Politics and Economics

The political commitment to an active role for government in managing the economy was largely a post-war development – at least in the Anglo-Saxon world. The retreat from that position, to a harder emphasis on the discipline of market forces and on ‘sound’ finance, is even more recent: it set in from about 1968 onwards, gathering pace during the Seventies. Now, in the mid-Eighties, both the feasibility and the desirability of government action to manage the economy are widely doubted. Little seems to be left of the consensus view that prevailed in the golden age of the Fifties and Sixties – of a benign administration actively engaged in promoting economic welfare by ensuring full utilisation of resources, and by appropriate (if, in practice, modest) measures of redistribution towards the needy.

Was the consensus view of the Fifties and Sixties justified? Or are those who, writing from the standpoint of the Eighties, suggest that the idea of economic management was always an illusion nearer the mark? And, whichever side is right, what would be the implications for the future – especially for the future role of government? These are grand questions which are as much political as economic. They are seldom seriously debated: instead we have sterile and technical disputes among academics, often limping along about two years behind the political roller-coaster. From this point of view, Sam Brittan’s book is greatly to be welcomed. It addresses the chief political/economic issues of our time; and as we would expect of one of our foremost economic journalists, it is international, and it is readable. It poses, one might say, all the right questions. It is the suggested answers that many will find contentious and provocative.

The Role and Limits of Government is not primarily a work of exposition, though some of the expository passages, such as that on the origins of the debt crisis, are among the best in the book. It is clearly intended as a work of persuasion: putting forward a set of political and economic views which Brittan believes to be right, and which he wants others to share. Readers seeking a balanced discussion of alternative viewpoints will have to look elsewhere. The style is, at crucial points, assertive rather than analytical. What the book offers is a comprehensive account of where Sam Brittan stands on the role of government and on macroeconomic management, rather than new insights into the issues themselves.

There are, however, reasons why the general reader should be interested in what Brittan’s economic viewpoint amounts to. The first is that he has been almost uniquely close to the issues he is discussing over several decades. Not only has he been in touch, but he has contributed, often importantly, to the emerging consensus among officials and politicians. He was one of the midwives to the birth of monetarist policy attitudes in the UK – though, as the book makes clear, he is far from being a simple monetarist in the Friedmanite mould. The second is that Sam Brittan’s economic world-view is broadly representative of an important strand of political and economic thinking, stemming from Hayek and picking up bits of monetarism and of the thinking of the New Right along the way, which is becoming increasingly influential in much international and domestic policy-making. In Brittan’s case, however, the hard anti-collectivist and ‘sound money’ elements combine with a streak of liberalism and a concern for social justice and the distribution of income. This bitter-sweet combination is interesting: both Left and Right, from their opposite starting-points, need to articulate their response to it.

The book is divided into four sections. Part One, entitled ‘Political Expectations’, is both the most interesting and the least satisfying. In it Brittan addresses general questions such as the proper role of government and markets. There are threads here which underpin his better-known views on macroeconomic policy, expounded in Part Two – ‘How to end the Monetarist Controversy’. (This Section is based on his Hobart Paper of the same title, published by the Institute of Economic Affairs in 1980.) Parts Three and Four, on the world economy and on ‘The British Instance’, are more straightforward but nevertheless filled with provocative assertions and prescriptions. The general line will be familiar enough to readers of his column in the Financial Times.

The first essay in Part One sets the scene. It is awkwardly entitled ‘The Wenceslas Myth’ and is an extended discussion on the subject of ‘there is no such thing as a free lunch’ – a seemingly trite idea popularised by Milton Friedman among others. The primary target is the belief – pernicious and prevalent according to Brittan – that governments have resources to hand out, like Santa Claus. On the contrary, he notes, the ‘government has no resources, but is simply an agency for carrying out those decisions which, rightly or wrongly, are taken collectively’. There is always an opportunity cost to redistribution. Another theme which he goes on to elaborate is that the overall benefits of government action are usually small and often illusory. There is no ‘free lunch’ from better policy action either.

