Читать книгу The Ideas That Shaped Post-War Britain - Anthony Seldon - Страница 11

The most basic, but also least tractable, question is: to what extent was the ‘golden age’ of the 1950s and 1960s the fruit of recognisably ‘Keynesian’ ideas and policies? Angus Maddison can do no better than to say that it ‘was due in considerable measure to enlightened policy, but it was helped by temporarily favourable opportunities for fast growth and modest inflation’.¹⁸ The field of enquiry can be narrowed by concentrating on the British experience, leaving aside for the moment the question of international factors.

Keynesianism was a collection of ideas, policies, and institutions designed to maintain full employment. In Britain, the Employment White Paper of 1944 committed governments to a ‘high and stable level of employment’. (Similarly, the 1946 Employment Act in the USA pledged the Federal government to use all its ‘plans, functions, and resources’ to maintain ‘maximum employment, production, and purchasing power’.) Full employment became a goal, says Herbert Stein, because it had become a fact in the war.¹⁹ I doubt if this is true: there was full employment in the First World War too, but no full employment goal after it. The goal was not the product of full employment, or even the wishes of the electorate, but of governments’ belief that they knew how to get full employment and how to maintain it. This was the result of the Keynesian revolution.

This is not to deny the importance of political factors. The Keynesian policy of full employment was adopted by the two leading capitalist victors, the United States and Britain, in order to put capitalism in a stronger position to withstand revolutionary assaults, both domestic and international. In Britain, the full employment commitment was part of an implicit social contract by which the state undertook to compensate the civilian population for its wartime sacrifices. Keynesianism was also a way of being left-wing without being socialist, and of purging Conservatism from its association with inter-war unemployment. It ‘became the flag around which everyone could rally’.²⁰ It relegated disputes between planners and anti-planners, businessmen and socialists to the background. In liberated Europe, Keynesianism was seen as a way of re-legitimating the state.²¹ Keynesianism, together with the associated commitment to welfare and a mixed economy of public and private sectors, became the basis of a new ‘consensus’. So the important political function of Keynesian ideas must not be neglected. The question is whether these ideas had much effect on economic performance.

After the war, Britain’s Labour government initially favoured planning sectors of supply (through a licensing or rationing system) to planning components of demand. Supply-side planning more obviously pointed to public ownership. Socialists like Dalton (Britain’s first post-war Chancellor), Durbin and Gaitskell were hostile to Keynes’s social values. ‘Durbin recognised that Keynesian policies alone would lead to a continuation of the system of private enterprise …’²² However, there was some scope for reconciliation. On the one hand, demand management could be made the instrument of redistributive goals which socialists favoured, while reducing the need for extensive nationalisation. On the other side, the socialised public utilities offered increased scope for controlling aggregate investment. On this basis, a deal could be struck. Powerful anti-planning arguments were provided by the economists Denis Robertson and, intermittently, Hubert Henderson, who both spoke for Keynes’s values, if not his theory, as did Hayek in his influential book, The Road to Serfdom.

However, the crucial factor facilitating acceptance of Keynesianism was the need to contain inflationary pressures. Here was a paradox. The Keynesian commitment of the mid-1940s was directed to saving the world from another slump. Keynesian policy was actually adopted to control the postwar boom. The technique adopted was fiscal Keynesianism. Not only had it proved itself in the war, but the Treasury wanted to keep interest rates low to borrow more cheaply. The situation called for budget surpluses, not deficits. Thus Keynesian calculation emerged as an instrument of financial orthodoxy.

