Out of 

Stagnation 


A POLICY FOR GROWTH 

J. I. SARGENT 
FOUR SHILLINGS AND SIXPENCE 



J. R . Sargent was until recently Fellow and Lecturer in 
Economics at Worcester College, Oxford, and Chairman 
of the Oxford City Fabian Society. 
FABIAN TRACT No. 343 

' 

I 

'::. 

THE FABIAN SociETY. 
11_Dartmoutli St~~et; ·S.W .1 


Note.-This pamphlet, like all publications of 
the F AB/AN SOCIETY. represents not the collective 
view of the Society but only the view of the 
individual who prepared it. The responsibility of 
the Society is limited to approving the publications 
which it issues as worthy of consideration within 
the Labour Movement. 

February, 1963 



I. Introduction 
THE ABOLITION OF ECONOMICS 

SHOULD Socialists be concerned about Britain's slow rate of economic 

growth? I believe that they should; and deeply. ~he most obvious and 
immediate reason for thinking so is that there is so much to do, so much 
that anyone can see who cares for the quality of our national life without 
even digging below the surface: mean housing, ancient hospitals, understaffed 
schools, derelict city centres, all now drooping in a lengthening 
queue, and a whole new world of widespread cultural and leisure activity 
awaiting release from commercial purse strings. It may be that we could 
achieve more of this than we now do, if we were to reorder our priorities, 
to stop wasting resources on deterrents or detergents, or advertising, or 
conspicuous consumption, or expense accounts. Let us then do so; we could 
achieve more still if we had more growth as well. But behind these immediate 
objectives there lies (for me) the belief that growth is the most formidable 
engine of equality. This is not simply because of the progressive tax 
system. It is the notion that between a man with £5,000 a year and a man 
with £10,000 a year the sense of inequality is much less than it is between 
men with £500 and £1,0001 In the latter case the sense of inequality is 
sharpened by deprivation to a much greater extent than in the former, and 
the fact that the difference is more obvious to all makes it easier for the 
distinction of income to harden into a distinction of status. 

Those Socialists who prefer to base their beliefs on ancient writ may 
recollect the passage in 'News from Nowhere' in which the author, in his 
dream of the future, goes into a shop to buy himself a pipe, and is amazed 
to find that he is invited to take any one that he likes without payment. 
It is through economic growth that we may hope to transform this Socialist 
dream into reality, not merely for ourselves, but for all the world. In 
William Morris's dream the problem of production has been solved. The 
age of the economists and the calculators is past; and the glory of the price 
system is departed for ever. This is the particular vision which, at the deepest 
level, inspires my own concern with economic growth. The object'of Socialism 
is the abolition of economics. 

Between an existing situation and an ideal, the path is not necessarily 
one of steady improvement. In the sphere of consumption, while complete 
abundance may be best, more can mean worse. This will quickly be pointed 
out by those Socialist writers who have skilfully turned 'affluence' into a 
dirty word, who complain vaguely of 'capitalist values', and who regard 
the growth of car ownership in particular as the beginning of corruption. 
I have no sympathy with the concept of Socialism as a kind of holy poverty 
in which material desires are somehow assuaged by the contemplation of 
publicly owned assets. At the same time, it would be foolish to ignore the 
possibility that certain paths of growth could require the sacrifice of other 
Socialist objectives, such as a more equal distribution of property and the 
spending of a greater proportion of the national income for social pur


1 This point is, of course, Crosland's; see his 'Future of Socialism.' 


OUT OF STAGNATION 

poses. If, for example, it could be convincingly shown (as it has not been) 
that the main impediment to more rapid growth was the effect on incentives 
of the present degree of redistributive taxation, we should then be 
faced, as Socialists, with an awkward choice. But to my mind the policy 
which I shall outline contains enough promise of raising the rate of growth 
of output per man to justify the assertion that the moment for such a 
choice has not arrived. 

If growth is an important agent of social equality, and is not inimical 
to other socialist objectives, it also has a certain advantage over orthodox 
socialist measures. For orthodox socialist measures require the existence of 
radical governments; and these are a historical rarity. A high rate of growth, 
once created, is more likely to be self-sustaining, and thus to survive the 
end of the radical government, which, perhaps, has been required to initiate 
it. Contrasted with the occasional excitement of the bouts of socialist legislation 
which the electorate will permit from time to time, the gains from 
rapid growth will be more steady and less interrupted. This is not said to 
belittle the importance of orthodox socialist measures, but to urge the claim 
of rapid growth, as an agent of equality and the source of social spending, 
to be included in that category. 

The Competitive Position 

Apart from specifically Socialist reasons for being concerned about 
economic growth, there is another important reason which is not particularly 
Socialist, but which has to be reckoned with by Socialists as well as everyone 
else. This is that if output per man rises more slowly in this country 
than it does in others, then, unless real wages also rise at a correspondingly 
slower rate, our competitive position in world trade will steadily worsen 
as our prices are forced relatively upwards. In so £ar as this causes our 
balance of payments to worsen, we shall be compelled periodically to correct 
it by measures which lower our standard of living absolutely-for this is 
the effect of whatever method of correction we use. Some economists hold 
the view that a relatively slow rate of growth will, on the contrary be favourable 
to the balance of payments. They believe that a country with a relatively 
slow growth of i:1come will generate a slow growth of demands for imports, 
and experience a fast growth of demand for its exports from the faster-growing 
economies abroad. This takes an excessively static view of the determination 
of d':!mand; for surely the faster-growing countries would increas:ngly 
channel their faster-rising import demands towards the relatively cheapening 
source of supply. The optimistic view is unlikely to be justified for 
an economy which operates in a competitive world. In any case it is not a 
solid enough base on which to sit Q_ack content when there is a strong risk 
of worse things happening. Against these we have to be on guard. We are 
n:>t an island; every country's growth diminishes us. 

2. Why have we been Growing so Slowly? 
MUCH attention has been paid to the fact that this country has been 
spending a relatively small proportion of its annual product on investment, 
on the replacement and extension of its capital equipment. If this 



OUT OF STAGNATION 

were the key, the door should have been swinging open fast in the last 
few years, since the proportion has steadily risen from 14 per cent in 195# 
to 17-!-per cent in 1961.1 But this considerable investment effort has had 
no perceptible effect on the growth rate of output per man. In any case 
the proportion spent on investment is not a very relevant statistic. Jt will 
naturally be smaller for countries like the U.K. whose labour force is 
expanding slowly. For such countries have each year a smaller number of 
additional workers waiting to be rigged out (as it were) with the standard 
set of tools. More relevant than th.e proportion of the national income 
invested is the growth of capital per man. 

This is shown in column (2) .of Table I below for a number of Western 
countries, Canada and the United States, Column (1) shows for contrast 
the growth of Gross National Product per employee. Both columns measure 
the average annual rate of growth during the decade of 1950-60, for each 
country, calculated in real terms; that is, having corre.cted the raw figures 
for price increases. The contrast between columns (I) and (2) is indicated 
by the ratio in column (3), about whi·:::h more will be said later. 

T·ABIE I 

1950-1960 

Annual average rate of growth of : 

(1) (2) (3)
G.N.P. per Capital stock 
employee per employee (I) + (2)
Western Germany 5.0 4.6 1.09 
France ... 3.9 3.0 1.30 
Netherlands 3.6 3.5 1.03 
Sweden 3.3 1.7 1.93 
Norway 3.1 4.9 0.63 
Belgium 2.4 2.6 0.92 

U.K. .. . 
2.1 2.9 0.72 
U.S.A .... 1.9 2.8 0.60 
Canada 1.9 4.2 0.45 
The countries are listed in decreasing order of growth of G.N.P. 
per employee. 

Note on the Statistics. 

The figures of G.N.P. and Capital Stock, from which the above growthrates are derived, are in real terms, i.e. corrected for price changes. 
The rates of growth of the capital stock are based on : 

(I) 
estimates of the capital stock in a particular "ear by various authors: 
see Income and Wealth Series VIII, published by the Ln1ernational 
Association for Research in Income and Wealth, and in particular the 
summary survey pp. 1-34; and 
(2) 
estimates of net fixed capital formation at constant orices taken from 
the national income statistics of the various countries and applied to 
(1) to give a continuous series throughout the decade. 
The capital stock includes in principle all durable goods in public and private 
enterprises except: military installations; forests, land and livestock; stocks of 
raw materials and of semi-finished and finished goods; and consumer goods.
durable and non-durable, in the hands of consumers. Limitations of the staJtistics 
prevent exact adherence to this principle. 

1 The percentages represent Gross Fixed Investment of all kinds divided by 
Gross National Product, both measured at Factor Cost. 


4 OUT OF STAGNATION 

From an examination of these figures, the following points stand out: 

I. The disparity between ourselves and the fastest movers is much 
less marked in column (2) than it is in column (1); for example, our rate of 
growth of output per employee has been only two-fifths of Germany's. 
but our rate of growth of capital per employee has been two-thirds ot 
hers. On the latter measure we are still among the slowest growers, but 
we are not nearly so far behind. Column (1) is still the more interesting 
measure, since the effort of accumulating capital is not made for its own 
sake, but for its yield in terms of output. But column (2) takes at any 
rate some of the steam out of the argument of insufficient investment. 
2. Our rate of growth of capital per employee has been very nearly 
tC' the same as that of France, whose rate of growth of output per employee 
has been almost twice as high; and has been six-sevenths of that of the 
Netherlands, whose rate of growth of output per employee has been more 
than one--and-aJhalf times as high. The envy with which we frequently 
regard the performance of these countries must be fixed, not on the investment 
eff'ort that they have achieved, but on the results that they have 

IC obtained from it. 

3. Canada has achieved a low rate of growth per output per employee 
in spite of a very high rate of growth of capital per employee; and Norway, 
although she has raised capital per employee at a faster rate than any 
other country in the Table, has realised only a moderate growth rate of 
output per employee. By contrast, Sweden has achieved a rate of growth 
of output per employee which has been one-and-a-half times ours, with 
a rate of growth of capital per employee only 60 per cent of ours. 
The e facts which emerge t'rom Table I dispose of the idea that then. 
1 any simple correlation between the rate of capital accumulation and 
the rate of growth of output p~r man, such as would lead us to prescribe 
bigger doses of investment as the fundamental cure for our lethargic performance 
under the latter head.' 

Tbo e who hanker after correlations are more likely to find satisfaction 
by looking at column (3) of Table I, which shows, for each country, 
the ratio of the growth rate of output per employee to that of capital per 
employee. If all capital and all products were homogeneous, i.e., if there 
were only one type of capital goods producing one type of product in all 
the countries listed, one could interpret column (3) as showing the percentage 
increment of the product achieved annually over the decade for 
every one per cent increment of the capital installed to produce it, or what 
economi t would call 'the relative marginal efficiency of capital'. Since 
our economy is not like Robinson Crusoe' (except perhaps in its tendency 
to recruit coloured labour), it is only with a good deal of licence that we 
can refer to the figures of column (3) as indicative of the relative 'effectiveness' 
of capital formation in the different countries. (Fellow economi ts, 
plea e note the inverted comma ). But seizing the opportunity of licence, we 
ob erve that the ratios are all high for the fast-growing German, French 
and Dutch economic -their capital formation has been relatively 'effective· 

1 Certain exceptions are con idered later concerning in\estment in education 
.t nd rcohcement tmc tment ec ect10n ( ) 


OUT OF STAGNATION 

-while for the slow-growing British, U.S. and Canadian economies the 
ratios have all been low. The contrast is blurred a little by the intermediate 
cases of Belgium, Norway and Sweden, but it is quite striking, nevertheless. 
In particular, it appears that with the same rate of growth of capital per 
employee as we a<etually achieved during the decade, but with the 'effectiveness' 
of that of the French,1 we should have realised very nearly the French 
rate of growth of output per man. Though still short of the German, this 
would scarcely have been worth complaining about. 

