Prospects for Recovery in the British Economy

F. V. Meyer

• Publisher: Routledge
• Year: 2021
• eBook ISBN: 9781000290295
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

First published in 1985, Prospects for Recovery in the British Economy examines the origins of the economic downturn of the early 1980s.

The book explores the causes of the decrease in industrial production and employment during the early 1980s and considers the longer-term cyclical problems of the British economy. In doing so, it provides a detailed study on downturn and recovery from a variety of perspectives. Topics covered include the role of the financial markets; the decline in profitability and productivity in the manufacturing industry; and, the social implications of long-term trends.

Prospects for Recovery in the British Economy is ideal for those with an interest in the history of the British economy and the history of economic thought.

1 THE ECONOMIC DOWNTURN OF THE EARLY 1980s

F.V. Meyer, University of Exeter

1.1 Recession and Depression

The 1980s started with industrial output falling and unemployment rising at rates not seen since the 1930s. The hoped-for upturn always seemed some months hence, and even the more optimistic forecasters seemed to see only a feeble recovery at the end of the downturn. Economics was once more 'the dismal science'. Its reputation was not helped by the deep division amongst economists about causes and cures. To some, any rise in unemployment was an indication of economic anaemia, to be cured by injections of money. Others pointed to rising prices as an indication of excess demand in relation to productive capacity. In their view, the patient's rising inactivity was due to mounting economic blood pressure. Their recommendations included tighter control of the money supply. Whatever was recommended as a remedy by one school of thought, was dismissed as aggravating by the other.

Both sides have produced cogent arguments. Whom to support seems to depend largely on the time scale and the nature of the economy which one has in mind. Those who want to cure our ills through monetary expansion seem to think in terms of a few months or whatever time scale is appropriate for an economy that serves given purposes with given methods of production. Their concern is with more employment in given ways, leading to a larger output of currently available goods and services. In this sense the problem is quantitative. Those who think in terms of longer periods, take account of ever-changing wants and production techniques. For them it is not so much a question of making more use of a given economic structure as of improving that structure. Theirs is qualitative economics. So far, the search for a middle way between these two approaches has not succeeded. It still seems impossible to attack the economy's quantitative problems without undue disturbance to the qualitative ones. And vice versa.

There is not even agreement on what to call the downturn. Some refer to it as a recession, others call it a depression. For the purpose of the present chapter, the term 'recession' means a setback to the growth rate of current activities which will be followed by a revival in the same activities. Normally, this will be a short period problem of, at worst, a few years' duration. 'Depression' has longer term implications. It means that some activities are becoming less important within the economy as a whole. General economic revival then depends upon growth of different activities. For instance, in the early 1980s, the electronics industry was in recession. Its growth had slowed down. Nevertheless, this industry group was believed to contain growth sectors of the future, and it seemed likely to become more rather than less important. By contrast, the motor car industry could not reasonably hope to resume its former role as a major growth sector. It was in depression. Whether the economy as a whole is in recession or in depression, depends on whether the overall economic problem of the time is primarily a short-period and quantitative one or a long-period and qualitative one.

Recessions can be attributable to any one of the variety of causes which lead to a growth of effective demand greater than that of potential supplies. Often they are a penalty for exuberance. For instance, since 1951 there have been six complete business cycles averaging about 4¾ years' duration.¹ A seventh got under way in the late 1970s and at the time of writing, had not yet run its course. The cause of such cycles may be the less regular growth of demand than of productive capacity. The last downturn of this kind of cycle occurred in 1979. There also were cycles of longer duration, which were associated with disturbances in supplies of certain primary commodities. These came to a head in the early years of each post-war decade to date and again in the latter 1970s. They meant that industrial capacity could not be fully utilised, even at times when a vailable capacity was already inadequate to meet demand at current prices. Although in the shorter cycles, the cause was within the industrial economy and in the longer ones outside it, in both cases there was a restraint in supply (relative to demand). The appropriate response seemed to be demand management. This will be considered in section 1.2.