This is the plausible story told by Jim Tomlinson. As he tells it, the budget of November 1947 marked a shift within the government from the use of controls to fiscal policy and Harold Wilson began his ‘bonfire of controls’ in 1948. A full employment target of 3 per cent was officially announced in 1951, mainly, it seems, to encourage the United States and other countries to follow suit so as to ensure a high demand for British exports. On the other hand, a basic problem had already emerged with using the public sector as an instrument of short-term demand management, because of its disruptive effect on public sector investment programmes. This pointed to reinserting monetary policy into the armoury of instruments available to balance the economy. ‘The kind of macroeconomic management that began to emerge in the late 1940s, and was to dominate the 1950s and 1960s, owed little to the devices suggested in 1944. It focused on budgetary and, to a lesser extent, monetary policy, within an overall framework of buoyant private expenditure and budget surpluses.’²³

However, this cannot be quite right. Although British budgets were always in surplus ‘above the line’ from 1947 onwards, loan-financed capital spending by public authorities was much greater than it had been before the war. There was a positive borrowing requirement (budget deficit) right through the Keynesian age (except for the years 1969–70) which tended to expand with time.²⁴ It is at least arguable that the net impact of fiscal policy during the ‘golden age’ was somewhat inflationary. However, the more substantial charge is not that public spending policies produced inflationary pressures in the golden age, but that Keynesian policy-makers, over-anxious about the dangers of depression, took the build-up of these pressures too lightly.

The Conservatives, who held power from 1951 to 1964, had their own political agenda, notably cutting taxes. This meant making more use of monetary policy as an instrument of short-term demand management. More importantly, demand-management under the Conservatives was directed towards maintaining the sterling-dollar exchange rate at $2.80 at all costs, and ensuring the re-election of Conservative governments. Both aims made their policies seem perverse from a ‘Keynesian’ perspective, without however threatening the maintenance of full employment. From the mid-1950s onwards, maintaining the value (and it was thought the world position) of sterling in face of low productivity growth and wage inflation required subjecting the British economy to frequent ‘stops’ in order to protect the balance of payments from the tendency to import too much at full employment. The Conservative penchant for depressing and stimulating the economy at the ‘wrong’ times led to them being credited with inventing the ‘political business cycle’. ‘Stop-Go’ or ‘fine-tuning’ the economy may be seen as a specific British contribution to Keynesianism arising from the economic characteristics of a declining economy, the tightness of the political battle between Conservative and Labour, and the ability of the British Prime Minister to fix, within broad limits, the date of the next general election.

Although ‘stop-go’ policies were attacked for destabilising the economy, they did not destabilise it by much, and unemployment never exceeded 3 per cent over the whole Conservative period. This employment record was not the result of national full employment policy but of a global private investment boom which swept up the ‘free world’ in a cumulative wave of prosperity. In other words, those historians are right who claim that the ‘golden age’ was the product of world conditions, from which most national economies benefited, irrespective of whether their governments were imbued with Keynesian ideas or pursued Keynesian policies. (The German, French and Japanese economies were not managed according to Keynesian principles, even rhetorically.)

To this there may seem to be one important qualification. Most governments in the post-war era spent about 10 per cent more of their national incomes than they had before the war – 35 per cent, rather than 25 per cent. This probably had an important effect in steadying economic activity over the cycle; or, to put it another way, making the cycle much shallower than it would otherwise have been. But although the higher level of government spending may have had Keynesian effects, it was not undertaken, for Keynesian reasons, reflecting rather the state of international relations (arms spending) and the establishment of ‘welfare states’ in post-war capitalist countries.

‘International conditions’ is an omnibus term, made up of a ‘conjuncture’ of market opportunities, policies and institutions. The crucial conditions for the long private investment boom seem to have been reconstruction needs, opportunities for technological catch-up with the United States, availability of cheap labour and energy, and the policies of military spending and trade and payments liberalisation associated with the Pax Americana. The war had also bequeathed a set of transnational institutions (the International Monetary Fund, the World Bank and GATT) designed to reconcile the national pursuit of full employment with free trade and stable exchange rates. The central idea inspiring the Bretton Woods system, as it was known, was that full employment should be secured by national policy; its achievement would make it safe to liberalise trade and payments.

Or at least this was the British view, as argued by Keynes. It was never so clear that it was the American view. The Americans attached much more importance to trade liberalisation as the engine, and not just the consequence, of full employment and prosperity, and were able to impose their views on a reluctant Britain and western Europe. They looked to trade expansion rather than government spending to keep demand buoyant; this was also the economic philosophy that inspired the Common Market, which was established in 1958. Trade liberalisation was a policy decision, but it had nothing as such to do with Keynes or Keynesianism. The historical comparison is with the Cobden treaties, which helped produce a similar ‘golden age’ in the mid-nineteenth century.

