Nowadays there are nearly four hundred members of the Government Economic Service, distributed through the various ministries and departments, with a sizable concentration in the Treasury. It will come as a surprise to most people that at the outbreak of war in 1939, there was no professional economist with major responsibility employed in any of the central departments of government. An Economic Advisory Council of some twenty members had been established in 1929, but it ceased to meet after 1931. However, one of its committees, on Economic Information, which included Josiah Stamp, Maynard Keynes and Hubert Henderson, continued until the war, making regular reports to the Treasury. As war grew near, the Government asked Lord Stamp to make a survey of the preparations for war being made by the separate departments, and to make recommendations. From this survey there emerged, at the end of 1939, the Central Economic Information Service, which gave way, a year later, to an Economic Section of a group of economists responsible for surveys and analysis, and a Central Statistical Office, to coordinate the statistics collected by individual departments, and to make regular digests for the use of all parts of government, both bodies being located in the Cabinet Office. This arrangement persisted throughout the war and until 1953, when the Economic Section was transferred to the Treasury, the CSO following in 1989. Throughout its life, the Economic Section was a small unit, with between ten and fifteen members. They were not the only economists being employed by the Government during the war. Apart from Keynes and Henderson, at the Treasury, economists worked in ministries such as Supply and Aircraft Production, and there was the Prime Minister’s Statistical Branch, set up by Churchill at the Admiralty, and continued when he became Prime Minister.
The presence of a team of professional economists, devoted to providing regular policy advice to the Government in peacetime, was something quite new in British politics. It has always been fairly widely assumed that the Economic Section had considerable influence, but there was little public knowledge about how it worked, how much of its advice was taken, and whether that advice was good. These two books, the one a history of the Economic Section up to 1961, and the other the first instalment of the diaries of Robert Hall, who was head of the Economic Section from 1947, throw a good deal of light on these questions. Both authors of the history worked in the Section, Alec Cairncross briefly in 1940-41, and again as its head after 1961, and Nita Watts from 1941 to 1955.
Economic mobilisation got off to a leisurely start during the ‘phoney war’, but speeded up sharply after Dunkirk, and by the time the Economic Section was established in 1940 the main structures of the war economy, such as controls of materials, of building and of labour, were in place. There were to continue to be specific problems calling for study, many of them of shortages and bottlenecks, in imports, manpower, transport, and so on. But as Lionel Robbins, the wartime head, observed, ‘the economic problems of war are child’s play compared with the problems which will emerge as soon as the single objective of war disappears.’ From quite early on, the attention of the Section was turned towards post-war problems, and the proportion of papers on such topics steadily rose. The most important problem, in the Section’s eyes, was unemployment. The younger economists in the Section, notably James Meade, developed the approach outlined by Keynes in the General Theory published in 1936. Robbins himself had initially rejected Keynes in favour of the ‘classical’ position, but was in process of being converted and was content to leave the younger members of the team to make the running in a debate which was to lead to the White Paper on ‘Employment Policy’ of May 1944 – the one Mrs Thatcher used to carry about in her handbag. The Section’s opening paper focused on the counter-cyclical management of total demand, with the clear implication that in depressions the Budget should run into deficit, debt being repaid in periods of active trade.
The draft White Paper received the support of Keynes himself, who emerges as a somewhat cautious Keynesian on practical issues. But from the rest of the Treasury, there was little support. The strongest criticism came from Hubert Henderson. In the Twenties, he and Keynes had collaborated, as editor and chairman, respectively, of the Nation, and together they had produced the Liberal campaign pamphlet ‘Can Lloyd George do it?’, which included the advocacy of public works in depression. But he had been highly critical of the General Theory, and was similarly critical of the Section’s paper. Instead, Henderson put forward the striking suggestion that the state should be the main entrepreneur, or wholesaler, in the supply of a wide range of consumer goods and services. He said nothing about the financing of this buffer stock scheme, and the Section did not take it up in any substantial way. This was a pity, for had they done so, they would have been able to point out that the budgetary implications were exactly the same, in principle, as their own counter-cyclic proposals. From the majority of the ‘Treasury knights’ there was only incomprehension. Sir Wilfrid Eady described a note by Keynes as ‘a voyage into the stratosphere for most of us’: Keynes urged that the Treasury should not give the impression that ‘it would much rather be found drowned than learn to swim.’