Thus, it seems to me that the first thing to be explored is why we 
have not had more out of the growth of capital per employee than we have 
achieved. Impediments to capital formation itself appear to have been surprisingly 
weak, and are less likely to be found playing a restraining role 
in the present than in the future, when the underlying conditions of a more 
rapid rate of expansion of output have been created. Indeed, a situation 
in which the growth of capital has been outstripping that of output can 
breed a slump; for ~t creates a presumption that ov:er large areas of the 
economy rhe fruits of capital investment are not being reaped, or in other 
words that the average productivity of capital is !falling. Signs that this 
is the ca·se have 'been multiplying in our economy in the last few years; 
for example, the appearance of idle <Capacity in an increasing number of 
industries, particularly steel and consumer durables, and the widespread 
tendency for the rate of profit on capital to fall. No one would wish to 
see the rate of growth of capital reduced in the face 'of this situati-on, 
although this may be the natural reaction of businessmen and there are 
already signs that it may be happening. But it does mean that we should 
be putting the wrong foot forward, with the dsk of falling flat on our 
faces, if we were to adopt a growth policy whkh began with a programme 
of accelerated investment. The moment for this is not yet. The immediate, 
and in<ereasingly urgent, ,problem is why the increased capital stock that 
we have managed to install has not given us a bigger increase of output 
than it has.2 

1 That is, 2.9 (column (2), U.K.) multiplied by 1.30 (column (3), France)
equals 3.77, or only 0.13 below the French rate of growth of output per employee 
(column (I)). 

2 This footnote is addressed primarily to economis1s, who will suspect the 
excessively aggregative nature of the facts adduced above. It is possible that 
the tendency for the growth of capital per employee to run ahead of the growthof output per employee (the tendency which I have dubbed the ' ineffectiveness ' 
of investment) might disappear if the figures were disaggregated and considered 
industry by industry. In other words, ' ineffectiveness ' might prove a statistical 
illusion. For example, the aggregated result set out above could have emerged 
if it had been the case that those industrie·s whose technique of productionnecessarily involved a high capital/output ratio were also those which had been 
most rapidly expanding. Thus each single industry could have achieved 'effective' 
capital formation (at least in the sense of maintaining the average productivity 
of its capital). while the result for the economy as a whole appeared'ineffective' because of the different expansion rates of its component industries. 
The verification of such a hypothesis would involve a substantial statistical effort 
which I cannot undertake; but I strongly suspect that it would not be borne out. 
It seems . generally agreed that 'structural' effects of this sort explain only a 
small part of the lag in British progress as far as output per man is concerned. 
It would be surprising if the opposite were the case where output per unit of 
capital is concerned. 


6 
OUT OF STAGNATION 

3. A Theory of 'Ineffectiveness' 
THE key to this seems to me to lie in the relatively slow growth in the 
1f Un ited Kingdom of the population of working age, and in the inadequacy 
of our adaptation to this particular feature of our situation. How does this 
key fit? In 1954 there began the grea!t post-war ,investment boom, which 
has sustained its impetus almost 'to the _present time and raised the share 
of the national income invested from 14 per cent to 17! per cent. Initiated 
in the mood of post-Korean opt"imism, intoxicated with Bu'tlerian visions of 
doubling the standard of living in twenty-five years, and practically stimulated 
by the introduction of investment allowances, it set in motion the 
tole-ably rapid rate of growth of capital per employee to which we have 
a;r~ady drawn attention. Now in general a process of capital expansion 
can be expected to have two effects. Partly, in so far as it is motivated by 
the p:·os{:ect of expanding markets it will require a complementary 
e;tpansion of the labour force. If one is installing and bringing into 
p:·oduction J 0 per cent more machines of a certain type, one will need 
I0 per cent more labour. But usually the advance of technical knowle:
lge allows one to do with less than a proportionate increase of 
the labour force; the investment will be to some extent labour-saving. 
Plainly the need for this latter, labour-saving element to be present in a 
marked degree existed in the Bri,tish economy ·in the 'fifties; for while 
the populati-on of working age was inc.reasing at an annual rate of only 

0.1 per cent, the c'apital stock was increasing at over 3 .per cent. But suppose 
that the inveSitment done· had, ~or some reason, failed to be a kind 
which allowed for the saving of labour on this scale. Then, if businessmen 
expected sufficient demand to 'employ their expanded capital to the full, the 
effect would be to generate a growth of the demand for complementary 
labour which would .outrun the growth of the normal supply. 
There has -:::edainly been -the persistent pressure on the labour supply 

' 
that one would expect in such ·circumstan,ces. Up to 1952 it can adequately 
be explained by the abnormally heavy demand for ·goods and services in 
general in the immediate post-war period (due to pent-up consumption 
and investment want's J'OStponed during the war itself, and to the export 
drive) and by its reappearance at the time of the Korean rearmament effort. 
But the strain has conltinued lthroughout the period of more normal demand 
for goods and services sin'Ce 1953. The O.E.E.C. Report on the Problem 
of Rising Prices t2kes the view that Britain is one of the countries in 

t which the sl.::arcity of labour has been greatest between 1955 and 1959t: 
and the scarcity has been refleoted •in the low national unemployment percentage, 
in the tendency of total employment to rise more rapidly than the 
population of working age, in the un hakeable persistence of overtime 
working, in the steady stream of immigrants, and in the strong pressure for 
wage increases. There have, c'f course, been variations in the intensrity of 
these phenomena, which may be partly explicable in te1'ms of variations 
in the demand for goods and servkes (e.g. in 1954/5 and 1958/9); but the 
underlying strength and persistence ·Of the demand for labour has been 
such that it must be attributed to other factors. At the same time as labour 

1 See p. 125 of this Report (May, 1961). 


OUT OF STAGNATION 7 

has continued to be scarce, complalints of lack of capital :eapacity have 
been dwindling, and have more recently given way to indications of its 
under-utilisation. The first signs of this, appearing towards the end of 1957. 
were smothered in the 1959 boom, but it has been confirmed by an increasing 
number of reports frc'm industry in the last year or two, and has 
reflected itself in the falling tendency of the rate of profit on capitaJ.l 

What this picture strongly suggests is a lack of harmony between the 
relative rates of growth of capital and labour. But how does this larck of 
harmony aocount for illle 'ineffectiveness' of our investment, which has been 
the most obvj:ous feature rof our poor growth of output per man? The 
connecting link is the disposition of those in control of economic policy to 
ta,ckle the scarcity of lab.our, and the wage inflation which either did or 
was held to result from it, by means of measures to restrain the demand 1 
for goods and services in general. This disposition sprang in part from a 
simple failure of comprehension. It did not occur 'to the authorities (nor. 
one should add, to many of their critJ.cs) that there might be an excess of 
demand rover supply in the labour market without there being simultaneous 
excess demand in the market for goods and services.2 But the determination 
of the authorities to stam the latter, without asking whether it was 
the~e that the inflationary pressure originated, was strengthened by a particular 
feature of the second half of the 'fifties. This was the necessity of 
maintaining c:Jn'idence in sterling, given 1that, in pursuit of their policy of 
restoring the convertibility of sterling and its importan·ce as an international 
currency, they were dismantling exchange controls and there/with an alternat've 
means of defence against bss of gold reserves due to flu·ctuations of 
foreign confidence. This greatly increased the urgency of wielding th~ only 
weapon which they had left themselves, namely, action against the general 
level of demand for goods and services. But even in the absence of the 
confidence factor, they would have been driven to use this weapon owing 
to their distaste for, and cbnsequent fai lure to equip themselves with, anything 
more selective and discriminating. At any Date, restraint on the growth 
of demand-mainly through credit poli·cy, but periodically supplemented by 
hire-purchase restrictions-became the dominan't policy of the later 'fifties. 
Consequently, output, being held back through the fear of wage inflation 
·in conditions uf labour scarcity, was prevented from growing at a rate commensurate 
with the fairly satisfactory growth of capital which was being! 
achieved. Hence the 'ineffectiveness' of our investment effort, as illustrated 

1 See the Economist, 21st Arril, 1962, ' Profi,ts: a Ten-Year-Look.' Accor1ing 
to the Economist's figures, -based on company reoorts, the average ero:;s 
return on capital employed has de::lined from 20.4 rer ~ent. at the end of 1951 
to 15.1 per cent. in the first qu:~-•ec of 1962. The .-:Jownward trend was broken 
only during 1954-55 and 1959-60. Gross return is orofit after orovi-l irtg for 
depreciation divided by net assets. Dividend rates have been better maintained 
because of the reduction in the standard rate of income tax; and to•al dividends 
have, of course. greatlv increased because so has the ·stock of capit3.1. 

2 This is a tribute to the captiva>ting elegance of classical 'general equilibrium·
models of the economic svstem, in which impulses are transmitted like quicksilve 
from one market to another. T.hings have eot worse since K evne• obs'!rve-t 
that 'practical men ... are often the slaves of some defun:t e~onomist.' So i1 
seems are manv extant economists also. 


OUT OF STAGNATION 

by Table 1, and the disappointing growth of output per man to which it 
is the key. 

If this account were correct, we would also expect to have seen the 
share of wages and salaries in the national ineome tending to rise. This 
will happen, by definitiqn, if the rate of increase of money wage rates is large 
compared to the combined effect of the rate of growth of output per man and 
the rate of increase of product prices.1 We have suggested that, because 

'capital accumulation has been insufficiently labour-saving, there has been an 
underlying scarcity of labour; and from this we would expect to find, over 
a number of years, a tendency for money wages to rise oomparatively rapidly. 
At the same time we have shown how demand restrictions, responding to 
this, have slowed the growth of output per man. Thus as far as its first 
two components are concerned, the share of wages and salaries in the 
national income should have been rising. But what about the rise of prices? 
These reacted to wages through the cost-inflation mechanism of course, but 
their role has mainly 'been a passive one. Once the heat of the 1954/5 boom 
had subsided and except for a brierf period in 1959, there was little sign 

t o£ excessive demand for goods and services operating independently to push 
prices up, and their effort to keep pace was struggling increasingly against 
the need to keep capacity employed. With wages and salaries the pacemakers, 
and output per man and prices handicapped as described, we should 
have seen the former's share of the national income rising in the latter 
years of the 'fifties; and this is exactly what has tended to happen.2 It is a 
tendency which should have surprised So'me economists, who hold that a 
rising share of investment will be associated with a rising share of profits, 
on the grounds that it is from pr..>fits that the savings to finance investment 
mainly come. But it is not surprising if our account of the influences at 
work is correct. 

Differing Rates of Growth 

The vital element, then, in our explanation of the poor British record 
of growth in the 'fifties is the supposition that there has been a damaging 
disharmony between the rates of growth in the supply of the two factors 

IJ 
of production, labour and capital. The natural growth of the former has 
been less than the rapid growth which the latter has demanded; the resulting 
pressure of demand for labour has led to counter measures taking the form 
of restricted demand for goods and services; and so the expected fruits of 
capital expansion have not been gathered. This has been the underlying 
system of reactions. From time to time, as one would expect, the stripped-
down version presented here has been overlaid by the effects of other 
influences at work. For example, it seems likely that in recent years the 
wage-price spiral has acquired some momentum of its own, in addition to 

1 vhis proposi{ion is logically impeccable only in the case of a single firm 
producing one product with one type of labour. For the case of the whole 
economy, it is complicated by the process of aggregating diverse goods and 
labour of different skills. The reader should be warned, but not frightened,
by this. 

2 The share of income from employment in the gross national product rose 
from 64.3 per cent. in 1954 to 67.7 per cent in I 960. 


OUT OF STAGNATION 9 

the effect of labour shortage. The functioning of the system has also been 
complicated by variations in the strength of its component parts. For 
example, sometimes (as in 1954/5) the demand for goods and services has 
surged up strongly enough to justify attributing the tightness of the labour 
market to that as much as anything else, and sometimes strongly enough to 
absorb available capacity for a while. Again, sometimes (as in 1958 and now) 
the restraint which the authorities have placed on the demand for goods and 
services has lain long enough to make an impression on the demand for 
labour. But the permanent and fundamental defect of the growth mechanism 
in Britain in the last decade has been the maladjustment between a slow 
growth of the labour force and a muclh more rapid growth of the capital 
stock.' 