A key question we would now want to ask about the ‘golden age’ is why, until about 1968, there was a lack of serious wage inflation. The answer that is most consistent with the story told above falls into three parts. First, a high rate of real economic growth allowed the demand for rising real incomes to be satisfied out of productivity gains. Secondly, the adoption of mass-production technology allowed the labour market to be balanced without upsetting the ‘modest traditional pay relativities between industries, and between skilled and unskilled workers’.²⁵ Finally, working class incomes were still very lightly taxed, so that increases in negotiated pay were reflected in increases in take-home pay. These factors account for the moderate wage behaviour, which in turn smoothed growth. All this started to change in the 1960s.

Nevertheless, inflationary pressure was building up right through the golden age. With hindsight, it would now be widely argued that financial policy should have been used more aggressively against inflation, with labour market reforms being used to keep down the ‘natural’ rate of unemployment. 1957 marked one turning point in British history, when the Treasury ministers Peter Thorneycroft, Nigel Birch and Enoch Powell lost the battle to rein in public spending; 1955 had been another, when prime minister Anthony Eden fail to win Cabinet support to curb trade union power.²⁶ But at the time, such ideas were instincts or prejudices, which got no support from the economic theory or consensual politics of the day. As Enoch Powell said:

‘we were … monetarists … pre-Friedman’.²⁷

During the golden age, mainstream Keynesian economics became ‘normal’ science, with a ‘research programme’ based on the core Keynesian assumption that the unmanaged working of capitalist economies generated insufficient levels of demand to maintain full employment. It failed to develop the key concepts necessary to cope with, much less avert, inflation.

Keynes had seemingly left an upside-down universe – a ‘general theory’ of employment, without money and prices. This was not, in fact, true of the General Theory of Employment, Interest, and Money. But it was the emphasis Keynes gave to his theory in the circumstances of the 1930s, which was inherited, with far less justification, by his disciples in the 1950s and 1960s. To compress a complicated story: what Joan Robinson called ‘bastard Keynesianism’ resulted from a peace treaty between Keynesian and anti-Keynesian economists – called the neo-classical synthesis – by which the anti-Keynesians (mainly Americans) accepted the possibility of short-period ‘underemployment equilibrium’ in return for Keynesian acceptance that downwardly rigid money wages were the necessary and sufficient condition of it. Thus the General Theory turned out to be a ‘special case’ of the classical theory after all, but with important implications for policy. A world in which money wages are rigid and business confidence is variable is still a world which requires Keynesian therapy. However, this ‘treaty’, which confirmed the relevance of Keynesianism as policy while leaving it bereft of any micro-theoretical underpinnings, depended to a large extent on fears of a renewed depression.²⁸

The income-expenditure model was the main Keynesian policy construction. With wages and prices fixed, together with the capital stock, wealth and the state of expectations, the model exhibited a simple dependence of output and employment on expenditure. Further, the analysis readily lent itself to quantification and thus macroeconomic modelling, so that the task of securing the desired level of output and employment was made to seem deceptively easy. ‘Quantities adjust, not prices’ was the flag under which the early Keynesians sailed. This left them without an economic theory of inflation or, indeed, a tenable definition of full employment. There were, in the argot, no ‘supply constraints’.

In place of an inflation theory there was an empirical observation dating from 1958, the Phillips curve, which showed a stable inverse relationship between the level of unemployment and the rate of change of money wages: a lower level of unemployment brings about a higher rate of increase of money wages, and vice versa. Policy-makers thus supposedly had a ‘menu of choice’ between degrees of inflation and of unemployment. The message of the Phillips curve for most British Keynesians was clear. Since it was considered immoral to run the country with a ‘higher margin of unused capacity’, the government should maintain unemployment as close as possible to zero, and use an incomes policy to control wage costs, either in agreement with the trade unions or by legislation. Wage-push at full exployment rather than excess demand was identified as the cause of inflation. The refusal of Keynesians to take supply constraints seriously left them with cost control as their only weapon against inflation. But this begged the question of how much power a government had, or should have, in a free society.²⁹