A precondition of high and stable employment, which appears in the White Paper, was ‘moderation in wage matters’. Section papers on ‘wage policy’ began to appear as early as 1941, and the question was put, notably by Meade, whether, as unemployment fell, a vicious spiral of inflation might result. Cairncross and Watts note that ‘during the postwar years nearly all the ideas that have since emerged in the efforts of successive governments to find a workable incomes policy were advanced by members of the Economic Section, or by others in Whitehall.’
The Economic Section’s war-time work on external policy was divided between assessment of the balance of payments prospects immediately after the war, with the need for a great expansion of exports, and plans for a new international order in the longer term. Keynes proposed an international clearing union, in which penalties would be imposed on creditor and debtor countries alike, a scheme which had to give way to the proposals by the American, White, which were the basis for the International Monetary Fund. Complementary to this was a scheme for an International Commercial Union being worked out under the direction of Meade. As it turned out, the International Trade Charter was never ratified, what was left being the GATT, a machinery for negotiating the reduction of tariffs and other barriers to trade.
Looking over the Section’s work on postwar Britain, one is struck by the amount of thought given to looking forward to the time when the economy would be managed by monetary and fiscal means alone. It was recognised that there would have to be a period of transition between the end of hostilities and the emergence of a normal market economy, during which the elaborate wartime machinery of rationing and quantitative controls would have to be maintained, but not much thought was given to the strategy of dismantling this apparatus, which was unfortunate, since the transition was to prove longer than most people imagined.
At the end of the war, the Economic Section was kept in being, with Meade succeeding Robbins as head. It remained in the Cabinet Office, with Herbert Morrison, Lord President of the Council, as its minister. On the face of it, this looked like the core of an economic general staff, but it did not work out that way. In the long list of domestic and external problems needing attention, the wartime controls did not figure. When Labour leaders talked of planning, it mostly meant keeping on these controls. This was better than scrapping them overnight, but there was no philosophy. To Meade it meant planning for full employment through demand management. As Cairncross and Watts observe, he more than any man – more than Keynes – was the prophet of demand management before the real world was ready for it. Not that the controls rendered budgetary policy totally irrelevant. But the Chancellor of the Exchequer, Hugh Dalton, felt himself quite capable of taking the decisions without consulting either his ministerial colleagues, or taking advice from the head of the Section, and when, in 1947, Meade was obliged by illness to relinquish his post, it was through no fault of his that the Economic Section was at a low ebb.
Meade’s successor was Robert Hall. Both men had been tutors of economics in Oxford before the war, but there the resemblance ended. Meade must surely be his generation’s finest exponent of the taxonomic method in economics. Starting from an apparently simple model, he classifies all possible alternatives, according to different assumptions about critical elements in the model. Commenting on Meade’s application of this method to international economic policy, Harry Johnson wrote: ‘if economic theory is to be applied to problems of economic policy, this can only be done within the context of a particular problem, occurring in a particular environment.’ This view was shared by Hall, who told a junior colleague: ‘In general, administrators find that a balanced view from an economist is no use at all. In particular, the Economic Section is expected to say what course they themselves would take in a given situation and to say it positively. In my experience it is not much use giving advice to Ministers unless it is very loud and clear.’ Other important changes in personnel were taking place. Following the fuel crisis in February 1947, the Government appointed Edwin Plowden as Chief Planning Officer and gave him a Central Economic Planning Staff. In September, following the convertibility crisis, Stafford Cripps was made Minister of Economic Affairs, and within two months had also become Chancellor. So the planning minister had two secretariats at his disposal within the Treasury, the regular officials and the new Planning staff. The Economic Section was in the Cabinet Office, but now reported to him. This might have been a prescription for confusion, but it worked, and it seems to have worked because of the personality of the new Chancellor, and because Hall and Plowden quickly established a close working relationship and friendship. When Cripps resigned because of ill health in 1950, Hall noted in his diary: ‘I think he will be one of the great Chancellors.’
