Britain's Achilles Heel

Britain’s Achilles Heel Our Uncompetitive Pound John Mills Britain’s Achilles Heel Britain’s Achilles Heel Our Uncompetitive Pound John Mills First published May 2017 © Civitas 2017 55 Tufton Street London SW1P 3QL email: [email protected] All rights reserved ISBN 978-1-906837-86-0 Independence: Civitas: Institute for the Study of Civil Society is a registered educational charity (No. 1085494) and a company limited by guarantee (No. 04023541). Civitas is financed from a variety of private sources to avoid over-reliance on any single or small group of donors. All publications are independently refereed. All the Institute’s publications seek to further its objective of promoting the advancement of learning. The views expressed are those of the authors, not of the Institute, as is responsibility for data and content. Designed and typeset by Typetechnique Printed in Great Britain by Berforts Group Ltd Contents Preface ix Author xiv Acknowledgements xv Glossary xviii Introduction 1 1. Economic Evolution 6 – The ancient world 7 – Machinery, technology and power 12 – The Industrial Revolution 21 – Europe up to 1914 25 – The US economy to World War I 32 – Lessons from the gold standard era 38 2. International Turmoil: 1914 to 1945 42 – Europe’s disastrous years 45 – Boom and slump in the USA 52 – Keynes and demand management 56 3. Post-World War II 63 – European recovery and the Common Market 66 – US experience post-World War II 71 – Mixed fortunes in Japan 77 – The USSR and the command economies 84 – The Third World 88 vii BRITAIN’S ACHILLES HEEL 4. Monetarism and Neo-Liberalism 94 – Monetarist theory and practice 99 – Slow growth in Europe 107 – Neo-liberal Policies in the USA 114 – The Tiger economies 119 5. World Imbalances 124 – Surpluses and deficits 127 – The 2008 financial crisis and austerity 132 – Europe’s Single Currency 139 – US and UK Travails 146 6. Unmanageable Competition 150 – Globalisation 154 – Borrowing and lending 160 – Economic imbalances 165 – The response from academia 173 7. Competitiveness 179 – History recapitulated 182 – The cost base 187 – Elasticities 191 – Changing the exchange rate 197 – Objections 200 8. Sustainability 209 – Population 212 – Resources 218 – Climate change 223 – Migration 228 Conclusion 233 Notes 239 Index 257 viii Preface This book is about questions of evident importance to which there appear to be no obvious answers. Why is economic growth and prosperity in the world so patchy and unstable? Why are countries in the East doing so much better in growth terms than those in the West? Why have incomes for so many people in both Europe and the USA stagnated for long periods? Why is there so much inequality – and debt? Are all these conditions inevitable or are there more effective ways of ordering our economic affairs which could achieve better results? There is not much disagreement about the conditions which most people would like to see attained. They would like to see a combination of reasonably rapid economic growth and living standards, as near full employment as is achievable, relatively stable prices, not too much inequality and a sustainable future. But for much of the world, including most of the West, this is not what is being delivered. Is this because such a combination of goals is simply unattainable? Or is it because there are policies which we are not applying but which we ought to be using which could produce much better results? If so, how do we determine what they are? The message in this book is that there are better policies available and that a study of our economic history, and the ideas which have shaped it, is capable of showing what they might be. The approach adopted is to review in parallel both how our economies have developed and how thinking about economic policy has evolved, to enable us to learn lessons from successive phases of our economic history on what went well and what went badly and what guidance might be gleaned from them for the future. The Industrial Revolution was all about increasing productivity, the growth rate and thus living standards, a phenomenon which ix BRITAIN’S ACHILLES HEEL the world had never seen before at least on anything like the same scale. Why did this happen when and where it did? The steady but uneven spread of industry in the nineteenth century and up to World War I, initially mainly in the western world, but subsequently more widely, contains important lessons about how to maintain economic momentum. The two world wars and the period between them provided a kaleidoscope of good and bad economic outcomes, from which there is much to be learnt. The post-war period, especially in the West, was far more successful than anything before or after it but proved to be unsustainable. Was it really necessary that this happened? In fact, the 1970s saw stagflation – a combination of higher inflation and slower growth – in a new policy environment as Keynesianism was replaced by monetarism. Why did this reduction in economic performance occur and was it inevitable? Following the fall of the Berlin Wall in 1989, the 1990s and the early years of the twenty-first century seemed to exhibit a sustainable ‘Great Moderation’, until the crash came in 2008 followed by almost no growth at all, at least measured by GDP per head in the West, while the East romped ahead. The problem now in much of Europe, the USA and Japan is to achieve any increase in living standards, especially for the bulk of the population, excluding the already well-off and the super-rich. What has gone wrong? Are these conditions really inevitable or are there policies which could produce much better outcomes? These are some of questions to which this book attempts to offer answers. Even if different policies did succeed in producing more economic growth, would they be sustainable or would more output run up against environmental and resource constraints which would make more of further growth impossible to attain – or not worth achieving even if it could be? What about other economic objectives, such as full employment, reasonably stable prices, sustainability and avoiding unnecessarily extreme inequality? Full-time employment for nearly all the population is a relatively new concept, born out of the regular jobs which flowed from industrialisation and the decline in agriculture. At a time most people scratched a living in subsistence agriculture, there were relatively few full-time jobs. Inflation on anything like the scale seen in the 1970s is also a new x PREFACE phenomenon in most countries, except for during wars or their immediate aftermath. An ounce of gold retained the same sterling value – £3. 17s 9d – with occasional usually short breaks – from 1711 to 1931.1 Sustainability was first highlighted in a major way by the Club of Rome in their report published in 19722 and global warming or climate change only began to hit the headlines during the last quarter of the twentieth century.3 Inequality has always been with us but it became much less extreme between 1914 and 1945, then widened only very slowly up to 1970 and has since become far greater. There are, therefore, plenty of issues which need to be addressed, other than just getting the economy to grow more rapidly, if more successful economic policies are to be pursued than those we have seen recently, especially in the West. Of course there are no very easy and obvious solutions to all our economic problems. If there were, no doubt they would have been implemented long ago. The question, nevertheless, is whether, even if we cannot reach nirvana, we ought to be able to do substantially better than we are now. The conclusion reached in this book is not that the problems we face are insoluble but that in a number of key respects the policy framework within which our political and administrative leaders work is flawed, so we could do better. There are important lessons from the past which we have failed to learn and gaps in our economic understanding which have led to policies being implemented which are much less effective and successful than they might be. The thesis in this book is that there is too little clear understanding about what actually produces economic growth and what will and will not encourage it to happen; too little appreciation of what potentially can be done to provide everyone who wants to work with a productive and well-paid job; too much fear of price increases and too little concern about very low or negative inflation; too much insouciance about the destabilising impact of footloose capital moving round the world; far too little worry about the enormous increase in credit and debt which has taken place especially during the early part of the twenty-first century; and much too little concern about the imbalances there are in the world economy between countries, particularly in the West, with chronic xi BRITAIN’S ACHILLES HEEL balance of payments deficits and others which pile up surpluses every year. Capitalism and globalisation have been remarkably successful in lifting many millions of people out of poverty over recent decades but at the cost of generating imbalances in the world economy which are in danger of choking off future progress. There is also a very large political dimension to the problems currently faced, particularly by the western world. While many people are generally content with their lot in life there is a very significant minority who are not. Broadly speaking, these are the people who have not seen their fortunes improved by globalisation as their jobs and lifestyles have become more insecure and their incomes have stagnated or declined.

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