fabian tract 378 is Britain viable? contents 1 the problem 1 2 the existing constraints 3 3 a way out 7 4 industrial policies 11 this pamphlet is based on a lecture given before a Fabian audience in London in November 1967 this pamphlet, like all publications of the Fabian Society, represents not the collective view of the Society but only the view of the individual who prepared it. The responsibility of the Society is limited to approving the publications which it issues as worthy of consideration within the Labour movement. Fabian Society, 11 Dartmouth Street, London SW1. December 1967 7163 0378 7 the problem "What would be the use, if people were to say: 'The British are nice people, but they haven't got any money' ?" The quotation is from the late Per Jacobs- son, former director of the International Monetary Fund, during one of the many crises of the late-fifties and early-sixties. It is the authentic voice- detached, not vindictive, realistic, yet profoundly unsympathetic to all that the Labour movement stands for-of what is probably the most exclusive and powerful in-group in the world today: the international banker. It is this group which today, after three years of Labour Government, effectively controls the destinies of this country, perhaps to a greater extent than at any time since the early-thirties. What I want to discuss are not the social and political objectives of the Labour Government, but the means by which they can be achieved. My theme is the question whether we can summon the economic strength to realise these objectives, whether and by what means we can acquire the room for manoeuvre to carry out the policies for improving the quality of life in these islands and beyond which we all want. If this enquiry falls short of being inspiring, I think it will be agreed that it is rather basic. For if there is one thing on which almost all commentators on this Government's performance are agreed, it is that the main weakness so far has been in the field of central economic management. And it is clear that this failure is bedeveUing-as we "growthmen" always said it would-progressin almost all other major fields of policy. To begin with, the fact that we are in deep debt to the successors and confreres of Per J acobsson means that our economic policies are subject to a stricter degree of international surveillance than any other major industrial nation has had to face. This surveillance extends to issues which one would have thought were of purely parochial interest, such as the extent to which we choose to finance health prescriptions or nationalised industry charges out of the pocket of the taxpayer or the consumer. Those who exercise the surveillance are not always as well- informed as they should be about our national accounting conventions or about the comparative services provided by our and other nations' welfare states. It is easy to say, as some on the left say, that we should therefore ignoretheir advice, and tell our creditors to jump in the English Channel. But this is somewhat difficult for a country which relies on imports to feed its people and to provide the raw materials for its industry. And if you are dependent on your neighbour to loan you the money for your next meal, you can hardlycomplain if he also insists on advising you how to spend it. In any case, the most fundamental restraints on our freedom of manoeuvre are not imposed by our creditors but by the facts. We all know that if we are to raise living standards in these islands to an acceptable level, if we are to undertake the basic investment in education, communications, technology and so on which we need to make Britain a competitive country in the second half of the twentieth century, we need to spend a lot more money. Where is that money to come from? Clearly it will not all come, on present policies, out of the fruits of industrial expansion. It will come, if it comes, only out of a further increase in tax levels which are already, in many areas, too high. There is a vicious circle here. High tax rates depress consumer demand and remove from industry both the incentive and the resources to undertake new investment. So Government has to step in with new incentives whether by investment grants or by the more direct measures envisaged in the proposed Industrial Expansion Bill- to fill the gap. But to raise the money for these new incentives Government has to increase taxes further; and so the cycle goes on. It is not too hard to foresee a situation in which a stagnant economy requires a continuously increasing public sector to remedy the defects of private enterprise, while this very increase intensifies the stagnation it is designed to correct. We have, it seems to me, gone a little too far along this road already for comfort. What we have proved, it seems to me, in the last three years is not that socialism is necessarily better than conservatism in getting growth; I believe it is, but we have yet to prove it. What we have proved, I think, is that socialism knows how to make a stagnant economy more tolerable than conservatism : because, with its greater instinct for social justice, it has been able to do more than the Conservatives to shield the worst hit members of the community from the effects of our economic failure-by redundancy payments, increased pensions, special help to development areas and so on. This is something, but to me it is emphatically not enough. I did not vote for Harold Wilson in 1964 because I thought he was the man most likelyto persuade the British to stop worrying and love the squeeze. It is of course quite unfair to blame this Government for failing in three years to solve a problem which has dogged every British Government for nearly half-a-century; namely how to expand the economy as fast as its competitors while maintaining a stable balance of payments. It is hardly disputed that in the last nine years of the Conservative administration, after the collapse of the 1955 boom, our positionsteadily worsened; our growth rate began to fall further behind our corn petitors, while our balance of payments deteriorated. It was during these years that Britain replaced France as the· " sick man" of the indus-trial world economy, and began to become increasingly the world's marginal industrial trader : the one whose exports were most vulnerable to any downturn in world trade. This was the legacy Labour inherited. 2. the existing constraints What are the underlying factors which make Britain's economic problems so intractable, whatever policies we pursue? Is our problem more complexthan other peoples', or are we just worse at solving it? Let me say first of all that I do not believe that the British are less gifted than other people, or less hard-working. I see no evidence, either from history or from my own travels around the world, to supporteither of these propositions. Nor have I seen any evidence to support the view that we have all been corrupted by the Welfare State and full employment. If we were, then it is odd that the corruption should not have extended to all those other nations, including most of our main competitors, who have at least as lavish standards of welfare benefits as we have (which is not in fact saying very much) and on averagerather higher levels of employment. I do think we are behind some of our competitors at getting value from our efforts, through institutional rigidities (for example, trade union demarcat·ion) and through a lack of expertise in managing large organisations (one of the most fundamental differences, I think, between British and American industry). If we are to rule out national character, are there any other general explanationsfor our failure? I think we can rule out Government economic policies as a main cause, though these have in many cases undoubtedly been a secondary factor worsening an already bad situation. I do not support the sweeping criticisms made by Max Nicholson recently of "The System," which attributes almost everything that