No thanks to the liberal revolution

For thirty years after the war Britain had full employment, stable (if slow) growth, low inflation, and a welfare state that was widely admired. And it was common ground that governments could and should provide those things. Since the mid-Seventies, all that has changed. The norm for unemployment has risen five or sixfold from about half a million to nearly three million; growth is slow and uneven, inflation is stubbornly higher than in the early post-war period; the provision of public services has markedly deteriorated; and new disparities in the distribution of income and wealth have opened up. Instead of being shocked by these changes, many people seem disposed to think that they are all for the good, or, at least, that there is nothing that can be done about them.

While the Thatcherites bear a lot of responsibility for what has happened, it would be a mistake to lay too much at their door. The Keynesian full employment pass had already been sold by Callaghan and Healey in 1975-76; moreover, the liberal revolution could never have taken place had there not been an undertow of populist support waiting to be exploited – as it was – by a skilful and ruthless propaganda campaign. A bigger mistake now would be to suppose that, just because Mrs Thatcher herself was dumped in 1990 and the personal style of government transformed by John Major, there has yet – apart from a very different attitude towards Europe – been any significant change in the conduct of economic and social policy or in the intention behind it.

The collection of books and papers under review, most of which issue, appropriately enough, from Cambridge, and in which no fewer than five Cambridge professors are involved, documents the extraordinary changes for the worse that have taken place during the last two decades. They take the view that the changes were neither desirable nor inevitable. They foresee, given the existing and prospective policy regime, that matters will continue to deteriorate in the short and medium term. But they also suggest ways in which the tide can be turned before things get out of hand.

The Economic Legacy 1979-1992, edited by Jonathan Michie, contains a set of essays by over thirty leading economists which analyse the results of the great market experiment in a large number of individual fields. They tell a sorry tale of failure and polarisation. To take only a few examples. Professor John Toye describes the causes and consequences of the debt crisis. According to Toye, after the OPEC surpluses were recycled in a totally unregulated way by the commercial banking system, it was the pursuit of ‘insular monetarism’ by Britain and the US which caused a very sharp rise in real interest rates, and as a result, the burden of debt service has severely and, it seems, enduringly impoverished the Third World. Andrew Glynn puts a new gloss on the ‘productivity miracle’ by arguing that the gains, which should have led to higher investment, lower prices and improved competitiveness, were largely dissipated in higher profits and dividends. Bob Rowthorn gives a careful analysis of the impact of government expenditure and taxation policy on public services and the distribution of income. He describes how the Government misuses its own accounting conventions to exaggerate the scale of public service provision, as well as the way in which it pretended that receipts from privatisation were equivalent to receipts from taxation. Rowthorn also describes how tax reform favoured the rich and how arbitrary pay awards discriminated against weaker groups of employees in the public sector. Other authors deal, among other things, with regional and inner-city problems, labour laws and reform of industrial relations.

The Economic Legacy 1979-1992 is a formidable indictment of Thatcherite policies. It would have been still more impressive had it been less partial. It avoids, for instance, giving few if indeed any points to the successful and necessary assault on Trade Union powers. After pointing out that over 90 per cent of strike ballots held under the 1984 Trade Union Act resulted in votes for industrial action, Simon Deakin comments that the Government became ‘conscious that the 1984 balloting laws had backfired.’ In fact, the figure of 90 per cent of ballots for strike action was not a result of the failure of the 1984 Act, but of its success in forcing union leaders often to abandon the strike option, since they knew a strike would not be supported by a majority of their members. The option was only put to their members when there was a very strong case.

The Godley Papers consists of articles by Wynne Godley which have appeared in the Observer and New Statesman during the last four years and which fight a passionate rearguard action against the revival of pre-Keynesian economics. The papers start off (in September 1988) with a well-substantiated rebuttal of the view, successfully propagated by the right-wing press and other Thatcherite hangers-on, that the famous letter of 364 economists protesting against the 1981 Budget had discredited the entire profession. They go on to provide a summary of the overall performance of the economy during the Thatcher years, set in the context of a much longer period. Godley’s use of charts (see, for instance, the papers dated 11 January and 17 May 1991) will readily convey to the non-specialist reader in how spectacular a manner this performance was worse in almost every respect than in earlier periods: the growth rate exceptionally low, the rise in unemployment exceptionally rapid, the amplitude of the trade cycle vastly increased, and so on and on. It has been so hard to keep the record straight during these difficult years that the Godley Papers are worth having for this, if for no other reason.

