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fabian tract 486 
The Economic Consequences 
of Mrs Thatcher 

Foreword 
Chapter 


Peter Shore 
1 
2 
3 
Prelude: the Ideological Challenge 
The Philosophy of Public Expenditure 
The Disease and the 'Cure' 
2 
4 
· 8 
4 The Private and Public Sectors 10 
5 The Economics of the Primitive 12 
6 The Achievements of Conviction 14 
7 
8 
9 
Drawing up the Balance Sheet 
Market Forces and Industry 
Unemployment: the Unexplored 
Alternative 
18 
20 
24 
10 An Epitaph 28 

The Author 
Nicholas (Lord) Kaldor was Professor of Economics at the University of Cambridge 
1966-75. His public service includes Membership of the Royal Commission on 
Taxation of Profits and Income 1951-55 and Special Adviser to the Chancellor of the 
Exchequer 1964-68 and 1974-76. He is a former member of the Fabian Society 
Executive Committee. 

The Editor 

Nick Butler is Treasurer of the Fabian Society and a former chair of the Young Fabian 
Group. He was a co-author of Why Vote Labour? (1979) and author of The IMF: time 
forreform. 

This pamphlet, like all the publications of the Fabian Society, represents not the 
collective view of the Society but only the views of the individuals who prepared it. 
The responsibility of the Society is limited to approving the publications it issues as 
worthy of consideration within the Labour movement. 
Fabian Society, 11 Dartmouth Street, London SW1H 9BN. 


January 1983 Cover design by Dick Leadbetter 
ISBN 7163 0486 4 Printed by Blackrose Press (TU) 
ISSN 0307 7535 Photoset by Range Left (TU) 
Fabian Society, 11 Dartmouth Street, London SW1H 9BN. 


Foreword 


by Peter Shore 

27}t fgs 

The economic consequences of four years of Tory government are clearly apparent to all 
of us. Unemployment in May 1979 was 1.3 million, 5.4% of the working population. It is 
now 14%. Two million more people, including several hundred thousand schoolleavers 
who have never had the chance to work now stand in the dole queues. No attempt to 
fiddle the figures can diminish the waste and misery that that represents. Inflation which 
Labour had brought down below 10% during its last year in office rose to over 20% in 
1980 and has fallen since only as a consequence of the imposed recession. Our industrial 
base has been crushed by the combined effects of the collapse of demand at home, high 
interest rates and the ludicrously overvalued exchange rate which has denied us export 
markets. Nothing has been done to encourage the development of new industries which 
should provide the employment of the 1990s. The government of Mrs Thatcher will go 
down in history as the first British administration to preside over the transformation of 
Britain's net trade balance on manufactured goods. For the first time since the Tudors 
ruled England we find ourselves in deficit on that account. There are days when it seems 
as if Mrs Thatcher has declared war on the British economy -a war which our 
competitors and trading partners are winning. The cost, in economic and social terms, 
cannot and will not be hidden from the electorate by political rhetoric or by the black arts 
of the advertising industry. 

There is no individual better qualified to describe and dissect the economies of 
monetarism than Nicky Kaldor. His intellectual contribution to British economics is 
unmatched. In a period when economic theory has become mechanistic and shallow 
Lord Kaldor has sustained the concept of political economy combining analysis and 
evidence with political and social objectives. These speeches taken from the last four 
years have gone unanswered by the apologists of the government, whether in Parliament 
or outside. They deserve the widest possible circulation, not just as a critique of what has 
happened but as a contribution to the reassertion of a different concept of economic 
policy. The view that government intervention in economic activity, nationally and 
internationally, was integral and indispensible to modern government and indeed could 
be of enormous positive benefit became unfashionable in the difficult economic conditions 
of the 1970s. Now with the proven failure of the monetarist alternative that view 
is being given renewed consideration. Lord Kaldor provides a firm intellectual basis for 
the ideas which instinct and judgement tell us are right. 

1983 marks the Centenary of the birth of John Maynard Keynes. It is highly appropriate 
that the Fabian Society should open the year with a publication by the greatest 
living Keynesian economist asserting once again the value and the strength of the ideas 
which Keynes himself developed, and which to our cost Mrs Thatcher has abandoned. 


1. 
Prelude: the IdeologicalChallenge
16 May 1979 

As a loyal supporter of the Labour Party, I cannot say that I welcome the outcome of this 
election. One can hardly be happy with having a Government with a strong majority 
committed to a strategy based on the strongly ideological orientation of the present 
leadership of the Conservative Party; if one is convinced, as I am, that that strategy is 
wholly misguided and that its pursuit will make our situation a great deal worse and not 
better than would have been the case if we had just drifted on with no strategy at all. 

However, looking at the matter from an 
even longer-term point of view, I can also 
see positive advantages in the present outcome, 
for it provides a unique opportunity 
to settle for good the great philosophical 
issue which has plagued our political life 
and our economic progress for well over 
100 years. I refer to the philosophy of 
laissez-faire. Despite its French name, it is 
a philosophy which is almost entirely 
British in origin. It owes its success to the 
English Utilitarians like Jeremy Bentham, 
who was the real father of the Manchester 
School and whose general rule, in his own 
words, was that: " Nothing ought to be done 
or attempted by Government" ; or, to take 
another of its authors, Herbert Spencer, 
who in 1851 published a book with the 
intriguing title State Education is Self-
Defeating, and 30 years later published 
another book called Man versus the State . 
This philosophy has frequently been condemned 
and pronounced dead and buried. 
It was condemned by the Conservative 
economist Cairns as early as 1870 in his 
famous inaugural lecture. It was condemned 
a generation later in the early 
1920s by a Liberal economist, Keynes, and 
the authors of the Yellow Book. But, in 
spite of all this it is now bursting into life 
again embraced by a Tory Party, which 
historically always opposed it. It was 
opposed by Shaftesbury at the beginning 
of the 19th century, by Benjamin Disraeli, 
and by Joseph Chamberlain, to mention 
only a few of the leading Tory statesmen. 

Like true converts, the new Tories propound 
the creed with the fervour and 
vitality of a new religion, and in total 
oblivion of its dismal past record. 

Britain in Decline 

I confess that I can think of few historical 
situations in which the rigid application of 
the principles of the free market and the 
suppression of State interference would be 
less appropriate than in present day Britain. 
Our industrial future is in serious 
jeopardy, and we are in acute danger that 
the century-long period of our relative 
decline-a decline relative to other industrial 
nations who started much behind us 
and then surpassed us -is about to turn 
into an absolute decline with falling production 
, employment, and falling real income 
year after year, and with all the 
stresses this is bound to cause to our social 
fabric and to the whole of our institutional 
heritage. Indeed, if it had not been for the 
godsend of North Sea oil we would be in 
that miserable state already. 

There is a steady stream of factory 
closures, of industrial areas becoming 
derelict , of whole industries disappearing 
in front of our eyes. The motor cycle industry, 
where we were leading world 
experts 10 years ago, has gone completely; 
the motor-car industry, which is still one of 
major industries, is disappearing fast , 
while others are kept alive only with the 
aid of large-scale Government subsidies. 


Some of us have predicted this acceleration 
of decline as the ineluctable consequence 
of Britain joining the Common 
Market in the industrial conditions we 
were in as against the industrial situation 
of the other Common Market countries. I 
predicted the "negative" dynamic effects 
of membership in the form of a decline of 
British industry, and what has actually 
happened has fully borne out one's 
expectations. 

The fundamental error of free market 
philosophy resides in the notion that profit 
is the true and the only relevant criterion 
for deciding whether a particular form of 
economic activity is of benefit to the 
nation. It is only under highly abstract and 
unreal assumptions that commercial profit 
or loss can be treated as any certain indicator 
of social gain or loss. The main 
assumption of this thesis -which is manifestly 
not true at present is that the labour 
and the other resources which are released 
by the cessation of a loss making activity 
have a more profitable alternative 
employment waiting for them. However, 
if closing down an aero-engine factory (I 
use this for the sake of example) like Rolls 
Royce does not lead to the re-employment 
of its many skilled workers and technicians 
in other more efficient factories but at best 
to their emigration to some foreign 
country; if the cessation of shipbuilding on 
the Clyde means only that fewer ships will 
be built but that nothing else will be produced 
instead, in these circumstances the 
application of the profit criterion is not a 
road to salvation; it is a road to ruin. 

It has become so fashionable to run 
down our nationalised industries as a result 
of the chorus of ceaseless derogation by 
the media that it requires an act of courage 
to speak up in their favour. Whatever may. 
be said against State enterprises on account 
of excessive bureaucracy, and so on, pales 
into insignificance in comparison with the 
merit of State enterprises in having kept 
up (until recent years, at any rate) a large 
flow of capital investment as a result of 

which their capacity was modernised, their 
efficiency improved, and the basic industries 
were brought up to date, something 
which could never have been 
achieved under private enterprise. Could 
anyone seriously contend that our coal 
industry would be superior today if it had 
not been nationalised -or the electricity 
industry, or the gas industry, or the railways, 
or the steel industry? 

The illusion of incentives 

Between 1880 and 1930 excluding the 
war years hardly any new money was sunk 
into the coal industry or the iron and steel 
industry, and very little money -in comparison 
with Germany, not to speak of the 
United States -was put into the new 
technology industries which arose out of 
the invention of electricity, the motor car, 
heavy machinery, synthetic dye stuffs and 
other chemicals. Instead, vast sums were 
invested abroad. In some years during the 
Edwardian period, when home investment 
in manufacturing industry was almost zero, 
no less than 10 per cent of our national 
income was invested abroad. 

In those days there were incentives 
galore. However much present Ministers 
may try to revive incentives through tax 
reductions, they can never hope to achieve 
the Victorian or Edwardian peaks in fiscal 
incentives, when income tax was not progressive 
and it was seven old pence in the 
pound or three per cent instead of the 
present 33 per cent. Yet with all those 
incentives, the economy was stagnating. If 
people think we will now see miracles as a 
result of cutting income tax by, say, 3p or 
6p in the pound, I can regretfully prophesy 
that it is more likely to make no difference 
whatever. 

I have no doubt that without nationalisation 
we should have had the same situation 
after World War 11 as we had for 40 
years before World War I and throughout 
a larger part of the inter-war years, and if 
one thinks that the period after World War 


II was bad, I can only say that in the 
opinion of all economic historians who 
have studied this matter seriously, the 20 
years of the 1950s and 1960s showed more 
rapid economic progress and more rapid 
growth of productivity than any comparable 
20 years in previous British history. 
That that was due not just to a reflection of 
a world trend is shown by the fact that 
while it was true of Britain, it was not true 
of Germany or the United States; in other 
words, their post-war record of productivity 
was no higher than had been achieved 
in previous periods. It was true in our case, 
and it is only in the last 10 years that our 
economic progress has broken down, for 
the reasons I menti0ned. 

Contrary to the general presumption, 
investing less in some industries does not 
mean that we shall be investing more in 
others. So far as the United Kingdom is 
concerned, it may merely mean less investment 
all round. For a more appropriate 
diagnosis of our present troubles, I would 
refer to a new study on the economic 
growth performance of the United 
Kingdom which has just been published in 
the staff papers of the International 
Monetary Fund, an institution not noted 
for irresponsible, radical, Left-wing views. 
The author ofthe study, after an exhaustive 

examination of the causes of Britain's 
comparative failure in the post-1945 
period, concludes: "In the United 
Kingdom, there has been a relatively greater 
flow of capital resources (in the private 
sector) into lagging industrial sectors such 
as textiles, food and beverages and relatively 
less in to the more dynamic export-oriented 
heavy and science based industries. Accordingly, 
United Kingdom industry has 
not been able to take full advantage of the 
marked upswing in world trade in manufactures 
over the post-war period. This tendency 
has manifested itself in a loss of 
export market shares and rising import 
penetration, which in turn have led to 
periodic balance of payments constraints 
on the growth ofoutput. It is possible that in 
certain industries the shortage of complementary 
factor inputs, such as skilled manpower 
at the technician and engineer levels, 
together with inefficient management, may 
have contributed also to depressing output 
returns on new capital formation. " 

In the light of that, can there really be 
much doubt about whether our prime requirement 
now is more laissez-faire or the 
very opposite -more Government planning 
and more Government support for 
industrial investment? 

