The economy appears to be reaching the bottom of the cycle. Industrial production after a precipitous drop in the second quarter has levelled off since May. Retail prices have decelerated to show month on month rises at annual rates near to 10 per cent since July. The current account deficit, after falling sharply from 1974 levels in the first half of the year, increased again in the third quarter to an annual rate of £2½ billion. The growth of M3 has recently started to exceed the inflation rate, which it has not done since 1973 IV. These indicators suggest that the UK is at this point lagging only a few months behind Japan and the USA and barely if at all behind the other major European economies (see Chapter 2). Unemployment, a lagging indicator, continues to rise in this country, but has started to turn down in the United States and appears to be levelling off in Japan, Germany and France.

After levelling out in the second quarter the total output of the industrial countries increased quite sharply in the third. The rise was, however, heavily concentrated in the United States. Production has begun to increase also in Japan and Canada and, more recently, in France and West Germany. But it has become increasingly clear that in the smaller countries of Western Europe the main impact of the recession had to a considerable extent been delayed rather than avoided. So far, moreover, the recovery in the major countries has depended heavily on the reduction or reversal of the previous liquidation of stocks and on high rates of government spending. There appears as yet to be only a very limited revival in final demand for consumer goods and still little immediate prospect of a recovery in business fixed investment. So long as this remains true, confidence that a fairly rapid rate of growth will be sustained for the next year or two must be tempered with caution.

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’.

‘Fine-tuning’ can be defined as frequent discretionary adjustments to policy instruments. This article attempts to isolate this issue from a multiplicity of criticisms directed at UK economic policy-making. The attack on fine-tuning itself by the New Cambridge and the Manchester monetarist schools is shown to be connected essentially with the view that the economy is stable (i.e. returns to equilibrium in the absence of discretionary intervention). Nevertheless, even if the economy is stable, optimal control theory suggests that policy adjustments could be desirable, essentially because they could, at least in principle, speed the return to equilibrium. A more fundamental question concerns the way in which the private sector form their expectations; if they are ‘rational’, that is based on information at least as good as the authorities', then the grounds for discretionary intervention by the authorities are greatly diminished. These issues all require further empirical investigation.

This article analyses the trend of earnings in the public and private sectors of the British economy from 1950 to 1975. It was found that public and private sector earnings moved closely together throughout the 1950s and 1960s but then diverged considerably in the early 1970s, with public sector earnings moving ahead of private sector earnings in an unprecedented fashion in 1974 and 1975; given the earlier stability in relative earnings, this movement might be temporary. There was a significant difference in the cyclical behaviour of the two series with public sector earnings generally increasing faster than private sector earnings during the downswing and vice versa during the upswing; this finding is consistent with the lesser exposure of the public sector to market pressures. Incomes policy does not appear to have affected relative earnings in any systematic way.

The changes in the exchange rates of the major exporters of manufactures between 1967 and 1971 were followed by substantial changes in their export performance measured against trends before the realignment, indicating that the devaluations and revaluations were effective, contrary to some preliminary assessments. Changes in relative prices are a good explanation of the previous trends, as well as the basic reason for expecting effects from exchange rate changes. The results under fixed rates cannot therefore be applied under floating rates as these reduce, if they do not eliminate, relative price changes converted to a common currency.