This essay reveals much about the underlying assumptions of Brittan’s economics – assumptions shared by a large number of politicians and economists on the broadly ‘monetarist’ end of the economic spectrum. The first point to bring out is the extraordinary elision, characteristic of this kind of political position, between two different propositions. The first is that in looking at the redistributive role of government there are losers as well as gainers Brittan notes that this proposition has been attacked as obvious – which it is. The second is that government action more generally can do little to affect the size of the cake to be shared out (which, in the hands of many monetarists and ‘supply-siders’, has now become the idea that government interference of whatever type will actually diminish the overall product). This is a proposition of another kind: it amounts to the credo of the ‘market-optimist’ that a laissez-faire system will lead to full employment growth or something near to it. This far-from-obvious proposition is the most important assumption made by monetarists and their allies. If it is true, then there is no need for policy activism to avoid slumps or unemployment. It stands in contrast to the view referred to above, that high growth and full employment in the Fifties and Sixties were a result of policy activism and it denies that better economic management could have made much difference to the international economic problems of the last decade. Indeed, it goes further and by implication attributes the economic disasters of recent years to departures from the laissez-faire model – to rigidities, inflexibilities and excessive government interference. The prescription follows from the diagnosis: roll back the state, curb union power and so on. Thus, hidden behind the seemingly innocuous statement that people should not have excessive expectations about what governments can achieve, are most of the economic issues that ought to be at the forefront of the debate.

Leaving aside for the moment the justification or otherwise for macroeconomic policy action, what are the virtues, as seen by Brittan, of the free market as a way of allocating resources – as opposed to more ‘dirigiste’ or collectivist solutions? As is clear, especially from his third essay, on ‘Hayek, Freedom and Interest Groups’, Brittan certainly does not subscribe to the view, common among the ‘Radical Right’ and among many Conservatives, that the free market produces a just distribution of income. On the contrary, he believes that the market solution needs to be modified and supplemented by redistributive taxation, welfare payments and the like. Here he certainly parts company with Hayek, and with many others who have been influenced by the Austrian school. He is in that tradition, however, in seeing the market as a ‘social phenomenon’ which is particularly good at dealing flexibly with change and uncertainty. This justification for free enterprise, more common on the continent of Europe than in the Anglo-Saxon tradition, is not the same as the standard justification of the economics textbooks that ‘perfect’ competition allocates resources efficiently – maximising economic welfare in a thoroughly static sense. (Indeed Schumpeter, splitting off from the mainstream of Austrian theory, went further and was prepared to justify monopoly capitalism by its dynamism in introducing new products and technical innovations.) Later in the book Brittan joins forces with those who see the lack of flexibility in existing structures as explaining the adverse response of Western economies to the shocks of the Seventies.

But while efficiency is important – especially if, as Brittan asserts, there is a realistic possibility of dealing with poverty and income distribution via the tax system – there is something else which, in these essays, appears to be given even greater weight. This is the claim, again stemming from Hayek, that markets are conducive to political freedom. In The Road to Serfdom Hayek attacked socialism, which he identified with economic centralisation, as the enemy of political liberties – and went on to predict the imminent demise of the postwar economic order. Brittan is not so foolish and forcibly makes the point that centralisation and interventionism are tendencies which span the political spectrum: right-wing interventionism, left-wing decentralisation are equally plausible positions. His vision of the enemy is more even-handed, more Orwellian. The great advantage of the market, for those who think this way, is its impersonality. An analogy is often drawn between its workings and the operation of the Law (an iron law?), and it is maintained that because it is impersonal it is both non-discriminatory and hard to subvert by individuals and special interest groups. By contrast, interventionist governments soon give way to pressures; their concessions in search of a majority (or a mandate) cumulate, leading to allocative inefficiency and the politicisation of income distribution. The discriminatory elements are inimical to choice and, ultimately, to freedom. These arguments are familiar and anyone can point to examples of intervention which are ad hoc, discriminatory and bungling. But they do not establish the general case, and one is left with an impression of less than full impartiality. When he looks at the private sector and the operation of the market, rose-tinted spectacles conceal the many inefficiencies and bureaucratic ineptitudes which perhaps led to the need for intervention in the first place. And when he looks at government, dark glasses emphasise inefficiency and the self-seeking of interest groups. If the spectacles were swopped over, we might see an idealistic public sector doing its best – in the face of private-sector failures and special pleading – to improve welfare, the allocation of resources and the dynamism of the economy. In short, something like the optimistic vision of the Fifties and Sixties.