has gone wrong in Britain in the last century to the machinations of the Higher Civil Service, recruited along lines laid down by Jowett of Balliol in a deep-laid plot to prevent democratic institutions taking hold in Britain after the Second Reform Bill. Addicted as I am to the conspiracy theory of history, I find this a little hard to accept. I would not wish to be misunderstood. There is a lot wrong with our civil service, with "The System" generally, and with the economic policies pursued by postwar governments. I shall be spelling these out in greater detail, with suggested remedies, later on. But I cannot accept that our national affairs have been conducted so much worse than all our competitors as to account fully for the gap in performance, without looking for other explanations. What other explanations? If one tries to analyse what is unique about the British situation, there are I think three related factors which do set us apartfrom our competitors and which spring from a common cause. That cause is the historical phenomenon that in the nineteenth century, when the pattern of the modern industrial world was established, this tiny island-limited in population and natural resources-was, nevertheless, through a strange combination of factors, the centre of world finance, industry and political power. I believe a large part of our problems, certainly in the last two decades and perhaps further back too, spring from this disproportion between our commitments and our native resources, and the enormous difficulty of disengaging ourselves from a role to which we are no longer fitted. I believe that we have in fact made more progress in this very necessary task of readaptation in the last three years than is generallyrecognised. east of Suez What are these three related factors to which I've referred? First, and most obvious, is what is called for shorthand purposes our "East-of-Suez" role. Because of our imperial legacy, and the large Commonwealth presence in South Asia and the Pacific, we have veryheavy defence commitments in this part of the world which none of our competitors outside the United States has. This is an obvious burden on our balance of payments, quite disproportionate to our resources or to the commitments of our non-Arnerican allies in the area, such as Australia. We are in fact liquidating these commitments about as fast as circumstances permit. I judge that by, say, 1975 we will to all intents and purposes have stopped being in any sense a world power and become instead a European one-the transition which France has successfully made, behind a Gaullist smokescreen which suggests that she is trying to do the exact opposite. Commonwealth trade Second, our trade effort has verynaturally been geared traditionally to the Commonwealth. In the early postwar years the Commonwealth took more than two-thirds of all our exports. It was in many ways an ideal export market, in the sense that it could be regarded in effect like an extension of the home market. Many of the customers were in fact British officials, at least in the colonies. English was the lingua franca, and English standards, measurements and methods were the norm throughout the area. It was in large measure a captive market; and that was part of the trouble. As the colonies became independent, there was a growing tendency to diversify sources of supply at Britain's expense. Moreover, for a variety of reasons in the postwar world the Commonwealth as a whole has been a slow-growingmarket. As a result of these two factors, British industry has had to make a sustained effort to switch its emphasis to the faster-growing markets, particularly Western Europe and the United States. We have not been unsuccessful in this. Today Western Europe takes about 40 per cent of our exports(against 20 per cent in the early postwar years), while the Commonwealth share has dropped to under one-third. But the effort has not been painless, as one may gather from all the stories about poor British salesmanship which one picksup around the world. Europe and North America are much tougher, more demanding, more sophisticated, more competitive markets than the old Commonwealth. Regrettably the natives do not always speak English or expresstheir needs in British weights and measures. Often their standards and tastes are different. It has been a hard process of adaptation, and on the whole we haven't done too badly. But our main problem in this area is of course our exclusion from the biggest European trading unit, the EEC. I don't want to go too deeply into the details of the Common Market controversy except to say this. I believe the logic of our position in the world requires us to be a European power, rather than a global power or a Switzerland or Sweden. I do not see how we can be an effective European power, in the political sense, outside the Common Market; nor would I care to speculate too deeply on the likely long-termpolitical development in the EEC if we are excluded. Also, I believe it would be very damaging to our long-termindustrial growth and competitiveness to be excluded from this great natural market on our doorstep. Without this market we are much less attractive to outside investment, notably from the us, and our more dynamic and successful industries will lack the opportunity to exploit the full economies of large- scale production and marketing-and, in the increasingly important case of the science-based, high-technologyindustries, of large-scale research and development. I think it is worth paying a high price to avoid this handicap. As it is, even with EFTA we are today the one major indus·trial power with a home market of less than 100 million people, and I find this an unattractive prospect. I have discussed so far two legacies of our imperial heyday which have bedevilled us: our defence commitments east of Suez and our excessivelyCommonwealth -oriented exports. I might also mention, though I don't class it on the same level as these two, our traditional tendency, partly as a result of the well-developed institutions of the City of London, to invest our capitaloverseas, particularly in the Commonwealth, rather than in Britain. The Labour Government has rightly imposed restraints on this overseas investment at a time when we are having to borrow large amounts abroad in order to balance our payments. In doingso it has incurred a good deal of enmityfrom industry, the City and-at least under its former governor-the Bank of England, despite the broad endorsement it has had from the independent Reddaway Report. sterling However, the third and in many ways the most intractable legacy from the nineteenth century is the survival of the pound sterling as a world reserve currency, or, to put it another way, the fact that Britain finds herself in the involuntary role of banker to the world. If a man from Mars were to appear on earth and enquire how the nations conducted their international financial transactions, he would I think be somewhat surprised to learn that the two world bankers were not the two strongest in terms of reserves, gross national product or what you will, but the strongest (the us), and a country (ourselves) ranking sixth in world pro- duction-and a good deal below that in the level of financial reserves. He would perhaps find it easier to understand if he were told that when the system evolved, since it was never formally invented or decided upon, this second country was, by a strangechance, the centre of world capital and a great political and industrial power. But he would still, I think, be puzzled at the slowness of human reactions to changed circumstances when designing their institutions, and would write us earthmen off as an incompetent and tradition-bound species. What the sterling system means, in a nutshell, is that we as a nation act like a joint-stock banker. Like any other banker, our short-term liabilities (customers' deposits) are much greater than our short-term assets (our gold and dollar reserves). The