Sir Ian Gilmour has written a splendid book about a splendid subject. The question he asks is: ‘How did Monetarism capture the Conservatives?’ It is a genuine mystery, and also a very serious issue, as more than three million Britons, including Sir Ian, know to their cost. They – and he – have lost their jobs as a result of it: they as victims of a heartless, misguided and ill-founded policy, and he as a victim of his views about it.
Perhaps his views might not have mattered so much – even in Mrs Thatcher’s Cabinet there are some unbelievers, Peter Walker is an honourable example – but his style must have been insufferable. It is not only wickedly witty – better, perhaps, even than Galbraith. From a background of Eton, Balliol, the Guards and the Spectator it is the least some might expect (one wonders what he can think of one of his later co-workers on that journal – the Mount who has come to Mahomet). Mixed in with the wit, moreover, is an immense seriousness.
All the bits and pieces of monetarist and Friedmaniac mumbo-jumbo are taken apart. First, there is the terrible trio of targets – M1, M3 and Sterling M3, each moving differently from the others and largely out of control. Then there is the Rational Expectations Hypothesis: the proposition that people are ‘normal’, that with perfect knowledge they know best how to pursue their interests, that their efficiency in the use of information is absolute and that they know the true probabilities attached to all possible outcomes. Who could possibly believe that these are the conditions under which ordinary human beings live, and behave? Then, the Natural Rate of Unemployment – that level at which inflation is steady. ‘What’s natural about that?’ you might ask. And on to the PSBR, the MTFS, PSL1 and PSL2, and on and on and on. Sir Ian’s demolition of these false gods is a delight to read.
He has to demolish them, if only because they are the modern supports for the ancient ‘quantity theory of money’ which, two centuries after it was so elegantly spelt out by David Hume and a century after it was translated into snappy but empty symbols – MV = PT – by Irving Fisher, is still the basis of so much analysis of inflation. As Sir Ian says, ‘old doctrines never die: in economics, they never even fade away.’ He spells out all the attacks that can be mounted against the Quantity Theory and its grandiose modern offspring – that ‘inflation is always and everywhere a purely monetary phenomenon’ – but rightly recognises that this is not the target to aim at: the real questions to be asked lie further back. Monetarism is not a single or discrete phenomenon: it is but one element in an overall view of what the study of economics is about, of what politics and policy are about, and therefore, and naturally from Sir Ian’s point of view, what the Conservative Party and its policies should be about.
He deplores, as I do, the retreat from Political Economy, the ancient and honourable name of one of the areas of social study, to the modern Economics, as the queen of the so-called Social Sciences. The subject as it is now all too often taught, and, alas, learnt, proceeds from absurdly simplified and desiccated assumptions about men and markets, and spins fairy-tales about how both behave, or should behave, or would behave if they were left ‘free’. It’s all good clever fun for those who like that sort of thing. But, although good fun, it is by no means harmless fun. It has led to untold damage to economic policy, and hence to economic performance in many countries. As Sir Ian says, happy the country with no great economists. The US and the UK have suffered in the extreme: Japan, Germany and France have, by contrast, done pretty well, at least until Professor Friedman and his disciples toured the world. Indeed, Sir Ian makes the contrast between the modern economist’s approach to a problem and that of Keynes. Faced with a terrible problem like that of unemployment in Britain in the Twenties, or of unemployment in the world in the Thirties, Keynes made proposals based on common sense, and then, if need be, thought up a clever theory. Keynes and Gilmour and people and politicians look upon economics as a study with a purpose, whatever its pretensions to being thought a science. Sir Ian might well have quoted one more passage from Alfred Marshall: what economists were (or should be) trying to do, Marshall said, was to build up, not ‘universal truth, but the machinery of universal application in the discovery of a certain class of truths ... I do not assign any universality to economic dogmas. It is not a body of concrete truth, but an engine for the discovery of concrete truth.’
Unfortunately, monetarists are dogmatists, and, politically at least, they have triumphed. In the last decade it is they who have made all the running. In their studies not of ordinary men and women but of ‘economic man’, they have come to dominate the graduate schools, the younger generation of academics, textbook writers and school teachers, as well as converting journalists, commentators and right-wing politicians of all parties in very many countries to policies which a decade ago most of us had pronounced not only clinically but actually dead. Thus the present has been ruined and the future endangered. How have they done it?
Sir Ian rightly emphasises that the key assumption underlying the monetarist approach is that a market economy is inherently self-stabilising. No evidence is given for this. Indeed, how could it be? What evidence exists would surely suggest that market economies have never been stable, and that even less have they been stable at levels of economic activity, employment and income of which the economy is potentially capable or which its members want. Planned or command economies have also been unstable, but their instability comes from fluctuations in output, in supply, whereas our fluctuations in output arise from fluctuations in demand. Their failures arise from failures in planning, i.e. in the management of supply – there is never any lack of demand in such countries – whereas ours come from failures in the management of demand. Keynes invented the tools to analyse our instability, and out of that analysis his followers devised policy weapons for minimising it.