From this we could draw the timorous conclusion that, given the 
slow growth of the labour force, the growth of capital should be reduced 
to harmonise with it. At the present time 'there is a distinct danger that this 
may happen of its own accord, as the falling profitability of capital, reflecting 
the fact that output has been held back from rising in line with it, gradually 
saps the confidence of business. If the retreat from optimistic expectations 
becomes a rout, a new and highly dangerous element will be introduced 
into the situati'on, capable of playing havoc with the prospects of maintaining 
the present rate of growth, let alone increasing it. But apart from 
this it seems absurd to waste the ability which the economy has shown it 
possesses to accumulate capital at a reasonably rapid rate, an ability reflected 
in the remarkable growth of personal savings. The right and bold conclusion 
to draw is that the rates of growth of capital and labour must be harmonised 
by ensuring that investment that we do in future is of a signifi-1' 
cantly more labour-saving kind than we have done in the past. I 

But before the implications of this are drawn, there is an important 
loose end to tie up. When we say that investment has not been laboursaving 
enough, we are not reporting something we have actually observed 
to be the case; we are setting down a hypothesis. The hypothesis springs to 
mind because il seems to be consistent with certain dominant facts of our 
experience. Any hypothesis like ours must expect the question: "Has it 
actually been so?' This is a question which it would be very difficult to 
answer, and I cannot hope to do so. But at least there must be some consideration 
of the weaker question: 'Why should it have been so?' Having 
inferred the existence of a shortcoming in the nature of our capital investment, 
can we account for it? 

It is not at all easy to do so. But the mystery is not quite as deep as 
it might seem. What has to be explained is the failure of British industry to 
invest in a sufficiently labour-saving way. This could mean that we have 
not done as well as other countries have in this connection. If this were 

1 It may be ~aid that in the last year what has caused the authorities to hold 
back expansion has been not so much their fear that the shortage of labour 
would recur (though this has played a part) as their anxiety about the expansion 
of exports. From my explanation of the 'ineffectiveness' of our capital form a· 
tion reasons follow why exports should have been slow to expand. These arc 
treated in Section (7), p. 35. 


OUT OF STAGNATION 

true, it would certainly be mysterious; for even if it were proved that we 
had fallen b~hind as innovators because of inattention to basic research or 
higher education (as is often suggested), it would be surprising if we had 
not benefitted from the rapid international transmission of ideas among so 
competitive a group of economies as those of Western Europe and the 
United States. Not a few countries have grown by imitation, and some of 
them, like Japan, have grown exceedingly fast. However, this is not the 
issue. When we inferred from the foregoing analysis that our investment 
had be~n insufficiently labour-saving, we meant that it had not been sufficiently 
so to offset the relatively slow growth of our population of working 
age. Even if we had in no way fallen behind other countries in the appli


\1 cation of labour-saving te<:hniques, we would still have fallen behind what 
was demanded by this particular feature of our situation. What we have 
failed to do is to be ahead of other countries to the extent that this country 
and its slow population growth requires.' 

This is r.::grettable, bu1 not neces;arily surprising. Historically we have 
\I long been accustomed to a relatively slow rate of growth of output per 
man.2 We must have bounded rapidly ahead in the first half of the nineteenth 
century, since when we have continued on a relatively gentle curve with 
many countries catching us up and some overtaking us. This suggests that 
the pace of capital accumulation has also been comparatively gentle. Then 
aft ~r 1954 it suddenly quickened, while the population of working age 
continued its leisurely grow~h.3 It is not altogether surprising that there 
should have been a time-lag before the country be<:ame aware of the 
changed relationship between the growth rates of its two factors of production, 
and of the implications which the ,change held for its technology. 
At the same time it is doubtful whether, even if business had be<:ome 
rapidly aware of Britain's special need for labour-saving investment, conlditions 
were favourable to undertaking it. The conditions that would have 
been necessary for this are ones in which capital is cheap and plentiful, 
and labour scarce and expensive. Of these the latter has generally been 
present in the se<:ond half of the 'fifties and since, though sometimes moderated 
by the effects of demand restrictions. But, except for firms able to 
raise money by issuing shares on the stock exchange, capital has been 
expensive and subject to interruption,owing to the devotion of the rnthorities 
tOiliOnetary policy, in particular for the purpose of butt:-essing the status 
of sterling as an international curren::y. Faced with circumstances in which 
there are both difficulties in obtaining capital and difficulties in obtaining 
labour, firms anxious to grow will probably find the latter l::ss absolutr. 

1 The French, whose growth record we all admire, have also experienced a 
slow growth of the population of working age, but without evidently suffering 
from it. They have, however, been able to take advantage of a previous maldistribution 
of the labour force, attracting people into their growing sectors of 
industry who had been under-employed elsewhere, e.g. in agriculture. 

2 See the article by D. Paige, ' Economic Growth; the Last Hundred Years,' 
National Institute Economic Review, July, 1961. 

a The growth of the population of working age probably over-estimates the 
growth of the available labour supply in the last decade, owing to the increasing 
tendency to stay on at school or seek higher education. 


OUT OF STAGNATION 

For in the labour market it is quite conventional to bid labour away from 
other firms, Whereas this is unheard of in the distribution of bank credit. 
This line of argument, however, runs up against the objection that, whatever 
one might have expected of the conditions of the period, they evidently 
did not prevent the carrying out of a substantial programme of capital 
accumulation in general. This Table I has shown and our earlier argument 
has relied upon. Can we now argue that conditions which have not inhibited 
capital investment in general have nevertheless inhibited capital investment!! 
for the particular purpose of replacing labour? 

I do not think that it is implausible to suggest this. Capital projects 
have various objectives and can be expected to respond to differing motives. 
labour-saving investment ·involves a change in the method of production 
which means using more capital and less labour to produce a given output, 
and whose justification will depend on a comparison of their costs or what 
their costs are thought likely to be in the future. Where there is little to 
choose between the factors as regards their cost, and both are equally bard } 
to get, the motive for emphasising labour-saving investment is weak. Bu 
simultaneously there may be strong motives for investment to expand 
capacity, in the face of which the cost of capital is a minor deterrent and 
failure to find ways and means of overcoming a shortage of it will run the 
severe risk of having to turn away customers unsupplied. This was certainly 
the case in 1954, and the desire to expand capacity provided most of the 
energy for the investment boom1 Thus we have lived through a situation 
in whi<:h the motive to extend the capital stock has been strong despite 
the cost and uncertain availability of capital funds, while because of these 
same things the motive to make investment particularly labour-saving haf/ 
been weak. To put the point slightly differently, if capital funds had bee# 

1 It may be asked whether this motive, justified in 1954, can expiain why the 
growth of investment has been so prolonged, maintaining itself almost to the 
present time through a period of decreasing utilisation of capacity. This can 
be explained by two factors : 

(a) 
One effect of recurrent credit restrictions may have been to cause t>he 
later stages of investment plans originally conceived in 1954 and shortly 
after, to be postponed, and so stretched out over later years. The 
decision to cancel part of an integrated investment programme can be 
very costly. The effect of credit restrictions in causing the postponement 
of investment plans was probably reinforced by increasing pressure 
for higher dividends in the later 'fifties and ~he effect of this on 
internal sources of capital from undistributed profits; 
(b) competitive expansion 
of capacity. Once competitors are known to 
he expanding, an independent motive enters with increasing strength 
into investment planning-the desire to keep in as good a position a~ 
they to snap up any new customers that may offer or to match any 
-sales promotion drives that they make. Thus a firm may feel justified 
in planning a certain expansion of its own capacity, even though it 
recognises that the plans of the industry as a whole are likely to run 
ahead of probable demand. The motor industry (not only in this 
country) is a case in point. 
~hus the capacity-expansion motive could be expected to go on working out 
its effects for some years after t>he investment boom to which it originally gave 
rise. 


OUT OF STAGNATI01 

cheaper and more plentiful, I do not think that the investment done w~uld 
have been greater, but I do think that it would have been more labour savmg. 

'Indivisible' Costs 
Another reason for thinking that the conditions of the later 'fifties in 
Britain have been unfavourable to the required emphasis on investment of 
a labour-saving kind can be found in the work of a Belgian economist 
interested in the comparatively slow growth of his own economy.1 The 
suggestion is that capital-intensive investments, or projects intended to make 
a major change in the method of production replacing labour by capital, 
will generally be of a "lumpy' or 'indivisible' kind. That is to say, they will 
require the installation of capital equipment in large units, representing a 
substantial financial commitment on the part of the business. Consequently 
a significant proportion of its costs will be transferred from the category 
of variable costs (wages) into that of fixed or 'overhead' costs (depreciation 
and obsolescence, and interest charges) from which it is less easy for the 
firm to disengage itselP Conditions in which the future is cloudy and uncertain, 
in which recurrent restrictions on demand permit no confidence on the 
\part of the businessman that the equipment will yield a steady revenue 
to match the costs to which it commits him, will clearly be inimical to 
investment of this kind. It must have been discouraged in Britain's stop-
start economy of the late 'fifties. Moreover, quite apart from the uncertainty 
of the outlook, the slowness of growth itself has added discouragement. For 
if demand is growing slowly the reabsorption of the displaced labour will be 
more difficult, and the prospect of trouble over redundancy may frighten 
the businessman away from this type of investment. Also, over-<:ommitment 
is less risky when growth is fast. Thus we discover another of the vicious 
circles which are always cropping up in economics; growth has been slow 
because investment has been insufficiently labour saving, and investment has 
been insufficiently labour saving because growth has been slow. 

Saving Labour 
These arguments support, although they do not substantiate, the contention 
that economic conditions in Britain in the late 'fifties were actively 
hostile to investment of the kind which was particularly needed. They can 
only be substantiated by a detailed study of actual investment decisions 
which were taken; and this cannot be undertaken here. The main conclusion 
of our analysis, however, does not depend on them. Even if one is not 
persuaded by them and remains mystified concerning why investment was 
msufficiently labour saving, our basic contention stands-that a greater 
effort to economise in the use of our scarcest and slowest-growing resource, 

1 A. Lamfalussy, Investment and Growth m Mature Economies. There 
are a number of other suggestions in this intriguing book whose factual relevance 

to the U.K. economy deserves investigation. 

• 2 • re not byego_nes ~orever _byegones? Not if the firm sees itself as staying 
m busmess or growmg (1.e. haVlng to replace or extend its capital). 

iS 

n 

Jl 
IS 


!f 

e, 

re 

;e 


OUT OF STAGNATIO!'. 

our labour power/ was the really vital condition in the 'fifties for achieving 
a rate of growth of output commensurate with the rate of growth of capital. 
For the sixties there is no obvious reason why we should not be capable of 
accumulating capital at the same rate; for recent experience confirms that 
savings ride high on the rising tide of affluence. At the moment the doubt 
that casts the longest shadow is whether business can sustain its willingness/ 
to accumulate capital, given the disappointing returns. Indeed there is a risk: 
of its falling rapidly away; risks on other fronts are well worth taking to 
forestall this. But assuming that the willingness to invest can be preserved, 
the growth of output and of output per man that it promises can only be 
had so long as we ensure that the investment demands a slower growth of 
complementary labour than in the past and thus one for which the normal 
growth of our population can provide. Otherwise we are back to the old 
sequence of wage inflation, restricted demand, and under-utilisation of 
capacity. 

Before we go on to work out the detailed implications of this general 
principle of policy, it should be emphasised that what it asks for is that 
Britain should adapt her policy to her own peculiar circumstances. Of these/} 
the most marked is her slow population growth. Possibly this is becoming 
faster now. But what has surely accelerated is the growth of capital, and 
we have not succeeded in absorbing it. It is not as if there were a lot of 
labour-saving possibilities lying around, which investment planners in this 
country have failed to pick up and their opposite numbers in Western 
Europe have quickly seized. It is rather that we have not made the special 
effort to develop such possibilities that was warranted by our own circumstances. 
Our discontent with our growth record began when we compared 
it with that of other countries, but it will not be removed simply by asking 
ourselves what we have not done that they have done. The study of French 
planning, or Swedish wage policy, or other such developments, is interesting 
and important; but it must not obscure the fact that we have a special 
problem to overcome, which ideas evolved in other conditions may not be 
sufficient to solve. If we are to save our position in Europe, it will have 
to be by our exertions rather than her example. 