essence of successful banking is that, because the customer has confidence that the banker will be able to let him have his money back whenever he wants it, he does not in fact demand it. When people do lose confidence, and demand their money back in large numbers, banks have a disturbing tendency to go bankrupt. We are in the position of a banker whose customers do tend to lose confidence rather often, with regrettableresults. In normal times people like to hold sterling, because it is a convenient medium for world trade (nearly a third of which is in fact financed by sterling). But from time to time crises of confidence arise, possibly for reasons not directly concerned with our trade performance- a Middle Eastern war, for example. These crises are intensified by the general knowledge that our finanical reserves, and still more the industrial structure which constitutes our ultimate assets, are weak compared to our liabilities. And there is no world government to stand behind sterling as the Government, for example, stands behind Barclays or Lloyds or the National Provincial. I think there is now a fairly wide consensus, as there was not even a few years ago, that the reserve currency role of sterling is a grave burden on the British economy, and not as used to be thought a source of strength. The trouble is to know what to do about it. How does a banker get out of banking, short of selling out to another banker? One way would be to revoke our obligations, impose strict exchangecontrol, and announce that from henceforth we would not accept claims on sterling except for trade transactions. This it seems is what the French Government is recommending us to do, in telling us to shed our reserve currency function unilaterally before trying to enter the Common Market. The difficulty about such a drastic move is that it would set up a chain reaction the ultimate consequences of which would be hard to foresee, but which could result in our suppliers abroad refusing to continue selling to us. This could deal a death-blow to our economy which depends so heavily on imports. Rightly, I think, no British government in peacetime has been prepared to take this risk. a way out The right long-term solution is plainly to create a genuine world bank with reserves which would underpin sterling and the dollar, and I believe that we are moving slowly along this road. The latest IMF reform is a timid step forward. The French may even prove to have helped by posing the sterlingproblem so starkly in the Common Market context. The Chancellor was absolutely right to respond by offering to talk with all concerned on possible ways of solving the sterling problem on a supranational basis, par-ticularly in the Common Market context. I don't think one should be under any illusion that the French intend to be in the least bit helpful or constructive; nevertheless the issue they have posed is a real one, which it is as much in our interest to resolve as anybody else's. One obvious interim solution, pending a world reform, which has been advocated in slightly different forms recently by Mr Callaghan and M. Mendes- France, is the creation of a European reserve currency, with which sterlingcould be integrated and which would be backed by the combined financial resources of Britain and the Six. Such a move, were it possible to negotiate, would strengthen the position of Europe vis-a-vis the us, as France in particular has long wished to do. (Only those unfamiliar with the peculiarities of Gaullism will be surprised to learn that it is nevertheless the French authorities who most oppose it). It would strengthen the stability of the world economy, by replacing a shaky reserve currency by a more credible one backed by stronger resources. It would make Britain a stronger and more reliable partner for Europe. For it is an illusion to think that, if Britain remains outside the Comon Market, the Six will not have to worry about the troubles of sterling. In fact the history of recent years shows that the world financial system is already so interlocked that if a key currency gets into trouble the rest of the world has to help bail it out. There are various other things we can do in the meantime to strengthen our position. The most important-! am ignoring minor but possibly useful gimmicks like an import depositscheme, concealed export assistance of one form or another, use of publicprocurement to improve the balance of payments, a "Buy British" campaign, and so on, are discussed below. dollar portfolio The first is to take over the so- called "dollar portfolio." The dollar portfolio consists of private British holdings of dollar securities and assets. (It is worth about £3! billion, more than three times as much as our official reserves.) If these were nationalised and incorporated in the gold and dollar reserves, our financial position would not only look a great deal better but we would also have more reserves available to meet sudden runs on the bank as it were. Our credibility as a world banker would look much better. On the other hand, this would be an act of expropriation which would be extremely unpopular, not only with the City but with world financial opinion, and for this reason might itself precipitate a run on the pound. Also, insofar as these new reserves were used to meet such a speculative run, we would of course be giving up real assets. The alternative, politically less dangerous, is to devise some sort of voluntary scheme by which it would be made attractive to holders of dollar securities to sell them to the Treasury. If enough money can be voluntarily transferred to the Treasury in this way to fund a substantial part of our sterling balances, this will undoubtedly help. But the danger is that any scheme which is palatable to the City will fall short of meeting our needs. At best this is a means of buying time; at worst it could backfire and lead to a further loss of confidence. I do not see it as a panacea. import quotas A second means of buying time is by import quotas. I do not favour this approach, though it could become necessary. I dislike it, partly because it means protecting one's least efficient industries, partly because it is not calculated to ease our way into the Common Market, but chiefly because I think it rests on a faulty diagnosis of our problem. Import quotas in the modern world are really only acceptable as temporary measures to meet a temporary crisis. I do not think our difficulties are of this nature. I cannot see what is going to happen within, say, the next two years which is going to transform our competitive position vis-a-vis the rest of the world. I believe that we have done and are doing a number of important things which will help. But I cannot honestly put my hand on myheart and say that, either individually or collectively, they are going to pull off the trick that has eluded us throughout the last half-century. Rather, I think we will be doing well in the next year or so if we manage to arrest the steady worsening of our positionvis-a-vis the rest of the world which, as we have seen has characterised the period since 1955. devaluation So one is left, I think, with the third and most radical alternative, which is to alter the exchange rate of the pound, to devalue in fact. The case for devaluation is if you believe that we are in fundamental long-term disequilibrium. I do in fact believe this to be so, and so evidently does the Common Market Commission, according to its report on Britain's application for entry. If a devaluation is part of the price of British entry into Europe, it is a price I would certainly be willing to pay. It is often argued that we cannot be in fundamental disequilibrium, because our export prices are on the whole not out of line with those of our competitors. Of course not; you charge whatever you must to get the business. But the question to ask is what is the relative profitability of exports and home sales at current prices, and how much potential export