Brittan himself does not subscribe to the libertarian excesses of the New Right, who believe in the untrammeled operation of market forces, sometimes to the extent of advocating private armies and (following Hayek) private monies. As I have said, he wants redistributive taxation and believes there is a genuine role for government in the provision of public goods. He also suggests that ‘authority is necessary to prevent people tearing each other to pieces and to safeguard at least some personal liberty.’ Thus his framework ends up as thoroughly, and sometimes mystifyingly, eclectic (for example, he appears to be in favour of both Utilitarianism and Rawls) so that few general principles emerge. Nearly everyone would subscribe to some mixture of reliance on markets and governmental intervention and control. The question is what mixture: what kinds of intervention and what types of control.

This takes us to Brittan’s view on macroeconomic management – the subject-matter of the rest of this book Mainstream centre and Left opinion has failed to respond adequately to the rise of monetarism and related doctrines. This would not worry Brittan, who reveals himself as an unrepentant ‘counter-revolutionary’: i.e. an anti-Keynesian – except, that is, for a little wavering when discussing the most recent policy episodes. Some years ago Brittan appeared strongly sympathetic to monetarism proper – the doctrine that controlling the money supply would control inflation, with only small and transient costs in terms of unemployment. Here he (quite rightly) goes behind ‘technical monetarism’ to the much more fundamental assumption of this kind of economics, that demand management cannot permanently lower unemployment and that attempts by policy activists to do so lead only to inflation. Originally the outstanding characteristic of this current of economic thinking was its belief that free markets would lead (with control over a few financial variables) to full-employment non-inflationary growth. That optimism has been much tarnished by recent experience – there are now few technical monetarists left – and, as in Brittan’s case, has given way to pessimism over the persistence of unemployment. The diagnosis, however, is not macroeconomic failure, but microeconomic rigidities and frictions – the factors discussed in Part One.

Brittan asserts the impotence of macroeconomic management with extraordinary confidence. This is a great pity. For the truth or falsity of this underlying assumption is probably the most important question in political economy. Brittan simply states his opinion, and the debate is taken no further forward. Worse, the reader might get the impression that there is nothing to debate and no alternative to political change and a return to freer markets if unemployment is to be brought down without reviving inflation. The alternative view, of course, is that even a freely functioning market economy needs help from the centre, in the form of demand management and other policies. For this school of thought the problem was the rise in inflation from the late Sixties onwards, for which there appeared to be no easy remedy. In the absence of other ways of dealing with it, the demand management instruments were reluctantly, and with many a U-turn, diverted away from the maintenance of real growth, to the control of inflation. With this diversion, both government commitment to high employment and the public’s belief in the efficacy of policy were severely eroded.

It is clear that, superficially at least, the two accounts of what went wrong and of the problems we now face have much in common. They both start with the problem of inflation – though one sees it as being due to misplaced policy activism (an unwillingness to accept a high enough level of unemployment), whereas the other tends to emphasise more fundamental problems in the wage bargaining system. They can, moreover, be brought even closer together. For the market failures, rigidities and excessive expectations which are used by Sam Brittan and others to explain persistent high unemployment are similar to the kinds of factor used by the policy activists to explain the rise in inflationary pressure, and hence the high level of unemployment needed to contain it if the policy instruments are so diverted. Thus for much of the way the two types of explanation seem, so to speak, to march in step. In the end, however, they point to diametrically opposed policy prescriptions, free markets, on the one hand; better and more active economic management, on the other.