4. What not to do 
JN turning from analysis to policy, the first thing to do is to carry out a 

post mortem on Selwyn Lloyd and see that his policies are well and 
truly nailed down into their coffin. Heartily sick of them as the country 
was when he was dismissed, the danger that he may walk again, with the 

1 These words are written at a time when redundancy has been increasingly 
in the news, and may be read w~tih a wry face by anyone suffering from this. 
My argument that there has been an underlying scarcity of labour does not 
require that we should a'\ways be able to observe it, or that we should never 
be able to observe iils o.ppos.i1e. The argument is that there has been a cause-
effect sequence running; scarcity of labour-wage inflation (or fear of it)demand 
restriction. Atfter the demand restriction stage we could very well expect 
to find redundancies cropping up. Put another way, the argument is that if 
the level of demand were raised till redundancy disappeared (apart from 
special cases like the rai'Jways), and nothing else were done, we should soon 
find ourselves observing all the signs of labour scarcity. 


OUT OF STAGNATION 

added authority of a wronged man justified, is serious, unless it is clearly 
seen that they were also wrongly based. They must not only be damned 
but also discredited. If our analysis is right, they were fundamentally wrong 
because, like the Red Queen, they flew to an indiscriminate chopping off 
of heads. They read the signs of labour shortage, but interpreted them without 
differentiation as indicating that the demand for final products also 
was excessive, ignoring the fact that, to a steadily increasing degree, this 

Jfailed to be confirmed by a concomitant shortage of capital capacity. Thus 
restrictions on the demand for goods and services were applied, which 
assuming them sufficient to remove the excess demand for labour, were 
bound to prevent the economy from realising the full potential of its investment. 
So output per man grew more slowly than capital per man, and 
the latter failed to fructify in the pockets of the people. 

It might be claimed that Selwyn Lloyd's term at the Exchequer did 
produce an idea of the kind required, a measure whkh would attack the 
particular shortage which was dominant, namely the Payroll Tax.1 This 
defence would add that the instruments of economic control available to 
the Chancellor previously-credit control, hire purchase regulations, annual 
tax changes, and the ultimate authority over the capital investment prog~
ammes of the nationalised industries-were none of them at all well 
adapted to differentiating between demand for products and demand for 
labour, and that Selwyn Lloyd should go down to history with the credit 
of having introduced one that would do this. Yet this particular episode of 
his Chancellorship reveals the most significant evidence of all of his failure 
to direct his policies at the right objective. For in his exposition of the 

new device it was quite clear that he saw it as yet another means by which 
he could re3train demand for the final product. To this it was of doubtful 
relevance; but this is not the point. The tragedy is that, when a tool , was 
thrust into his hand which might have done what was needed, his preoccupation 
with the demand for goods and services was such that he did not 
even se~ what it was for. 

The 'Paish Thesis' 

The same sort of failure of comprehension is found in the well-known 
'Paish thesis', which stresses the importance of running the economy with a 
certain ma;gin of unused capacity as a condition of growth without inflation. 
This is scarcely surprising, as Professor Paish is thought to have had 
some influence on Conservative Chancellors. Yet at the same time it is 
surprising, because in his work he specifically distinguishes between the 

1 
proportion of capital and the proportion of the labour force employed, and 
provides estimates of each. The idea is that there are certain 'safe' levels 
for these proportions, such that inflation rapidly follows their being exceeded. 
For Professor Paish 'makes the assumption, which appears to have considerable 
statistical confirmation, that, at any rate in conditions of near-full 
employment, the most important factor in determining the rate of rise in 

1 This waiS p~oposed in the 1961 Budget, to be applied at a rate of up to 
4s. per employee per week. Subsequently it was dropped. 


e 
b 
1 
11 
IS 
I· 
Jt 

to 


OUT OF STAGNATION 

money incomes is the proportion of productive capacity currently employed'.' /! 
Of the 'safe' proportions he says: 'It does not seem possible to put the necessary 
margin of unused capacity at less than 5 per cent, which roughly 
corresponds to 2 per cent of unemployment, and it may well have been 
higher, though probably not very much higher. We may probably put it 
somewhere within the range of 5 to 7 per cent, corresponding to between 

2

2 and 2t per cent of unemploymenf.

The closer demand prt:;sses on the economy's capacity to produce, the 
greater is the risk of rising wages and prices. This element of the 'Paisb 
thesis' can hardly be denied. What is wrong with it, for the circumstances 
of Britain since the middle 'fifties, is that it totally ignores the relation/ 
between the two percentages, of unemployment and of capacity utilisation. 
They are supposed to 'correspond' in some way. But bow? Suppose we start 
from 2 per cent unemployment and 5 per cent unused capacity, and aim 
to maintain these proportions. To maintain the percentage of unemployment. / 
the number of jobs must expand at the same rate as the labour force, which! 
in our case is rather slow. At the same time the advance of technology i 
steadily achieving economies in the use of labour, so that if the number o 
jobs is to expand at the same rate as the labour force, capital will have t 
accumulate at a faster rate. This sets the required rate of growth of demand 
since any other rate will change the degree of utilisation of capacity. Th 
required growth rates of capital and demand, consistent with maintaining 
unemployment at the 2 per cent level, will be greater, the greater the extent 
to which advances in technology are labour saving. But suppose that at the 
same time the economy shows itself capable of saving and accumulating 
capital at an even faster rate. Then the degree of utilisation of capacity will 
not be maintained at the 5 per cent level. It will in fact decline. From Paish's 
point of view this will be 'safe', in that it avoids generating inflationary 
pressure. But it must eventually check the willingness of business to make 
use of the available savings in further accumulation, and thus lead to their 
being wasted, as well as to the defeat of the original aim through the cumulative 
impact of deflation on the percentage of unemployment.J 

This situation, in which the. growth of the labour force and the rate 
at which opportunities occur for labour-saving investment are together too 
slow for the growth of capital achieved, is exactly that which, according to 
our analysis, has been present in the United Kingdom since 1954. Plainly it 
cannot be met by playing about with demand and hoping to bit on some 
rate of expansion of it which will simultaneously preserve 'safe' levels of 
unemployment .and capacity utilisation. Moreover, the attempt to do so 
leads to an exaggerated view of what the 'safe' margin of unused capacity 
is. Professor Paish singles out the year and a half from the beginning of 

1 Paish, F. W., Studies in an Inflationary Economy, p. 3to. We refer in the 
next section to the staltistncal confirmMion which he cla-ims. What it appearsto confirm, however, i<> not so much the power of the ' proportion of productivecapacity currently employed to influence the growth of money incomes, as ~hat 
of the proportion of labour unemployed to influence the growth of money wa1res. 

2 0 p. cif., p. 327. 
3 Similarly, if we started by trying to maintain the 5 per cent. margin of 
unused capacity, the result would be increasing ex<:ess demand for labour. 


16 OUT OF STAG ATIO 
1958 to the middle of 1959 as the only one since the war in which there 
has been long-term price equilibrium. From his estimate that capacity 
utilisation was somewhat below 95 per cent during that period, he concludes 
that this is the 'safe' maximum. But the reason why capacity utilisation was 
' 
then as low as that was that demand was restrained in response to the 
underlying labour shortage. If this shortage could have been relieved by 
increasing the labour-saving potential of investment, the demand restric-
tions would have been unnecessary and capacity could have been more fully 
utili ed without strain. In the long term, therefore, when the disparity be-
tween the growth rates of labour and capital i corrected, the 'safe' margin 
of unused capacity would not be as large as in 1958-9. 
Unemployment Levels 
In the conditions that we have had, the practical effect of the 'Paish 
thesis' is that policy becomes preoccupied with the defence of one of the 
sacred percentages, that of unemployment, since it is this that the under-
lying shortage of labour is always seeking to press down. It can be prevented 
from actually doing so, if enough effort is made to hold back the expan-
ion of demand. But this cannot be done without creating a weakness 
elsewhere in the form of under utilisation of capacity, thus endangering 
CHART I 
I ~t rf-+i ~~ LK ~~ -+_ t++.I± ;r-..,-_, rr T ·TT ·-+ ++++ .. 
' ,. ...'., ,.~ 
I f~ 
I ~ a .... 
I 95S 
f( 
~~ 
~ 
ti 
in 
16 OUT OF STAG ATIO 
1958 to the middle of 1959 as the only one since the war in which there 
has been long-term price equilibrium. From his estimate that capacity 
utilisation was somewhat below 95 per cent during that period, he concludes 
that this is the 'safe' maximum. But the reason why capacity utilisation was 
' 
then as low as that was that demand was restrained in response to the 
underlying labour shortage. If this shortage could have been relieved by 
increasing the labour-saving potential of investment, the demand restric-
tions would have been unnecessary and capacity could have been more fully 
utili ed without strain. In the long term, therefore, when the disparity be-
tween the growth rates of labour and capital i corrected, the 'safe' margin 
of unused capacity would not be as large as in 1958-9. 
Unemployment Levels 
In the conditions that we have had, the practical effect of the 'Paish 
thesis' is that policy becomes preoccupied with the defence of one of the 
sacred percentages, that of unemployment, since it is this that the under-
lying shortage of labour is always seeking to press down. It can be prevented 
from actually doing so, if enough effort is made to hold back the expan-
ion of demand. But this cannot be done without creating a weakness 
elsewhere in the form of under utilisation of capacity, thus endangering 
CHART I 
I ~t rf-+i ~~ LK ~~ -+_ t++.I± ;r-..,-_, rr T ·TT ·-+ ++++ .. 
' ,. ...'., ,.~ 
I f~ 
I ~ a .... 
I 95S 
f( 
~~ 
~ 
ti 
in 

OUT OF STAGNATION 

the other percentage.l The maintenance of both cannot be achieved by 
regulating demand alone. More radical measures are required in order to 
balance the growth of the economy. 

Demand Expansion 

From what we have said, it is clear that there also falls into the category 
of 'what not to do' the idea that a long-term solution can be found by 
pinning our colours to demand expansion. Given the fundamental maladjust-1 
ment of capital formation to the slow growth of the labour force, a more 
rapid expansion of the demand for goods and services would improve the 
utilisation of capacity, only to be defeated by the recrudescence of labour J 
shortage on a scale which could not be simply ignored. Once the fundamental 
maladjustment has been cured, of course, the way will be cleared 
for demand to expand more rapidly than in the past decade, so that we 
realise all that we are offered by our potential for saving and accumulation 
of capital. But we must take the cure before we can enjoy its results. Nevertheless 
it is important that at the present juncture we should take a bit 
of a risk in this direction for the sake of preventing things from getting 
worse. There is now a serious danger that the under-utilisation of capacity! 
has reached a stage at which it is sapping the expectations of business about 
the future. As reflected in business investment plans, these expectations 
have continued optimistic for surprisingly long. If they now change, as they 
have been known to do with remarkable suddenness, we stand liable not 
only to lose the rate of growth of capacity which we want in the long run, 
but also to plunge into a genuine slump. The recent signs of hesitancy in 
the investment plans of business are a warning which should not be ignored. 

1 The working of vhis effect should have been spotted by Pais•h from his 
own figures, but for a bit of gra.phmanship in plotting them. Observing the 
range of fluctuation of the percentages of capita·! in use to be greater than 
that of the percentages of labour employed, he plots them on separate scales. 
Wlhich give to each movement of the employment percentage a weight of fin: 
times as great as the weight given to each movement of the percentage of capitalin use. (Paish, op. cit., chart HI, p. 324). When both are plotted on the same 
scale, the relation of the percentages is tJhat shown in our Chart I (p. 16).
This clearly shows that when demand restrictions have been such as to make a 
moderate dent in the employment percentage (from the end of 1955 to the 
middle of 1958), the degree of capacity utilisation has been substantially lowered; 
and that when they have been such as to keep the employment percentage stable 
or slightly rising (from the 3rd quarter of 1960 to the end of the series), 
capacity utilisation has also been declining. (The earliest part of the period. 
from the beginning of 1954 to the end of 1955, is different, because it is a period 
of transition to the mare rapid growth of capital subsequently achieved, and 
during it there was certainly excess demand for goods in general). These results 
are exactly what would be expected from our analysis with its insistence on 
the fundamental lack of adjustment of the rate of capital forma·tion to the 
growth of the labour force. Pai'Sh himself remarks that the employment percentage 
tends to be held up by emp•loyers hoarding labour. But employers 
have developed this habit precisely because they have recognised, better than 
economists have, that labour has become our sca·rcest resource. What theyhave not yet done is to draw the conclusion that investment has not been laboursaving 
enough to overcome it. Nor are they likely to if Paishite demand 
restraint continue·s much longer. 