business is just not beingdone because it is unprofitable. To anybody who goes around British industry I think the answer to this is very clear. By and large, exports are very unprofitable compared to home sales even in today's not exactly buoyant home market conditions. The result is that, despite every inducement, a large proportion of firms are not exporting at all, and in too many others exporting is regarded as a chore. In such conditions sales organisation tends to be skimped, the best men go on home sales, export orders have a low priority in companyschedules, so that delivery dates are often not met and firms are unready to meet special specifications. Result- British exports get a bad name. It is better not to export at all than to do it badly and halfheartedly. We all know thi~ . ha~ been happening in parts of Bnt1sh mdustry. I do not believe it is due to original sin, but to the simple fact that our exchange rate no longer r~flects realities.. There is nothing very smful or shockmg about this. It has happe~ed to many countries in the past, and will no doubt happen to many in the future. In a constantly changing world, there is no reason why the one unchanging factor should be a historic ally-determined parity of exchange rates. Devaluations are a fact of life. It is true that devaluation for a reserve currency is a particularly complexoperation, and that in the case of such a currency there are particularly important vested interests against change at any particular t,ime. But the fact that we devalued in 1931 and 1949 provesthat it is not impossible. I am personally, therefore, in favour of a devaluation of the pound. So far as I know, the Government is not. It is known that a definite decision not to devalue was taken in October 1964 and again in July 1966. I believe that the decision was right on both occasions. The basic difference between the situation up to end-1966 and todayis that until the July measures had started to bite Britain was an overheated economy suffering from excess pressure of demand. In such circumstances it would have been impossible to have stopped internal costs and prices from rising to offset the beneficial effects of devaluation. Our state would have been like France in her repeated, and repeatedly unsuccessful, devaluations under the Fourth Republic. Also a devaluation in these conditions would have destroyed, I think, any hope of getting a voluntary prices and incomes policy to work. So I do not support the view of a number of economists that devaluation was, or is, an alternative to the other measures this Government has taken : ~o internal deflation, to the prices and ~~comes policy, still less to the imaginative and important micro-economic policies towards industry which would be necessary whatever macro-economic strategy we follow. The argumentbetween the so-called expansionists in the Government and the others has not, I think, been over whether to deflate or not. It has been over whether defla tion by itself would be enough, and over what positive measures should be taken to reap advantage of the breathing- space which deflation provides. Events since July 1966 have in my view altered the balance of argument in favour of devaluation in two ways. First, they have created internal conditions which should enable us to hold our internal costs despite the rise in import prices which would accrue from devaluation. One must, I am afraid, be brutally clear about this. Devaluation will temporarily-! repeat temporarily -worsen the living conditions of our people. Only if it does this will it enable us to make the decisive shift of our resources from home sales to exports which is the necessary condition for an export-led boom-the only kind of boom which can be sustained without a return to stop-go. The second factor which has I think emerged since July 1966 is that deflation by itself is not an adequate policy-even if it is accompanied by ail the other measures which this Government has taken, and which I've already briefly referred to. There is an ominous difference between our recent experiencesand those of other countries which have been forced by balance of payments difficulties to deflate in recent years. If you take Japan, Western Germany, Italy or France, you find a consistent picture. A cut in internal demand le~ds rapidly to a dramatic turnaround in the balance of payments, with soaring exports and steeply falling imports. In our case the turnaround has been much slower and more sluggish. Indeed, the balance of payments surplus forecast for 1966 has now been officially postponed to 1968, and now looks doubtful even for that year. Of course we have had bad luck-the seamen's strike, Rhodesia, Suez-but our vulnerability to such happenings is not accidental, but one of the facts of our life which our planners need to take into account in their forecasts. conclusion So I would sum up our present macroeconomic position and prospects as follows: 1. This Government has made a determined and so far reasonably successful attempt to remove the particular external constraints on the British economy. Unfortunately these are by their nature mostly long-term measures, and in some cases-for example international currency reform or membership of the Common Market-not entirely within our own power. 2. The Government was right to put the brakes on in July 1966, and its handling of our internal affairs since then has been in many ways both courageous and deft. Devaluation was not a realistic alternative. 3. Nevertheless, events since then have shown that it is going to be much more difficult to get the economy moving again on an internationally viable basis than was originally thought. The present strategy does not I'm afraid hold out a particularly inviting prospect. I wrote in The Times on 21 August 1967: "The Government's present strategy offers virtually no room for manoeuvre or contingency planning. If all goes well, it should just about enable us to pay our way with a rate of growth which is well below that of our competitors, a public expenditure programme which is probably less than we need but which requires increased taxation, a rate of unemployment which a few years ago we would have rejected as intolerable, and a rate of private industrial investment which is generally recognised to be inadequate." I might have add~ "and an accelerated brain drain whi 1 is robbing us of our intellectual see · corn." 4. I conclude, therefore, that someth. ~ more is needed to enable us to tru: advantage of the sacrifices of the h t twelve months, and to end the stag '. tion before it does lasting damage J our industrial and social structu . Having considered the alternatives, I at left with devaluation not as an alter · tive to the Government's ot r measures, but as a necessary conditi 1 for their success. industrial policies I would now like to turn to our micro-economic policies for improving the structure and performance of industry. There are, not surprisingly, problems here too. But I think the story here is much more promising and encouraging, and I believe that in this field the Government has a great deal to be I proud of. r It is true of course that these microeconomic policies have failed to solve ' the current economic crisis. But it was never realistic to expect that they would . I think there was a good deal of muddled thinking in 1964 and 1965 about the kind of time-scale againstwhich one was operating in one's various industrial policies: about the length of time it would take to produce a major pay-off from the work of Min- tech, the Little Neddies, the IRC, the Industrial Training Boards, the stimulation of management education, and so on. What we have been doing here is to identify and tackle the built-in structural defects of our industrial economy. You don't do this overnight. You oannot re-structure industry and train up a new generation of business managers in a year or two. These things take time, even if one is working in a controlled economy where one