Although there are elements of Keynesianism in Brittan’s analysis (he regards himself as retaining the best features of both Friedmanite and Keynesian thought), his roots are firmly in the monetarist tradition. The bit of Keynesianism that is left is his belief that an active demand management strategy is necessary to maintain a steady and predictable growth of money GDP – i.e. the total money value of expenditure in the economy. (Superficially this appears similar to some Keynesian prescriptions, such as the ‘New Keynesianism’ of Professor Meade – but Meade goes on to advocate an active strategy of employment creation via incomes and exchange-rate policies.) For Brittan, demand management is solely required to provide a climate of financial stability once that is done, the real economy can get no further help from macroeconomic policies, and does not need any.

This means that, in contrast to most Keynesians, Brittan gives little weight to macroeconomic policy failures in explaining the rise in unemployment in the Western world as a whole or in the UK. The unemployment that results from non-accommodating policies is ‘real’ and reflects supply-side problems and interest-group pressures. It is also very large. He suggests a figure for the underlying rate of unemployment in the UK (the NAIRU or non-accelerating inflation rate of unemployment) of ‘probably around 10 per cent or two or three million seasonably adjusted, excluding school leavers’. Readers of this book may want to question whether the kinds of factor Brittan discusses as lying behind the rise in unemployment have changed sufficiently and are powerful enough to explain the vast deterioration in economic performance that has occurred all over the world since the Sixties.

We are left with something of a paradox. Brittan, who some years ago appeared as an over-optimistic monetarist (using the term loosely), ends up in a profoundly pessimistic position. He can see no alternative to hanging on like grim death to something resembling present policies, but has no illusions that the cost in terms of unemployment will be small or transient. In the Preface he says, ‘If democracy has survived better than some of us had feared, it is because it has after all abandoned full employment,’ and asks rhetorically: ‘Am I alone among those of the non-collectivist limited government school, in regarding this as an unsatisfactory and doubtfully desirable basis of survival?’ Indeed his prescriptions, especially those dependent on political change and a diminished role for the state, may seem like crying for the moon – even if (and it is a big ‘if’) it is thought that they would actually work.

By contrast, it is now the Keynesian activists (again using the term loosely), previously noted for their pessimism about the operation of the economy, who appear as optimists. For them, there is at least a potential alternative. They would not want to disguise the difficulties, but offer a vision of better policy action, involving both macroeconomic instruments and a measure of intervention in the wage-formation process (as well, possibly, as intervention to ease structural transitions and other supply-side problems), which could markedly improve the performance of the mixed economy. There is no reason, what is more, why they should not go some of the way to meet Sam Brittan, by increased reliance on markets (where that seemed appropriate), by measures to decrease interest-group pressures in policy formation, and by a generally tough line of opposition to ad hoc interventions.

Brittan would see the activists’ case as a dangerous pipe-dream. But there are dangers in his position too. The most serious is that his remedies will be tried and that they will fail. If that were to happen no government of right or left could stand aloof for very long and there seems little doubt that the next stage would be large-scale direct intervention of the kind that he most detests. It is to avoid just such an outcome that policy activists would advocate an expanded but still limited role for purposeful intervention by the state. That was the political essence of the Keynesian revolution. It is worth recalling, however, that the international economic difficulties of the inter-war period were not solved that way, but by World War Two. Keynesian activism came second.

Many people will disagree with Mr Brittan’s main conclusions. Others will feel that the most important questions are glossed over, or analysed in insufficient depth. But the issues raised are of the greatest practical significance. Radicals and ‘progressives’ (Sam Brittan’s term) seem, systematically, to have underestimated the political importance of the current of ideas represented here. It is very much to be hoped that this book will stimulate them to engage in the debate over the proper ‘role and limits of government’ – though I should be surprised if many ended up by agreeing with either his diagnosis or his prescription.