The Tyranny of Nostalgia

 

Russell Jones has written a history of the UK economy since the 1970s, and as narratives go this is very good. While I inevitably had minor points of disagreement, on most issues I think the author makes the right calls. The narrative is clear and not unnecessarily technical, so you don’t need to be an economist to read it. (The book is also chart free, which I think is a shame.) It is very comprehensive implying extensive research, which is quite an achievement when writing about 50 years of economic developments and policies.

These virtues have costs, of course, at least for an academic like me. Being comprehensive can mean that you give too many reasons why this or that happened, or particular policies failed, rather than focusing on the key drivers. That in turn can lead to ambiguities or inconsistencies. One rather interesting one is the conflict that emerged between PM Brown and Chancellor Darling over the relative priorities to be given to the recovery (requiring fiscal stimulus) and controlling the growing budget deficit (requiring fiscal consolidation). While I sense that the author favours Darling on this, his later discussion on austerity rather suggests that Brown was right.

As this blog has featured many of the episodes covered by this book, I will not try to go over this ground again here with a short narrative about a longer narrative. (For this, see William Keegan’s nice review). Instead let me try and do something different. I want to use the book as material to bust several widely held myths about the macroeconomic history of the UK over the last fifty years.

1. There is no relentless decline. This is a point I have made before but cannot be repeated too often, given the UK economic declinism temptation many fall into. This period might have started and ended in relative decline compared to the US, Germany and France, but from the 1980s until around the Global Financial Crisis the UK economy grew as fast or faster than these economies. This is a point the author notes at various places in the text, although the book’s title and conclusions do relapse somewhat. .

It is this relative performance that really matters. Those who say Thatcherism and New Labour disappointed because growth was no better or maybe even worse than in the golden age after WWII ignore that starting point! The reality is that much of Europe and Japan were rebuilding their economies after large scale destruction during the war, and the UK was bound to see some of the benefit of that. The UK economy may have never had it so good in the 1950s, but it was falling behind other major economies, which is one of the reasons we kept trying, and eventually succeeded, in joining the EU.

2. The relative unimportance of economic thought. The myth that it is otherwise is often promulgated by economists, suggesting that economic history is to a considerable extent determined by changing economic ideas within academia. So, for example, the story goes that In the UK Keynes ruled from WWII, but Keynesianism failed in the 1970s with high inflation, so Freidman and monetarism took over from the 1980s. While the author does describe changing academic fashions at various points in the book, reading his account confirmed my view that these changing academic winds were generally not the key driver of policy changes.

In my view the key policy failure of the 1960s and 1970s was that policymakers were determined to avoid using demand management as a means of moderating inflation. It is not, as James Forder has pointed out, that policy makers were using the wrong Phillips curve, but just that UK policymakers didn’t want to use the Phillips curve at all. To call this reluctance ‘Keynesian’ is really too far a stretch, as neither Keynes nor those who developed Keynesian theory were great proponents of prices and incomes policies.

Equally, in the narrow sense of the term, what came after the 1970s was not monetarism. As the book makes clear, money supply targets were briefly tried and failed miserably, with great harm done to UK manufacturing and many who worked in it. What changed in 1979 was the UK got a Prime Minister and Chancellor who were no longer committed to maintaining full employment, but were determined to get inflation down without resorting to prices and incomes policies. Today the reluctance of policymakers in the 1960s and 1970s to use the Phillips curve to control inflation looks like a temporary aberration reflecting a determination not to repeat the disaster of the Great Depression. [1]

Equally the idea that austerity was the result of work by Alesina or Reinhart and Rogoff is nonsense. The unfortunate truth is that there will always be some economists around to give even the craziest policies some respectability, as Brexit showed. The pandemic taught us that this is not a peculiarity of economics, but can happen with supposedly harder sciences as well. (Actually, as my own book argued, medicine is perhaps the closest discipline to economics.)

If there is an exception to this argument that economic ideas matter very little to recent UK economic history, I think you can find that too in this fifty year period. The idea that macroeconomic stabilisation should come from independent central banks pursuing inflation targets did come in large part from current academic economics, rather than politics or Keynes’s 30 year old academic scribblers.

3. Another favourite myth of mine that I have talked about before, but which is clearly shown to be a myth by this book, is that Conservative politicians are better at managing the economy than Labour politicians. Labour tends to get the blame for the IMF crisis in the mid-70s, but this had a lot to do with the earlier Barber boom, where the author reminds us that policy aimed for 5% growth. The Thatcher period may have seen relatively good growth on average, but it was a really bumpy ride because of what can best be described as destabilisation policy: monetarism, the 1981 budget (Jones describes this as “an admission of failure”) followed by the Lawson boom, then ERM membership at an overvalued rate leading to Black Wednesday. The author is right that Labour inherited a reasonably healthy economy, but the 1997-2007 period was incredibly stable compared to the 1980s and early 1990s, in part because macro policy was much better. Unfortunately 2010 to today has seen a return to destabilisation policy, first with austerity, then Brexit, then the government’s reaction to Covid and finally Liz Truss.
   
   

4. 2010 sea change. 1979 rightly represents an important shift in how UK economic policy was done, although I would argue this is not so much from Keynesian to monetarism (see 2 above) as the advent of neoliberalsm. However 2010 (to 2024?) may also come to be seen as a similar sea change.
   
   From reading this book it is clear that from WWII until 2010 policymakers were constantly looking forward, trying (and sometimes failing) to deal with real and serious economic problems. Policymakers constantly worried about the productivity gap (and therefore prosperity gap) between the UK and Germany, France or the US, and tried to do something about it. It is a major reason why UK policymakers wanted to be part of the EU, and then the Single Market.
   
   In contrast since 2010 Prime Ministers and Chancellors have based policy on largely imaginary problems, like austerity or sovereignty, to further either minority or individual goals. Since 2010 policymakers have stopped focusing on the UK’s relative productivity compared to Germany, France and the US, and instead have preferred to tell us that everything they do is ‘world beating’. It is the shift in focus that is perhaps the underlying story behind the UK’s relative decline since 2010.

If you want a comprehensive and well researched book on which to compose your own ideas (or bust myths) about UK economic policy over the last 50 years, this book is for you. Alternatively if the subject just interests you, and you want a well written account that avoids dogma, I can recommend this book. One thing you can say unequivocally about UK economic policy over the last half century is that it has been far from uneventful or boring.

[1] Just to preempt the inevitable responses, although basic MMT does hark back to post-war policies it does also use demand management and the Phillips curve to control inflation. With a job guarantee what changes is the number of people on the JG scheme, rather than unemployment.