Where and why did we go wrong?

The decline of the British economy has been blamed on gentrification, ideological differences and now Europe. An eminent economic historian charts a tale of confusion

Our leaders have been telling us that the economy is at last on the up and up. Maybe. There are some current indicators, on unemployment and inflation for example, that have been relatively favourable. We must be grateful for small mercies.

But what of the future? I have recently reviewed - with the benefit of hindsight - the course of the British economy over the past 70 years. The picture that emerges does not give confidence that all will now be well. Indeed, if the past is any guide, the bumpy ride will continue. We have lost ground.

In 1900 Britain ranked third in total Gross Domestic Product (GDP) and third in GDP per head. She also ranked first in exports. In 1987 she was eighth in GDP (18th per head) and fourth in exports. The most recent study by the Organisation for Economic Co-operation and Development (OECD) confirms the trend. In 1990 Britain ranked 18th out of 24 developed countries by income per head, behind Italy, Australia, Norway, Iceland and the Netherlands.

Of course, the world economy has changed greatly since the beginning of this century. Perhaps we could not expect our old position to remain unchanged. But let us not ascribe this change ``to the stars'' rather than to ourselves. There have been far too many errors of policy and far too many self-inflicted wounds over these last few decades for that.

There have been some general theories to account for the relative decline of the British economy. One such theory blames a process of "gentrification''. It is argued that the energy and money-making propensity of the entrepreneurs have been sapped by the adoption of lifestyles derived from earlier cultures and this has meant that Britain has produced less wealth than many other, newer industrialised countries.

I do not accept that theory. I do not believe that the entry of those new to the ``upper-income brackets'' into the lifestyle of Wimbledon, Henley, Ascot or the royal garden parties is proof that their sense of money-making and their energy in the pursuit of material wealth has declined. Moreover, in the newer industrialised countries, such as Germany and the United States, we find that such people have all too readily taken on the lifestyle and the leisure class activities of earlier cultures. Even in Japan, the traditionally modest lifestyles of top business people now seem to be changing. In any event, at the very least the stop-and-go phenomenon that has plagued us could not be explained by this theory.

Hindsight shows up many errors of policy; it is challenging to try to see whether there are any common features.

I start this sad tale with our return to the Gold Standard in 1925 at the old parity. This administered a tremendous shock to our exports, particularly coal. It led directly to the miners' lock-out and to the General Strike. It exacerbated the still powerful differences - amounting even to hatred - between the left and the right, which lasted right up to the war.

The return to the Gold Standard helped to intensify the difficulties caused by the 1929-31 world depression and crisis. Superimposed upon it was the way in which we ourselves resolved our troubles by so-called orthodox means in 1931. This can now be seen to be exactly the opposite of what was required in the circumstances.

During the war, of course, with the complete mobilisation of human and material resources, the nation worked and fought as one. But the wounds left on the industrial relations front reappeared soon after the war. The clamour of rising expectations, a repeat of the post-First World War cry for ``a land fit for heroes to live in'', was in any event difficult to satisfy. The Labour Party, soon to come to power in the 1945 election, was naturally greatly burdened by these demands as well as by the doctrinal and ideological expressions that accompanied them.

The problem of the exchange-rate policy remained an incubus on economic policy almost continuously. In 1931 Philip Snowden boasted about the tremendous effort that had been made to avoid the ``disaster'' of abandoning the Gold Standard just a few days before he did so. We remained on a floating rate up to the war.

After the war, under American pressure, we attempted a precipitate and unrealistic return to convertibility, which, combined with an over-generous settlement of sterling balances, led to the massive devaluation in 1949. The American loan and the Marshall Plan relieved the situation for some years but there remained an underlying threat of potential balance-of- payments and exchange-rate crises for the next decade. The Maudling rush for growth led to a massive balance-of-payments deficit which was inherited by Labour in the 1960s; it also led to continual disputes about the appropriateness of a further devaluation.

Devaluation did not happen when the Labour government came to power. At the time there was not only the overwhelming political argument against it (``Labour is the party of devaluation'') but it was far from certain whether, given the economic conditions, devaluation would bring the necessary balance-of-payments relief. When it finally happened in 1966, it was again carried out in rather doubtful circumstances; and it led to the extraordinary statement by the Prime Minister (one of the rare ones trained in economics) that ``the pound in your pocket has not been devalued''.