simplyhas to elicit the facts and then give the relevant orders. It takes much more time if you are working, as we have Ix:en working, on a basis of partnership With industry and the unions. For this adds a new dimension, which can be the most time-consuming of the lot. Having got agreement on the facts, you then have to persuade other people to take the necessary decisions-and this can be a long and wearisome process. ~o it has always been clear to me that m the industrial side of the DEA, as in Mintech and the other industrial agencies, one has been working for the 1970s and not for the immediate economic crisis. Only the right macro- strategy can solve your immediate economic problems. But this does not mean that industrial policies are unimportant. On the contrary, they are supremely important. Only if we can solve our structural problems can we get ourselves into the right long-term posture, a posture where we can getaway from stop-go and combine continuous expansion with stability in the balance of payments and internal prices. Micro-and macro-measures are complementary. Without the right macro- strategy you will not be able to get full advantage from your micro-policies. That is one reason why our industrial policies have so far seemed disappointingly ineffective. But by the same token, unless you can tackle your structural problems, any macro-strategy you adopt is liable to come unstuck. We found this to our cost in 1963-66, when first the Conservative government and then the Labour government tried unsuccessfully to follow through a "dash for growth" policy, on the assumption that a period of sustained high demand would itself enable the necessary structural changes to be made and thus strengthen our long-term competitiveness. I still believe this was an experimentworth trying, and that we were right to maintain it as long as we reasonablycould. lt is true that a period of buoyant demand, when people can plan ahead with confidence, provides the best climate for innovation and change. We would I believe be better off today if in the first part of this four-year experiment, the Maudling era, a more systematic attempt had been made to complement the macro-strategy by the kind of sustained attack on specific industrial problems which was the hallmark of the succeeding Labour government. We lost valuable time here, time which in the event we found we could not afford . In the last twelve months we have had to continue the drive for greaterefficiency in a much colder, less congenial climate, in which the fear of change has to some extent returned, in which it is much harder to convince people of the reward which will follow if they accept change. I think it is quite an achievement that, despite this, so little of the initial momentum has been lost. I am an enthusiast for what Andrew Shonfield has called "Positive Government." I believe profoundly that the conditions of the modern world call for an increasing involvement of government in industry, for an increasingdegree of cooperation and crossfertilisation between government, both sides of industry, the educational system and indeed the other main sectors of our body politic. I believe that only thus will we be able to exploit the opportunities of technology and remove the built- in obstacles in our society to its profitable exploitation. This is all set out in much greater detail in my latest Penguin book, The Innovators. I believe that no government, Labour or Tory, in modern Britain can afford to disinterest itself in the performance of business. For onlyby a better use of our assets can we grow, and only by growth can we find the wherewithal to finance the improvements which every modern government rightly feels it should provide for its people. Although I could discuss the detailed work of the Prices and Incomes Board, the Little Neddies and so on, at length, 1 know from experience that to those who are not intimately concerned, the minutiae of these activities can be extremely boring. For of their nature these industrial policies lack the broad sweep of macro-strategy, and involve the painstaking probing of particular problems of particular ector of indus try which are not normally of great interest except to those involved. If yoLdon't believe me, try reading th second part of the National Plan! So I will confine myself to a brieJ analysis of what seem to me to be the main current issues arising in this field . I would like to start by identifying twc main approaches to the problem oJ industrial policy. They are neither mutually exclusive, nor do they exclude other approaches. But they are suffici· ently important, and sufficiently different, to justify a brief discussion. The first approach, which is that identified with Neddy, with the TrainingBoards, the Regional Planning Council~ and with the prices and incomes policy -though not with the Board as such- is what I sometimes call the "sweetness and light" approach. An alternative description is the "Swedish" approach. The essence of this type of approach is the voluntary getting-together of all the main interested parties, to examine in a spirit of dispassionate cooperation the opportunities for growth, the targets at which it would be reasonable to aim. and the main obstacles which look like preventing these targets being reached. The Neddy Council does this on the national scale, the Little Neddies for particular industries, the RegionalCounoils for individual regions, while the Training Boards carry out the same kind of exercise in the specific field of labour requirements. The assumption i~ that, having identified the problems, the partners in the exercise will then work jointly to remove them. Thi pattern was, of course, established by the Conservative administration, and I think they deserve some credit for it. On the foundations they laid it has been possible to build , and to tackle a number of major problems while maintaining the goodwill of industry tot always an easy matter for a Labour (Overnment. The "consensus" approachleveloped through these bodies was a element in getHng agreement to successive stages of the prices and •'"r·nn'"'" policy. It has been an import- mt and fruitful development of ndustrial-economic policy, and one .vhich I guess will remain with us for nany years to come, irrespeotive of the ~olour of the government in power. this approach has the defects of virtues. The main defect is that if parties concerned are not preparedo take action, action will not be taken. fhus Little Neddies have broadly >peaking so far proved relatively in- ~ffective in the fields of use of man- power (including restrictive practicesmd demarcation rules) and industrial >tructure (the scope for mergersmd rationalisation). The reason is )bvious. By and large the unions are not willing to discuss the former, and the employers the latter, in the relatively blic forum of an industry committee. means that if one wants to get on these fronts one must seek other ways. Second, there is an implicit assumption in the Neddy approach that people will 1ct in the public interest once it is pointed out to them with sufficient force. But this is not always the case. There is sometimes an irreducible gap between what is in the public interest and what is in the short-term sectional interest; and in such circumstances the public interest is likely to take second place. Union demarcation rights are a :::ase in point. An alternative example is the question of investment during a recession. We all know, I think, that we have been investing ·too small a proportion of our national product in industry since the war, and this is one of the main reasons 13 for our poor performance. Specifically, in certain key industries-chemicals and many sectors of engineering and machine tools for example-we simplyhave not had enough capacity installed to meet our needs at the top of the boom; with the result that importshave been sucked in, and the ensuing strain on the balance of payments has forced government to kill