Economics in the Long View

I believe we shall increasingly interpret a significant element in the interwar sluggishness of Western Europe as due to the process of disengagement from the old leading sectors of the pre-1914 and wartime years and to the rather slow preparation for the age of high mass-consumption which, in the 1950s, at last fully seized Western Europe, as the lessons of income analysis were learned and the old men of steel and electricity and heavy chemicals were superseded by the bright young men of automobiles and plastics, electronics, and aeronautics. ( The Stages of Economic Growth) ¹

The following paper presents some main results of recent research on post-war industrial development in Sweden. Although some international readers may be interested in the substantial findings as such, the account is given mainly in order to articulate a methodological point. The primary objective is to illustrate advantages of complementing the conventional macro-approach by historical research, partly on the corporate decision making level, utilising a conceptual frame of reference of a Neo-Schumpeterian and ‘Austrian’ type.¹ What more exactly is meant by this will hopefully become clear to the reader from what follows.

A shift is occurring in the paradigm for macro-economics in the United States — a shift from the demand side to the supply side. This shift is causing a change in focus from problems in aggregative economics to problems in certain sectors such as energy and autos and in certain states such as Michigan and Ohio. The signs of the shift are widespread. Econometric models are being respecified to include price and output equations for many different sectors. Detailed economic models with activity-analysis structures are being developed for individual sectors. Renewed concern is being voiced about unemployment in regions which are heavily affected by certain industries.

Productivity measures the use of economic resources and is, therefore, a major index of economic welfare for individuals and the nation. The rate of productivity growth over the long run determines economic growth and makes possible improvements in living conditions and the attainment of national objectives. A slow growth economy will have difficulty reconciling society’s desire for general economic progress and resolving domestic and international problems; slow growth will therefore cause internal political and social problems, because improvements for some groups must come at the expense of losses for others. The decomposition of society into competing groups attempting to improve their relative positions when the nation as a whole loses (as with OPEC price increases), can escalate inflationary pressures, further shrinking national wealth. Thus, our national prestige, competitiveness, security, and welfare depend heavily on the level and growth of productivity.

It may be regarded by some as ill-mannered to argue with Walt Rostow in honouring him. A superficial defence can be found in the modern statement that it doesn’t make any difference what you say about a person as long as you mention him frequently and spell his name correctly. More fundamentally, Professor Rostow has posed an interesting and profound interpretation of a classic issue that is worth illuminating.

To those who took part in it, the devaluation of sterling in September 1949 was one of the most dramatic episodes in the postwar history of the United Kingdom. It seemed likely at the time that it would also prove one of the most important in terms of its effects. There might be room for disagreement as to the need or the purpose or the wisdom or even the significance of the devaluation. But it was unmistakably a turning-point. So rare and startling an event as a fall of 30 per cent in the parity of sterling, the currency in which one- third of the world’s commerce was conducted, could not fail to exercise a powerful influence on international transactions of all kinds. Yet many of those who have looked back on the devaluation have doubted whether it accomplished any lasting changes and have concluded that it was of quite minor importance in post-war economic development. How does it look now in retrospect after thirty years that have seen one more major devaluation of sterling as well as day-to-day fluctuations that rob devaluation of its drama?

‘The Government accept as one of their primary aims and responsibilities the maintenance of a high and stable level of employment after the war’. This is the opening of the White Paper on Employment Policy (Cmd. 6527) issued in May 1944 by the British Coalition Government, in which the three main parties were represented. This marked a revolutionary change in economic policy and undertook a commitment which no previous British Government would have contemplated. For the next three years the problems were those of transition, but as excess demand slackened the new policy had to be implemented. In November 1947 Sir Stafford Cripps succeeded Mr Dalton as Chancellor of the Exchequer and retained the portfolio he already held as Minister of Economic Affairs. As Director of the Economic Section of the Cabinet Office (later transferred to the Treasury and called Economic Adviser to H.M.G.), I became in effect his economic adviser, remaining in this capacity under successive Chancellors until my retirement in 1961. This paper is a short account of how the policy worked in practice and some reflections on later events.

The purpose of this chapter is to show, by using data on France and Germany in the 1970s, how to apply a quantitative method for examining the causes of stagflation.