2. 
The Philosophy of Public 
Expenditure
7th November, 1979 

As noble Lords opposite know, we are not, on certain fundamental matters, divided; that 
this country is in a perilously difficult situation; that inflation is a terrible curse and it must 
somehow be brought to an end, and that our uncompetitiveness has brought us down a 
slippery slope where the gradient gets ever steeper. 

Where I differ fundamentally from the things around. This is what I wish to speak 
other side is in their beliefs of how to turn about. I should like to spend my time on 


one aspect only-a detailed criticism of the 
first page of the White Paper on Government 
Expenditure Plans 1979-84 (Cmnd. 
7036, HMSO, 1979) which the Government 
issued last week. I apologise for 
going into such detail on a few paragraphs, 
but I feel that this is the only way in which 
one can hope to carry conviction and to 
convince them that they suffer from 
numerous delusions. 

When I first read this page l was so 
surprised that I said, "Here is a neoconservative 
manifesto, a testament of 
faith in monetarism, which is something 
quite new and distinguishes the present 
Government from the traditional Conservative 
Party." It is something that could 
not have been written when either Winston 
Churchill or Harold MacMillan was Prime 
Minister, or when Lord Butler was 
Chancellor. It is a neo-Conservative manifesto 
which calls to mind, at opposite extreme, 
the Communist manifesto of Marx 
and Engels which is well over 100 years 
old. The very boldness and vagueness of 
its assertions make the two documents 
rather similar. 

It is very disconcerting to those of us 
who are accustomed to the studied moderation 
and carefully guarded language of 
traditional State papers in this country. In 
fact, when I first read it the first thing that 
came to my mind was a well:known remark 
by a great historical figure of your 
Lordships' House, the third Marquess of 
Salisbury, who said about the Daily Mail 
that it was a paper written by office boys 
for office boys. Reading the first page and 
a half of this White paper, I felt that he 

might have said almost the same about this 

new manifesto. 

Myths and Faith 

When carefully examined, this manifesto 
collapses into a series on non sequiturs, 
interspersed with assertions which can 
easily be proved false by an examination of 
relevant statistics. Since the truth or false


hood of its basic assertions are absolutely 
critical to the success of the present Government's 
strategy, I hope l shall be forgiven 
if I deal with them at some length. I 
take my cue, in the same way as the preceding 
speaker, Lord Harris ofHigh Cross, 
did, from the opening sentence which 
reads: " Public expenditure is at the heart of 
Britain's present economic difficulties". 

This raises many questions. It does not say 
which aspect-whether it is its size, its rate 
of growth or its composition-they regard 
as critical. By saying that it is at the heart 
of Britain's difficulties, the implication is 
that public expenditure is something which 
peculiarly plagues Britain and does not 
plague other countries. Indeed, the next 
paragraph insinuates, without actually saying 
so, that public expenditure was responsible 
for Britain's dismal economic 
performance. It goes on: " Over the past 
five years output has grown less than halfas 
fast as it did over the previous 20 years, and 
a little over a third as fast as in other industrialised 
countries". 

Economic historians would confirm, I 
think, that the same statements or something 
very like to it, could be made about 
the Edwardian period, the first decade of 
this country. Perhaps public expenditure 
was responsible for that too -because it 
was too small rather than too large. 

However, in the third paragraph the 
authors reveal that it is the growth ofpublic 
expenditure rather than the size which they 
regard as the main cause of our difficulties. 
It runs: 

"Over the years public spending has been 
increased on assumptions about economic 
growth which have not been achieved". 

This statement is quite inconsistent with 
the fact that at constant prices total public 
expenditure fell over the last five years by 
no less than ZV2 per cent. It has not been 
growing. Lord Soames referred in his 
speech to the rapidly growing burden of 
public debt, and to anticipate critics I have 
checked the figures. The fact is that public 
expenditure, including debt interest, fell 

5 


by 1 per cent between 1974-75 and 1979


80. Over the same period our national output, 
unsatisfactory though it was, had risen 
be between 6 and 7 per cent. So, clearly, 
contrary to what the White Paper says, 
there has been an appreciable fall, and not 
a rise , in public expenditure both absolutely 
and even more, in relation to 
national income. 
It would be equally untrue to say that 
our public expenditure is large in comparison 
with other countries as a proportion 
of GNP. Our expenditure has been, 
and is, below the average of the 10 major 
European countries, and it remains below 
the average even if account is taken of our 
relatively low income per head and of the 
relationship of income per head to public 
expenditure and to the GNP. The manifesto 
is completely wrong on public expenditure, 
and all noble Lords opposite 
who believe it are wrong, because they just 
repeat to themselves certain slogans, and 
the more often they repeat them, the more 
strongly they believe them and the less 
they feel to be under the necessity to check 
their beliefs against the facts. They are 
equally wrong on taxation. 

The author of the White Paper could 
not have seen the December 1978 issue of 
Economic Trends which shows that Britain 
was the only one of 17leading countries in 
the world which had reduced the sum of 
taxes and social insurance contributions in 
relation to gross national product between 
1970 and 1976 and that it had done so by 
three percentage points of GNP. All but 
two of the other 17 countries had increased 
their taxation in relation to GNP, some by 
as much as 12 percentage points. 

Moreover, according to the evidence 
contained in this paper, in 1976, which is 
the latest year for which comparative 
figures are available, the United Kingdom 
occupied ninth place among the 17 
countries as regards the total burden of 
taxation. With a total burden of 40 per 
cent of GNP it was bang in the middle 
between the upper extreme of Sweden, 

with 58 per cent, and the lower extreme of 
Japan, with only 22 per cent. So we were 
the only country among the 17 which 
actually reduced taxation in relation to 
GNP , whereas all but two of the others 
increased it. We were right in the middle. 
So what justification has the White Paper 
for saying "increases in taxes have made 
inflationary pressures worse and reduced 
incentives". 

If the writers of the White Paper had 
looked up their facts and studied them, 
they should have said the opposite. They 
should have said that a reduced burden of 
taxation lightened the inflationary pressure 
and improved incentives. 

Monetarism is nonsense 

Let us turn to paragraph 4. This contains 
even bigger blunders. It says that to bring 
down the rate of inflation "it is essential to 
contain and reduce progressively the growth 
of the money suppply. This means that 
Government borrowing must be firmly 
controlled. It is a main determinant of 
monetary growth." 

Itis only an uneducated person, or a person 
who is not in the least familiar with the 
subject, who would not know that since 
1970 there has ceased to be any correlation 
between the borrowing requirement and 
the change in the money supply. The facts 
are everywhere to be seen -in all kinds of 
official publications of both the Government 
and the Bank of England. It is true 
that a relationship existed until1969 and I 
believe that I was the first economist to 
draw attention to it in an article which was 
published in 1970. Almost immediately 
afterwards, however, the relationship 
ceased to exist because the new Tory 
Government which came into office in 1970 
abandoned the old system of credit control 
by means of credit ceilings and inroduced a 
new system called "Competition and 
Credit Control". I calculated the correlation 
coefficient by computer at 
Cambridge and it comes out exactly at 

6 


zero. So much for saying that the borrowing 
requirement is the main determinant 
of the money supply. There is a zero correlation 
between the change in the money 
stock in the United Kingdom and the 
borrowing requirement. 

Equally, it is only a person who is totally 
ignorant of monetary statistics who could 
believe that it was the excessive rate of 
growth in the monetary supply which was 
responsible for Britain's high rate of inflation 
over the last five years. Anybody 
who cares to look up the facts needs to go 
no further than that admirable storehouse 
of information, International Fnancial 
Statistics published by the IMF. From that 
it can easily be discovered that the rate of 
growth of the money supply, in the broad 
and only significant definition (on which 
the Government, the Bank of England and 
everybody else concerned with this matter 
are agreed), namely, M3, clustered around 
10 per cent a year, at an almost identical 
rate for the last five years, 1973 to 1978 in 
four countries: Germany, Switzerland, 
Belgium and the United Kingdom, All our 
countries had the same rate of growth in 
the money supply. Yet the rate of inflation 
averaged no less than 15 per cent in Britain 
over that five year period, but only 41/2 per 
cent in Switzerland, 43/ 4 per cent in 
Germany and 9 per cent in Belgium. 

I think it is obvious from these figures 
that the growth in the money supply no 
more explains the high rate of inflation in 
the United Kingdom than it explains the 
exceptionally low inflation rates of 
Switzerland and Germany. Indeed, if one 
relates the money supply to the gross 
national income, Germany's money supply 
is twice as large as that of the United 
Kingdom. It is 67 per cent of GNP as 
against our 341/2 per cent, while, 
Switzerland's money supply is nearer four 
times that of the United Kingdom. It is 125 
per cent of GNP against our 34 per cent. 
So monetarists please note that on their 
own chosen criteria the danger of inflation 
through excessive liquidity is greatest in 

Switzerland and Germany, while the 
United Kingdom ought to be the least 
vulnerable. Of course this is nonsense, but 
it is nonsense because monetarism is nonsense. 
It is not Germany and Switzerland 
which stand in real danger of a high rate of 
inflation, but this country. 

In fact, the United Kingdom has by far 
the worse record and is in the most dangerous 
situation from the point of view of 
inflation, and the policies of the present 
Government are, I am afraid, more likely 
to speed up this process than to slow it 
down because they go so completely the 
wrong way about it. There is not a word 
about wages or a policy on wage settlements 
in the White Paper. 

An Impotent Government 

As far as output, employment and 
economic growth are concerned, the White 
Paper adopts a wholly fatalistic attitude. 
All it says is "that the prospects are poor . .. 
both in this country and in the rest of the 
world". This reminds one of a statement 
attributed to Neville Chamberlain during 
the great depression that the Government 
is no more capable ofregulating the general 
demand for labour than it is of regulating 
the weather. After a long circle we now 
seem to have returned to the same point. 

The philosophy underlying the present 
Government's policy is that wealth can be 
created only by the private sector, that 
wealth can be created only by giving incentives 
for risk bearing and so on, and that 
Governments cannot create wealth. Indeed, 
they say that "to plan for more public 
expenditure before the required output is 
available to support it would ensure that the 
growth ofoutput does not take place." 

The absurdity of this view is shown by 
the fact that this Government would be 
only too glad to see more motorways built 
if private enterprise built them -as is the 
case in France -but it nevertheless feels 
that the same economic circumstances 
compel it to reduce the road building pro


7 


gramme by £200 million merely because 
this is produced by the public sector and 
not by the private sector. Why do they not 
hand it over to private enterprise and be 
done with it? Then they can say "Ah, the 
private sector has created our wealth or 
output, so now we can be allowed to spend 
more money". 

