Lord Roberthall, economic adviser to Macmillan’s government, looks at the failure of monetarism
The purpose of this article is to survey the nature and causes of the severe distresses now afflicting the British economy, and to consider the changes we should be making. These distresses are most evident in our unemployment, now approaching three million and in reality a good deal more because so many are involved in training schemes or not registered. This represents a huge waste of resources and a great deal of personal suffering. There has also been a check, which cannot as yet be measured, to the steady growth of the national income which went on in the period when we enjoyed full employment. During this period, unemployment rarely rose above half a million, mostly people changing their jobs or well below the standard of employability. The change from full employment is the result of a deliberate change in policy. To understand this change it is necessary to understand the place of money in our economic life.
If everyone who gets an income from the sale of goods and services spends this amount and no more, the total offered for output will equal the total price of it. Those who have sold the goods and services are thus enabled to pay wages, dividends etc, and they all pay taxes which are paid out again, mostly to local and national government employees. Thus spending our incomes provides the funds to keep the incomes flowing. But both individuals and governments can spend less than they receive, or use past savings or borrowings to spend more. Thus there may be deficiencies in demand leading to unemployment, or excesses leading to rising prices and inflation. Demand management, based mainly on the influence of J.M. Keynes, was intended to offset these swings, the government varying the balance between its own income and expenditure according to what was needed to keep employment fairly steady. It was this policy which avoided the booms and slumps of the past and gave us something like full employment and moderately steady growth from the end of World War Two for nearly thirty years.
The change in policy, initiated to some extent in the last years of the Labour Government, but pursued with such vigour by the present administration as to produce a worse slump than the Great Depression of the Thirties, involves an attempt to halt the inflation which has been associated with full employment. The price mechanism which is the lubricant for our whole system is put under severe strain if prices are all rising, because they do so at different rates. Those whose incomes or assets rise first benefit at the expense of the latecomers. It has always been agreed that it is one of the primary duties of government to avoid inflation by controlling the amount of money available. But after full employment became the primary object of policy, it was found that prices rose by about 2 to 3 per cent every year, and most economists agreed that this was because full employment increased the bargaining power of labour. This rate of inflation, fairly constant until about 1967, then began to increase, and prices roughly doubled in the next seven years and rose even faster after that. This is an alarming rate and the history of other inflations shows that such rates tend to get faster until everyone loses confidence in money. But though all agreed that something needed to be done, there was, and remains, an acute difference of opinion about how the wage and price increases could be checked and controlled.