the boom. Unless industry is persuaded to invest more in these key areas, we are in danger of running into exactly the same bottlenecks the next time we try to run our economy flat out This has been documented in consider- able detail for a number of industries by Neddy, and it has been pointed out that it is in the long-term collective interest of these industries, as it is in the national interest, to remedy this problem. But the trouble is that many finns who accept the basic logic, argue nevertheless that it is in their individual commercial interest to under-invest, so that they are always operating in a seller's market. It costs them less to lose orders at the top of the boom through inability to supply, than it would to carry heavy overheads of unused capa- city in slacker periods. I am over- simplifying the argument, but there is here, I believe, a valid distinction between the public interest and the private interest. There is a further problem to the Neddy approach. The consensus on which it is based is still, I am afraid, a very shallow affair. I think this was brought out very clearly at the last TUC Congress, where in the economic debate it seemed to me that the general secretary and the Congress were conducting a dialogue of the deaf. Mr Woodcock was asserting his right, as representing the trade union movement, to negotiate direct with the Prime Minister on the whole drift of economic and industrial policy, and he tot always an easy matter for a Labour (Overnment. The "consensus" approachleveloped through these bodies was a element in getHng agreement to successive stages of the prices and •'"r·nn'"'" policy. It has been an import- mt and fruitful development of ndustrial-economic policy, and one .vhich I guess will remain with us for nany years to come, irrespeotive of the ~olour of the government in power. this approach has the defects of virtues. The main defect is that if parties concerned are not preparedo take action, action will not be taken. fhus Little Neddies have broadly >peaking so far proved relatively in- ~ffective in the fields of use of man- power (including restrictive practicesmd demarcation rules) and industrial >tructure (the scope for mergersmd rationalisation). The reason is )bvious. By and large the unions are not willing to discuss the former, and the employers the latter, in the relatively blic forum of an industry committee. means that if one wants to get on these fronts one must seek other ways. Second, there is an implicit assumption in the Neddy approach that people will 1ct in the public interest once it is pointed out to them with sufficient force. But this is not always the case. There is sometimes an irreducible gap between what is in the public interest and what is in the short-term sectional interest; and in such circumstances the public interest is likely to take second place. Union demarcation rights are a :::ase in point. An alternative example is the question of investment during a recession. We all know, I think, that we have been investing ·too small a proportion of our national product in industry since the war, and this is one of the main reasons 13 for our poor performance. Specifically, in certain key industries-chemicals and many sectors of engineering and machine tools for example-we simplyhave not had enough capacity installed to meet our needs at the top of the boom; with the result that importshave been sucked in, and the ensuing strain on the balance of payments has forced government to kill the boom. Unless industry is persuaded to invest more in these key areas, we are in danger of running into exactly the same bottlenecks the next time we try to run our economy flat out This has been documented in consider- able detail for a number of industries by Neddy, and it has been pointed out that it is in the long-term collective interest of these industries, as it is in the national interest, to remedy this problem. But the trouble is that many finns who accept the basic logic, argue nevertheless that it is in their individual commercial interest to under-invest, so that they are always operating in a seller's market. It costs them less to lose orders at the top of the boom through inability to supply, than it would to carry heavy overheads of unused capa- city in slacker periods. I am over- simplifying the argument, but there is here, I believe, a valid distinction between the public interest and the private interest. There is a further problem to the Neddy approach. The consensus on which it is based is still, I am afraid, a very shallow affair. I think this was brought out very clearly at the last TUC Congress, where in the economic debate it seemed to me that the general secretary and the Congress were conducting a dialogue of the deaf. Mr Woodcock was asserting his right, as representing the trade union movement, to negotiate direct with the Prime Minister on the whole drift of economic and industrial policy, and he wanted a clear mandate from the Congress to do so. But all this was a bit esoteric to the delegates, who were much more concerned with their and their members' jobs than with the grand design of economic policy. In the event Mr Woodcock didn't get his mandate, but assumed that he had it, and went off to 10 Downing Street regardless. The fact is, it seems to me, that whereas in Sweden a consensus ·policy worked out between government and both sides of industry is widely accepted in principle, and for that reason and because Swedish central institutions are verystrong is generally applied in practice, in Britain this is not yet so. The consensus so far as industry and the unions are concerned seems to me &till to be essentially an Establishment consensus, limited to the relatively small number of people who sit on one or other of the many Neddy-type committees. It doesn't as yet penetrate far beyond that, and it certainly doesn't as yet anyway animate the national consciousness as it does in Sweden. This is partly a function of rime~the Swedes have been at it for thirty years, we for five; partly a function of the greater complexity of our economy; and partly a function of the fact that both the CBI and TUC are by Swedish standards very weak organisations, with relatively little power or influence over their members (this is much more true of the CBI than of the TUC) . This means that in dealing with these bodies the Government is to some extent dealing with paper tigers, with bodies possessing more of the shadow of power than its substance. This applies also of course to the Little Neddies, which have no executive authority and in some cases a questionable standing in their industries. If one adds to this the unfortunate fact that communications down the line in most trade unions and most trade associations are extremely poor, it becomes clear that the impact of bodies like Little Neddies on the aotual centres of decision-making in industry-the individual board-room or the shop floor-i~ pretty limited. the implications of intervention All this is not to say that the Neddy exercise is useless or mistaken; only tc say that it still needs more time tc develop, and in the meantime should no1 be asked to carry more weight than i1 can bear. Consequently it is not surpris ing that the Government has been cast ing about for more direct ways of in fluencing industrial deoision-making, through measures which discriminate between firm and firm. There are various ways in which this can be done. A more discriminating and purposeful use of public purchasing is one. The IRC is another, though outside the direct control of government itself. A third line of approach is through the NRDC and the various means at the disposal of Mintech to help stimulate technological advance. The Government now proposes to take more general powers to discriminate , through the Industrial Expansion Bill. I think in principle it is right to do so and the CBI's opposition looks increasingly doctrinaire. Government has a duty to see that the very considerable