Depression, as here defined, occurs when there are excess supplies relative to effective demand. In a way, it is a penalty for success. For a long time before the depression, activity had become increasingly geared towards the satisfaction of certain human wants which had never been satisfied so well before. For instance, in the half century or so before 1929, the main economic achievements of the time included cheap food for the urbanised population and cheap basic materials for competitive manufacturing industries. This had been made possible by finance capitalism which organised investment and trade in such goods. The major growth sector was in finance and other services, and the City of London could be described as the world's most efficient importing agency. Eventually it became 'too successful'. Supplies of primaries came to exceed the quantities wanted at prices which covered costs. Needless to say, 50 years of economic history cannot be adequately summarised in a few lines, and it is easy to point to much else which contributed to the situation. But take away any one of the other contributory factors, and there would still have been a similar sort of depression at about that time. Take away the excess supplies of primaries, and there would not have been the sharp fall in prices led by primaries, the major shock this gave to the financial system and the loss of important customers for the industrial sector.

Primary production, finance capitalism and traditional industry did not disappear but had to retreat relative to other activities. Eventually, the slack was taken up by new activities which, for political reasons, could not fully develop until after the war. When they did, they gave rise to the consumer durables boom. Amongst these were more houses and improved standards of housing. People lived further away from work. This, in turn, was both cause and effect of widespread car-ownership. In those houses, there came to be all sorts of machines which made women's drudgery redundant. Women's economic emancipation could become a reality. And it added home entertainment through television. All this, and more, was made possible by the application of science to industrial production. Most of the enterprises which led the way were multinational. They were best able to afford research and development (R & D) and the costly selling organisations through which those products were made available to the public. The material aspects of life changed beyond recognition. So did the economic status of women.

These achievements cannot be repeated. By the 1980s, the majority of households in industrial countries had the number of currently known consumer durables which they could accommodate. As far as such items are concerned, future demand is likely to be mainly replacement demand. In the Third World, the elites also had these things while the incomes of the rest were too low to make them likely customers for some time to come. Once again, there is a demand restraint on the possible growth of activities which had been successful in the past. Renewed growth of the economy will ultimately depend on finding a new range of human wants which modern industry can satisfy in ways which they had never been satisfied before.

1.2 Domestic Supply Restraints

1.2.1 The Limitations of Industrial Capacity

'What to produce?' is a long-term question of how to meet potential demand. 'How and how much to produce?' are perennial short-term questions of whether the right sorts of inputs are available in the required quantities. If there is not enough industrial capacity or if there are difficulties in obtaining primary commodity inputs, then output cannot increase. The economy goes into recession however buoyant the demand for industrial products. Attempts to get out of the recession through the creation of additional purchasing power can only aggravate this particular problem.

In recession, the growth of output slackens or declines. Inevitably employment opportunities are reduced and there is more idle capacity. If past experience is any guide, machines will be idle before workers are laid off so that the rise in unemployment will appear after the emergence of idle capacity. Since less is produced than the economy is capable of, current purchasing power puts more pressure on fewer goods and services, so that prices rise more than before. And they will do so on emergence of idle capacity. There is an element of cruelty in this; unemployment rises at a time when prices are already rising more than before. Pre-war recessions tended to be associated with falling prices which somewhat alleviated the poverty caused by unemployment. Post-war, before the 1970s, recessions were relatively mild and the welfare state took care of the worst economic consequences of such unemployment as there was. In the more severe recessions of the 1970s and 1980s, the welfare state still alleviated the economic hardships of unemployment to a much greater extent than, say, 50 years earlier. But the sharp price rises of the time counteracted this by more than the milder price rises did, say, 20 years earlier.

