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The New Cambridge and ‘Monetarist’ Criticisms of ‘Conventional’ Economic Policy-Making

Published online by Cambridge University Press:  26 March 2020

J.A. Bispham
J.A. Bispham*
Affiliation:
National Institute of Economic and Social Research
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Abstract

Over recent years there has been increasing criticism of what may be called ‘conventional’ economic policy-making The methods of forecasting and analysis used at the National Institute and elsewhere are at the centre of this type type of policy formation, and, although there have certainly been forecasting errors, the conclusion of this article is that nothing better has been proposed. This is certainly true of the New Cambridge view of the balance of payments which always had many theoretical difficulties, but which has now, it is demonstrated, also fallen down empirically.

The school which is here labelled Monetarist is defined rather widely and probably includes somewhat divergent strains of thinking. They have in common however that they reject the cost-push explanation of inflation in favour of a monetary/excess demand theory. Attention is restricted to those who have commented on the UK situation. It is the central contention of this section of the article that the case is not proven by the sorts of ‘evidence’ which tend to be adduced. It is much more likely that the relatively painless monetarist cure for inflation is not a real option at all, but a mirage resulting from excessive concentration on statistical correlations of quarterly post-war data. A much broader view considers the important implications of the shift from the pre-war world to the ‘full employment welfare state’.

Type
Articles
Information
National Institute Economic Review , Volume 74 , November 1975 , pp. 39 - 55
Copyright
Copyright © 1975 National Institute of Economic and Social Research

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Footnotes

At the suggestion of the Editorial Board, Mr Bispham, the retiring editor of the National Institute Economic Review, was invited to write a valedictory article in which he expressed his opinions freely; the views put forward here are his sole responsibility. By the time this article is published Mr Bispham will have taken up an appointment at the Bank of England.

David Savage of the National Institute assisted with some of the calculations.

References

Notes

(page 39 note 2) The balance of payments on current account (plus net capital transfers) with the sign reversed.

(page 39 note 3) It is worth noting that at this stage the view of the Cambridge Economic Policy Group, that economic expansion would run into unprecedented balance of payments difficulties, was based on entirely different methodology from that discussed here. Their attention was then focussed on the (adverse) discrepancy between the medium-term trend growth rates of exports and imports; see ‘Problems in the management of the economy 1971-75’ CEPG, Department of Applied Economics, Cambridge, 1972, and ‘Prospects for economic management 1972-76’; CEPG, 1973.

(page 40 note 1) Ninth Report from the Expenditure Committee, 1974, HC 328, HMSO.

(page 41 note 1) The stock appreciation relief of November 1974, amounting to £800 million, is at first sight a contradiction of this proposition. In fact it merely prevented the abnormal stock appreciation of the most recent period from causing an abnormally large change in company taxation in relation to profits net of stock appreciation.

(page 44 note 1) See NIER no. 71 February 1975, pages 15-16, 50.

(page 45 note 1) At one point it was suggested that even the abnormal commodity price behaviour of these years would not have much effect because the resulting increase in primary producers' incomes would be spent on exports from the industrial countries. This was however to ignore the likelihood of a significant lag between the rise in prices and expenditure of the resulting incomes, as well as the possibility that the export gains might well not be distributed so as to precisely offset for each commodity-importing country the effects of the rise in prices (which would depend on the composition of imports). This theory also contradicts the assertion (noted in the main text) that economic fluctuations in the rest of the world do not affect domestic income and output: if rising commodity prices generate further exports in addition to those accompanying the rise in prices, then these price increases do not offset the initial export rise—they are neutral, so that one is still left with an overall rise in demand. The case of the Arab oil producers—though completely unprecedented—served to knock the final nail into this particular coffin: the Arabs were simply physically unable to spend all of the increase in their revenues on imports from the rest of the world—at least over a 2-year period.

(page 48 note 1) Speech to bankers at the Mansion House dinner, 16 October 1975.

(page 48 note 1) F. W. Paish and J. Hennessy, ‘Policy for incomes’, Hobart Paper no. 29, Institute of Economic Affairs, 1964.

(page 48 note 2) M. Parkin, ‘United Kingdom inflation: the policy alternatives’, National Westminster Bank Review, May 1974.

(page 49 note 1) ‘Full employment in a free society’ by W. Beveridge, Allen and Unwin, 1944.

(page 50 note 1) ‘Last straw or turning point?’ by Wilfred Beckerman, in ‘Crisis '75 … ?’; Occasional Paper Special, No. 43, Institute of Economic Affairs.

(page 50 note 2) In an even more recent article, Professor Parkin has now suggested that the natural rate has shifted upwards since 1967. From 1952-67 he estimates that it was as low as 1.78 per cent, but since then it has been 3.73 per cent. See ‘Inflation in the United Kingdom: causes and transmission mechanisms’, by M. R. Gray, M. Parkin and M. T. Summer, University of Manchester Social Science Research Council Research Programme paper No. 7518.

The estimate for the later period would have been higher but for the fact that 1971 and 1972 data were effectively excluded from the calculation as they gave an ‘implausibly high’ estimate.

(page 51 note 1) ‘Incomes policy: a reappraisal’, by R. G. Lipsey and J. M. Parkin, Economica, May 1970.

(page 53 note 1) Unless other industrial countries had also revalued, which they did not.

(page 53 note 2) If all the ‘strain’ were taken on profits, bankruptcies and unemployment would still be likely to occur.

(page 54 note 1) The Times, 23 October 1975. The original use of the term ‘crowding out’ in the economics literature was in the context of full employment, however.

(page 54 note 2) ‘Spending ourselves into prosperity’, Financial Times, 9 March, 1972.