OUT OF STAGNATION

18 

Some immediate stimulus to demand, though not a long-term solution to 
our growth problem, is worth it to avoid the risk of worse. 


5. Outlines of Policy 
SECTJON (3) concluded that for a more rapid rate of growth of output 

per man we must concentrate on adjusting ourselves to the peculiarities 
of the British situation. Chief among these is the wide gap between the 
slow rate of growth of our population of working age and the tolerably 
rapid rate of growth of our stock of capital. The bridge between the two 


V 

is the degree to which investment is labour-saving; and the extension of 

~ 

this bridge should be the dominant aim of a policy for faster growth. We 

il 

now pick out the particular fields for action which are indicated for a policy 

li 
dominated by this general aim. It does not follow, of course, that the need 

for action in them hinges upon accepting the particular diagnosis of sec· 

tl

tion (3). Many of them would find their place in anybody's prescription. 

tl 
f

\ Science and Technology 
First, the field of science and technology. It is difficult to see what 

n 

policy measures could give our technology a labour-saving twist. The best 
approach is to create the conditions for more rapid technological advance 
in gene:·al, and stimulate business to demand of it innovations of a more 
labour-saving kind. With regard to one of the major conditions of more 
rapid technological advance, the supply of qualified manpower, things are 
beginning to move, but not fast enough. The government's Committee on 
Scientific Manpower concluded in August, 1961 , that 'the overall supply 


Ci 

and demar.::l for qualified manpower will not be very much out of balance 
at the end of the first five years of the decade 1960/70'.1 But their calculations 
have almost certainly underestimated the demand, being based on 
enquiries from industry in 1960, the end of a decade of slow growth and a 
time when decreasing utilisation of capacity was probably inducing a 
cautious view about capital expansion in the 'sixties. Moreover, the demand 
should increase beyond the Committee's reckoning to the extent that we 
succeed in swinging investment in a more capital intensive, labour-saving 
direction.2 According to the F.B.I.,3 the number of qualified research and 
development staff in 254 firms answering their enquiry, had increased by 
52 per cent between 1946 and 1950. This is an annual rate of increase of 
ll per cent, which is well in excess of that of 6 per cent which the Committee 

1 'The Long-Term Demand {or Scientific Manpower,' Cmnd. 1490, para. () 
7~. Qualified manpower includes· aH with degrees or Dip. Techs .. and those 
v.:1th H._N.J?. ~r H.N.C.s ('only a proportion') who gain admittance to professwnal 
mstltutwns. 

2 This is not ~ pa~dox. Highly-trained manpower is really capitai. since 
to a _large extent lts skill has been created by teaching in the past, just as a 
maohme has been created by la1bour m the past. The Committee says that it 
' had gro~nd for assuming that technologica·l " break•throughs " as such within 

a. l~rge mdus!r.Y would not normally involve those industries in taking on 
~1gmficant add1honal resources of (qualified ?) manpower.' It would be interest-
mg to know the grounds for this rather surpri ing assumption. 
3 F.B.I. (1950/51), Research and Developmefnt in British Industry Table 7. 
and Cmd. 1490, Table 9. ' 


OUT OF STAGNATION 


thought would be enough between 1959 and 1970. Even the balance which 
the Committee foresees depends upon the fulfilment of the universities' 
plans for 170,000 students by 1971/2, which are now set back by the 
Government's refusal to face the financial implications of them. Nevertheless, 
as far as the growth of numbers is concerned, the task is to accelerate 
something which has at last acquired momentum. What really needs the 
nation's shoulder behind it is the task of discovering and developing the 
latent abilities of our people. It was the Crowther Report which most 
dramatically confronted us with our failure here in the famous survey 
which revealed that 'half of the National Service recruits to the Army who l 
were rated in the two highest ability groups had left school at fifteen ', thus 
illustrating the Report's conclusion that 'the country is a l'ong way from 
tapping all the available supply of talent by present methods '.1 But the 
failure is confirmed by other evidence: 'There are, for example, more than 
three men undergraduates for every girl undergraduate. There are more 
than two male undergraduates from the top two social classes for every one 
from the manual working class-while in the population as a whole the 
ratio of these classes is one to three. There is no evidence to show that 
girls are less able than !boys, and there is a great deal of evidence that there 
are many very able children of wotking-dass parents who are not getting 
higher education at the moment'.2 Not all of this lost ability would flow 
into science and technology, but if the quality as well as the size of the 
intake into these fields is to be raised, it is clear that educational reform 

will have to reach well down the age-groups. The task is all the greater 
because no socialist can treat the educational system simply as a gigantic 
talent scout, and the extension of opportunities to talent will have to be 
carried out within the context of improved education for all. 

Although any expenditure on education which increases the numbers 
and skill of the country's qualified manpower is an investment in a very 
real sense, the statistics of investment include only the physical assets of 
the educational system. But these wiH have to be in the van of educa~onal 
improvement, and here we need (o qualify something we sa'id earlier. 
Although spending a higher proportion of the national income on investment 
in general is not a cure for our lagging growth, we must expect to 
spend a higher proportion on educational investment, as well as on education 
in general. 

Channels of Communication 

Apart from the need to provide the necessary numbers and ratse the 
quality of our scientific manpower, we must also keep clear the channels 
of communication between their work and the needs of the economy. It 
could be that some blockage here accounts for part of our failure to 
adapt our capital formation to the slow growth of the working population. 

1 Report of the Cenrtral Advisory Commirtitee on Educa.tion ; 15 to 18. 
para. 202. 

2 Investment for National Survival, a repont wr.ltten at the invitation of 
the N.U.T. by an independent committee under the chairmanship of Sir Oharles 
Morris, 1961. 


OUT OF STAGNATION 

Such a blockage could be expected to arise from our native love of putting 
people into classes. If we insist that technologists are not scientists, and that 
technicians are not technologists, and enshrine the distinctions in the institutional 
set up of higher education, we shall certainly diminish the speed 
with which technology adapts itself to the new fields opened up by research. 
and, in the other direction, the speed with which problems of technology 
make the necessity felt for new departures in pure research. No one should 
be so foolish as to interpret this as suggesting that science should be 
'directed towards some specified, materially useful end.'1 What it does 
suggest is that ideas which might be materially useful should be rapidly 
transmitted, rapidly received, and adaptably applied. This requires that the 
training of technologists should be less dedicated to the handing on of 
traditional skills, and should have a higher content of formal education in 
scientific principles and method. But the channel of communication which 
most needs opening up is that between scientists and management. It is not 
clear that this is a matter of having more scientifically qualified people in 
managerial positions. From their enquiries, published in 1957, Carter and 
Williams concluded: 'If scientists hold senior positions .in management, or 
are directors, there seems a moderate probability that the firm will be found 
to be technically progressive; but the cause-effect relationship is not certain, 
and firms can achieve considerable technical progress with no scientists or 
technologists in leading positions'.2 On the other hand, if our investment 
is to be adapted in the way required by the slow growth of the working 
population, we shall need managers who are not merely receptive to technical 
change, but are capable of influencing it; and this argues for a 
greater weight of scientists in ma:1agement. But rather than simply drafting 
scientists into the boardroom, the major necessity is to create a disciplined 
and comprehensive type of management training at university level. The 
elements of such a training would be drawn from the history of technology, 
the principles of economics, and the study of industrial relations, together 
with a pervasive emphasis on the habit of quantitative thinking. Its object 
would be to turn out managers not only equipped and inclined to measure 
their problems, but also able to understand the relationship between the 
technical, economic and human sides of the management function.3 The 

1 J. Jewkes, How Much Science, Presidential Address to Section F of the 

British Association, .1959 (Economic Journal, March, 1960, p. 14). Professor 

Jewkes fears that th1s may be a result of the recent boosting of science. and 

solemnly warns us: 'In "seeking to sell science to the Establishment " scientists 

may also sell themselves to the Establishment.' Is it tJhe Oxford academic life 

that accounts for such nervousness? Or is it this that we mean by 'con


servatism '? 

2 Industry and Technical Progress, a report written on behalf of the Science 

and l!'ld~stry Committee appointed by the Royal Society of Arts, the British 

AssocJatwn, and the Nuffield Foundation, p. 190. 

3 No doubt a certain flair continues to be an indispensable ingredie1111: of 

succe~sful mana~el!le~t. But ~naided by training it is nowadays decreasingly 

effective: The hm1tat.1~ns o~ s1mply drafting scientists into managerial positions 

set;~s hke!y to be VIVIdly 1llustraJted by the experience of Dr. Beeohing with 

Bnbsh Ra1lways, though 1t may be that his concentrat~on on the technical and 

ec~>nomic (and neglect of the humam) problems of the rai<lways stems from his 

bnef from the gm:ernment. 


OUT OF STAGNATION 

increasing complexity of this function demands a disciplined approach based 
upon an integrated conception of it; and thus equipped, managers would 
be better placed both to influence and to exploit the contribution of science 
to industry.1 

The importance of better-trained management is greater the less one 
is convinced by the reasons given earlier to explain the failure of our 
investment to be sufficiently labour saving. While these reasons-the high 
cost of capital, the uncertainty over its availability, and the more generalised 
uncertainty of the economic outlook which discouraged commitment to 
capital-intensive innovations--carry some force, they do not leave one 
altogether satisfied. The inadequate adaptation of our investment to the 
slow growth of our labour force remains something of a puzzle; and this p 
suggests that the fault may lie, not only in the objective situation in which j":) I' 
managers have worked, but in themselves. In spite of the shortage of labour, \ D\ 
which has been obvious enough, they may simply have failed to take the (j \.f>-llD 
opportunities to adapt which did exist. As we have pointed out, ideas are I"U·l 
not confined by frontiers; and really determined management might well 
have imported labour-saving ideas on a bigger scale. Whether this is so or 
not, an improvement of the quality and in particular the adaptability of 
management is very important. Of the economic advantages of the loss of 
empire, the greatest may be the release of able men from government to 
industry. But the reservoir of potential talent is deeper than that; and, what 
is important from a socialist point of view, by making strenuous efforts to 
tap it, we can both increase the supply of high-grade managers and avoid 
doing so by offering higher pre-or post-tax incomes and thus retreating from 
equality. 

Scale of Research 

The scale of research in industry is something of which one instinctively 
wants to ask whether it should not be larger. But there is not much basis 
for suggesting that it should. It is true that, on an industry by industry 
analysis, there is an observa·ble association in the U.K. and the U.S.A. 
between the proportion of its net output which an industry devotes to 
research and its rate of growth. But this does not imply any particular 
causal relationship between the two ; and on the national scale it is noticeable 
that there has been little difference between the growth rates of out


1 Suoh a course might weH be at postgraduate level, wirth provision for 
completion in a shorter time by graduates in engineering or economics. In 
Oxford, where a preliminary skiTmish has just taken place, resistance would be 
intense. It would take its stand on the view that there are certain subj.ects'proper ' for a university to teach, among whioh management (even in the wider 
sense suggested above) would no1 fail. How to recognise a 'proper' subject is 
not usually made clear, and I suspect that the adjective is tautologically defined 
as 'what Oxford recognises.' Often the words ' l·iberal and huma>ne ' arc used, 
but they aTe not usually defined either. It is s1upid to imagine that what is 
proper for university study can be defined by subject. It is not a matter of 
subject at all, but of the manner in 'Wihich it is studied. 'rhe manner of 
university study is critical and disciplined, aiming at the formulation of generalprinciples and careful'!y e~amining their specific validity. I hope that this will 
be recognised in the new universities. 


