the activities of government do reduce inequality, maintain full employment, improve the location of industry and increase the rate of economic growth. It is by no means self-evident that the greater the state’s involvement in economic life the more it succeeds in all its various aims.

FULL EMPLOYMENT AND GOVERNMENT CONTROL

Any doubts of this kind are probably least valid in relation to full employment, strange as that conclusion would have seemed a generation ago. It has been the success of governments in avoiding unemployment since the War that has done most to establish the idea of a managed economy. I suspect that governments deserve less of the credit for this than they are given; that some at least of the improvement reflects good luck rather than good guidance; and that we are too apt to draw comparisons with the inter-war years without recalling the period before the First World War when there was little unemployment and no one imagined that this was the government’s doing. However that may be, the acceptance of full employment as an aim of policy is enough to justify a much higher degree of central control over the economy.

As originally conceived by Keynes this control did not extend beyond general measures designed to stabilize demand and purchasing power without detailed interference by the government in industry. In its most primitive form, going back before the First World War, the idea of demand management involved no more than efforts by the government to defer public works in times of boom and accelerate them in times of slump. Later, emphasis was put to monetary policy and gradually shifted in the course of the 1930s to fiscal policy.

No one nowadays would question the importance of greater economic stability or the use of monetary and fiscal policy for this purpose. But as time has gone on it has become increasingly clear that there is a lot more to demand management than was once imagined. It is all very well to think of it in terms of pulling this lever or that – increasing the budget surplus or the money supply, for example – with no intention of helping one firm or industry more than another. But all government action is directional in practice however non-discriminatory in intention.

Demand Management is Necessarily Directional

Take, for example, monetary policy. Limiting bank credit is bound to have more drastic effects on small firms than large if only because small firms have fewer alternative sources of finance. A restrictive monetary policy will also hit the building industry harder than others – especially those parts of it that are engaged in erecting dwelling-houses. There is no escape from these consequences of tight money, as a glance at the British or US figures of bankruptcies and housing starts will show. Similarly, if hire-purchase measures are taken, the industries supplying consumer durables like cars or television sets are bound to suffer.

But, of course, monetary policy is itself an increasingly complex thing that can have different effects depending on the instruments that are brought into play. Import deposits, for example, are essentially a monetary device and have marked characteristics of their own in their impact on industry. There is also a whole range of interest rates, some of which are directly under the government’s control, while for others pressure can be brought to delay an increase or make it smaller.

Precisely because any particular business is affected by monetary measures, firms have to keep asking themselves not just whether the government will act and whether it will use monetary measures but what monetary measures it will take. It becomes more difficult as time goes on to draw a clear line between broad measures operating on the level of purchasing power and specific interventions affecting an identifiable group of firms. The professedly unintentional outcome of demand management may come very close to direct discrimination against particular businesses.

All this applies with even more force to fiscal measures. Manipulating the size of the budget surplus so as to withdraw or add to total purchasing power sounds splendidly impersonal. But it must involve changes in specific tax rates or in specific items of expenditure; and these are inevitably far from neutral in their industrial impact. Few firms are likely to be indifferent whether an extra £100 million is raised by increasing SET or corporation tax or, alternatively, by cutting expenditure on roads or investment grants.

Demand management itself has also become less general with the passage of time. There is now a greater effort to adapt the pattern of demand to local variations in pressure, so that demand is restrained where there are labour shortages or bottle necks in capacity and expanded where there is unemployed labour and surplus capacity. I do not say that these efforts are conspicuously successful but only that the objectives of policy are now, in this respect, a little more ambitious and call for policy instruments with a narrower and more precise impact. For example, if the building industry is working flat out when other industries are not, it may be legitimate to use building licensing or take action to delay the placing of contracts for public building. Quite independently of this consideration demand management implies that public expenditure should be controlled with an eye to the total load on resources over time.

The Balance of Payments, Inflation and Government Intervention

Full employment can be jeopardized by balance of payments difficulties on the one hand and the threat of inflation on the other. These are so often cited in justification of government measures that one might suppose that the whole purpose of economic management was to preserve external balance and avoid inflation. But referring to a deficit in the balance of payments is just another way of saying ‘borrowing’ or ‘becoming less liquid’; and what is undesirable about borrowing is simply that it can’t go on indefinitely. The danger is of an abrupt stop when finance runs out and of a consequent loss of control over the domestic level of activity. In other words, the objective that is threatened or prejudiced is full employment. Action taken to protect or improve the balance of payments has to be justified, therefore, primarily in terms of an expected gain in economic stability. The fact that the action in question is nearly always calculated to produce instability, in the short run at least, may explain why it has been customary to justify it in less paradoxical terms.

Similarly, fear of inflation may be the immediate cause of government action but is not really by itself the ultimate justification. After all, some countries have lived with inflation for the past hundred years and survived; and in some the rate has far exceeded anything experienced in this country. But we all know that inflation affects different groups of people very unequally and that any useful effects it may have on production tend to be short-lived. It is primarily this unequal incidence on the aged and the poor, unredeemed by positive advantages to economic growth, that makes inflation undesirable.

Balance of payments difficulties may force the government into all kinds of policy contortions in order to avoid or delay a change in the exchange rate; or, if the rate is allowed to float, business will have to adapt its behaviour to the fluctuations in the exchange market as well as to the vagaries of government policy – for the government is most unlikely to stay out of the market or refrain from devising policies to take some of the strain off the rate.

We have had plenty of experience in this country of the variety of ways in which governments struggle with an obstinate balance of payments deficit and i...

Table of contents

• Cover
• Title Page
• Copyright Page
• Title Page
• Copyright Page
• Contents
• Preface
• 1 Government and Industry
• 2 The Managed Economy
• 3 How Can the Economy be Controlled?
• 4 Demand Management: The Changing Background to Monetary Policy
• 5 Demand Management: The Scope for Monetary Policy in a Mixed Economy
• 6 Demand Management: Monetary Policy and Fiscal Policy
• 7 Economic Forecasting: Preliminary Reflections
• 8 Economic Forecasting: Further Reflections
• 9 Economic Planning: The Short Term and the Long
• 10 The Work of an Economic Adviser
• 11 Economists in Government
• Index