One of the duties of the Economic Section was to prepare regular assessments of the state of the economy. These were cast in the framework of national accounts, and provided forecasts for a year to eighteen months ahead, of national output, investment, exports, imports and so on, which formed the basis of policy decisions, in particular the Budget judgment of the desirable overall balance of revenues and expenditure. Such forecasts are subject to error, often considerable, but they are inescapable. To suggest, as some do, that forecasts be abandoned, is on a par with advising a motorist driving in a fog to shut his eyes and take his hands off the wheel. A more interesting question is whether they should be published. The political objection is that if a forecast proves wrong, it is ammunition for the opposition. The economic objection is that for the Chancellor to forecast an unfavourable trend, without at the same time announcing remedial measures, may be a gift to speculators. In favour of publication is the right of the citizen to know what his government is up to. And there is the argument, used many times in the context of wage increases, that if the facts are ‘put before the people’, workers or their trade-union representatives will moderate their claims, enabling the achievment of other aims, such as lower unemployment, which they share with the government. The annual Economic Surveys, which began to be published in 1947, contained fairly detailed forecasts in the first few years, but in the Fifties the Surveys became increasingly platitudinous, and the forecasts remained secret until 1968, when a brief summary began to be published twice a year.
Under Robert Hall, the Economic Section acquired great influence. It played the main part in setting the Budget figures. Hall himself was principally responsible for the 1949 devaluation. Three years later, he was successful, in alliance with others, in stopping the ROBOT scheme for blocking the sterling balances, letting the pound float, and restoring convertibility for non-residents, after the plan had been agreed by a group of ministers, which included the Prime Minister and the Chancellor. In William Armstrong’s words, ‘the Plowden-Hall team is the strongest force in Whitehall, since Ministers will not accept anything that they strongly disapprove.’ It is arguable that the Economic Section was the control room of Butskellism, when both Labour and Conservative parties accepted the objectives of full employment and the welfare state.
Cairncross and Watts have done a splendid job in boiling down and arranging the mass of material from which they started. They present the essentials of economic arguments while avoiding technicalities, and when conflicts in doctrine occur are uniformly fair minded. There are tranquil passages, but when things get exciting, as in the 1949 devaluation or the ROBOT affair in 1952, they know how to tell a good story. Robert Hall’s diary was already available to the authors in writing the history of the Economic Section, and the first volume has now been published. It makes excellent complementary reading. These are notes which Hall made at the end of the day, or of a week or more. Sometimes he used them to clear his own mind on some important issue: at other times he expresses his feelings about the many players he encountered on the policy stage in London and Washington. He could be generous in his praise, but he could be sharp as well, and more than once he lets off steam about the Bank of England. He saw clearly the problem of communication between the economists, putting a premium on logic and consistency, and the politicians, with their eyes on votes, divisions and elections. Allowing, as best one may, for the fact that the authors of both these books were professional economists, they leave the impression that, as a rule, the ministers were putting up questions for the economists to seek the answers. It seems to have been understood that the latter had some expertise not generally available to laymen: perhaps it is coincidence that of the three Chancellors who appear in this volume – Cripps, Gaitskell and Butler – it was Gaitskell, himself a professional economist, with whom Hall found it hardest to establish rapport. The system described here is one of ministers as laymen advised by experts. How the system works when ministers already know, or think they know, the economic answers would be fascinating to compare. As things stand, however, we may have to wait another thirty years to find out.