OUT OF STAGNATIO 

put per man in the U.K. and the U .S.A. during the 'fifties, in spite of the 
fact that the average large firm in the U.S.A. spent five times as much on 
research as the average large firm in the U.K.l Carter and Williams assure 
us that 'industrial research and development are growing rapidly ... and 
they will yield greater rewards in the future'. 2 In general it is best to allow 
industry to be the judge of the right scale of its research, and to concentrate 
on improving its judgment by providing it with managers who have 
"light of science in their eyes.' But there are two exceptions to this. First 
there are the particular cases where an industry has obviously judged 
wrongly. The leading example of this is ship-building, which has been 
specifically criticised by the Department of Scientific and Industrial Research 
for not spending enough on research. The Department should be strengthened 
to do more probing of backward industries. It should also be given 
funds to publicise cases where research (not only that carried out under its 
auspices) has led to spectacular saving of resources.3 But since the greatest 
importance attaches to technical advances which economise in the use of 
labour, the D.S.I.R. should make the encouragement of these a special 
objective of its policy. The second exception stems from the fact that there 
may be inventions which, if developed, will have a general applicability 
in a wide range of industries, but are not important enough to any one 
industry for it to undertake the effort of development itself. These fall into 
the special province of the National Research Development Corporation, 
which was established to concern itself with inventions insufficiently exploited 
as well as with those resulting from public research. The N.R.D.C. 
must be adequately provided for; the current level of its expenditure, at 
£1 million in 1959/60, seems very small. 

Obsolescence 

With technical progress, as with management, the rate at which the 
new get in is conditioned by the rate at which the old retire. When a new 
technique appears, it has to be embodied in new capital equipment; and 
the rate at which opportunities occur to replace old by new depends on the 
normal length of life of capital assets. If this is short, a large proportion 
of the country's stock of capital falls due for renewal each year, and the 
average age of capital equipment in use is low.4 Of course there is nothing 
absolute about the life-span of a particular piece of equipment. If technical 
advance throws up a new type whose operating costs are sufficiently below 
those of the old type in use, it will pay to scrap it before its normal life 

1 C. Freeman, Research and Development: a Comparim n between Britirh 
and .-:fn;erican Industry,_ National Institute Economic Review, May. 1961. The 
assoctahon referred to ts between research expenditure and output, not output 
per man; but output and output per man are also associated. 

z Op. cit., p. 189. 

3. Some exampl~s are given in a lecture to the Manchester Statistical Society 
by Str Harry MelV!lle, the head of D.S.I.R. (see Financial Times 26th March 
1%2). ' , 

4 A low average age of capital is, of course, an incidental advantage of a 
high rate of growth of the capital stock, and a reason why success may breed 
succes~. But th~ rate of growth of the capital stock cannot be stepped up simply 
for th1s reason; 1t must take account of the growth and cost of other factors. 


OUT OF STAGNAT!O:"< 

has expired. But the hold of accounting conventions and of Inland Revenue 
depreciation allowances is strong enough to make managers look primarily 
to the end of the normal life-span as the appropriate time to replace old 
by new. Hence the importance of what is regarded as normal to the speed 
at which technical advance becomes effective. 

There is a great deal of evidence of the continued existence of too much 
old equipment in British industry. A constant theme of the Reports of the 
Anglo-American Productivity Council (set up by the Labour government 
just after the war) was that the best British plants in the industries studied 
were comparable with the best American, but that the worst British were 
far behind. The same thing is noticed in their particular field by Carter 
and Williams, who say: 'British industry is not universally backwards in 
scientific matters, but is uneven in its development, with a great range 
from the best to the worst firms'.1 The shipbuilding industry, for instance. 
criticised itself through a committee of nine chosen by itself from its top 
management levels. The committee visited a number of European shipyards 
and concluded that 'only a few ... were superior to the best of their 
British counterparts. But the least progressive British shipyards also created 
a less favourable impression than any of the comparable foreign yards'.2 
Then there is the McGraw-Hill survey of machine tools in use in the U.K. 
which found 65 per cent to be more than ten years old and thus beyond 
the commonly accepted age for obsolescence.3 Finally, in so far as the 
normal life of equipment is determined by what is agreed with the Inland 
Revenue, British industry suffers under a considerable disadvantage compared 
to its competitors. The average tax life of industrial equipment is 
5 years in Sweden, 8 years in Belgium, 10 years in Canada, France, West 
Germany, Italy and the Netherlands, 16 years in Japan-and in Britain 
27 years.• 

Rapid Replacement 

More rapid replacement is vitally needed, and makes a second qualification 
to our view that investing a higher proportion of the national income 
will not solve our growth problem. For part of the solution must certainly 
be to keep our capital stock more up to date by turning it over more rapidly, 
and turning it over more rapidly will involve allocating a higher proportion 
of the national income to depreciation and replacement. To encourage this, 
the normal tax life of industrial equipment should be lowered at least down 
to the ten-year average which prevails in · most of the Common Market 

1 Op. cit., p. 189. 

2 See report in the Financial Times, 21st March, 1962. 

3fbid., 201th November, 1961. 

4 The Times, 13th February, 1962. The figures were produced by the 

American Secretary of the Treasury, Mr. Dillon, for the Joint Committee on 
Internal Revenue Taxation, to support his own reforms in this field. It should 
be added that, as regards the proportion of the initial cost of equipment which 
can be written off during the first year of its life, Britain is second only to 
Japan; but as regards the first two years, she drops down to fifth. and as 
regards the first five to bottom again. 


OUT OF STAGNATION 

countries and the tax life of other types of asset should be adjusted accordingly. 
And this should not be done at the expense of the comparatively large 
proportion of the initial cost which our tax system now allows to be written 
off in the first year. The giving of generous initial allowances is important 
because it confers a differential advantage on the firms which are growing 
fastest.l The need to do these things at once is underlined by the fact that 
the Americans are also now revising their depreciation provisions in order 
to 'place American industry on a substantially equal footing with its foreign 
competitors' (Mr. Dillon). But the overhaul of this part of our tax system 
should also be conducted with a view to introducing a more far-reaching 
reform, whereby firms would be allowed to decide for themselves the rate at 
which they write off their assets and provide for their replacement. This 
would force them to keep a continual watch on their assets, liberate them 
from conventional notions about their normal life, and concentrate their 
attention instead on the more relevant question of how profitable they are 
compared with more modern types which have become available. A bold 
departure like this is needed to counter the strength of the national addiction 
to the preservation of ancient monuments. 

So far we have concentrated on the rate at which technical progress 
occurs and becomes effective. By the policies suggested it will not be directly 
harnessed to the labour-saving requirement which stands out so clearly 
from the contrast between the rate of capital accumulation and the slow 
growth of the labour force, except in so far as bodies like D.S.I.R. concerned 
with research and development are persuaded to accept this as a 
major plank in their policy. Of course all technical progress helps because 
it means that a given amount can be produced with less labour as well as 
with less capital. But the particular twist in a labour-saving direction that 
we must give to technical prugress is best administered indirectly by makingindustry want it. We now turn to ways of doing this. 

Persuasion 

First, persuasion. The opportunity for this already exists in the practice 
whereby the government reviews the investment programmes of the nationalised 
industries. In future these reviews should particularly press the question 
how ~arefully, in drawing up the programmes, labour-saving techniques were 
exammed. The government must press the question on itself as well, since 
administration would probably yield substantial returns to such techniques. 
Much criticism has been levelled at investment planning in the nationalised 
industries, and there is even a school of thought which gives weight to 

1 The advantage ta~es .t~e ~orm of postponement of tax liability. The initial 
allo~ance reduces the hab_thty m _the first year. The liability will be felt by the 
static firm aJt a later date m the life of the asset but when that date arrives the 
growing firm will be receiving the initial allow~nce on further additions t~ its 
a set~. For a firm which is continually growing, the liability is postponed in


defirutely. 


OUT OF STAGNATION 

alleged failures there as a cause of our slow growth.1 But if what is important 
is the extent to which investment is labour saving, there is no evidence 
that the nationalised industries have a worse record than any others, and 
some that they have a better. The investment of the National Coal Board, 
for example, has been heavily labour saving. Investment in electricity could 
hardly be more so, except by going over more rapidly to nuclear power 
(thus dispensing with labour-intensive coal); and the Atomic Energy Authority 
has pressed ahead with this rather faster than many thought justified by 
the current comparison of costs. Transport is a jungle of planning mistakes, 
mostly rooted in the lack of a comprehensive scheme of integration; failure 
to exploit labour-saving investment possibilities may be tangled up in here, 
but it is hard to identify with any certainty. As far as private industry is 
<:oncerned, one of the most important tasks of N.E.D.C. is to build up for 
itself a position of prestige and influence from whi<:h it can make its views 
felt quite independently of any sanctions it may wield. And one thing that 
it must particularly get across is the special importance of labour-saving 
investment. In this it may well suc<:eed. Cynics who dismiss the possibilities 
of persuasion are as far from the realities of power as the idealists who 
overrate them. But it is bound to be some time before it is working 
effectively. 

Payroll Tax 

So a more immediate stimulus is needed. If investment is insufficiently 
labour saving on the national scale, then growth on the national scale will 
be checked; but the likelihood that its own growth may be chocked is less 
obvious to the individual firm. It may feel confident that it can poach 
labour from others, or work more overtime, and in an inflationary climate 
not be too worried about putting itself at a cost disadvantage. No doubt 
the scarcity of labour would ultimately make itself felt by the individual 
firm via general wage inflation, which would give the corroctive twist to 
investment and make it more labour saving. But it would be hazardous to 
wait for this. Instead, the <:orrective twist should be given straight away by 
means of an effective payroll tax. The rate of up to 4/-per employee per 
week at whi<:h Selwyn Lloyd originally intended to apply this is much too 

1 These failures mostly involve waste of capital, e.g. capacity in transpertand electricity has to be of a srize to meet the peak demand on the system,
and if the peak were spread over the day, smaHer capacity could serve a givendaily demand. But since neither industry has a pricing policy which encourages 
demand to distribute itself more evenly, larger capacity has to be installed than 
otherwise. This argument, though simplified, is perfectly correct, and it is 
important that nationalised industries should ha\'e pricing policies which make 
for efficient use of capi>tal, old and new. But I do not think that the argumentexpla,ins the 'ineffectivenes-s' of our investment, pointed out earlier as the 
most striking fact about our growth record. Assume that nationalised industries 
have a normal ratio of capital to output which is higher than it ought to be,
but tha.t they do nothing about it and use it in their investment planning. Then 
we would expect to find capttal and output still growing together. The inefficient 
use of capital would not explain the 'ineffective ' investment observed. 
If the nationalised industries beglMl to turn over to better pricing policies, there 
woUild be a period of transition during which out..,ut would be observed rising 
faster than capi,tal (•investment would be more 'effective'); but thi'S would end 
once the new pricing policies had become universal. 


26 OUT OF STAGNATIOl\ 

small; the figure should be more like 10/-. This attacks the pro~lem on 
one side; and it needs to be supported from the other by cheapenmg and 
stabilising the supply of credit. For the fact that credit has been both expensive 
and repeatedly squeezed has got in the way of establishing that clear 
contrast between the costs of labour-intensive and capital-intensive methods 
which was needed in the peculiar circumstances of the British economy to 
twist investment in the right direction. 