As to the rest , there is one thing on 
which I agreed with Lord Boyd-Carpenter, 
when he mentioned the "so-called" cuts. 
The White Paper is so full of "so-called" 
cuts. They are not cuts at all ; they are not 
cuts in services, provided they are treated 
as negative public expenditure, which is a 
concealed form of taxation, hypothetical 
taxation of the most regressive kind. When 
they say that the country can no longer 
afford to send children to school by bus its 
is not that the buses will stop -on the 
contrary they cannot stop because the 
schools are to be concentrated in bigger 
villages. It is simply that a charge is made 
for the transport of the children. There is 
no change in the use of resources, but only 
a regressive change in redistribution of 

taxation. The road to national salvation is 
sought by making higher prescription 
charges for the same makes of prescription; 
by compelling higher payments for school 
meals and school milk and goodness knows 
what else besides. It is a plain cheat to call 
these cuts in public expenditure. It is not 
that the resources are transferred from one 
use to another. It is just a way of putting 
more burdens on the poor; and they are 
worse than general indirect taxes, because 
if you put VAT of 15 per cent. on clothes 
then everyone has to pay -not only the 
poor but also the rich. 

I will conclude where I began, with a 
quotation. I began with the opening sentence 
of this neo-Conservative Manifesto. 
I think it is only fitting that I should end 
with the opening sentence of its counterpart, 
the Communist Manifesto, which 
runs: " The history of mankind is a history 
ofclass struggles". I cannot say that I ever 
believed in this, but the present White 
Paper makes me feel that there must be 
more to it than I had once thought. 

3. The Disease and the "Cure" 
16th Apri/1980 

The publication of the long-awaited economic plan by the Government, called Medium 
Term Economic Strategy provides an opportunity to review the competence with which 
the Government conduct their affairs in terms of their own chosen objectives. This Red 
Book is an extraordinary document. Itcontains bold assertions, logical non sequiturs and 
tautologies masquerading as empirical laws, which will provide rich source material to 
teachers of economics and examiners for many years to come. 

The Government's objective, as we all 
know, is to bring down the rate ofinflation. 
This is uncontroversial. What is new is 
that, in their view, this requires, "a progressive 
reduction in the growth of the 
money stock". This is the new emphasis, to 
which they add in the same paragraph that 
they will , "pursue policies necessary to 

achieve this aim". 

Why say that? Why not just say that from 
now on they will issue less and less new 
money each year? 

Ifthe increase in the money supply is the 
cause of inflation, as Ministers constantly 
proclaim that it is , surely this implies that 
the money supply is something that can be 

8 


directly controlled, in the same way as 
VAT, or income tax or the size of the 
armed forces. If it is not, if it is something 
that can be influenced only indirectly, 
through the use of other instruments, then 
the rise in the so-called money supply is at 
best a measure of inflation and not the 
cause of it. 

When Lord Cockfield, told the House 
the other day that the "money supply was 
the critical factor in the level ofinflation" he 
was saying in effect no more than a doctor 
who says that "body temperature is a critical 
factor in health". You cannot cure disease 
by bringing down the temperature, even 
though your temperature will necessarily 
come down if and when the disease is cured. 

The true instrumental variables are fiscal 
policy and interest rate policy. These influence 
the level of expenditures of consumers 
and businesses and, through them 
the public's demand to hold liquid assets, 
cash and bank deposits. 

These are the same instruments as those 
of Keynesian policies of demand management. 
What has changed are not the instruments 
of control but the objectives. 
The present monetarist economic management 
aims at regulating effective 
demand, not for the sake of full employment, 
but rather the opposite; in order to 
secure a certain maximum rate of growth 
in total expenditures or in total incomes-
the two come to the same-or, if I may use 
a technical term, in the rate of growth of 
the money GNP. This is the real target. 
The growth in the money stock-whether 
you choose one definition , another, or a 
third-is only a proxy, and not a very good 
proxy, because, as experience of recent 
years has shown, the rise in the money 
national income consistently exceeded by 
20, 30 or even 50 per cent the growth of the 
money stock. 

The rate of growth of the total money 
income, though it may be a true target, is 
not the same thing, of course, as what we 
or the public generally understand as inflation 
. Inflation is something that relates 

to the rate of increase in prices or in the 
cost of living. The rise in prices depends on 
the rise in costs, the costs of material and 
the costs of labour, and these can be influenced 
by the instruments of fiscal and 
monetary policy, meaning restrictive fiscal 
measures and higher interest rates, only in 
an irregular and highly uncertain manner. 
Restrictive fiscal measures, particularly 
when they imply higher taxes and highPr 
charges, may have a perverse effect by 
causing an acceleration of wage inflation-
as indeed happened last year. 

The Government can, and do, make sure 
by their policies that the aggregate demand 
for labour be reduced , and goes on falling , 
and that wage earners shall be punished 
for asking for too much. 

Real Wage Resistance 

But this in itself may be unavailing in the 
light of what Professor Hicks called, in a 
felicitous phrase, "real wage resistance", 
by which he meant the workers' demand 
for compensation for the rise in living costs 
through an increase in money earnings. 
Hence, in order to succeed, it is not enough 
for the Government to reduce effective 
demand and thereby induce a slump in 
production and employment. They must 
break " real wage resistance", and this is 
the crucial factor in their whole strategy. 

In order to bring down inflation, pay 
settlements must be consistently lower 
than the prevailing rate of increase in 
prices and must be lower not only for one 
year but for a whole number of years in 
succession. 

"Real wage resistance" is no doubt 
abated by reducing the workers' ability to 
resist. 

This Government orchestrated a whole 
gamut of policies in order to reduce "real 
wage resistance". The cuts in unemployment 
pay, the cuts in benefits to strikers' 
families, the rise in numerous charges, of 
gas and electricty prices, of rents, or rates, 
and the contemplated tax on food, all serve 

9 


this end, as well as the policy, to which my 
noble friend referred, of resistance to wage 
claims in the public sector as for instance in 
the steel industry, which has been claimed 
by some as a great victory. On the other 
hand, the militancy of the unions is bound 
to be enhanced as well by what they feel is 
a deliberate process by the Government of 
reducing their standard of living. One cannot 
reckon on the same cost-unconscious 
resistance to wage pressures in the private 
sector as in the public sector. In the public 

sector, Sir Keith Joseph may be willing to 
put any price to get a victory in a strike, but 
in the private sector firms will not resist if it 
is too costly. Some of the policies of the 
Government -for example, the unfortunate 
idea of raising gas and electricty prices 
by 10 per cent, more than the rate of 
inflation, whatever the rate of inflation is-
acts as a built-in accelerator of inflation in 
much the same way as OPEC acts as a 
world-inflation accelerator. 

4. 
The Private and Public 
Sectors 
4th February 1981 

Apart from a lunatic fringe, there is no one in this country who belongs to either extreme 
in the matter of private versus public enterprise. We do not have many communists or 
many Left-Wing socialists who want to abolish private enterprise altogether, nor do we 
have very many Right-Wing capitalists who want to get rid of public enterprise. What is 
true is that the present Government and the party opposite, as Lord Thorneycroft 
emphasised, find that the public sector in this country is too large -a blot on the 
landscape. He did not explain on what basis they regard it as being too large, but they 
regard it as a burden and they want to reduce its size-and they neglect no opportunity to 
emphasise their intention to re-privatise publicly-owned enterprises, at least those which 
yield a profit and for which buyers can be found. 

The Ruin of the Private Sector 

I would advise them to hurry up if that is their objectives, they are rapidly diminish-
their intention, because soon they may find ing the weight of the private sector relative 
it difficult to find profitable sectors to hive to the public sector, and not the other way 
off, and they may find it even more difficult round. They scream against nationalised 
to find buyers, knowing the uncertainty to industries, but it is private industry which 
which the future status of such re-privatised they ruin, much more than nationalised 
businesses will be subject. But I am not industry. On top of that, they might well 
very optimistic, from their point of view, end up, as the depression deepens, having 
about what is going to happen, because to take large enterprises into public owner-
the real trouble is that by their present hip to prevent their extinction, just as Mr. 
general economic policies-the policies of Heath was compelled to do in the case of 
economic depression-they are destroying Rolls-Royce aero engines, to give but one 
private industry so fast that, contrary to example. 

10 


Lord Gowrie said that the difference 
between public and private enterprise is 
that private enterprise can go bankrupt. I 
think this is not quite accurate. If private 
enterprise is important, or if it supplies 
something which is vital to the national 
interest, or simply if it is an important 
segment of the economy, then it cannot go 
bankrupt, any more than can public enterprise. 
What happens is that it is taken into 
public ownership, which is not the same 
thing. Bankruptcies caused by recession 
simply increase the size ofthe public sector, 
just as, if you look at Mussolini's Italy, 
which was all against public enterprise, 
you see that they ended up with almost the 
whole ofindustry being owned by the state. 

This could possibly happen here, also. 
This is not a debate on the economic situation, 
and therefore I cannot now go into 
the reasons. But, contrary to the optimism 
expressed by our Prime Minister in 
numerous speeches, prosperity is not just 
around the corner, and we are not approaching 
the bottom. I think there are 
important forces making for economic 
contraction which have not really begun to 
operate yet. We have had a big recession 
due to de-stocking, but the consequences 
on private consumption, on private investment 
, on fixed investment, and on exports 
-the three main factors determining the 
level of economic activity -are all set to 
turn down, and as they do, we are going to 
see a much deeper recession than has yet 
been seen. In the course of that, I am 
willing to prophesy, the range of the public 
sector will be rapidly enlarged and not 
diminished . 

The industries which the first post-war 
Labour Government nationalised brought 
enormous benefits to the British economy. 
A far more efficient service was created in 
vital sectors than could have been provided 
under private enterprise. Why was that? It 
is partly because the nationalised industry 
was able to work on the basis of a comprehensive, 
long-term plan, and partly 
because, barring exceptional periods of 

ideologically hostile Governments such as 
the present one, it was able to undertake 
sustained investment on a very much larger 
scale then private enterprise would have 
done. 

Financial Capitalism 

I 

In these respects, British private enterprise, 
I regret to say, is in general much 
inferior not only to British public enterprise 
but to the privately-run industries in 
other industrial countries. We have one of 
the most extensive and sophisticated 
financial markets in the world to serve the 
needs ofindustry, yet industrial investment 
has been inadequate in this country for 
more than 100 years. As a proportion of 
the value of manufacturing output, gross 
investment in manufacturing has been only 
one-half as high in the post-Second World 
War period as in our competitor countries. 
Ifwe go back to the 1920s, or even farther 
to the 40 years preceding World War I, 
inferiority of industrial investment of 
Britain was far greater in relation to 
countries such as Germany, America, 
Japan and so on. 

What has been the main reason for this? 
There are no universally accepted explanations, 
and I do not think that my own 
view would commend itself to many people 
in this House; but my view is that the very 
existence of the City of London , the 
supremacy of financial capitalism over industrial 
capitalism, has had a deleterious 
effect on our industrial development. It 
has certainly increased the attractions and 
the facility of foreign investment against 
home investment. 

It has also meant, in the more recent 
decades since the Second World War that 
the managers of our businesses have been 
engaged in a continuous struggle either in 
averting certain takeover bids or in putting 
themselves into a position to be taken over 
on favourable terms, or else in the position 
to take over other firms -a game which 
requires clever accountants who can show 


the best-looking profit and loss accounts. 
We find more accountants among the 
heads of industrial firms of this country 
than in any other country in the world. 
This financial game, the gains from successful 
takeover bids-that you are either 
taking over or else are taken over-are far 
more rewarding to owners and controllers 
of firms than the profits derived from 
developing new lines or new markets, all 
of which are, by their nature, slow and 
long-term operations, but which, in contrast 
to the short-term financial gains, are 
in the national interest. 