It was left to Milton Friedman of Chicago University to restate the ‘classical’ theory of inflation – the quantity theory of money. As we have seen, Friedman’s work on the consumption function (one of Keynes’s own building blocks) had led him to believe that the ‘demand for money’, and therefore economic activity, was much more stable than Keynes had assumed. This meant that for most circumstances the quantity theory of money was a good predictor of inflation. Friedman’s policy rule was to ensure just enough money in the economy to finance what the economy was capable of producing: the unfettered forces of productivity and thrift would maintain a high level of activity. It could be argued that this was the ‘right kind of theory’ for the world of the 1950s and 1960s, just as Keynes’s had been for the world of the 1920s and 1930s.

Friedman’s decisive amendment to the dominant Keynesian orthodoxy came in 1967, with his concept of the ‘natural’ rate of unemployment. His central idea was that in the long-run, labour markets clear at an institutionally-determined unemployment rate, and that any attempt, by expanding money demand, to maintain the actual unemployment rate below this ‘natural’ rate will lead only to accelerating inflation.³⁰ The seeds of this are to be found in Keynes’s own distinction in chapter two of the General Theory between ‘voluntary’ and ‘involuntary’ unemployment and his chapter nineteen on prices. Broadly speaking, Keynes defined full employment as the maximum that could be reached by expansionary measures. If one tried to lower unemployment beyond this, one would run into inflationary problems.

Friedman’s much sharper concept of the ‘natural’ rate of unemployment provided a theoretical explanation of the tendency for inflation to increase: governments had been trying to hold actual unemployment below its ‘natural’ rate by expanding the money supply too much. He added one argument, known in the literature as the theory of adaptive expectations. The employment-creating effects of expansionary policy depend on ‘money illusion’ – on employed workers not pressing for money wage increases to compensate them for higher prices. But once inflation is expected, money illusion disappears. The employment effects of expansionary policy become increasingly temporary, the price effects increasingly permanent.

It has to be said that there was nothing in this which could not have been developed from the General Theory, had Keynesian economists been minded to do so. In fact, it was a fervent Keynesian, Abba Lerner, who developed a distinction between ‘high’ and ‘low’ full employment in 1951, high full employment leading to demand-pull inflation, low full employment keeping prices stable, and intermediate levels creating cost-push inflation.³¹ However, even though British unemployment for most of the golden age was less than 2 per cent, mainstream Keynesians denied the existence of demand-pull inflation, rejected the distinction between ‘high’ and ‘low’ full employment, and simply said that cost-push inflation should be prevented by controlling incomes. The point is that Keynesian theory might have been refashioned and extended to suit post-war problems, but Keynesian orthodoxy stood in the way. Keynesian economists, therefore, cannot simply blame their defeats on policy mistakes or unexpected events. Politicians no doubt wished to maintain the high levels of full employment achieved in the 1950s and 1960s. There was little in the theory they were being supplied with to tell them that this might be impossible in a free society. By the 1960s, Keynesian beliefs were held religiously, and Friedman was branded as the Antichrist.

In the 1960s, British economic policy was set to target not inflation but growth, a growth target of 4 per cent a year for five years being announced in 1961. The object of policy became to make the economy grow faster than it had in the 1950s. David Marquand has called this a shift from arms’ length to hands-on Keynesianism.³² But to what extent did it reflect Keynesian analysis or prescription? The answer is far from clear. On the one hand, ‘growthmanship’ was a political decision reflecting the view of virtually the whole of the British ruling class that Britain was ‘falling behind’ the more successful capitalist economies like Germany and France. For the Labour Party, which took power in 1964, the fear was that slow growth would endanger the achievement of its welfare objectives within the framework of consensual politics; that is, one that vetoed higher taxes to finance higher welfare spending. ‘Economic growth sets the pace at which Labour can build the fair and just society we want to see …’³³ An important background factor was the (unjustified) fear that Western capitalism was falling behind Soviet communism. Also, there was a general fear that the spontaneous sources of post-war growth were drying up – echoing, perhaps, Keynes’s forecast of ‘secular stagnation’. But how far was the growth strategy the product of specific Keynesian analysis and recommendation?