Cheap Credit 

This immediately raises two difficulties. First is the defence of sterling, 
which has always been foremost among the reasons brought forward to 
justify a tight credit policy. This is dealt with in section (7). The second is 
that, if we are to keep credit cheap and stable, we have to avoid using 
monetary policy to control demand. It will then be asked: 'How do we 
control it?' Presumably by increasing and decreasing taxation in particular 
by use of the new 'regulator' which gives the Chancellor power to vary rates 
of purchase tax between budgets. But if we are going to hit demand more 
often with this, even though we hit it less often with the monetary weapon, 
shall we not still be very far from creating the conditions of steady expansion, 
of minimal uncertainty, in which business will be prepared to look 
far into the future and commit itself to substantial capital-intensive, laboursaving 
investment? In other words, does it help to keep credit cheap and 
plentiful if we then have to interfere with demand in some other way? It 
certainly does. First, the aim of the policy we are outlining is to remove the 
disharmony which has led in the past to perpetual interference with demand. 
If we succeed, there will b'! much less for the 'regulator' to do than 
monetary policy has had to do in the past. But success will not be had 

unless conditions exist, and are seen by business to be set for some time 
ahead, in which there is a marked contrast between the costliness of labour 
and the cheapness of capital. The general policy will not prevent all fluctuations 
in demand. But experience suggests that what can be most predictably 
influenced is the demand for consumption goods, either via taxes 
on income or directly through purchase and similar taxes. If, when demand 
fluctuates, we concentrate our attention on these, we shall achieve a steadier 
and smoother control than could ever be expected from the dramatic 
'package deals' of monetary policy. For the very reason why these piled 
higher Bank Rate, restricted credit, calls on special deposits, letters to bank 
chairmen, stiffer hire-purchase terms, and cuts in public investment all on 
top of each other, was that no one had any idea how effective any one of 
them would be in curtailing demand; so the only way of making sure was to 
try the loP 

1 This emphasis o.n <;>perating aga~nst consumption, since it would involve 
more frequent use of md1rect taxes, ra1scs the question whether it would not be 
regressive. It should not be, so long as the government plays the game and 
uses t~e '. regulato~ ' as a ~eg~lat.or, and does not yield to the temptation of 
consohdat.mg. any 1ncr~ase m md1rect taxes resulting from it into the generallevel of md1r~t .taxation.. Selwyn. Ll~yd dtd a great disservice to his own 
regulator by y1eldmg to t~1s. tempta~JO~ m the 1962 budget. There is no reason 
why a more frequent vanatwn of Indirect taxes should not be compatible with 
a reduced dependence on them m the long run, a:s measured by their share of 
total revenue. To reduce the latter should certainly be an object of policythough it has no special relevance to our argument here. ' 



OUT OF STAGNATION 

27 

The Mobility of Labour 

In addition to creating the conditions in which investment will become 
more labour saving, we should also aim to increase the supply and mobility 
of labour. The Immigration Act-a revolting example of the alacrity with · 
which the Tories are willing to explain the worst kinds of popular prejudice Iin order to pass themselves off as the people's friends-should be repealed, 
for sound economic reasons as well as those of common humanity. At the 
same time it should be recognised in the labour movement that the opening 
of our frontiers to immigration from Western Europe is an argument for ' 
joining the Common Market, not against it. For if immigration raises the 
rate of growth of the labour force closer towards harmony with the rate of 
capital accumulation, there will be no reason why demand should not 
expand at a rate much closer to the latter. Since demand and real income 
can be expected to move together, this will mean that the growth of real 
income per head can increase towards the growth of capital per head. The 
need to improve the mobility of labour requires a much more vigorous effort 
to overcome the housing shortage, and in particular to ensure that a pool 
of rentable accommodation is ·always available in growing industrial centres. 
If local authorities need to be persuaded of this by bigger subsidies, the 
economic returns from these will amply justify them. 

Redundancy 

Next, a major effort is needed to deal with the fear of redundancy. But 
first, at the risk of a repetition, let us get the problem in the right perspective. 
We have said that the main cause of our slow growth has been the persistent, 
underlying shortage of labour. Policy should therefore be directed to 
removing this shortage.1 This does not mean creating a surplus; and if our 
policy measures are seen to be having this effect, they must be withdrawn 
while the analysis supporting them is re-examined. Nor are they meant to 
pose any kind of choice between a high level of employment and a high 
rate of increase of real wages, such as someone might imagine there to be 
who thought that unemployment had some magically incentive effect. Their 
aim is to raise the rate of growth of real wages, while maintaining unemployment 
within the lower part of the range 1.5 to 2.0 per cent. 

The choice that is posed is the following. If we do nothing about the 
shortage, there will be repeated attempts to bottle it up by holding back 
demand until it does disappear. So the shortage of labour will be eliminated 
anyway, and with risk of worse to come; for the fact that demand is now 
expanding less rapidly than the capital stock will set the stage for a slump. 
But if we tackle the shortage of labour at its source, nothing need stop 
demand from rising more rapidly to create new jobs in place of those which 
labour-saving investment has destroyed-and a faster growth of real wages 
into the bargain. Clearly this is what it is in labour's interest to choose. 
But at the same time we cannot expect pe0ple whose livelihood is threatened 
by labour-saving techniques to be content with the assurance that the bread 

1 The suggestion that it might actually be exploited for the sake o.f raisinglabour's share in tne national income is considered in section (6). 


OUT OF STAGNATION 

which they are forced to cast upon the waters will return to them after 
many days. So it will; but meanwhile, shall they be told to eat cake? It 
is easy to raise the cry of 'Luddites!', but in their circumstances most of us 
would have been Luddites too. Faster growth with social justice demands 
that generous compensation for redundancy become the general rule 
throughout the economy.1 In getting this provided there is a strong case for 
a state subsidy. Many people would oppose this, at any rate for private 
industry, on the grounds that it ought to recognise and carry its social 
responsibility. While the principle has a strong appeal, the trouble is that 
it is not the firms which pay out under redundancy schemes that receive 
the benefit of them, but the growing firms to which the labour is more quickly 
transferred. There is also a more widely diffused benefit to society as a 
whole in that the loss of output due to the transfer is smaller. It is not only 
fair that some of the cost of compensating for redundancy should be placed 
on the beneficiaries, but it is also likely to accelerate the acceptance of 
schemes for it throughout the private sector. Obviously, however, the beneficiaries 
can only be made to contribute indirectly. For this purpose, schemes 
accepted by workers and management and approved by the Ministry of 
Labour should qualify for state aid, and this aid should be a charge on 
the revenue from the payroll tax. This would uphold in a general sense the 
principle that industry should look after its own. 

Distressed Areas 

Finally there are the particular cases which do not fit the general 
picture. We would not expect the existence of an underlying labour shortage 
to be quickly recognised on Merseyside or in South Wales, in central Scot


lland or on the north-east coast. In these districts the growth of capital has 
not outrun the labour force; and unemployment has been well above the 
national average. The application here of a payroll tax and other measures 
leading to economy in the use of labour will create special problems; and 
these problems will be the more severe in so far as the districts depend 
heavily on industries of the older and more labour-intensive kind. Again 
it must be remembered that some of the edge will be taken off their difficulties 
by the faster rate of growth on the national scale which our general 
policy will make possible. But the problem of localised unemployment has 
proved an intractable one in all conditions, and will remain. The introduction 
of a stiff payroll tax could provide a new and powerful means of influencing 
the regional distribution of industry, namely by exempting firms in the 
development areas. This would derogate from its main purpose; if firm 
could avoid it by moving, they would not need to do so by making their 
investment more labour aving. But in the hort run they might be contributing 
just as much to the possibility of more rapid expansion. For if 
the growth of capital can be concentrated in areas where it presses less 
heavily on the labour supply, the shortage of labour will be less acutely 
felt, and the rate of growth of demand can be edged up closer to the growth 
of capacity without the risk of wage-inflation and a wage-price spiral. The fact 
that the firms might be less efficiently located in the development areas 
would be off et by the faster rate of growth that would be nationally 


OUT OF STAGNATION 

possible. In the long run the payroll tax must be applied to make investment 
more labour saving; but if exemption from it in the short run can 
ease the problem of l'ocalised unemployment, an important objection to it 
will be removed. 

6. Wages Policy and the Distribution of Income 
THE next thing to consider is the relevance of a national wages policy; 

that is, of having some device or other to ensure that the growth 
of wages is not simply the resultant of collective bargaining, but is mader 
consistent with the national interest in a¥oiding inflationary price trends 
or other difficulties. If this meant that workers yielded to persuasion and 
accepted a growth of wages smaller than they would otherwise have got, 
in conditions of labour shortage, it would relieve one of the symptoms of 
the shortage and temporarily remove the case for resorting to restraint of 
demand.l But it is very unlikely that it could endure in the teeth of the 
market situation, as is surely demonstrated by previous experiments with 
wage restraint.2 Indeed, looked on as a panacea, it would actually work 
against a lasting solution, since it would blunt one of the incentives to invest 1 
in a labour-saving way. 

At this point it will be asked whether, having tackled at its source and 
overcome the underlying shortage of labour, we shall have thereby removed 
the danger of inflation stemming from wage claims. This brings us to the 
vexed question of the extent to which wage inflation in the latter part of 
the 'fifties has been attributable to the pressure of demand for labour, and 
of the extent to which it has been self-generated. It is the latter possibility, 
that of 'wage-push' inflation, that is uppermost in the minds of the greatest J 
enthusiasts for a wages policy. That there should be a connection between 
the rate of increase of money wages and the pressure of demand for labour 
is something which is suggested by common sense. It was first illustrated 
by A. W. Phillips,3 from historical statistics extending some way back. This 
drew the reasonable criticism that things might have been changing since 
1862, when the figurec; began. Subsequently the relationship has been systematically 
investigated by R. G. Lipsey,4 and by J. C. R. Dow and L. A. 

1 This would require them not merely not to press for wage increases, but 
to decline the offers whioh employers would make. attempting to bid labour 
away from each other. Wage inflation does not come only from the S'ide of 
the wage-earners. 

2 Conceivably it might endure for some time under a Tory government 
which resolutely proclaJimed to the Unions : 'restrain wages, or we will deflate 
till your market power is broken.' Rumblings of such thunder have been 
heard from Tory Ohancellors from time to time. but usually just before their 
political careers have run into trouble. I doubt whether a Tory government 
would risk taking the bit between its teeth to this extent. It would be clearly 
inconceivable (and highly undesirable) for a Labour government to do so. 

3 Economica, November, 1958, The Relation be<tween Unemployment and 
the Rate of Change of Money Wage Rates in the U.K. 1862-1957. 
4 Economica, February, 1960, A Further Analysis. 


OUT OF STAGNATION 

Dicks-Mireau1 for the period since the war. It has also been criticaJly 
examined by Kenneth Knowles and C. B. Winsten.2 From this controversy 
I would conclude: 

(a) that the relation between the rate of change of wages and the demand 
I for labour is not a tight one. Thus it would be foolish to believe that 
moderate variations in the level of unemployment could be relied upon with 
any accuracy to control the pace ·of wage inflation; 

) 
(b) but at the same time a period of some years over which a shortage 
of labour has persisted can reliably be expected to be one of relatively 
marked wage inflation ; 

(c) nevertheless wages appear to have an independent movement of 
I their own, even when there is no excess demand for i<rbour, and no recent 
price rises, to push them up. In the 'fifties this independent increase averaged 
between 3 per cent and 4 per cent a year, or rather more than would 
have been expected on account of the growth of productivity. 

Exactly what this independent movement of wages is due to needs 
further investigation. The temptation is to ascribe it oo the one important 
influence left out of the statistical calculations, on the grounds that it cannot 
be measured; namely the energy and strength of Trade Union pressure. 
However this may be, it is clear enough that, having succeeded in adjusting 
ourselves to the slow growth of our lcrbour force and thus removed the 
cause of persistent labour shortage, we shaJI not be able to expoct to find 
ourselves delivered also from self-generated wage inflation. From this shrill 
voices may preach deliverance by pressing down the level of employment.3 
But those who have ceased to believe in human sacrifice must find some 
other way; and it is through a wages policy that they are seeking it. 

J

Wages Policy and Growth 
But what is its relevance to growth? Some people, while prepared to 
agree that inflati,on is a social nuisance which should be avoided if possible, 
would argue that the first priority is growth, and that if a wages policy 
does not contribute directly to this, and even more if its enforcement 
weakens the wiJI of labour to co-operate in other policies required for 
growth (such as the acceptance of more labour-saving methods), then too 
much effort should not be wasted on it. This is a misguided view. Although, 
as we have argued above, no wages policy by itself can remove the fundamental 
barrier to growth, it remains true that the lack of it can impose 
another one. Once we have achieved the necessary harmony between the 
slow growth of the labour force and the growth of the capital stock, and 
demand is again expanding at the rate aJlowed by fuJI utilisation of the 

1 JournaJl Olf the Royal Staltistical Society, 1959, The Determinants of WageInflation : U.K. 1946-56 (Dow and Dicks~Mi•reaJUx); OX!ford Economic Papers, 
October, 1961, The Inter-relationship between Cost and Price Changes 1946-59; 
a Study of Inflation in Post-war Britain (Dticks~Mireaux). 

2 Bulletin of Oxford University InstitUJte of Statistics, 1959. 
3 Mithough they vary in ·their predictions aJbout the percentage Olf unemploym~
nt required, they are not necessarily b1se prophets. What they preach, 
1f car~·led out on ~he .sca<le required and sustained for long enough, would do 
the tnck. The pomt IS thaJt we prefer to try something more hum:ane. 


