The Way Forward

In Britain, oppositions do not win general elections; the economy occasionally wins one for them. To prevent it doing so, governments in the second half of a Parliament devote much of their energy to ensuring that on election day the voters will feel prosperous and the economy look healthy. Such a political and economic miracle entails much dumping of dogma and convictions. Child benefit, say, which has been frozen in previous years, is at last uprated in line with inflation. Public expenditure, formerly regarded as a disease that must at all costs be curbed, now becomes a sign of health that must be fostered. Similarly, even in the days when Labour was supposed to be a socialist party, the dreaded word was banished in the run-up to an election.

In disliking political dogma, whether left or right, the electorate has shown itself more sensible than its political leaders, but in always believing that next time things will be different it has remained their dupe. Consequently the education it has provided for its masters has only been temporary; dogma has soon resumed its sway. Nevertheless, the electorate’s demand for prosperity above all else causes elections to be both a political limit on economics and an economic limit on politics. This varied collection of essays on aspects of history, philosophy and economics deals, at an extremely high level of subtlety and scholarship, with both kinds of restraint.

From the later 17th century onwards, Istvan Hont argues, the burgeoning expense of warfare compelled governments to concern themselves with trade. Only by trade could they afford to pay for their military establishments. And to be successful commercially they had to have a favourable trade balance, which could only be achieved by selling cheap exports; and the ability to sell cheap required, it was believed until the mid-18th century, paying low wages – otherwise Britain would not be able to compete with poorer countries. Defence and empire depended therefore on trade and on keeping working men poor. ‘Commercial society,’ writes Professor Hont, ‘set clear limits on ideological politics.’ The need for low wages was considered to be common sense, not ideology.

J.G.A. Pocock, on ground which he has made very much his own, shows that ‘the political limits to pre-modern economics’ lay in the basic assumption that the citizen was also a warrior. In practice, of course, he was not. In England even the aristocracy, the traditional home of martial violence, was not greatly involved in war. But the idea lingered on regardless of practice, and the Scottish fathers of modern political economy feared that men’s concentration on increasingly specialised tasks, while admittedly enhancing the production and distribution of goods, would produce defective human beings. Such people would not be able either properly to enjoy the increased goods or to exercise the moral freedom of the citizen. Thus the division of labour, speculation and the quest for profit of a commercial society might, in Professor Pocock’s words, produce ‘a moral, as well as material, poverty in the midst of plenty’.

Evidently, things have not greatly changed in the last two hundred years. No existing country, John Dunn suggests, manages ‘to combine prudent regard for the economic limits to modern politics with delicate and effective concern for the sorts of human beings whom its economic momentum fashions’. Professor Dunn, who contributes the introduction and both the opening and closing essays, is eloquently dubious of the ability of political (or economic) theory, in their present state, to explain how politics (or the economy) actually work, deeming the academic discipline of political science ‘a fairly unmitigated intellectual disaster’.* Dunn has only a slightly higher opinion of the current political scene, believing that in Britain the last ten years have seen a sorry sacrifice of future prospects to current consumption and to the Government’s advantage, and thinking that Mrs Thatcher’s view of political economy has advanced scarcely at all since the days of Hard Times and Harriet Martineau. His dictum that ‘the full dominion of either market or plan today requires a narrow and socially-insulated dictatorship’ should, but probably won’t, cause the right-wing ultras of the ‘No Turning Back’ group to think just a little.

A crucial range of restraints on political action, Dunn points out, is supplied by the workings of a global system of production and exchange, as the French socialists expensively discovered in the early Eighties and as the leaders of the English Labour Party now seem to realise. Furthermore, ‘the fulcrum of political realism for modern society is always an understanding of its economic flourishing,’ and it is ‘politically important’ that the ‘implications are extremely difficult to understand’. Those whom Dunn calls the ‘hapless practitioners’ of modern politics will therefore turn eagerly to the essay by our leading economic theorist, Professor Frank Hahn. What does high theory have to offer the practical politician?

In his preface Professor Hahn tells us that new thinking by himself and others has led him to ‘almost inevitable’ answers which ‘bear a close family resemblance to propositions found in Hayek’s Road to Serfdom’. According to Hahn, Hayek’s view, like that of Milton Friedman in Capitalism and Freedom, published in 1963, was that ‘a capitalist market economy ... ensures that the privately-motivated activities of many agents result in an efficient use of a society’s resources and an allocation which reflects the private concerns of individuals. In addition, the institution of private property permits political independence ... and in various ways limits the power of the state.’