Creating Wealth 

We require more public enterprise, not 
less, and a fundamentally different attitude 
to public enterprise-not one which regards 
public investment as a burden on the community. 
In the past few years-and I admit 
that the last years of the Labour Government 
share part of the blame-economies 
in public spending were largely concentrated 
on public investment as the easiest 
field in which to cut. This was the result of 
muddled thinking. People thought -and 
ministers still think-that, compared with 
private investment, public investment was 
not wealth-creating, that it was just a 
burden on the taxpayer. This is of course 

nonsense. Take, for example, motorways. 
Superficially there is nothing to distinguish 
British motorways from French motorways 
except that they are called autoroutes. But 
in the eyes of Ministers there is all the 
difference in the world. French motorways 
are profit-making enterprises and therefore 
they are wealth-creating. By levying a 
toll on users, just like the turnpike trusts in 
Britain in the 18th century, they are made 
highly profitable. They are built by companies 
which are in part at least -sometimes 
50 per cent, sometimes more privately 
owned. 

The French Government may be just as 
anxious to keep down their version of the 
PSBR (which is a much more sensible 
version than ours to start with) but all this 
does not come into it. It does not make 
them cut road building in times of unemployment 
for utterly irrelevant financial 
reasons. Although French Governments 
are criticised quite a lot in France for their 
financially conservative attitudes, they are 
miles ahead of us in their attitude to economic 
development, to co-operation of 
public and private enterprise and meshing 
the development of various sectors together, 
and also to the central direction of 
industrial investment, none of which are 
known in this country. 

5. 
The Economics of the 
Primitive 
18th March 1981 

The belief that public expenditure must be cut in order to balance the budget, which is 
clearly held passionately by the Prime Minister and her immediate associates, derives 
from an anthropomorphic conception of economics. Primitive religions are anthropomorphic. 
They believe in gods which resemble human beings in physical shape and 
character. The Prime Minister's economics is anthropomorphic, in that she believes in 
applying to the national economy the same principles and rules of conduct as have been 

12 


found appropriate to a single individual or a family ; paying your way; trimming your 
expenditure to fit your earnings; avoiding living beyond your means and avoiding getting 
into debt. These are all well-worn principles of prudent conduct for an individual, but 
when applied as policy prescriptions to a national economy, I submit they lead to 
absurdities. 

If an individual cuts his expenditure he having to make more cuts and impose more 
will not thereby reduce his income. How-taxes in order to compensate, even if only 
ever, if a Government cut their public ex-partially, for the increased deficit caused 
penditure programme in relation to tax by the previous round of cuts. At the 
rates and charges, they will reduce the total moment they have to take two steps back-
spending in the economy and hence the wards to make one step forward. 
level of production and income. It will If you add to the money which is raised 
reduce the revenue yielded by existing by the Budget the monies raised through 
taxes and it will cause public expenditure fiscal drag in income tax and the 1 per cent 
on unemployment benefits and on the addition to the employees' contribution, 
support of firms in trouble, and other you get a total of between £6 billion and £7 
similar items, to rise. It is a policy that is billion taken out of the economy. For what, 
appropriate only in times ofexcess demand my Lords? In order to effect a prospective 
and over-full employment, as was the case reduction by £3% billion in the PSBR. 
in the period of Crippsian austerity after That is very much a hope. The relationship 
the war. At a time like now, with 21/2 worsens the whole time. Soon they will not 
million unemployed , far from being a be able to reduce the borrowing required 
recipe for prudent housekeeping and by however much they increase taxes and 
future prosperity it is a recipe for ruin. To by however much they cut expenditure, 
keep tightening the budget in the hope of because the yield of existing taxes will fall 
"balancing the books" is to keep reducing so fast and expenditure will rise so fast in 
the output and income of the nation and consequence. 
hence failing to balance the books as tax The one positive result of this Budget-
yields shrink and expenditures to support which they claim they have brought in to 
the disintegrating economy increase. help industry-is the reduction of MLR to 

12 per cent, which is what it was before 

The Vicious Circle they began to raise it in 1979. To take pride 

in that is to be like the legendary Duke of 
As a result of this kamikazi policy of York, feeling proud when he succeeded in 
repeated efforts to cut expenditure and to marching his troops down the hill, even 
raise taxes in order to reduce public though they were battered and very much 
borrowing, the tax burden has risen sub-enfeebled. That is the policy imposed on 
stantially, both aboslutely and as a per-the nation by the Prime Minister with her 
centage of the national income, and is belief in anthropomorphic economies -a 
much higher now than under the previous belief fully revealed in her impromptu 
Government. The PSBR as a percentage speech at a luncheon last week. 
of the GDP is higher than it was last year 
and higher than it was in the last year of the 

The Historical Equivalent 

Labour Government, when it was exceptionally 
large. The net results of the We have been through this nightmare 
Government's policies are thus the very before with Philip Snowden, the nearest 
opposite of what they intended to achieve. historical equivalent to Mrs Thatcher. He 
They are in the grip of a vicious circle of had the same highly moral. austere, an


13 


thropomorphic outlook. And when during 
the depth of the depression in 1931 the 
prospective Budget deficit threatened to 
reach £170 millions which was then 4 per 
cent of the GDP (as against 6 per cent 
today) he insisted on putting into effect 
the recommendations of the May Committee 
-a 10 per cent cut in all public 
sector wages and salaries, in forces pay 
and in unemployment benefit, plus a large 
dose ofadditional taxation in an emergency 
Budget of September, 1931. All this was 
done in the name 
standard. Keynes told a parliamentary 
group two days after that Government's 
emergency Budget: " It is one of the most 

wrong and foolish things which Parliament 
has deliberately perpetrated in my lifetime." 

He also wrote to an American friend , in 

reaction to Snowden's Budget: " To read 
the newspapers just now is to see bedlam let 
loose. Every person in the country ofsuper 
asinnine properties, everyone who hates 
social progress and loves deflation, feels 
that his hour has come and frequently announces 
how, by refraining from every 
form of economic activity, we can all 
become very prosperous again". 

Luckily, a few days later the French 
came to our rescue and saved us from the 
awful consequences of Snowden's anthropomorphist 
policies. They withdrew 
their loan and thereby cleared out all the 
gold remaining in the vaults of the Bank of 
England. So the great deflationary Budget 
came to late to save "sound money". We 
went off gold as there was no alternative. 

6. 
The Achievements of 
Conviction 
12th November 1981 

This is the third debate on the Queen's Speech in the lifetime of the present Parliament. I 
count myself fortunate to address your Lordships from the Back Benches of this side of the 
House and not from the Front Bench of the other side: I certainly do not envy Lord 
Cockfield in keeping up his usual air ofeffortless superiority and infallibility, while having 
to eat quietly so many of his past words. 

Lord Cockfield, with the same confidence 
and superiority, explained to us two and a 
half years ago that from now on everything 
would be different. It is a completely new 
world we are entering; the money supply 
will be strictly controlled; the control of 
the money supply will work miracles; inflation 
will rapidly disappear, and there 
will open up a marvellous new era of 
growth and prosperity. I do not want to 
repeat too many times the figures that 
have already been bandied about and 
quoted. The fact is that our production 

shrunk; our GDP in two years by 71h per 
cent, which is more than has ever happened 
before in peace time; a fifth of our manufacturing 
output disappeared ; and I could 
add many other features. 

Turning to the methods by which this 
new Government thought to bring about a 
new Jerusalem in this country, they were 
always concerned with turning back the 
frontiers of government; reducing government 
expenditure. Today we heard almost 
with satisfaction a statement from Lord 
Cockfield that government expenditure, 

14 


as a matter of fact, increased as a percentage 
of the national income from 50 per 
cent to 55 per cent, and it will! be higher 
still next yea r. The PSBR, by whose reduction 
they till seem to et great store, 
was exceeded by 57 per cent as compared 
with the Government' target in one year, 
and by 40 per cent in the next. 

I will not go into, but merely register my 
utter and total disagreement with, his 
present emphasis on the budgetary deficit 
and the level of interest rate . I could 
demonstrate to him -l have done so and 
am ready to supply written proof -that 
there is no necessary connection whatever 
between the budget deficit and the interest 
rates; you can have high interest rates and 
no deficit, enormous borrowing and very 
low interest rates; you can have a 2 per 
cent war (as we had in the Second World 
War) or a 6 per cent war (as we had in the 
First World War); and lately the great 
Milton Friedman has come round to this 
view too, and I could supply references to 
that effect also. Let us leave that there. 

The Money Supply 

What was missing from Lord ockfield's 
excellent and wid >-ranging account today 
was any refer >nc' to the money supply, 
wh r as two years ago th mon supply 
was the centrepiec of everything. The 
control of th > money supply and the 
reduction in its gowth rate would rewlt in 
all sorts of miraculous changes coming 
about, sow> w ·re told. In the event what 
ha pp ned? Since the day the Government 
cam· to offic· th money supply, by their 
own d ·finition, has increased at an annual 
compound rate of 18 p r cent, as against 
tiP Il. p ·r c ·nt in tiP pr •vious five ears. 
betwe n the se ond quarter of 1974 and 
that of 1979, and that was under a Labour 
Gov ·rnm •nt. So th > mon suppl iner 
as ·d m or· than 0 p•r cent fasterthan it 
did b for . That has b · n then ·t result of 

mon tarism. 

I submit that tiPr' is not a singl ' asp•ct 

of the Government's policy, announced or 
unannounced, in which the desired objectives 
of the Government have been 
attained, except perhap one, but that is 
not one for which anyone could openly 
claim credit. They have managed to create 
a pool -or a "reserve army", as Marx 
would have called it -of 3 million unemployed, 
and but for the fact that British 
Leyland was not closed down, as looked 
like happening -a lame duck, on Keith 
Jo eph ' definition, if ever there wa one-
the figure would oon have risen to 4 
million. 

There i no use blinking at the fact that 
in terms of the power of masters over men, 
the existence of 3 million unemployed 
makes a vast difference. One ha only to 
scan the tatistics of absenteeism, the 
number of days lost through strike and 
the ize of wage settlements, both ab olutely 
and relatively to the increase in the 
cost of living, to realise that the British 
working clas es have been thoroughly 
cowed and frightened. The trade unions 
are demoralised and a climate of fear 
dominates the land. The defeat of a nearunanim 
u strike recommendation by 350 
·hop stewards-I never knew there could 
be so many shop steward in one firm -of 
British Leyland only a week ago bears 
eloquent testimony to that. 

Abandoning Consensus 

Mrs Thatcher is our first Marxist Prime 
Minister -none but a Marxi t could speak 
so contemptuously of consen us politics. 
She was reported to have aid in Au tralia 
recently: "To me, consensus seems to be 
the process ofabandoning all beliefs, principles, 
values and policies . ... it is the process 
ofavoiding the ver issues that have got 
to be solved merely to get people to come to 
an agreement on the way ahead". 

l can almost hear Lenin ·peaking those 
words wh •n in ctober 1917 he bullied 17 
"wet" m mbers of his politburo in ord 'r to 
tak ·risks and seize pm er which the were 


most reluctant to do. 

Yet despite the Russian revolution, and 
despite Britain's present untimely essay 
into Victorian capitalism, the successful 
trend in the present century, at any rate in 
its second half after Hitler was defeated, 
has been precisely towards the kind of consensus 
politics our Prime Minister so 
despises. 

Perhaps she needs reminding that there 
was never a more far-reaching consensus 
in Britain than that attained by the wartime 
coalition Government of Winston 
Churchill, which certainly did not involve 
abandoning all beliefs, principles and 
values; whereas the previous "conviction 
politics" of Neville Chamberlain-a Prime 
Minister with much the same qualities of 
single-mindedness, courage and obstinacy 
as Mrs Thatcher-divided the nation as it 
had never been divided before. 

Coming nearer to our time, the successful 
democracies of post-war Europe countries 
like Germany, Australia, 
Holland and the Scandinavian countries-
follow the principles of consensus politics 
characterised by ever-widening consultation 
at all levels and by making all employees 
participate in decision-making at 
all levels. Those are the countries which 
have excellent labour relations, relatively 
low rates of inflation, few strikes and high 
productivity and production records, 
countries in which you find a recognition 
of a common interest in the success of the 
enterprise by all participants -which I 
consider a more important feature of 
success. 