Orthodox Keynesians argued that growth was demand-constrained. There were two versions of this view, one emphasising the balance of payment constraint on export demand, the other the effects of ‘stop-go’ policies on investment demand. The remedy for the first was devaluation; for the second the long-term ‘planning’ of demand, in which devaluation might also figure. Kaldor’s growth model, by contrast, emphasised the supply constraints on faster growth. It was not just a matter of making demand grow faster or more smoothly, but of ensuring an appropriate supply response. Kaldor believed that the main engine of growth was growth in manufacturing output. This was because of the existence of increasing returns to scale in manufacturing industry, and because output per man was higher in manufacturing than in agriculture or services. The growth of manufacturing output in turn depended on the growth of employment in manufacturing industry. But Britain had no ‘surplus’ supplies of labour to transfer from agriculture to manufacturing: it was suffering from ‘premature maturity’. The next best thing was to transfer labour from services to manufacturing by taxing service employment more heavily than manufacturing employment.³⁴ The ‘Keynesian’ analysis found more favour with the Conservatives, the ‘structural’ analysis with Labour, and particularly with Labour’s Prime Minister, Harold Wilson, who was a devotee of Soviet planning. The core proposition, however, which emerged from both sets of argument, was that there were no supply constraints on the growth of the British economy that could not be overcome by policy. In particular, the idea that productivity growth was a function of output growth suggested that, despite an acute labour shortage, a planned expansion of output would carry few inflationary risks, especially if an incomes policy were used to restrain wage costs.

An ‘indicative’ planning system was set up by Selwyn Lloyd in 1961, strengthened by the Labour government’s National Plan published in 1965. In fact, as we know, the planning period, which lasted from 1961–9, brought no increase in the national growth rate. The only things which ‘grew’ faster were the rate of inflation and public spending. In fact, it was in the ‘planning’ period that both took off, setting macroeconomic policy a much more difficult task in the 1970s. The economists, of course, claimed that their policies were misapplied: in particular, they blame Wilson’s ‘political’ decision not to devalue the pound on winning office in 1964. This view is hard to sustain. In retrospect, Wilson’s decision to stop the ‘dash for growth’ represents the last serious, though only partially successful, attempt for ten years to control inflation; his effort to curb trade union power in 1969 foreshadowed the eventually successful efforts of Margaret Thatcher. Wilson was not really a Keynesian. He understood that the main problems of the British economy lay on the supply-side, though his vision was clouded by his commitment to planning. By contrast, Keynesian economists of this period suffered from considerable hubris. They made unwarranted claims to theoretical and practical knowledge. Specifically, the claim that productivity growth depends on output growth is true only up to a certain point and in particular industries. Only in the Communist economies could such a claim be tested to destruction.

It is hard to divide responsibility for policy failures in the 1960s between the economists and the politicians. Policy was more theoretically-based in the 1960s than in the 1950s, largely because the Left was mostly in power – not just in Britain – and was less sceptical of theory than the Right. But both economists and politicians were relentlessly activist. This was an almost universal mindset. Politicians wanted to do too much; but they were encouraged to do so by the Keynesian advisers. Their policies were badly conceived; but they got bad advice.

However, although Britain may have suffered somewhat from its hyperactive policy-makers in the 1960s, the fate of the ‘golden age’ was being settled elsewhere. It was the inflationary financing of the Vietnam war, coming on top of the Kennedy-Johnson tax cuts and social spending programmes of 1963–5, which made inflation a serious world problem, and led to a destabilising sequence of events in which macroeconomic policy was called on to play a much more central – and exposed – role. Once inflationary expectations got established, policy-makers faced a rapidly worsening trade-off between inflation and unemployment. It was no longer a matter of keeping a light hand on the tiller. Policy-makers found they needed to swerve the tiller violently from one side to another, aiming first to halt the rise in inflation, then to halt the growth in unemployment. The increasing violence of these policy ‘U-turns’ contributed to the slowdown in economic growth and the tendency for structural unemployment (or the ‘natural’ rate) to rise from cycle to cycle, which made the old full employment commitment increasingly problematic.