From then on, the to-ing and fro-ing on the exchange rate inevitably became bound up with European policy. The weakness of sterling after devaluation undoubtedly further delayed French acceptance of our membership and it was not until 1972 that we entered the European Economic Community.

In 1979 the Community made one of its major leaps forward by instituting the European Monetary System. We became a member but without participating in its most important operating part, the Exchange Rate Mechanism. When we finally joined that in the early 1990s, we did so apparently without adequate consultation with our partners and at what was widely regarded as too high a rate against the deutschmark - ie, 2.95. Ministers were loud in proclaiming how important it was to stick to this rate within the Exchange Rate Mechanism almost until the day when we were driven off it. No sooner had this happened than we were told that we now had a ``fiercely competitive exchange rate''.

Alongside this major theme which operated right through the period I have reviewed, there have been more particular errors or frequent changes of policy which have, at the very least, confused and certainly set back a sustainable trend of economic growth. Among these, the appearance from time to time of sharp ideological differences (such as "the free market versus planning'') is one of the outstanding features of the last 30 years.

I do not need to trace the detail of the changing fashions for planning or deregulation. These cannot be said to be the monopoly of one party or the other. Both have changed sides from time to time. For example, it was a Labour minister who talked about the bonfire of controls, although the uncertainty about the continued validity of Clause IV(public ownership of the means of production, distribution and exchange) continued and, indeed, seems only now on the way to a final settlement that would free the Labour Party from this particular burdensome ballast.

It is not easy to be sure what weight to assign to these ideological differences - the peak of planning in the immediate post-war period and the heyday of free markets in the Thatcher era - as far as the performance of the economy is concerned. There is, however, some evidence that the periods of relative consensus and calm on the ideological front are more conducive to the maintenance of growth than the more disputatious periods.

Perhaps the greatest and most comprehensive of all errors, which extended way beyond the economic front, was the failure of successive British post- war governments to recognise the true strength of the movement on the Continent towards economic integration. It was the great merit of Harold Macmillan in 1962 at last to have recognised the significance of this movement and to have attempted to react to it in a positive way.

Unfortunately, the attempt to join the Community at that point failed, partly because the government, and perhaps public opinion, too, were not yet fully prepared to follow through on the initial decision. It took another 10 years before, under the Ted Heath government, we became members in 1972.

However, in spite of this apparently fundamental change in our position, the following 20 years were full of ambiguity and equivocation in our acceptance of the dynamics of the new entity. Our policy has been very much one of ``one step forward, two steps back'', particularly during the 12 years or so of the Thatcher regime when we were in the Community but effectively on many occasions outside and often playing a somewhat disruptive role.

The leadership of the European movement which could have been ours for the asking in 1945 was one of the great missed opportunities which only future historians will be able to assess at its true significance.

On the broader macro-economic front it would be tempting - but alas, not in accordance with the facts - to ascribe to one political party or another a particular propensity regarding the financial aspects of economic policy. No doubt they would each in fact claim that this is so. But no one who has looked at these matters with any care would regard Butler and Maudling as Scrooges who sadistically used all fiscal and monetary means to stop growth; or, alternatively, Cripps and Callaghan as frivolous, irresponsible spendthrifts who for the sake of growth would endanger the fiscal and monetary stability of the country. The facts in these particular instances are quite different.

Actions do not come down from heaven. They are the work of human beings. If we are to include the human element in the reckoning, it means asking for men who will avoid these errors in the future. They would be men who have the foresight, the knowledge, the strength of character and the political ability both to choose the right actions and to put them across in the best way. If this is to be the remedy, then I am afraid we must recognise that it is not available on prescription or over the counter.

Is there any single theme that remains through this history of errors? That great mathematician and philosopher Whitehead thought that the stability of a society depended on a balance between reverence for its symbols combined with a readiness to revise them. In the broadest sense, this nation has a good and lengthy record of doing this.

However, when we look at the economic aspect alone, I am afraid the balance has been very precarious from time to time. We have been generally far too close to the atrophy that Whitehead feared would result from excessive reverence to symbols (rather than to the anarchy which he regarded as the great danger of too ready a revision). I think if there is any one factor that can be seen to have caused so many of the errors, for example in the monetary field, they have been mainly a result of the inability to shed old forms of thought and to be prepared to look at new ones.

Lord Roll's `Where Did We Go Wrong?' was published by Faber and Faber on 6 March. His autobiography, `Crowded Hours',was reissued on the same day. Lord Roll is also the author of `A History of Economic Thought'.