I would put Japan in the same category. 
There, in apparent contrast to its strong 
hierarchical traditions, there is in fact 
widespread regular consultation between 
management and staff, as we learned from 
an article in The Times the other day; and I 
must say that one of the most promising 
and cheerful features of recent events has 
been the increasing involvement of Japanese 
management in British industry. I cannot 
see anything but good in that kind of 

development. In Japan, wages are rapidly 
rising, in real and money terms, and are 
twice as high now as they are in Britain, 
and workers are protected, by the guarantee 
of lifetime employment, from being 
made redundant as a result of either automation 
or robotisation. 

0 

The Miserable Contrast 

In miserable contrast to all that, British 
industry, as represented by the CBI, or the 
Government, is convinced that it is only 
through a large fall in the workers' standard 
of living, through wage increases consistently 
falling short of the rate of increase 
in prices, that industrial competitiveness 
can be restored. What nonsense that is! 
Improved competitiveness requires modernisation 
through new investment. It 
requires expanding home markets, which 
require higher, not lower, real wages and, 
most importantly, it requires an improvement 
in the technical competence of industrial 
maanagement which, in the view 
of all foreign experts-though not perhaps 
the native experts -is one of the worst in 
the world. 

Real wages could be much higher if our 
national production could be raised to its 
economic potential, and I failed to hear a 
single reference by Lord Cockfield or anyone 
else on the Government side, to this 
vital difference between actual output and 
potential output. If we could raise output 
to the full employment level, our production 
would be around 20 per cent higher 
than what it is now; and if that cannot be 
achieved it simply means that our organisation 
of the economy, our market system, 
and the whole system of production and 
distribution is fundamentally defective. 

The only way that I can see of regaining 
full employment is by expanding the 
demand for the products of British industry, 
which in our present feeble state, I 
readily admit, would not be possible without 
protection or import controls of some 
kind. It would be possible only if we could 
channel the additional demand to British 

16 


products and not to foreign products. To 
that extent I agree with the Government 
that within the confines of their ideological 
parameters, which abjure controls of any 
kind -whether exchange controls, import 
controls, wage controls, price controls or 
any form of planning -there may indeed 
be no alternative to their miserable 
policies, which I am convinced will lead us 
further down and down, and more and 
more unemployment until some type of 
revolution changes things radically, for the 
worse or for the better. Whether it will be 
a revolution of the Right or a revolution of 
the Left, I do not know; either might 
happen. 

In terms of their own chosen criteria the 
Government's two and a half years of 
office has been one unmitigated failure , 
unless the rise in unemployment by 2 
million is taken on the plus, not on the 
minus, side of the account, and that 
Government speakers are anxious to deny. 
Nevertheless, they feel both pride in their 
achievement and a great deal of confident 
optimism. This was particularly prominent 
in the Prime Minister's speech in another 
place last week. She talked about "the 
signs ofeconomic success . .. a testament to 
our new economic strength". She said that 
"the major changes that we have so long 
needed and so often shirked have now been 
made, and .. . we shall secure the kind of 
success which our neighbours have achieved 
and which has eluded us since the war". 

She did not tell us what she meant by " the 
major changes" which have now been 
made; we can only guess. None the less, I 

am sure that those were not debating 
points. They were genuine expressions of 
a deeply felt conviction which alone can 
sustain the Prime Minister in the face of 
the tremendous pressures to which she 
must be exposed, and one cannot suppress 
a certain admiration of the way that she 
stands up to them. 

Convictions and Delusions 

But unfortunately her convictions, however 
deep, however genuine, are based on 
a delusion. It is a delusion that Britain's 
failures and difficulties are the result of 
Fabian Socialism and the welfare state, the 
result of Keynes and Beveridge, and once 
we-here I quote again-"return as many 
industries as possible to the private sector". 

and get rid of the powers and privileges of 
trade unions everything will come right. 
We shall again be one of the leading nations 
of this world. That that view , which on my 
interpretation, is the basis of the 
Government's whole philosophy, is 
fundamentally false should be evident 
from two considerations. One is that our 
neighbours who have been so much more 
successful (to which the Prime Minister 
referred) have had a bigger dose of Keynes 
and Beveridge since the war, not a smaller 
one. Social security and full employment 
were more consistently pursued in postwar 
Germany, Austria, France, Sweeden, 
Denmark and Norway than they were in 
Britain. Yet they have not (Jeen enfeebled, 
but very much enriched by those policies. 

17 


7. 
Drawing up the Balance 
Sheet. 
17th March 1982 

The Government's basic philosophy in 1979, ably expounded by the noble Lord, Lord 
Cockfield, was that the Government's first priority was to bring down inflation; inflation 
was entirely a matter of the money supply. Therefore, "to reduce inflation, the Government 
will progressively reduce the growth ofthe money supply and will pursue the policies 

necessary to achieve this aim. " 

In the three years since the present explicitly 
monetarist Government came to 
power, the money supply has grown much 
faster than before. Compared with the five 
years from 1974-79, under Denis Healey 
between 1979 and now the annual rate of 
growth in the money supply is 80 per cent 
larger. Ifone takes an even better measure, 
which is not "sterling M3", which is an 
artificial thing but M3 itself, the excess in 
the rate of growth of money supply under 
a monetarist Government was fully 100 
per cent. Money supply increased twice as 
fast as it did before. 

Real Achievements 

On the other hand, remarkably, the Government 
do not claim credit for their real 
achievements, which are a rise of nearly 2 
million unemployed , a fall of 6 per cent in 
the GDP, and a fall of 19 per cent in 
manufacturing production. To be fair, one 
of Mrs Thatcher's closest supporters, Mr 
Arthur Seldon of the Institute of Economic 
Affairs writing for an American journal 
published in San Francisco, drew up a 
balance sheet of "Margaret Thatcher's 
successes and failures". He listed the rise 
in unemployment by 11h million in two 
years as being her No. 1 success-indeed, 
the only one of any consequence. The 
others were a slight reduction in the rate of 
increases in wages and prices, and a reduction 
in pay settlements to the same 
level at which they stood when Mrs 
Thatcher first came in. Mr Seldon listed all 

other aspects of the Government's policy-
taxation , Government expenditure, PSBR 
and bureaucracy -as "failures". That Mr 
Seldon should regard higher unemployment 
as such a good thing is further evidence 
of a quiet intellectual U-turn by the 
Friedmanites and the Thatcherites. Originally, 
high involuntary unemployment was 
not regarded as either a necessary part or 
consequence of monetarism. Once could 
quote plenty of passages from Milton 
Friedman and his true followers in this 
country to the effect that trade unions are 
quite harmless; if they raised wages above 
the true market level they would simply 
price themselves out of jobs but they could 
not-I repeat, "not"-cause either costs of 
production or prices to rise because these 
are firmly tied to the money supply. That 
was the core of the philosophy of the 
present Government. 

It was only the bitter experience of the 
Government's first year in office -when 
prices rose by 21 per cent instead of the 10 
per cent forecast -which convinced the 
Government that control over the money 
supply was not enough; one must also have 
low pay settlements. Indeed, without low 
pay settlements, the growth of the money 
supply could not be slowed down either. 
But the Government did discover that by 
driving firms to the verge of bankruptcy 
and beyond it, it was possible to bring 
down pay settlements quite considerably. 
If a firm is on the verge of going into 
liquidation then in order to keep it alive, 
keep it on that verge, c>ne can bring about 

18 


quite a significant moderation in wage 
claims. Faced with the prospect of job 
losses and permanent unemployment, a 
wage earner is willing to accept a cut in his 
real wages. In other words, the chief aim 
of the policy was to lower wage settlements 
and thereby lower the rate of inflation. 

An Economic Miracle 

What have the Government achieved? 
They claim that there is a wonderful new 
spirit of leanness and efficiency in industry 
and that we are on the brink of an 
"economic miracle" such as happened in 
Germany under Professor Erhard. Unfortunately, 
all this is just talk. None of 
these claims shows up in the statistics which 
matter -those of output, consumption, 
investment or exports. 

The Prime Minister has proclaimed at 
least once a year, if not twice, that the 
~orst of the recession is over and that, 
from now on, the economy is·on an upward 
path. This has been said ever since 
the middle of 1980 and it is still being said. 
The last time industrial production was 
proclaimed to have reached bottom was in 
the three months from March to May 1981. 
We heard Lord Cockfield, say that from 
then on, we have been recovering. Indeed, 
in the subsequent three months August-
October, manufacturing output was fully 
1112 per cent higher, which in annual terms 
is quite a substantial figure. Ministers were 
not slow in claiming credit for it. Unfortunately, 
it has turned out to be a false 
dawn. It is not true that just January was a 
bad figure; the whole of the last three 
months was bad. In the three months, 
November to January, production fell by 
more than 2 per cent as compared to the 
previous three months. 

So in the last three months manufacturing 
production was lower than in any 
previous three months in the life of the 
present Government. You have to go back 
15 or 20 years to find output as low as that. 
And there is no sign that it is improving. 

All this is just talk; when the figures come 
out, they show time and again that production 
is lower than before. October was 
an exception, it was a freak month; production 
was 2 per cent higher than either in 
earlier or later months. It was on the basis 
of this one month's figure that all the 
Government's optimism was based. 

If we take the forecasts -after all, the 
forecasts were prepared long before the 
January production figures were known, 
and they now look too sanguine -by the 
first part of 1983, which is the furthest 
forecasts go, GDP will be 3.4 per cent 
higher than at its lowest point in the first 
half of 1981. What a wonderful improvement 
to look forward to. From the depths 
of the recession, in two years, 24 months, 
you will have managed to increase manufacturing 
production by 3.4 per cent. This 
is what they claim. But these claims are 
already overtaken by the latest figures, the 
figures published since, and it is no more 
probable that a rise of 3.4 per cent will be 
realised than that the figures will show a 
fall by 2 per cent a year between now and 
1983. 

Even if we take the Government's 
figures at their face value, the net result of 
the whole Thatcher experiment will be a 
reduction of wealth. Real GDP is forecast 
to be some 4 per cent less than in the 
second quarter of 1979, when the present 
Government took office. We have to go 
back a long time to find an instance when a 
Government went out leaving the country 
poorer than when they came in. Perhaps 
the Government of Ramsay MacDonald 
from 1929 to 1931 qualifies for this 
description. 

The Thatcher Experiment 

' 

The purpose of national policy is to increase 
the production of wealth, and that 
cannot be repeated too often. It is not 
increased productivity, it is not lower inflation, 
it is not lower budget deficits; all 
these things are only important if they serve 

19 


the end of increased production of wealth. 
Initially this was recognised. Initially the 
Government proclaimed that their basic 
aim was: "to create conditions for a sustainable 
growth ofoutput and employment". 

We hear less about this now. After three 
years, despite numerous optimistic 
ministerial speeches, there is no sign 
whatever of this happening. The official 
explanation is that the whole world is in a 
state of recession; how could we have 
opted out of it, when everybody ~lse is in 
recession? Well, this leaves out of account 
the fact that while our industrial partners 
were at the losing end of the oil crisis, we 
were at the gaining end. It was our peculiar 
misfortune that oil and Mrs Thatcher came 
on full stream more or less at the same 
time. 