When a recession is associated with rising prices, there is too much growth of purchasing power relative to the growth of production potential. To say this does not yet indicate a possible solution. For too much purchasing power calls for restraint in order to keep demand in line with what can actually be got out of the economy. The appropriate prescription would be credit restraint. Too little production potential, on the other hand, calls for the creation of additional productive capacity. That, however, would be easier with credit expansion. How to reconcile such conflicting requirements through appropriate combinations of fiscal and monetary policies is an important issue in itself and well beyond the scope of this chapter. Here the question is why such recessions tend to occur at fairly regular intervals, and whether there are any factors in the post-war economy which make prices rise, instead of fall, in times of recession. Deficiency in supplies has already been mentioned. To this must now be added the related problems of fluctuations in the use of capacity and the rising importance of production under increasing returns to scale.

1.2.2 The Length and Intensity of the Paish Cycle

The economic downturns of the last 30 years occurred at intervals ranging from 3¾ to 6½ years, with an average of 4¾. In the 1950s and 1960s, such downturns were relatively mild. Fluctuations were around an upward moving trend, so that a recession would throw the economy sideways rather than downwards. Output would remain at a plateau, with overall performance at the trough still approximately the same as at the preceding peak. The movement was downwards relative to trend² but not in absolute terms. This changed in the 1970s. It is not necessary to remove the trend in order to see that gross domestic product (GDP) at factor cost and constant prices fell by 2% from 1973(I)³ to 1975(III) and by more from 1979(II) onwards. Although a slight recovery seemed to get under way in the second half of 1982, this leaves the downturn of the early 1980s the longest in post-war history. After the earlier ones, recovery came within 1½ and 2½ years, with an average of a little over 2 years.

If post-war experience makes the downturn of the early 1980s appear both long and exceptionally harsh, it offers some hope that the upswing to come will be longer than the current downturn but no assurance that, it will compensate for the severity of that downturn. Movements from trough to peak took between 1¾ and 3 years, with an average of 2½ years. Compared with the length of the post-war downturns, this suggests that an upswing would normally be more prolonged than the preceding downturn. This clearly happened in four of the six complete post-war cycles. There is some doubt about the dating of the downturn of the early 1960s which affects this particular result.⁴ But the upswing to 1973(I) was clearly shorter than the preceding downturn. For the moment, we must leave it open whether this was due to the monetary policy of the time which accelerated the growth of demand by more than supplies could possibly be increased, Here it must suffice to say that the historic odds are four or five to one on a longer upswing than downturn.

The odds are reversed when it comes to the question of whether the next upswing is likely to compensate for the severity of the current downturn. If so, the next peak should be at least as much above trend as the 1979(II) peak was. Relative to trend, only the peak of 1973(I) was higher than the one before. Each of the other five was lower.⁵

Random shocks and deliberate policy may have played some part in bringing about this result. The Korean War and monetary expansion may have led the economy to peaks in 1950/1 and 1973, respectively, which subsequently could not be sustained. The corrective downturns would then go too far, leaving room for secondary peaks and so on. If so, troughs too should have become milder as time went on, but this was not the case. Similarly, if credit is claimed for policy intervention in softening peaks (except in 1973 when intervention worked the other way), then policy simply depressed the economy's average performance unless it could also soften the troughs. But only the trough of 1962(I) was less below trend⁶ than the preceding one (and this would hold even if the further deterioration in 1963 had not been largely due to abnormal weather conditions).⁷ The other five troughs, including the one of the early 1980s, were each further below trend than the preceding ones. The historic odds are on troughs getting worse.

With peaks becoming milder and troughs more severe, the trend was adversely affected — and this was one of the causes of the much discussed 'slow' growth rate of the UK economy. In the 1970s, the trend became almost flat. But the cycle around trend continued. Thus before turning to longer-term issues, it will be asked why peak performance was never maintained for long, and why both peaks and troughs tended to become lower.

1.2.3 The Paish Cycle in the 1970s

One possible explanation may be found through adaptation of the Paish model of the business cycle of the 1950s to subsequent events. The more favourable trend of the 1960s made the cycle so mild that contemporaries wondered whether it had ceased.⁸ Only in re...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Original Title Page
• Original Copyright Page
• Contents
• Notes on Contributors
• Preface
• 1. The Economic Downturn of the Early 1980s
• Finance and Credit
• Production
• Socio-economic Factors
• Index