EXPLORATIONS in ECONOMIC LIBERALISM Alsoby Geoffrey E
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EXPLORATIONS IN ECONOMIC LIBERALISM ALsoby Geoffrey E. Wood FINANCIAL CRISES AND THE WORLD BANKING SYSTEM (editor with Forrest Capie) MACROECONOMIC POLICY AND ECONOMIC INTERDEPENDENCE (editor with DonaLdR. Hodgman) MONETARY AND EXCHANGE RATE POLICY (editor with DonaLd R. Hodgman) MONETARY ECONOMICS IN THE 1980s (editor with Forrest Capie) UNREGULATED BANKING: CHAOS OR ORDER? (editor with Forrest Capie) Explorations in Economic Liberalism The Wincott Lectures Edited by Geoffrey E. Wood City University Business School London Foreword by Lord Harris of High Cross First published in Great Britain 1996 by MACMILLAN PRESS LTD Houndmills, Basingstoke, Hampshire RG21 6XS and London Companies and representatives throughout the world A catalogue record for this book is available from the British Library. ISBN 978-1-349-24969-5 ISBN 978-1-349-24967-1 (eBook) DOI 10.1007/978-1-349-24967-1 First published in the United States of America 1996 by ST. MARTIN'S PRESS, INC., Scholarly and Reference Division, 175 Fifth Avenue, New York, N.Y. 10010 ISBN 978-0-312-15997-9 Library of Congress Cataloging-in-Publication Data Explorations in economic liberalism: the Wincott lectures I edited by Geoffrey E. Wood. p. cm. Includes bibliographical references and index. ISBN 978-0-312-15997-9 I. Free enterprise. 2. Wincott, Harold. I. Wincott, Harold. 11. Wood, Geoffrey Edward. HB95.E97 1996 330. 12'2--dc20 9S--53930 CIP © The Wincott Foundation 1996 Softcover reprint ofthe hardcover 1st edition 1996 All rights reserved. No reproduction, copy or transmission of this publication may be made without written pennission. No paragraph of this publication may be reproduced , copied or transmitted save with written pennission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London WIP 9HE. Any person who does any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims for damages . 10 9 8 7 6 5 4 3 2 I 05 04 03 02 0 I 00 99 98 97 96 Contents Foreword by Lord Harri s of High Cross IX Note s on the Contributors xii Introduction by Geoffrey E. Wood xv Foreword by Lord Robbins to Chapter 1 The Counter-Revolution in Monetary Theory 3 Milton Friedman Irving Fisher and the Quantity Theory 4 The Keynesian Revolution 6 The Counter-Revolution 10 Key Propositions of Monetarism 16 Concluding Cautions 19 2 Wages and Prices in a Mixed Economy 22 J. E. Meade Introduction 22 Inflation: 'Anticipated' and 'Explosive' 22 Condition s for Full Employment without Inflation 25 Recent Changes in the Labour Market 28 Proposals for Restraining 'Explosive' Wage Inflation 31 Supply and Demand in the Labour Market 35 A Critical Look at the Proposals 39 Bringing Profits and Prices into the Net 42 Free Imports Most Effective Weapon 44 Note on the Measurement of Influences 45 Affecting the Allocation of Labour 3 Economic Freedom and Representative Government 50 F. A. Hayek The Seeds of Destruction 50 The Danger of Unlimited Government 52 The Fundamental Principle 54 The Separation of Powers 57 v VI Contents Advantages of Legislative Separation 62 4 Aspects of Postwar Economic Policy 64 Lord Robbins Introduction 64 A General Perspective 64 The Burden of Taxation 66 Incentives, Saving and Investment 67 Industrial Policy 69 Restrictive Practices 70 Growth and Inflation 73 . Causes of Inflation 75 The Remedy 79 5 The Credibility of Liberal Economics 82 Sir Alan Peacock The Task. 82 The Background 84 The Supply of Liberal Political Economy 88 The Emotional Resistance to Liberal Political Economy 91 'The Intellectual Occasions of Hesitancy' 94 Retaining and Expanding Credibility 97 6 Economists and the British Economy 103 Sir Alan Walters A Reminiscence 103 Lessons of Macro-Economic Management 104 Monetarism 1970 106 Consumption and Savings in the 1970s 108 The Discrediting of 'New Cambridge' 110 The Counter-Re volution in Expectations 112 Cost-Push and Expansionism 115 Expansionism and the Role of Money 119 Conclusion 120 7 The Pleasures and Pains of Modern Capitalism 126 George J. Stigler The Pleasures 126 The Pains 132 Contents vii Th e Balance of Pleasures and Pains 135 Th e Outlook for Capitalism 137 8 The Lim its of Intern at ion al Coop erat ion 141 Deepak Lal Introduct ion \4 \ Intern ation al Co-oper ation to M aint ain Fr ee T radi ng and Payments System s 141 Th e Th eore tical Ca se for Int ern at ional Dirigism e 143 Intern ati on al Macro-econ omi c and Exch an ge Rate Coordinati on 145 Intern ati on al En vir onmental External ities 152 Th e Greenhouse Effect 154 Th e Ozone La yer 160 Conclusions 164 9 Do Currency Board s Have a Future ? 