Professor Hahn has reached his conclusions (albeit inevitably) strongly against his personal inclinations, and even hopes ‘that there are counter-arguments which I have neglected’. One is bound to wonder what precisely it is that Hahn originally disliked about Hayek and what it is about his change of heart that he now regrets. The Road to Serfdom was first published in 1944, and Hayek at that time was first and foremost concerned to persuade people that central planning would eventually lead to Nazism. (Stalinist Communism, like John Maynard Keynes, is scarcely mentioned.) There can surely be no reason to dislike the book on those grounds. As Hahn points out in the passage quoted above, Hayek also believed capitalism to be a better way of running an economy than through the public ownership of the means of production. Again there seem no grounds for disliking – or for that matter disagreeing with – this view; even the President of the Soviet Union agrees with it now.

The burning issues today, as for many years, concern the extent to which market forces are to be relied upon: that is, whether, and if so how, governments should take any economic action at all beyond providing an effective legal framework within which capitalism can operate without hindrance. Presumably, it is here that Professor Hahn has unwillingly changed his views. Both Hayek and Friedman took extreme positions on this matter. Like Von Mises before him, Hayek thought there could be no half-way house. ‘Both competition and central direction,’ he wrote, ‘become poor and inefficient tools if they are incomplete; they are alternative principles used to solve the same problem, and a mixture of the two means that neither will really work and that the result will be worse than if either system had been consistently relied upon.’ Moreover on full employment Hayek took a very hard line not all that different from the one taken by Friedman twenty years later. ‘It should be specially noted,’ he said of unemployment, ‘that monetary policy cannot provide a real cure except by a general and considerable inflation, sufficient to raise all other wages and prices relatively to those which cannot be lowered, and that even this would bring about the desired result only by effecting in a concealed and underhand fashion that reduction of real wages which could not be brought about directly.’ For Hahn, coming from Cambridge, to find himself at this stage of the game led towards agreement with Hayek and Friedman on these matters would certainly be disconcerting. But just how far has he been led ‘inevitably’ in this direction and why? Unfortunately Hahn does not tell us.

Skipping the passages in his essay which deal with the relative merits of market and ‘command’ economies as rival, mutually exclusive regimes because that is now only of academic interest, what are we then left with? Only some highly controversial bits and pieces. First, Hahn discusses ‘the proposal, certainly made by many politicians, to raise compulsorily the wage of those whose pay is unacceptably low’. This, he thinks, falls down because ‘it is pretty certain that they will not be employed or far fewer of them will be employed. The policy will fail because this is not a feasible way of redistributing income.’ In referring to statutory regulation of pay as a ‘proposal’, Hahn seems to ignore the history of the institution together with the extremely contentious reforms which have taken place during the last ten years. I shall mention two examples. In 1986 the Government, in a gesture unique in the developed world, took pay and (most of the) conditions of work of all people under the age of 21 totally out of regulation, so that employers may now, within the law, employ juveniles at any rate of pay whatever. Objections to that move did not, I think, stem as Hahn would have it from ‘intellectual laziness’ or ‘stupidity’, but from dismay that the Government should have dismantled a significant component of the social legislation which, after controversy prolonged over decades, succeeded in protecting young people from the more disagreeable manifestations of 19th-century capitalism. Unfortunately the late 17th and early 18th-century obsession with low wages, described by Hont, is still with us.

And what, to take another example, should we be thinking about Wages Councils? These are not a ‘proposal’ but an important system of institutions which have been in existence for decades and are now under threat. Would Professor Hahn simply abolish them, as the Government would ultimately like to do? The issues are vastly more complicated than Hahn would have us believe and cannot be settled magisterially in a couple of sentences. As I understand it, quite apart from the important issues of exploitation and poverty, severe problems have arisen because, even with Wages Councils in existence, there are gigantic differences in the wages paid for given types of work. In other words, the ‘free’ market in labour is doing its job so badly that statutory regulation of minimum pay may be required because it improves efficiency. The possibility of the loss of some very low-grade jobs as a result of the regulation of working conditions does not mean that full employment is unattainable: it is the role of macro-economic policies to determine employment overall.