Therefore, all the benefits, all the 
potentialities which North Sea Oil gave for 
renewing our industrial equipment, for 
renewing our aging and crumbling infrastructure 
and modernising British industry 
were entirely wasted. We reduced our 
GDP just when our potential GDP was 
enlarged by a new source of income, oil, 
the exploitation of which would have required 
a large increase in effective demand 
sufficient to maintain employment while 
avoiding vast balance of payments sur


pluses. The difference between us and 
other industrial countries is that all other 
industrial countries are constrained, on 
account of oil, by their balance of payments, 
and they could only expand further 
or faster or follow a more expansionary 
policy by incurring bigger balance of 
payments deficits. But our balance of 
payments is in surplus to the tune of £8 
billion, for the first time for I do not know 
how many years. We are not constrained 
by our balance of payments; we do not 
have the excuse that we cannot expand 
because our balance of payments would 
not allow it. 

However, bygones are bygones. When 
the present policies are finally abandoned 
and put into reverse gear, which I am sure 
will happen, Britain's capacity to produce 
will be found to have shrunk a great deal. 
And, however much the policies are put 
into reverse, the losses caused by the 
Thatcher experiment will never be recouped. 
At any particular future date the 
country will inevitably be poorer than it 
would have been if the Thatcher experiment, 
the triumph of monetarism and the 
magic of money supply, had never taken 
place. 

8. Market Forces and Industry
3rd February 1982 · 

The greatest ofEnglish economists ofthe late 19th century, namely Alfred Marshall, went 
out of his way to demonstrate that the doctrine of maximum satisfaction -which means 
that leaving things to the market leads to the best solution -is not true without strong 
qualifications. His greatest pupil in Cambridge, Professor Pigou, devoted his whole life to 
exploring the qualifications and the limitations of that doctrine in a systematic manner. 

I want to illustrate the point by one or best results. The clearest example which 
two examples of how market forces can springs to mind is what came to be called 
produce the worst results even in respects some 10 years ago as the Dutch disease. I 
in which they are expected to produce the am not referring, of course, to the disease 

20 


of elm trees, which is no doubt familiar to 
many of your Lordships. I am referring to 
the unfortunate and wholly unexpected 
consequences of the discovery of a great 
deal of natural gas under the sea near 
Groningen. On any rational grounds one 
would expect that this discovery would 
have been a great boon to Holland, just as 
the discovery of North Sea oil was supposed 
to have been a great boon to Norway 
and to Britain. 

However, the reality turned out to be 
quite different. Gas was a new, additional 
source of income which added greatly to 
Holland's exports -90 per cent of it was 
bought by other countries. But these exports 
had to be paid for, which made the 
guilder a highly-sought-after currency, 
driving up its value in relation to Dutch 
industrial costs sufficiently to make it 
possible for foreign countries to pay for 
their gas by increased exports to Holland 
and reduced imports from Holland. So the 
market mechanism, which automatically 
tends to bring exports and imports into 
balance, automatically also causes an improvement 
in the energy balance to be 
offset by a corresponding deterioration in 
the balance of trade in manufactured 
goods. 

As a result, from 1965 onwards Holland 
experienced rapid de-industrialisation even 
more rapid de-industrialisation than 
we are experiencing today and industrial 
employment fell by 30 per cent, having 
risen substantially by 2 per cent a year ever 
since the end of the second war. The result 
was that the growth of the national income, 
the growth of the GDP, very much slowed 
down. It was growing less fast than before 
gas was discovered. The huge income from 
gas served as a substitute for other sources 
of income -and an inferior substitute and 
not as an addition to other sources of 
income, which it should have done. And 
since gas production, unlike manufacturing, 
requires hardly any labour, Holland 
became a country of heavy unemployment 
and declining real wages. 

Many of us were afraid that we should 
catch the Dutch disease once North Sea oil 
came on stream, and that is precisely what 
happened. In terms of real GDP, oil 
brought no net benefit at all to this country. 
As the value of oil production went up , so 
the value of manufacturing production 
went down. Employment in manufacturing 
industry alone fell by 3 million -from 
nearly 9 million in 1965 to just under 6 
million in June 1981 , and it may have 
fallen by another 150,000 to 200,000 since. 
Manufacturing output, which reached its 
peak in 1973, has since fallen by 17 per 
cent. 

All this is due to the same natural 
tendency of the free market to substitute 
one source of production for another, even 
if the new source is more in the nature of a 
new inheritance -something which in a 
properly functioning economic system 
should be a net addition to wealth and not, 
as in the British case, the cause of a net 
reduction. Given the fact that there was 
nothing that would expand total demand 
in line with the increase in productive 
potential which occurred just when a 
socialist Chancellor thought that an expansion 
of demand is the very devil -the 
net result of the oil and gas discoveries in 
Britain, just as in Holland , was that in the 
field of manufactures less and less was 
produced at home and more and more was 
procured from abroad. 

The Real Alternatives 

That this sort of thing is not inevitable but 
simply the result of bad government-and 
I do not mind whether it is a bad Labour 
government or a bad Tory government; 
unfortunately in this country we have had 
both -is shown by a comparison with a 
third country, Norway, which is governed 
on Keynesian principles and not on 
Thatcherite principles. Oil and gas loom 
far larger in the economy of Norway. The 
gross value of their oil and gas production 
is equal to the value of the whole of their 

21 


manufacturing output, which is about 25 ' 

per cent of the GDP, whereas in Britain oil 

and gas production together is, I think, 

around 6 or 7 per cent ofGDP. But where


as employment in oil production is less 

than 0.5 per cent of total employment, 

employment in manufacturing in Norway 

i 20 per cent. I suppose the propagandists 

of the present Government would say, 

" Hooray! -productivity in oil or gas is 40 

times as high". Output per man is 40 times 

as high in oil as it is in manufacturing-just 

becau e oil does not require labour, or 

requires very little of it. 

Despite all this, thanks to a devaluation 
of the kroner (which the Government 
carried out in face of a strong balance of 
payments and of strong currents driving up 
the kroner) and then to its subsequent 
maintenance at a low level in relation to 
costs through extensive market intervention 
by the Norwegian Central Bank, in 
Norway manufacturing output and em'
ployment were maintained. Now Norway 
i the country with the lowest unemployment 
in Europe, at 2 per cent, if not in the 
whole world. It is only slightly exceeded by 
Austria which also kept unemployment 
very low as a result of a Socialist government 
in contrast to the high unemploy


ment of right-wing governments. 

Norway's example shows that there was 
no need to undergo the mi eries of deindustrialisation 
or having millions of unemployed. 
All that it was necessary to 
ensure was that effective demand was high 
enough to utilise the available resources to 
the full-and the available resources were 
enlarged by North Sea oil and ga . That 
simple proposition no one in Whitehall 
could understand. 

What we should do if we were rational 

and clever would be to build up our export 

capacity in manufactures by a large-scale 

industrial investment programme, a major 

programme of industrial regeneration and 

modernisation, organi ed from the centre, 

on much the same lines as in Japan. The 

central government there organised post


war industrialisation. Investment was 
carried out in businesses run by private 
enterprise, but the whole thing was 
planned by the Japanese Government. 
Private industry without central planning 
(what the Japanese call administrative 
guidance and direction) cannot be expected 
to undertake this. On a narrow 
view, it does not appear to be a profitable 
thing to do. But the interests of the nation 
and of the shareholders of the companies 
are not identical; or, rather, they do not 
appear to be so. Each company acting 
separately and individually may be justified 
in thinking that a major programme of 
modernisation and capacity extension 
would not pay. It would be throwing good 
money after bad. But if all companies 
undertook such a programme simultaneously, 
they might well be justified in 
terms of profit as well as of a higher and 
more secure emplQyment in the country 
and a higher real income for the nation as a 
whole. 

Moreover, our own problem of expanding 
and modernising our export 
industries is far more urgent than that of 
the Norwegians. Norway's proved oil 
re~erves are sufficient for a hundred years 
to come at the permitted maximum output 
of 75 million tonnes a year-which they do 
not expect to reach until 1990. Some 
Norwegian oil experts say that since the 
greater part of the Continental shelf has 
not yet been explored, oil might last for 
another hundred years or even longer. 

But this is not true with us. Our own oil 
reserves are expected to be exhausted 
somewhere in the early decades of the next 
century. Therefore, it is far more important 
that we should have something to replace 
oil in order to pay for our imports. 
That is to say, we should use this time 
when we could afford it to build up and 
modernise our export capacity. 

The Limitations of Market 
Forces 


I have given but one example ofthe general 

22 


proposition that you cannot rely on market 
forces to generate sufficient demand which 
alone can ensure the optimal use of resources. 
This is one thing that the markets 
cannot do. Nor can you rely on the foreign 
exchange market to secure a satisfactory 
balance of payments. Anyone who listened 
to the speech of Lord Soames, in the 
debate in this House last week will have 
been convinced that, in the matter of foreign 
exchange, reliance on market forces 
is a total absurdity. Another major respect 
in which we cannot rely on market forces 
concerns the stability of wages and prices. 
The present Government regard price 
stability as the supreme objective of national 
policy. Whether they are right in this 
-to give inflation or the absence of inflation 
such a high priority-is a matter for 
argument. But, whether the priority is high 
or low, they haven't a clue of how to 
achieve it. They have an idee fixe , which 
perhaps is not as widespread now as it was 
a year ago, that in some mysterious fashion, 
which is completely unexplained, it will 
come about automatically through control 
of the money supply. In fact, as experience 
has shown, they cannot control the money 
supply. I am sure it would not have made 
any difference, even ifthey had succeeded. 

The only way to make some real sense of 
their policy-one cannot assume that one's 
masters are all half-witted -is to suppose 
that they believe in the curative powers of 
unemployment; that, if you create enough 
unemployment, the working classes will 
be hungry enough and the trade unions 
will be weak enough not to have strikes, 
not to have absenteeism or recalcitrance, 
and not to have wages rising faster than 
productivity. The example of ASLEF in 
the last few weeks has shown that 3 million 
unemployed are not nearly enough. It may 
need unemployment up to 5 million or 6 
million to reduce the working classes to 
that state of obedience. And what a waste! 
What a lot of contrived misery of the large 
majority of the nation that depends on 
work for earning a living. 

All this is because the Prime Minister 
and her friends are ideologically opposed 
to controls. I am convinced that their 
policies will fail. In our present era, the 
late 20th century, inflation has become 
endemic to the capitalist system. It is 
present in all capitalist countries and , 
moreover, it has now spread to communist 
countries as well. It cannot be got rid of 
without a consensus policy on income distribution 
which allows effective and comprehensive 
controls over prices and wages. 
Lady Young said quite a lot about how 
impractical this was; but she did not tell us 
what her alternative is or whether she has 
an alternative. 

The Export of Capital 

A final area in which it is hopeless to rely 
on market forces is foreign investment. 
This is only an aspect of the more general 
issue of whether private profitability is a 
good or a bad guide to national profitability. 
It may be profitable for a British or 
a multinational firm to transfer its activities 
abroad where labour is cheaper or the exchange 
rate more favourable ; but it is 
against the interest of the nation as a whole. 
The Chancellor of the Exchequer in another 
place the other day argued against 
the view I have. just put forward by saying 
that, if we controlled outward investment, 
we could not expect to get the benefit of 
inward investment. What he did not say 
was that this is a poor argument because 
United Kingdom investment abroad in 
manufacturing industry is 10 times as large 
as foreign investment in Britain; so that we 
do not get benefits from foreign investments 
which are comparable with the losses 
to Britain through investing abroad rather 
than in this country. 

In other words, to restore the British 
economy, and with it the health and morale 
of the nation , we must adopt polcies to 
look after both the supply side of the 
economy-that is, the capacity to produce 

23 


-as well as the demand side. The present market forces, disclaim responsibility for 
Government, with their blind faith in both. 