‘All unnecessary,’ say the monetarists. ‘Not only unnecessary, but positively dangerous. Stabilisation policies destabilise. Leave it alone.’ Laissez-faire rides again! It is, of course, true that policies have often failed – but they were introduced because the alternative of no policy was predicted to be worse. It is also observably true that ‘there is in operation ... a law of the deterioration of British economic policies,’ to quote Sidney Pollard. But what follows from that? That we should be attempting to improve the policies and their implementation – or that laissez-faire, which is just as much a policy as interventionism, will also deteriorate?
We can hardly ever know for certain. But we can look about us. Andrew Shonfield, in the sadly truncated sequel to his excellent Modern Capitalism, does so. Observing and analysing the major economies since the war, he argues that there is no natural mechanism at work to determine the overall level of economic activity. Fortunately for us, the really successful market economies – Japan, Western Germany, France and their numerous economic satellites – do not believe there is either. Their policies have been highly interventionist: their overall management of both demand and supply factors has done rather well. Recently, their performance has, of course, somewhat ‘deteriorated’ – could that be a result of the widespread adoption of monetarist policies? What a treasonable thought! Fortunately for them, they are still far behind us in the flight into monetarist arm’s-length policies. In the long post-war search for arm’s-length policies, the UK leads the way. First, we had detailed overall planning and controls; then built-in (i.e. non-discretionary) buffers in the form of large public spending; then built-in stabilisers in our incremental taxation and spending arrangements; then the move away even from interventionist Bank of England policies, so that credit could be created and allocated by market forces. All that remains, a failure for which Professor Friedman castigates us, is ‘to set the monetary dials on automatic pilot, and go away’. As Sir Ian says, monetarism takes the politics out of economics (and intends to do so) and thereby takes the politics out of politics too.
Which leads us to an even more important question than ‘What is Monetarism?’ That is, who are the monetarists? This is not a question for economists to try to answer. It is one for sociologists, or psychologists, or perhaps psychiatrists. Neither Sir Ian nor your reviewer is one of these. And perhaps Sir Ian is too much of a gentleman to stoop to ask it. His loyalty – ill-repaid, one might think – to his party is so deep and strong that he does not mention the Prime Minister at all, and Sir Geoffrey is quoted less often than Lenin or Stalin. But I am prepared to ask the question, for it is a vital one.
First, although economists have been defined as people who know more about money than those who actually have it, the original monetarists, like Professor Friedman in Chicago and Professor Walters at LSE, were not monetary economists at all. They were micro-economists, experts on supply and demand and prices and markets – and unshakably in favour of markets, especially ‘free’ ones, everywhere and for everything. The fact that most markets for most things in most countries are highly oligopolised was a minor irritant: the theory is what counts. Most monetary economists, by no means only Keynesians, and most bankers, too, were pretty sceptical from the start, and have been since the Thirties.
It seems to me that like all revolutionaries, the modern monetarists of the academic, the journalistic and the political worlds are building on a personal alienation from the Establishment. The conversion of the Times and the Financial Times, which has led to their becoming daily news-sheets on behalf of monetarism, the development of the LSE into a highly proficient breeding-ground for academic and especially professorial monetarists to spread the gospel into all universities and business schools outside Oxbridge – these are no accidents. A natural bandwaggon effect has now drawn ambitious young men and women into propagating this harsh, alien, baseless doctrine and imposing it on the backs of the three million unemployed in this country who are their monument.
Gilmour blames our troubles partly on the Government’s tight money policy, which might suggest that Sir Geoffrey has actually succeeded in achieving tight money. In that respect, as Sir Ian points out elsewhere, he has totally failed: the target monetary aggregate has until recently been well up at the top of an ever-rising range, and generally well beyond it. The crippling damage has come, rather, from a very tight fiscal policy introduced in a vain attempt to control the money stock. The cost of this experiment is enormous. The human cost is unmeasurable, but the loss in output and income must be running at some £30 billion each year, and that is material welfare, output, income (but not, as on page 150, ‘growth’) lost for ever. Not only is this experiment, to put it mildly, very expensive: it is also wicked, in that the burden is dumped upon the poor. It is not the country which ‘suffers’ unemployment: it is the unemployed who suffer.
To ask yet again Lenin’s famous question, ‘what is to be done?’ In the short run, we might hope that experientia docet. After all, ‘the theory of monetarism’, as Gilmour says, ‘is in ruins, and experience of the last three years is there to prove it.’ Facts may destroy the theory, and, one must hope, this government too, although I fear they may do neither. At a very basic academic level, only theory and analysis can destroy a theory.