In these papers Godley again displays his flair for economic forecasting. Not only did he forecast the scale and duration of the present recession quite accurately from the autumn of 1989 onwards, but he wrote about the future in a circumstantial way giving, before the event, the same reasons for the post-Lawson debacle which are now being used by everyone to explain it ex post facto. This was at a time when the Treasury and all the mainstream forecasters (the City as well) were vastly over-optimistic, most of them not prepared to ‘forecast’ any recession at all until after it had taken hold. However, it is Godley’s vision of a chaotic and decadent long-term future for the country which chills – all the more so because, as he points out, the very armoury for the management of individual economies is being rapidly dismantled. This vision of the future is not to be shrugged off: the Cambridge Economic Policy Group, which he founded, correctly predicted in the mid-Seventies that unemployment would reach three million in the mid-Eighties.

I wish I could understand why the forecasts of the Treasury, the National Institute and the London Business School have all been so wildly wrong for several years now. As they have all tended to be wrong in the same way at the same time, it looks suspiciously as though all their models have an in-built tendency to generate, by virtue of their structure, numbers which conveniently converge towards stable growth rates with tolerable unemployment levels. Such models would conform comfortingly with the current dogma that government can do nothing (except tinker with the ‘supply side’) to improve macro-economic performance. Moreover, if these models invariably predict that recovery is just around the corner, their proprietors will always feel themselves to be absolved from any need to consider whether some radical change in policy is required. Now that unemployment has risen by up to one million more than the Treasury was expecting two years ago, I am coming to doubt whether it has much understanding of how the economy works. And if this is so, we cannot have much confidence that the Government’s policies – its fiscal and monetary policies as well as the whole thrust of its involvement with the evolution of EC institutions – are soundly based.

The question of how European integration should be managed is one of the most important things discussed in John Grieve Smith’s Full Employment in the 1990s. As Grieve Smith points out, the blueprint for the Maastricht agreement is to be found in the report of the Delors Committee which had been inappropriately dominated by central bankers. Hence the approach ‘was a hangover from monetarist thinking in the early Eighties’ and ‘reflected the Eighties obsession with inflation and indifference to unemployment, rather than the problems of the Nineties’. As a result, the entire concept of ‘convergence’ as it is currently understood is defective because it ‘is solely aimed at everybody matching the performance of the country ... with the lowest inflation rates; and in achieving this aim, countries may adopt deflationary policies which incur a heavy cost in unemployment.’

More generally, Grieve Smith’s position can be summarised by saying that since the liberal/monetarist experiment has failed so catastrophically, it is time to recover whatever was right about the instruments and objectives of policy in the early post-war period. His view, with which I agree, is that nothing happened in the Seventies and Eighties to discredit the principles which had previously guided policy, even though many mistakes were made and the world we live in has changed in very important ways.

The Labour Party may have overestimated the changes. Instead of giving such prominence in the election to their crude and easily misrepresented tax proposals, Labour might have been wiser to concentrate on unemployment. The reason that issue was so little discussed was, presumably, that the comprehensive measures which could deal with the problem have, under the new tyrannical ‘liberal’ orthodoxy, become ‘politically unacceptable’.

Taken together, these essays and papers make an inestimable contribution to the current policy discussion, effectively refuting the fashionable view that, even if technical monetarism failed, markets nevertheless always know best and must never be tampered with. It is not necessary to prove that we are on the road to Thirties-style depression or even that it is a serious possibility – only to recognise that unemployment in the region of three million for the foreseeable future is intolerable – in order to reach the conclusion that all ways in which governments can play an active role in economic management deserve urgent reconsideration. We must not be caught unawares. The next revolution, should permanent mass unemployment really stalk the land, may be far uglier than the liberal one.