9. 
Unemployment: The 
Unexplored Alternative 
16th November 1982 

The Select Committee on Unemployment-and chiefly its chairman Lady Seear-must be 
congratulated for producing in a short period a very solid piece of work (Report from the 
Select Committee of the House of Lords on Unemployment), extending to a history of 
unemployment, a review of the theories of unemployment, and to assembling a vast 
amount of statistical material on the costs of unemployment, its social effects, as well as a 
detailed review of possible remedies. In my view it is all the more regrettable that the 
committee missed its target as regards the basic causes of unemployment, and the causes 

of its aggravation since 1973. 

I think that it is true, as it is true in 
medicine and everything else, that one 
cannot find the right remedy without giving 
the right diagnosis; and the right diagnosis 
the committee certainly failed to give. The 
section of the report which comes near to 
it is that which discusses United Kingdom 
export performance, looked at from two 
different points of view; exports as a share 
of the national income, and exports as a 
share of world trade. These two measures 
of performance appear to yield widely 
divergent results. 

Exports in relation to 
national income and world trade 

U K Exports as 
share of U K 
U K Exports as 
share of 
Year national income world trade 
% % 
1953 24.7 21.2 
1958 23.3 17.8 
1963 21.3 15.4 
1968 23.9 11.6 
1973 27.0 9.4 
1979 33.4 9.7 
1981 32.1(est) 

Source: National Income and Expenditure 
NIESR. 

If you take the first of these two 
measures -exports as a share of national 
income-we seem to have done frightfully 
well. Comparing the initial year, 1953, with 
the final yea'r, 1979, we see that the share 
of exports in our total national output has 
increased in a most remarkable fashion from 
24.3 per cent to 33.4 per cent; in 
other words, from less than a quarter to 
just over a third of total output. Most of 
the improvement occurred after 1973. The 
rise in share up to 1973 was only from 24.7 
per cent to 27 per cent. Whereas at the 
earlier date, one in four of everything 
produced in this country-and I think that, 
judging from their source, the figures relate 
to manufacturing industry only -was exported 
abroad, by 1979 one in three of 
everything produced was exported. That is 
a very significant difference. 

Over the same period we lost more than 
one-half of our share of world trade in 
manufactures. Whereas in 1953 we still 
accounted for 21.2 per cent of total world 
trade , the share fell to less than 10 per cent 
-to 9. 7 per cent, to be exact-by 1979. The 
figures do not go much further, but since 
then the share has fallen by a further 20 per 

24 


cent and now stands at just over 8 per cent 
of world trade. 

Decline and Complacency 

That Britain's share of world trade has a 
diminishing trend is a long-established fact. 
It was first noted in the 1880s-100 years 
ago. But then, and for many years afterwards, 
people took comfort from the fact 
that a fall in our share of trade was an 
inevitable consequence of the spread of 
industrialisation to other countries. There 
was a time when Britain was the only 
country to produce factory-made goods. 
Then our share was necessarily 100 per 
cent of "manufactures", if we confine the 
term to factory-made goods and exclude 
hand-made goods. 

We could not prevent other countries 
from following our example. Indeed we 
actively assisted in the process by sending 
out our engineers, our skilled workmen, 
by establishing factories abroad, and 
sometimes by providing them also with the 
necessary funds through the City. Thus 
our share of world trade was bound to fall , 
but that was not regarded as a source of 
great worry, because it was thought-and, 
up to a point, rightly-that the size of the 
market is increased pari passu with the 
expansion of the number of producers. 

But this kind of complacent attitude will 
not hold water if applied to the post-World 
War 11 period. For there it can be seen that 
all other industrial countries -with the 
sole exception of the United States managed 
to keep their share, or even to 
increase it during the same period in which 
our share of trade was halved. Thus 
between 1953 and 1979 France's share 
increased from 9 per cent to 10.4 per cent, 

' Germany's share increased from 13.3 per 
cent to 20.7 per cent, Italy's from 3.3 per 
cent to 8.4 per cent, and Japan's from 3.8 
per cent to 13.6 per cent. 

Clearly, while Italy and Japan were exceptional 
in more than doubling or trebling 
their share of world trade, so were we 

exceptional. Nobody else in the world has 
diminished their share by one half, or anything 
like it, during these 26 years. Yet 
nobody else seems to have been as successful 
as Britain in increasing their share 
of exports in total output-not even Japan, 
I believe. We have increased it to 33 per 
cent. Ministers make speeches all over the 
country saying that there is no other 
middle-sized country-neither Germany, 
nor Italy, nor France-which exports such 
a high share of total manufacturing production 
as we do; and that is true. For 
Germany or France the figures is only 20 
or 25 per cent. 

Resolving the Paradox 

How is this paradox to be resolved? It can 
be resolved, and can be resolved only on 
the basis of Sir Roy Harrod's theory of 
how foreign trade is brought into balance. 
Put quite simply, the theory says that imports 
are brought into balance with exports 
through changes in the total effective 
demand; meaning by the term "total 
effective demand" the sum of home 
demand and foreign demand. This is not 
on account of deliberate policy measures, 
but because businesses naturally contract 
their operations whenever new orders fall 
short of current production; and, equally 
naturally, they expand their operations 
whenever new orders exceed current 
production.

Harrod then shows that the first state of 
affairs -the tendency to contract operations 
-is a result of an excess of imports 
over exports; and the second state of affairs 
-the tendency to expand -is the result of 
the opposite. Harrod's contention was that 
it is through such movements in output 
that foreign trade is brought into, and kept 
in equality. Since imports vary in direct 
proportion to home income (while exports 
vary with world income) these tendencies 
imply that a country's economic growth 
relative to other industrial countries-that 
is to say, its growth of capacity and its 

25 


growth of producitivity and of employment 
-will tend to diminish or increase accordingly 
as the yearly percentage rise in imports 
exceeds or falls short of the percentage 
rise in exports. That is the really 
fundamental point on which the whole 
question of unemployment hinges. 

We find that between 1953 and 1979 the 
volume of British manufactured exports 
increased threefold which I think is quite a 
respectable figure. But the volume. of 
manufactured imports increased 12.9 
times; that is four times as fast as the 
volume of exports. The result of this 
discrepancy was that the level of total 
manufacturing output over the whole 
period increased by only 85 per cent-that 
is to say, production increased by less than 
a third of the annual rise in exports and by 
less than a sixth of the annual rise in 
imports. 

What I am contending is that the shortfall 
in the growth of production over the 
growth of exports is nothing more than a 
mirror image of the shortfall in the growth 
of exports over the growth of imports. 

Imports and Output 

The fact that imports expressed in terms of 
annual rates rose at just over 10 per cent a 
year during the whole of that period was 
consistent with exports rising at only 4.7 
per cent a year, because, and only because, 
total income (or output) rose at only 1.9 
per cent a year. We had a very low growth 
rate of production because our growth rate 
of exports, although it was much higher 
than our growth rate of output, was so 
much less than our growth rate of imports. 
Every year more of the income generated 
by domestic production was diverted to 
imports and less of it returned to the producers, 
who originally laid out the wages 
and salaries which provided the source of 
demand. Therefore, the producers naturally 
found that orders did not expand fast 
enough; on the contrary, they consistently 
fell short. 

Whereas if, one way or another we had 
had a situation in which imports had risen 
in proportion to the rise in total output and 
no more, total output would also have risen 
in proportion to exports and no less, which 
in our situation means that both exports 
and imports, and total production, would 
have risen around 5 per cent a year instead 
of 1.9, 4.7 and 10 per cent respectively. In 
that event our output between 1953 and 
1979 would have increased by 255 per cent 
instead of the 8.5 actually achieved. That 
is to say, we had it in our power to increase 
three times the rate of growth of total production, 
if only we had kept the growth of 
imports down to the requisite level and not 
allowed it to exceed it. 

The fact that the United Kingdom's 
propensity to import foreign goods was so 
much higher than the world's propensity 
to buy British goods meant that our total 
output could rise at only a fraction of the 
rate of growth of our exports -a fraction 
which tended to diminish as the volume of 
imports took up a steadily rising part of 
total domestic demand. 

Hence the rise in the export ratio from 
one-quarter to one-third of total output, 
which I referred to before, from 25 to 33 
per cent, is a sign not of strength but of 
extraordinary weakness. The export ratio 
was rising not because exports were rising 
fast but because total production was rising 
so much more slowly. After all, a ratio is a 
ratio, and it depends on both the numerator 
and the denominator how it moves. 
Production rose far more slowly than 
exports, and a fortiori far more slowly than 
imports. In fact, it is interesting to note 
that the largest improvement in the export 
ratio occurred in the six years from 1973 to 
1979. That was a period during which the 
growth of manufacturing output was negative, 
being minus one-half per cent a year, 
and the growth of exports was only half as 
large at 2.8 per cent, as during the previous 
20 years. 

No doubt Sir Geoffrey Howe is formally 
correct in repeating on every possible 

26 


occasion that both of these phenomena fast 
growth of import penetration combined 
with the slow growth of export 
penetration -are manifestations of the 
same thing; that is, the fact that consumers, 
whether home consumers or foreign consumers, 
increasingly prefer foreign goods 
to British goods. We suffer from what the 
Government call "supply side difficulties". 
That is almost Her Majesty's Government's 
favourite expression ; and by 
"supply side difficulties" they simply mean 
that British producers find it more difficult 
to sell, either in the home market or in 
foreign markets, than foreign producers, 

and therefore their share of the market is 
shrinking both abroad and at home. 

The Duty of Government 

No doubt this is true, but it is the duty of 
the Government to help British industry to 
get out of this situation, and this is what 
the present Government are manifestly not 
doing; or they are doing it on the theory 
that if you want to cure a man of pneumonia 
the best thing to do is to expose him 
half naked in the middle of a cold night to a 
rainstorm. 

Owing to the importance of economies 
of large-scale production in manufacturing 
(which are very important but very little 
emphasised) both comparative success and 
comparative failure have cumulative 
effects. Ifwe want to make British industry 
more successful we must begin by improving 
its market prospects, and this 
requires a limitation on the growth of 
imports of the kind that we are already 
applying in connection with Japanese cars. 
Japanese cars are the one case where we 
operate a market penetration ceiling, at 10 
per cent. We tell the Japanese that they 
must not sell more than 10 per cent of the 
total car sales. They do it voluntarily, but 
obviously they do not do it because they 
like doing it. 

We must improve the market prospects 

also by ensuring a competitive exchange 

rate; that is, we must ensure that British 
goods are not in general handicapped by 
high unit costs owing to the overvaluation 
of the pound. The best example of the 
artificially high value of the pound is that 
you can buy a motor-car, either a British 
or a foreign car, in any Continental country 
20 per cent or 25 per cent cheaper than you 
can buy it in England. 

Imports and Employment 

The problem of unemployment appears 
insoluble so long as we are not prepared to 
tackle the problem at its source. Tackling 
the problem at its source means eliminating 
the disparities between the growth rates of 
imports and exports. Unlike many other 
speakers, I do not regard this as an insoluble 
problem; I do not regard it as a 
terribly difficult problem, and neither do I 
regard it as a problem for which you have 
to do hundreds of different things, as 
enumerated in a long list of things recommended 
for alleviating unemployment or 
its consequences. I think that once you 
solve the problem of keeping down the 
growth of imports to the growth of exports, 
then manufacturing production will pop 
up to equality with the two growth rates 
and you will find unemployment literally 
melting away. You do not have to do anything 
about it. It will just melt away of its 
own accord -without special skills or 
vocational schemes or job splitting or all 
the hundreds of other things that the 
Government have in contemplation. And 
you will be surprised at how quickly it 
happens.