The full force of these problems hit the Conservative government of Edward Heath, newly elected in 1970. Heath inherited not just the Wilson, but, more importantly, the Nixon ‘Stop’ of 1969–70. When British unemployment reached the ‘magic’ figure of one million in January 1972, he decided to reflate the economy in order to reduce it by 400,000 in twelve months. This was a political decision. The Chief Adviser to the Treasury, Sir Donald MacDougall, told him that ‘the attempt to reduce unemployment so quickly would be dangerous because it would lead to inflationary shortages and bottlenecks’ – a sound Keynesian warning, but by now inadequate to the total situation.³⁵ Nevertheless, tax cuts and spending increases went ahead in Barber’s 1972 budget. At the same time, the decision was taken to withdraw the pound sterling from the European ‘snake’ and abolish credit controls. The Bank of England’s idea was to allow interest rates rather than quantitative credit restrictions to control the volume of private borrowing. The problem was that politicians then blocked the rise in interest rates. So a private sector boom was superimposed on the public sector boom. The money supply rose by 25 per cent in 1972–3, and although unemployment came down by 400,000 (in two years) the inflation rate rose from 6 per cent a year in 1972 to 13 per cent a year later.³⁶ The whole episode is a good example of the interaction between technical and political mismanagement. The Keynesian economists gave politicians lame advice. The Bank of England concocted a policy which presumed that the market would be allowed to set interest rates. All this was before the OPEC oil price shock.

The analytical weakness of Keynesian economics at this point was that it could offer no theoretical explanation of the acceleration of inflation between 1968 and 1973. The worldwide explosion of the money supply was attributed to monopoly pricing by labour unions and firms rather than to the financial policy of government. It was considered sufficient refutation of Keynes’s own view that, at full employment, a further increase in the quantity of money is inflationary, to point out that employment was no longer full – or at least as full as it had been in the 1950s and 1960s. This ignored Keynes’s own distinction between ‘voluntary’ and ‘involuntary’ unemployment, as well as Friedman’s much sharper concept of the ‘natural’ rate of unemployment. Ironically, the Barber boom of 1972–3 was the first and last attempt to use full-blooded Keynesian policy to maintain what was then regarded as full employment. When it failed – and when the quadrupling of oil prices gave another savage twist to the inflationary spiral – all governments, including Britain’s, started to give priority to inflation reduction. Rhetorically, as well as analytically, they needed monetarism.

On 22 July 1976, the Bank of England publicly announced the adoption of money-supply targets, though it had already started using them. Fiscal policy needed to be made consistent with the goal of reducing the rate of growth in the money supply. In 1976, public expenditure started to be ‘cash limited’ and for the first time since the Second World War was cut during a major recession. In October 1976, James Callaghan made a speech at the Labour Party conference announcing that the government no longer believed Britain could ‘spend its way’ back to full employment. This is widely taken to be the year when ‘monetarism’ was adopted and the Keynesian full employment commitment abandoned. In fact, the situation was more complicated. The reason given for the public expenditure cuts was to ‘free’ resources for export and private investment as the only means of ‘restoring and maintaining full employment’. This was consistent with a ‘Keynesian’ analysis of Britain’s problem, such as had been presented by Bacon and Eltis.³⁷ What the Labour government retreated from was the commitment to maintain ‘high’ full employment, accepting that in the 1970s Britain was already in a state of ‘Keynesian full employment’. Finally, an incomes policy was used until 1979 alongside monetary targeting, as part of the inflation-reduction strategy. The reluctance to put the whole burden of the fight against inflation on monetary policy reflects both a vestigial political commitment to full employment and an analytic commitment to the cost-push theory of inflation. It was the collapse of incomes policy in the ‘winter of discontent’ in 1978–9, leading to the election of the much more ideologically intransigent Conservative Party under Mrs Thatcher, which finally put policy Keynesianism to sleep. But not too much should be ascribed to parochial British ideology, since the demise of policy Keynesianism proved to be worldwide.