172 Anna 1. Sch wartz Int roduction 172 Wh at is a Curren cy Board ? 172 Aba ndo nment of the Curren cy Board System 175 Present-Day Currency Board s 177 Are Curre ncy Board s the W ave of the Future? 179 Conclusion 182 10 Free Tr ade, 'Fa irness ' and the New Protect ion ism 186 Jagdish Bhagwati Int roducti on \86 Th e WTO: Th e Main Age nda 187 Reg ionalism versus Multilateralism or FTAs ve rsus FT 205 Th e WTO: Architecture, Not Eng ineering 2 10 Ind ex 2 14 Harold Wincott Foreword: Harold Wincott - Doyen of Financial Joumalism Ralph Harris I am not hopeful of conveying fully to a younger generation the en during place Harold Wineott earned in the postwar tran sformation of financial journalism. When I took up economics at Cambridge in 1945, few people outside the Square Mile and perhaps the financial com munities scattered around the provinces made a habit of poring over the acres of anonymous, densely packed, columns headed 'City Edi tor', 'Financial Editor' or 'Our Own Correspondent' . A real scoop might justify 'from our special correspondent ' . By 1957, when the Institute of Economic Affairs set ' up its first of fice behind Throgmorton Street, some of the anonymity was being shed. In the next decade I had the good fortune to meet a veritable academy of City journalists with names already winning wide recognition among businessmen, politicians and even professional economists. Among the most celebrated in their day were Oscar Hobson , Paul Bareau, Manning Dacey, Richard Fry, Wilfred King, Mauri ce Green, followed later by William Clarke, Andrew Shonfield , Patrick Hutber, Nigel Lawson, Peter Jay , Christopher Fildes, and, of course, the everlasting Samuel Brittan. All of them shared a serious, even scholarly approach to the interpre tation of current affa irs. And with few exceptions, they also shared a broad commitment to market economy learned from close observation of the real world. I believe none of these famous names would begrudge pride of place to Harold Wincott. Certainly, by the time of his death in 1969 at the age of 62, his weekly articles in The Financial Times had become some thing of a national institution. Unique among such a galaxy, this pre-emi nence was achieved without the least claim to formal study, let alone university education. Indeed, his apprenticeship was altogether more practical. Born in North London in 1906, he left Hornsey County School at 16. His father wanted him to go into the small family business of heraldic ix x Foreword engravers, hut thr ough a fellow choir member , Harold go t his first job as office boy in an accounta nt's firm. He then progressed throu gh the stoc ks and sha res dep artm ent of an insurance office to become a stat istician with a stoc k broker. Th rou gh the lucky cha nce of Wilfred King hap pe ning to be a slightly se nio r old- boy of Homsey Co unty as well as assistant edi tor of the Financial News, Harold go t his opening in journali sm on the sub-edi tor's tabl e of the paper in 1930, working up to become chief sub. Th e following year, he marri ed Joyce, who was the daught er of a printer and worked at the Ban k of Eng land. They formed a perfect match. Having attracted the atte ntio n of Brend an Bracken , he was appoi nted editor of the Investors Chronicle in 1938 at little over the age of 30 and co ntinued in the cha ir for 30 years, uninterrupted by war. After 1945 he added a sheaf of appointments as investment adviser to several blue-chip companies, a trade-union unit trust, and Provincial Insurance which remained his favourite as a priv ate, family-ma nage d co mpa ny rare in the insurance busine ss. In 1950, already known for his weekl y co lumn as 'Ca ndidus' in the Investors Chronicle, he add ed a regul ar Tuesday column, under his ow n name in the FT, which co ntinued to attrac t ever-widening fame until his untimely death at 62 in March 1969. With that background, it we nt with out say ing that eve rything he wrote was gro unded in a sure gras p and shrewd assessme nt of financial and eco nomic affairs. He once described his painstak ing fact- findi ng and analysis to be 'something like a squirrel gatheri ng nuts for win ter' , never kno wing when he wo uld need to draw on the store. But that was only a begi nning, to which he added lum inous, ye t unpreten tiou s, prose enlivened by a humorou s turn rare in expositio n of the dis ma l science.