sums of money which go to industry in one form of subsidy or another are used to best effect, and this can most easily be done by seeing that the money goe~ to those managements best equipped tc make good use of it. Second, it it can identify gaps in the economy which private enterprise cannot or will not fill unaided, government has a right and a duty to see what it can do to get them filled. The aluminium smelter proposal s a clear case in point. Whether the est way for government to achieve ts ends is by buying shares in private 'irms or by some other method is a matter of detail. The important thing is that the national economy should benefit. But I do have doubts about the Indus- trial Expansion Bill, though they are not the same as the CBI'S. My doubts are not about principle but about practice. Frankly, my fear is that the mountain will bring forth a mouse, that we shall incur the maximum suspicion and ill- will to gain the minimum results . In other words, my doubts concern the ability of government, as at presentconceived and organised in this country, to play the kind of positive, purposive role vis-a-vis industry to which it now- rightly, I think, and inevitably-aspires. I hope the Fulton Committee will ad- dress itself to this problem when it reports early next year. For I believe that a lot of our present troubles arise from the fact that we are trying to use the government machine to do some- thing for which it is not designed. We are trying to use a shock absorber as a dynamo. Organisationally and psychologically, government in Britain is designed to respond to outside pressures. It is not designed to initiate change. Civil servants have little direct feeling for or understanding of industry. Success comes to the civil servant, not from taking bold initiatives, but from avoid- ing anomalies, mistakes or decisions which cannot be publicly justified. This is hardly the right frame of reference ' for risk-taking. But the essence of posi- tive government is precisely that you do take risks. In discriminating between firm and firm, between project and project, you are creating anomalies, you are taking decisions which you may 15 not be able fully to expla-in or defend in the House of Commons, you are making choices some of which will turn out to be wrong. All this, I repeat, is right and inevitable in our present circumstances. But if we are to carry it off successfully we need to set new guidelines for our civil servants, we need to carry much further the very promising innovation of bring- ing businessmen into government in decision-making roles, and we ,need to a1ter to some extent the current rules of the parliamentary game, and enable ministers to take entrepreneurial deCi- sions without hav•ing to justify them fully in advance. (It was partly because of this inhibition that when the Govern- ment first felt the need to move into this difficult area it did it by setting up an independent institution in the form of the IRC) . Moreover, if it is to be a businesslike partner of industry government needs to streamline its deoision-making process. Government today lacks clear-cut channels of command, clearly-defined functional responsibilities. Far too much work is done through inter-departmental committees, where the need for swift decision is subordinated to the search for consensus and compromise, to what I have called elsewhere "government byconvoy" or saUing a-t the speed of the slowest. I am clear that this will con- tinue so long as the top executive com- mittee, from which all the others down the line take their tone, is as big and unwieldy as the present Cabinet. So, although I think we are movingalong the right lines, we have much to do to make Britain truly viable and to free ourselves from our present con- straints. Nor do I think we have all that much time. As I have argued, many of the measures on which we are working are inevitably long-term, and others are s a clear case in point. Whether the est way for government to achieve ts ends is by buying shares in private 'irms or by some other method is a matter of detail. The important thing is that the national economy should benefit. But I do have doubts about the Indus- trial Expansion Bill, though they are not the same as the CBI'S. My doubts are not about principle but about practice. Frankly, my fear is that the mountain will bring forth a mouse, that we shall incur the maximum suspicion and ill- will to gain the minimum results . In other words, my doubts concern the ability of government, as at presentconceived and organised in this country, to play the kind of positive, purposive role vis-a-vis industry to which it now- rightly, I think, and inevitably-aspires. I hope the Fulton Committee will ad- dress itself to this problem when it reports early next year. For I believe that a lot of our present troubles arise from the fact that we are trying to use the government machine to do some- thing for which it is not designed. We are trying to use a shock absorber as a dynamo. Organisationally and psychologically, government in Britain is designed to respond to outside pressures. It is not designed to initiate change. Civil servants have little direct feeling for or understanding of industry. Success comes to the civil servant, not from taking bold initiatives, but from avoid- ing anomalies, mistakes or decisions which cannot be publicly justified. This is hardly the right frame of reference ' for risk-taking. But the essence of posi- tive government is precisely that you do take risks. In discriminating between firm and firm, between project and project, you are creating anomalies, you are taking decisions which you may 15 not be able fully to expla-in or defend in the House of Commons, you are making choices some of which will turn out to be wrong. All this, I repeat, is right and inevitable in our present circumstances. But if we are to carry it off successfully we need to set new guidelines for our civil servants, we need to carry much further the very promising innovation of bring- ing businessmen into government in decision-making roles, and we ,need to a1ter to some extent the current rules of the parliamentary game, and enable ministers to take entrepreneurial deCi- sions without hav•ing to justify them fully in advance. (It was partly because of this inhibition that when the Govern- ment first felt the need to move into this difficult area it did it by setting up an independent institution in the form of the IRC) . Moreover, if it is to be a businesslike partner of industry government needs to streamline its deoision-making process. Government today lacks clear-cut channels of command, clearly-defined functional responsibilities. Far too much work is done through inter-departmental committees, where the need for swift decision is subordinated to the search for consensus and compromise, to what I have called elsewhere "government byconvoy" or saUing a-t the speed of the slowest. I am clear that this will con- tinue so long as the top executive com- mittee, from which all the others down the line take their tone, is as big and unwieldy as the present Cabinet. So, although I think we are movingalong the right lines, we have much to do to make Britain truly viable and to free ourselves from our present con- straints. Nor do I think we have all that much time. As I have argued, many of the measures on which we are working are inevitably long-term, and others are made long-term by the defects in our governing machinery. But the world outside us is not standing still. Many of the micro-policies on industrial structure which we are working on are being paralleled overseas. The gap between the standards of management and the application of technology in America and Europe (including ourselves) is not in my judgement being closed, but if anything is tending to widen; and Japan, which is absorbing American methods and standards at a rapid rate, is emerging as an increasingly dangerous competitor not only to ourselves but to the