I wish to end by giving just one example. 
At the end of the war, everybody-and I 
was one of them because I was there-was 
extremely pessimistic about the future of 
Western Germany. It was an overpopulated 
country; how on earth was it 
going to live? Then it had to absorb 4 
million expellees from East Prussia, Silesia 
and from the Sudetenland. Much to 
everyone's surprise, in a Vc' ry few years in 

27 


the 1950s it absorbed them, because its So with 4 million people in addition, 40 per 
exports were growing faster than its imports cent of the manufacturing labour force was 
and therefore domestic production had a comprised of expellees and the so-called 
double engine to enable it to go forward guest workers. In other words they had 
very fast. Then the expellees ran out and over-full employment 40 per cent. Nobody 
they came up against a labour shortage. had planned it; it just happened by itself What 
did they do? They lifted the barriers and it happened because the exports grew 
and let in, first the Italians and then, when faster than the imports. 
there were no more Italians, the Spaniards. I submit that, if people want to solve the 
When there were no more Spaniards, they unemployment problem, then the remedy 
let in the Greeks and, finally, the Turks. is in their hands. 

10. An Epitaph
1Oth November 1982 

This is the fourth debate on the Address in this Parliament and it is very likely to be the 
last. It provides a suitable occasion, therefore, to look back and review the economic 
consequences of the Government's policies in the light of their original aims and 
aspirations. That the Government stuck to their policy, was important for it meant that as 
the economic situation worsened, as production fell and as unemployment rose, they were 
not prepared to use the rudder and not prepared in any way to adjust their policies in the 
light of developing circumstances, as previous Governments have done. Their reaction 
was to do nothing -to ignore what was happening and to go on as before, gazing at the 
gathering clouds with folded arms, in the firm belief that provided they did nothing 
everything would come right in the end. 

Rolling Back the State • 

All that may be fine, indeed admirable, if 
the basic premises upon which the policy is 
founded are right. But it is absolutely fatal 
if the basic premises are wrong. The 
Government's basic philo ophy was essentially 
a simple one. According to their 
creed inflation is the source of all evil, and 
inflation is simply a consequence of increases 
in the money supply. So control of 
the money supply became the central objective 
of policy. However, to control the 
money supply one has to do more than just 
turn off a tap -although Mini ters, especially 
at the beginning, often talked as if it 
wa a simple as all that; one must deal 
with the basic cause of having "to print 

money" (to use the Prime Minister's 
favourite expre ion), which, in their view, 
is too much public spending. One must roll 
back the frontiers of the state, economise 
on everything except on law and order and 
the police and possibly defence. However, 
until the dramatic turnround over the 
Falkland Island, even defence did not 
escape the slimming process. And one 
must also raise money under this simple 
philosophy, as much as one can and as fast 
as one can, by selling all the assets one can 
lay one's hand on -hence privatise, 
privatise and privatise, and never mind 
how much thi lines the pockets of the 
share-owning community. The extraordinary 
haste to make this process of 

28 


privatisation speed up so much in the final 
year of this Parliament makes one doubt 
their confidence in being returned at the 
next election. 

The other part of the policy is to improve 
productivity by improving incentives, 
and this means lowering taxation, 
particularly at the top end where tax is 
supposed to act as a disincentive. There is 
quite a different type of incentive for 
bottom people -they are meant to work 
harder in response to the threat of unemployment 
and poverty. 

From the very beginning everything 
went wrong that possibly could go wrong. 
The Chancellor's first Budget, a few weeks 
after taking office, was the major cause, 
not of alleviating, but of aggravating inflation 
. From the 10 per cent rate in May 
1979 it rose within 12 months, by May 
1980, to 22 per cent. And the money 
supply, which was scheduled to rise between 
7 per cent and 11 per cent per year, 
again announced in the budget speech, 
rose by no less than 22 per cent in the 
course of the following year. In the year 
after that it rose by 13 per cent instead of 
between 6 per cent and 10 per cent as 
envisaged in the Medium Term Economic 
Strategy, and in the current year it is still 
around 13 per cent, although according to 
the original Strategy it should be down by 
now to between 5 per cent and 9 per cent. 
Government expenditure, which was 
meant to be reduced, kept going up as a 
percentage of the national income despite 
all economic drives which have been 
religiously repeated year after year. That 
was because national income, the denominator 
of this ratio, fell steadily and 
also because Government expenditure in 
connection with unemployment steadily 
ros'e. 

The Inversion of Keynesianism 

However, with the unexpected explosion 
of prices and wages in 1980-81, and the 
impossibility of preventing the money 

supply from rising in line with prices, strict 
monetarism-meaning Friedman ism-was 
quietly dropped because it did not work. 
Indeed, one Cabinet Minister declared in 
Cambridge last week that he always knew 
that Friedmanite policies were, "a lot of 
bloody nonsense". Luckily, perhaps, for 
him this was only reported in the local 
papers and it may not have reached the 
London area. 

In place of Friedman the Government 
regressed to an inverted Keynesian policy. 
I call it an inverted policy because 
Kenynesian instruments were used in 
reverse -for example, the budget was 
tightened in the face of growing unemployment, 
instead of loosened. The 
money supply as the main instrument of 
policy was abandoned and it was replaced 
by a rigid incomes policy-they call it "pay 
policy" -in the public sector, which was 
carried out very firmly against considerable 
resistance. This was combined with an 
over-valuation of the exchange rate 
achieved by high interest rates and the 
creation of mass unemployment in the 
private sector both through high exchange 
rates and even more through very tight 
fiscal policies which were concealed by the 
fact that revenues were low on account of 
unemployment and low output. On a full 
employment basis the PSBR was transformed 
into surplus. 

All of these things which the Government 
have done are anathema to the pure 
Friedmanite creed. The Government have 
kept up the pretence that they are fighting 
an inflation caused by excessive demand 
long after they have adopted policies that 
are appropriate only to an inflation caused 
by a rise in costs-whether labour costs or 
raw material costs -a type of inflation 
which has no validity and which is not 
supposed to exist in the pure monetarist 
philosophy. And in this, at the price of 
ruining British industry, of reducing the 
standard of public services and creating 4 
million unemployed, they have been 
reasonably successful. Inflation has indeed 


come down as we heard today, to the rate 
of 7.3 per cent and the Chancellor has 
before him the glamorous prospect of 5 
per cent by next spring. 

The Smell of Decay 

But no one has explained, nor has ever 
attempted to explain, what the great benefit 
of the low inflation rate is , if its achievement 
and continuance involve falling or 
stagnating output, falling or stagnating 
living standards, the disappearance of 
whole industries and the general smell of 
poverty and decay. When the Chancellor 
was asked some weeks ago, with the prospect 
of 5 per cent inflation. "Is it not time 
to lift the ban on reflation and allow the 
economy to expand?" he said, No, that 
would not do; it would merely endanger 
the hard won gains on the inflation front. 
His Statement on Monday, despite making 
some concessions to industry, really confirmed 
this attitude in view of the reactions 
that have already been quoted from the 
newspapers. 

But what are these gains on the inflation 
front for, if they are not meant to improve 
our economic performance? Monetary 
stability seems to be regarded not as an 
instrument, but as an ultimate end of 
policy. It is no longer even claimed that it 
is a necessary prelude to economic 
recovery. Indeed, Ministers after years of 
burgeoning optimism have ceased to proclaim 
that prosperity is round the corner. 
Instead, as Sir Geoffrey Howe said two 
days ago, one cannot opt out of the world 
recession. He ignored the fact that Britain 
is an oil producer and indeed an important 
net exporter of oil. Therefore, Britain is 
not hampered by a balance-of-payments 
constraint which prevents other countries, 
such as Germany and France, from having 
expansionary economic policies. We are 
by no means compelled to fall in line with 
deflationary policies pursued either on 
ideological grounds, as in the case of the 
United States of Mr Reagan, or on grounds 

of necessity as in the case of the oil consumers 
of continental Europe. 

One must contrast this vague fatalism 
with the admirable speech made last week 
to the CBI by Sir Kenneth Corfield, who is 
chairman and chief executive of Standard 
Telephones and Cables. It was a speech 
which, unfortunately, was not reported in 
its interesting parts in any of our serious 
newspapers. I think that I should remark 
here that there is a kind of privatised press 
censorship in this country which is not 
directed by the Government in any way-
there are no D notices behind it-but is a 
spontaneous consequence of the kind of 
people who own our newspapers. Something 
of this existed for a long time, but in 
the last two years they seem to have abandoned 
all restraint, and newspapers which 
prided themselves in being newspapers of 
record, are ready to suppress very important 
information if it does not fit in with 
the line they are taking in their leaders. 

Therefore, I beg the indulgence of your 
Lordships if I quote from the suppressed 
passages of Sir Kenneth Corfield's speech. 
He said: "Designing and marketing the 
right product is not only the key to successful 
wealth creation, but it is one ofthe very 
few actions which are entirely in the hands 
of management. For many years research 
and innovation has been one of Britain's 
success stories. But the product ofresearch 
and innovation, which is technology, has 
been neglected by far too many British 
firms. Just think of the things that are not 
made in Britain -binoculars, typewriters, 
video recorders, cassette recorders, tape 
recorders, transistor radios, cameras and 
cine camera, hand calculators, electronic 
games-need I go on?" 

An Industrial Wasteland 

He went on to say that when it comes to 
industrial investment, not to goods for 
consumption, nothing is produced here 
except bricks and mortar. All the plant 
and equipment which was needed for the 

30 


semi-conductor plant which he wanted to 
install in Scotland, had to be imported. 
We have known for many years -long 
before the present Government came to 
power -that British industrialists abandoned 
the production of the kind of 
machine tools which other British industrialists 
saw fit to install in their factories. 
So, one had to go abroad for the quality of 
plant and machienry which was necessary 
for " Britain, with its long industrial experience, 
its liberal traditions and its unexcelled 
academic prowess is a wasteland of 
obsolescent industry with a few oases of 
technical excellence." 

All this is not new-our decline, relative 
to newer industrial powers, has been going 
on for 100 years or more, though luckily it 
was reversed -and this is a very controversial 
statement although not as to factsfor25 
years during which time we protected 
our industries. That is to say, between 1932 
and 1957, and especially during the five 
years preceding World War 11, for the first 
time since the middle of the 19th century 
we were at the top of the league of 
countries in the rate of economic growth 
and not at the bottom of the league. 

But when that ceased our relative decline 
was resumed. We fell again to the bottom 
of the league and, after entry into the 
Common Market , our decline much accelerated-
as, indeed, I made every effort 
to convince people that it would be-until 
we have now reached the point at which 

there is a danger of collapse of, if not the 
whole, at least the greater part ofour whole 
manufacturing industry. Doubtless, as The 
Times says, we are very good at retailing, 
but what is the point of that if our manufacturing 
industry disappears? How do you 
make the money to spend in the shops? 

Clearly, Mrs Thatcher's Government 
cannot be held responsible for all this. She 
is responsible only for telescoping into a 
few years what otherwise might have taken 
some decades. By being ruthless in the 
belief that she is applying a genuine 
remedy, she has made things very much 
worse than they need have been, and has 
brought us no compensating benefit. For 
despite what Ministers say we are no better 
off from the point of view of industrial 
efficiency, of productivity, or in the range 
of products that we are producing. We 
have in no way eased the problems on the 
"supply side. " on which Sir Geoffrey Howe 
is so fond of concentrating. The weaknesses 
on the "supply side" have become 
very much greater, and not less, under this 
Government. So, we suffer all this with 
nothing to set against it on the other side. 

One is reminded of Tacitus who, when 
writing about the devastation of the outlying 
parts of Britain by the Romans, said: 
"Ubi solitudinem faciunt, pacem appellant", 
which is usually translated as: 
"They create a desert and call it stability". I 
think that is an apt epitaph for Her 
Majesty's present Government. 

31 


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