On most of Hahn’s other ‘bits’ I happen to be in closer accord, not because of subscribing to any overarching system of ideas such as those purveyed by Hayek and Friedman but as a straightforward matter of political judgment. Rent controls have indeed introduced undesirable distortions into the housing market as well as into the pattern of regional migration and employment. But the claim that their abolition would ‘raise no interesting feasibility problems’ seems cavalier. Apart from the logistics of providing transitional relief for tenants, abolition should be combined with well-thought-out tax and other reforms, perhaps along the lines recently proposed by Mr John Muellbauer in his IPPR pamphlet, ‘The Great British Housing Disaster and Economic Policy’. Like Hahn I have no idea whether low marginal rates of tax even for the very rich are necessary to give them the right incentives – though any spectacular favourable consequences are becoming distinctly overdue.

In the essay that precedes Hahn’s, Istvan Hont notes ‘the two drastically discrepant images of the nature of international trading relations’ present both in 1704 and today. One sees international commerce ‘as a mutual exchange of (eminently self-interested) benefits that enhances the long-term interests of all participants and that is in its essence a true system of natural liberty’. The other ‘sees it instead as a tense and unsteady field of force, constructed and sustained in every instance by the disciplined, if sometimes intricate, application of coercive power to the invariable advantage of the richer and more powerful nations’.

On present trends free trade will lead before long to Germany and Japan owning most of the world. Yet Professor Hahn ignores the second view. He favours free trade on the grounds that ‘tariffs and quotas ... lead to an outcome for the world which is Pareto-inferior for the world’, noting that the onus is on those who disagree to show that the circumstances are such as to negate this proposition. But Hahn is not really entitled to reach even this qualified conclusion. The intricacies of modern trade are beyond me, but I have learned always to search for the assumptions underlying any rigorous exposition of issues in political economy. As John Dunn says, ‘the epistemic status of theory in economies ... is eminently questionable’ partly ‘because of the dubious descriptive realism of most of its assumptions’.

On this occasion the conclusions about the benefits of international trade that are reached in Dixit and Norman’s Theory of International Trade, a textbook which Hahn quotes with approval and of which he was the series editor, depend entirely on the assumption that there exist perfect competition and constant returns to scale. As the authors themselves observe on their final page, ‘one cannot assert that there are unambiguous gains from trade in a world of scale economies and imperfect competition.’ Yet the world we live in is one where the main changes in the size and structure of international trade are indeed concentrated in products (e.g. electronics and cars) which are strongly characterised both by scale economies and by imperfect competition. So the onus of proving that the world will be better-off without any regulation of international trade would appear to lie, on the contrary, with Professor Hahn.

What about the really big stuff? What about full employment, inflation and growth? What about the money supply? What about rules and discretion? And does free-market capitalism have a natural tendency to generate full employment? Or are capitalist economies doomed to prolonged periods of unemployment equilibrium in the absence of appropriate macro-economic policies from governments? These are the great questions which have concerned and divided politicians and, surely, political economists since the Thirties: they are certainly the main issues associated with the names not only of Hayek and Friedman but also of Keynes (to whom Hahn, like Hayek, in 1944, only gives a walk-on part), and they are certainly the issues which have dominated practical politics in Britain during the past decade. Moreover, to these questions must now be added another. Have we or have we not lost all our power to operate an economic policy (for instance, to protect employment at home) independently of what happens in the rest of the world?

On every one of these great issues Professor Hahn, having led us to expect that he had reached new conclusions, turns out to be silent. In his closing paragraphs he even casts doubt on those conclusions which he had earlier reached. ‘If one looks, one finds that everywhere the invisible hand is pulling the wrong levers as well as some of the right ones ... The real question is whether the political hand can be expected to deliver what the invisible hand cannot. I do not have the expertise to answer this question.’ Thus does he expel such baby as remains with the bathwater.

If Professor Hahn does not have the expertise, few people do. I certainly do not have it, but as I have differed rather sharply from him, I should perhaps state the position from which I have done so. In brief, while accepting without reservation that market capitalism is for the time being the only framework within which freedom and prosperity can flourish, I believe Keynes’s great vision to have been vindicated by the events of the post-war period. Modern industrial economies have no natural tendency to full employment equilibrium. Market forces, whether at the national or international level, cannot be relied upon to produce satisfactory results on their own. It is therefore right for British governments, using the full range of policies open to them, including fiscal, monetary, regional, trade and incomes policies, to aspire to promote full employment without inflation together with an equitable distribution of income and wealth between individuals, organisations and regions. I am inspired by the idea of a united Europe. But I do not accept that the way forward is to go for free trade and economic union in advance of the creation of machinery for a very much enlarged Community budget.