whole of Western Europe. The brain drain shows how little, in the last analysis, can our industry insulate itself from outside trends. The winds of change are blowing harder through our society than for many years, but if one looks at Britain from outside it still looks like a country where the pace of change is slow and the obstacles to change are strong-a country where things take a long time to get moving. It is this hardening of the arteries, the sense that one sometimes has of living on a planet where the force of gravity is very great, so that one has to apply immense strength to shift a feather-it is this which constitutes to my mind the real "English disease." We have still to liberate the creative forces in our economy, to harness the inventive power which runs like a golden thread through our history, from Caxton to Carnaby Street. Then, and then only, I think will Britain become truly viable; and then, and then only, will we be able to build in Britain the just, dynamic society of socialism. POSTSCRIPT Eighteen days after this lecture was delivered, the Government announced the devaluation of the pound by 14.3 per cent. The decision was taken hastily, under intense international pressure, in a sterling crisis of unprecedented severity. It was accompanied by a package of what I regard as unnecessarily tough deflationary measures. The devaluation has not therefore taken place under the best auspices or in the most propitious conditions for its success. Nevertheless, I welcome it. I believe that it gives us, for the first time in years, an opportunity to reverse the long-term decline in our export competitiveness, and to achieve the small but decisive shift in resources from home sales to exports which is the essential condition for economic success. In my lecture I argued the case for devaluation, not as a panacea or a soft option, but as a crucial but at that time missing element in a comprehensivepolicy for sound and sustainable growth. I argued that the success or failure of devaluation would be determined by our subsequent actions. The die has now been cast sooner than I expected. We face our most decisive challenge. If we cannot solve our balance of payments crisis now, our case is very grave indeed. abian society Fabian Society exists to further socialist education and research. It is affiliated to the Labour Party, both na- tionally and locally, and embraces all of Socialist opinion within its right and centre. Since 1884 the Fabian Society has en- rolled thoughtful socialists who are pre- pared to discuss the essential questions of democratic socialism and relate them to practical plans for building socialism in a changing world. Beyond this the Society has no collective policy. It puts forward no resolutions of a political character, but it is not an organisation of armchair socialists. Its members are active in their Labour Parties, Trade Unions and Co-opera- tives. They are representative of the lab- our movement, practical people con- cerned to study and discuss problems that matter. The Society is organised nationally aud locally. The national Society, directed by an elected Executive Committee, publishes pamphlets, and holds schools and conferences of many kinds. Local Societies-there are some 80 of them- are self governing and are lively centres of discussion and also undertake re- search. Enquiries about membership should be sent to the General Secretary, Fabian Society, 11 Dartmouth Street, London, SWl; telephone Whitehall 3077. the author Michael Shanks has recently completed a two and a half year stint in the Depart- ment of Economic Affairs, which he joined as an Industrial Adviser, sub- sequently becoming Coordinator of Industrial Policy. Before joining the DEA, he was Honorary Treasurer of the Fabian Society. He is an economist, journalist and author-his books in- clude: The stagnant society, The Inno- vators, The lessons of public enterprise (a Fabian Society study) and others. He is currently Economic Adviser to the Leyland Motor Corporation and a weekly columni5t for The Times. Cover design and typography byGeoffrey Cannon. Printed by Civic Press Limited (TU), Civic Street, Glasgow, C4. Standard book no. 7163 0378 7. abian society Fabian Society exists to further socialist education and research. It is affiliated to the Labour Party, both na- tionally and locally, and embraces all of Socialist opinion within its right and centre. Since 1884 the Fabian Society has en- rolled thoughtful socialists who are pre- pared to discuss the essential questions of democratic socialism and relate them to practical plans for building socialism in a changing world. Beyond this the Society has no collective policy. It puts forward no resolutions of a political character, but it is not an organisation of armchair socialists. Its members are active in their Labour Parties, Trade Unions and Co-opera- tives. They are representative of the lab- our movement, practical people con- cerned to study and discuss problems that matter. The Society is organised nationally aud locally. The national Society, directed by an elected Executive Committee, publishes pamphlets, and holds schools and conferences of many kinds. Local Societies-there are some 80 of them- are self governing and are lively centres of discussion and also undertake re- search. Enquiries about membership should be sent to the General Secretary, Fabian Society, 11 Dartmouth Street, London, SWl; telephone Whitehall 3077. the author Michael Shanks has recently completed a two and a half year stint in the Depart- ment of Economic Affairs, which he joined as an Industrial Adviser, sub- sequently becoming Coordinator of Industrial Policy. Before joining the DEA, he was Honorary Treasurer of the Fabian Society. He is an economist, journalist and author-his books in- clude: The stagnant society, The Inno- vators, The lessons of public enterprise (a Fabian Society study) and others. He is currently Economic Adviser to the Leyland Motor Corporation and a weekly columni5t for The Times. Cover design and typography byGeoffrey Cannon. Printed by Civic Press Limited (TU), Civic Street, Glasgow, C4. Standard book no. 7163 0378 7. recent fabian pamphlets research series 235 Jack Cooper 236 Laurie Pavitt 252 Peter Mittler 254 Michael Posner and Richard Pryke 255 Jebs 256 Elizabeth Allsopp and David Grugeon 257 Ken ]ones and John Golding 259 a Fabian group 260 Lloyd Harrison and John Roper 261 Ken Hutchings 262 Anthony Lester and N. Deakin (eds) 263 Geoffrey Robinson Industrial relations: Sweden shows the way The health of the nation The mental health services New public enterprise Personal taxation Direct grant grammar schools Productivity bargaining Arabia: when Britain goes Towards regional co-operatives Urban transport: public or private? Policies for racial equality Europe: problems of negotiation 3s 3s 6d 3s 3s 2s 6d 2s 6d 4s 6d 3s 6d 2s 6d 3s 4s 6d 4s 6d tracts 346 Thomas Balogh 353 Brian Abel-Smith 355 a Fabian group 361 L. J. Sharpe362 Jeremy Bray 363 K. W. Wedderburn 364 David Downes and Fred Flower 366 Norman Ross 369 Brian Abel-Smith 370 Richard M. Titmuss 371 Peter Townsend 372 John Hughes 373 a Fabian group 374 Brigid Brophy 376 Neville Brown and others 377 Rigas Doganis Planning for progress Freedom in the Welfare State The administrators Why local democracy The new economy Company law reform Educating for uncertainty Workshop bargaining: a new approach Labour's social plans Choice and "The Welfare State" Poverty, Socialism and Labour in power An economic strategy for Labour The trade unions : on to 1980 Religious education in state schools Has Israel really won? A national airport plan 4s 6d Is 6d 4s 3s 6d 4s 2s 6d 2s 6d 3s 6d 2s 6d 2s 6d 2s 6d 4s 6d 2s 6d 2s 6d 2s 6d 2s 6d young fabian pamphlets 7 Howard Glennerster and Richard Pryke The public schools 3s 6d 10 a study group Strangers within 3s 6d 11 a study group Womanpower 3s 14 a study group The youth employment service 3s 6d l5 David Keene and others The adult criminal 3s 6d