OUT OF STAGNATION 

latter, an independent upward movement of wages and prices of the sort 
we have had would still be lia,ble to provoke counter measures in the form 
of restraints on demand. To dismiss this as typical Tory restrictionism is 
beside the point; we quite often have to live with Tory governments. And 
in any case it is not clear that a Labour government would be able or willing 
to face the consequences of alternative action. Thus growth policy and 
wages policy are not really divisible, independent policies to be taken or left 3 
separately. While the ~~toration of rapid growth does not hinge upon wage~t 
policy, its maintenance will. !-"'\?'" 

Does this mean that there is no urgency about getting a wages policy 
into operation? That it can perfectly well await the massive deliberation 
which is such an admirable and exhausting feature of the labour movement? 
In hustling on with the establishment of NIC, the government was clearly 
seizing the chance to score a tactical advantage over the T.U.C., by revealing 
how scantily it has clothed itself with ideas on the matter; and George 
Woodcock was unwise to show himself so rattled by this manoeuvre. But 
making all allowance for the political factor, it still has to be admitted 
that a wages policy is a matter of urgency. This is because the expansion 
of demand cannot await the time when it would really be appropriate. 
We have argued above that, if the rate of growth of demand is speeded up 
before the disharmony between the growth rates of labour and capital is 
being rectified, we shall risk a renewed shortage of labour and the demand-) 
inhibiting reaction of the past; but that we must now take that risk to 
prevent the expectations of business turning sour on its under-utilised capacity. 
To minimise that risk, to ensure that the immediate pressure on the 
supply of labour is contained without generating the inflationary effects/1 
which will play into restrictionist hands, a wages policy is vital. It is vital 
for another reason also, and that is the present vulnerability of the economy 
to lapses of foreign confidence in sterling. This is something which we must 
reduce as part of our long-term policy for growth. But in the short run, 
however much we may dislike it, it cannot be ignored. Foreign speculators 
are remarkably ignorant about the fundamental sources of strength of an 
economy; and if expansion designed to sustain the rate of capital formation 
is seen to have inflatlomfry effects, they will be tempted to liquidate their 
sterling holdings, so that the loss of gold compels the government to bring 
expansion to an end. The sting in the tail ·of our great international currency 
has to be respected in the short run, though we may hope to draw it in 
the long. 

Thus a wages policy is indispensable both now and in the future, 
though not sufficient for, nor even much help towards, restoring the conditions 
for rapid gmwth. In so far as the disharmony between the growth 
rates of capital and the labour force is removed, it will be easier also to 
succeed with a wages policy, since it will not be asked to battle against 
the tide of a persistent shortage of labour. What form such a policy might 
take, and how it is to be brought in~o operation, will be better written 
about by others. But even from an ivory tower it can be seen that some 
ground will have to be given on both sides. In the first place the unions 
will have to stop pretending that collective bargaining is like some mysterious 


OUT OF STAGNATION 

religious observance, in which only the participating initiates have anything 
to say. To hold that outside bodies should not interfere because they are 
ionorant of what goes on is as irrelevant as it would be to say that no one 
c~n express views on road safety who does not understand how an internal 
combustion engine works. The idea that wage claims should be decided 
on 'the merits of the case' must be broadened to include the question 
whether, through their inflationary impact, they will slash the real value 
of other successful claims. We cannot add up the merits of the dockers' 
case until we have asked whether it will ~ower the real wages of miners.1 

The Cost of Living 

On the other side the government must retreat from the position that 

l wage claims based on a rise in the cost of living should be disregarded. 
This amounts to saying that people are not justified in asking for more 
pay to restore their living standards t!o what they were before. In an 
economy with a normal expectation of growth in real wages year by year, 
this is an extreme position to take. Again, in industries which have fallen 
markedly behind in productivity, it may be that a cut in real wages is 
the only alternative to redundancy. But in such cases there is no reason 
why the workers should not, if they prefer it, choose to maintain real wages 
and risk redundancy; indeed, from the national point of view they will be 
doing a greater service, by accelerating the decline of a relatively inefficient 
industry. No wages policy can hope to succeed if it denies the right, in 
normal times, to maintain existing standards. 

All Incomes Included 

Nor can it do so unless two other conditions are fulfilled. The first 
is that NIC should firmly gather within its purview all forms of income. 
The government's attitude seems to be: 'let us concentrate our attention on 
wages; we can always do sofnething about profits, if need be'. Who can 
be expected to buy that one? The technique of NIC will presumably be 
to analyse, publicise, and 'criticise; but it must be allowed to perfect and 
develop it not only on wages and salaries, but also on profits, dividends 
and rents.2 Nor should it be prevented from examining the effect of capital 
gains on the distribution of real purchasing power. It needs a government 
directive to make this unequivocally clear. In the second place, it must be 
made less suspect by means of emphasising more effectively its key place 
in a sustained policy of more rapid growth, once the conditions for it have 
been created. We have said that it cannot itself create these conditions. 
But once they are again present, we shall not want to be forced off the 

1 Since writing this, the terms of reference of N.I.C. have been made known 
(see _Economist, Nove_mber lOth, 1962), .and evidently prevent it from commentmg 
on wage cla1ms while negotJatwns are going on, unless both sides 
agree. Th!s _mean~ that the ments .o~ the. case being negotiated will continue 
to be res~motl\'ely mterpreted. _But 1t IS gomg too far to say, as the Economist 
charactenstlcally does. that th1s means that 'the whole idea of a coherent 
national incomes policy has been abandoned.' Even if it had been no Labour 
government can afford to be wi~hout one. ' 

2 Under its _te~s of reference, published since this was written, it is allowed 

to say whether 1t thmks profits are too high. 


OUT OF STAGNATION 


higher growth rate which will then be possible by measures restraining the 
growth of demand. And such measures, unless we are prepared for the 
transition to a very different type of regime, will become necessary if 
money incomes try to rise independently at a rate in excess of the growth 
of productivity. In the long run, to realise all that this growth of productivity 
has to offer, money incomes must control themselves. 

The Consequences of Militancy 

Is the antithesis between restraining the growth of demand and restraining 
the growth of wages an inescapable one? To a 'militant' it would certainly 
not appear so. Let us trace the consequences of adopting a 'militant' 
approach. The 'militant' would welcome the underlying shortage 'of labour 
which we have diagnosed, as a strong tactical position from which further 
to force up the share of wages in the national income. He would reckon 
that it could be strengthened even more by lifting restraints on demand, 
and allowing it to grow at the same rate as capacity. If inflationary wage 
increases followed (as they surely would with an uncorrected labour shortage, 
and might well do without it), they could be prevented from raising prices 
by means of price control. The system of price control would either have 
to be comprehensive, or, if partial, require to be accompanied by rationing 
of the price-controlled goods. For if the prices of some goods only were 
controlled, demand would be diverted towards them and beoome excessive. 
Could not more then be produced? Not willingly, because it would not be 
profitable to do so; hence businesses would have to be directed, and supplied 
with directed labour. To avoid this a comprehensive system would be necessary, 
and the necessity might be heroically borne. But the matter would 
not end there. As the share of wages continued to rise, and profit margins 
were further eroded, the life blood of ca~pitalism would begin to run dry. 
Capital would try to flee abroad, and would presumably be checked by 
applying exchange control with the necessary severity. This done, businesses 
would gradually begin to close down, as there would be insufficient profit 
to induce them to replace their worn-out assets. To avert this, the state 
would have to take them over and private ownership of the means of 
production would be slowly extinguished. This would be welcome to the 
'militant'; but the interesting question is what would happen then. Would 
it be possible to stabilise the share of wages at the higher percentage reached 
after such an effort of 'militancy'? There would be two obstacles to this. 
First, the higher share of wages would be almost certain to mean that a 
higher proportion of the social product was being consumed, so that the) 
capitalistic rate of accumulation could not be sustained. Secondly, the 
higher share of wages, especially if it also meant a higher share for the 
lowest paid within the wages sector, would mean that the yield of the 
progressive tax system would be relatively smaller than if capitalism had 
been kept alive. Since the state-owned economy which has succeeded it 
will be no less anxious to accumulate capital and provide public services, 
it will have to reserve resources for these purposes. This must lead back 
both to a reduced share for wages, effected probably by turnover taxes 


OUT OF STAGNATION 

which raise the selling prices of goods and services, and to firm resistance 
to increasing it. Dizzy with success, the 'militants' find themselves knocked 
on the head. 

All this is said only partly for the purpose of highlighting the difficulties 
of 'militancy' as a practical policy. Dedicated 'militants' will swallow 
them whole, although I should strain at them myself. The point is rather 
that the distribution of the national income is not just a problem of 
capitalism. If wages, in real terms, rise faster than output per man, thus 
raising their share of the national income, difficulties are created for any 
kind of economy, except one which is ready to throw the rate of its 
capital accumulation and the adequacy of its public services to the winds. 
And these difficulties will outlast any shift, however large, from private 
to public ownership of the means of production. So for anyone who does 

not want to see the growth of demand held below what the growth of our 

productive resources can supply, dislike of capitalism is no excuse for avoid


ing commitment to a wages policy. Whatever the nature of the economic 

system, 'militancy' is barren, except for the important function of ensuring 

that non-wage incomes obey the same canons of self restraint. 

Distribution of Income 

Finally, we have to consider the effect on the distribution of the 
national income of the sort of policy that we have outlined in sections 

(3) and (5) for a more rapid growth · of output per man. We have argued 
that one of the symptoms of the underlying causes of our slow rate of 
growth of output per man has been the tendency of the share of wages 
land salaries in the national income to rise. This has resulted from the fact 
that the persistent shortage of labour has given a strong lift to wage rates, 
while the ensuing restraints on the demand for goods and services have 
held the growth of output per man below that of capital per man, causing 
diminishing utilisation of capacity and a falling rate of profit. It follows 
that if we correct the shortage of labour, by harmonising the growth of 
capital with the slow g!"owth of the labour force, we must expect this gain 
in the share of wages and salaries to be cancelled. Anyone who wants to 
condemn this as a regressive step must remember the following. In the 
first place, the combination of circumstances which has led to the increased 
share of wages and salaries will certainly, if left alone, be self cancelling. 
In particular the diminishing utilisation of capacity threatens the level of 
investment, and through that the level •of employment, and through that 
the power of wages to sustain their rate of growth. Secondly, the policy 
which we propose, with its heavy emphasis on the need for a more pronounced 
labour-saving element in our investment, is intended to allow full 
and uninterrupted utilisation of our growing capital stock. Thus with output 
per man growing faster than before, at a rate approaching instead of 
falling below that of the growth of capital per man, it will become possible 
to realise a sustained growth of real wages which offers labour far more, 
even over a few years, than could be dragged from a competitive struggle 
with profit~. 



OUT OF STAGNATION 

Real Wages 

The future of real wages lies in the growth of the social product rather • ' 
than in its distribution. But having set the economy on to a higher growth 
path, we ought also to be looking for means of improving distribution 
which are compatible with staying on it. One of the greatest obstacles to 
a higher share for wages-and for lower-income groups generally, including, 
for example, pensioners-has always been the fear that it would reduce 
the proportion of the national income saved and therefore available for 
capital accumulation; for the higher the income, the higher is the proportion 
of it which is saved. This obstacle can be overcome if wage earners can 
be helped to save more.1 As an objective of socialist policy, this must be 
given high priority. Recent investigations have told us much more about 
the motives for saving and the forms that it takes, in different income groups 
..ncf different personal circumstances. At the same time the opportunities 
are becoming wider and more varied. Not all of these are socially desirable; 
for example, uninformed dabbling in stocks and shares by small investors 
can have disturbing effects well beyond the boundaries of the Stock Exchange, 
and tied pension schemes can weaken a man's power to say Boo 
to his boss. It is high time that the left evolved a coherent policy for the 
encouragement of all socially desirable forms of saving by wage earners. 
For this is one of the most important means of shifting the distribution of 
income in their favour, without campromising the rate of capital formation 
on which their future standard of living chiefly depends. 

7. Growth in a World Setting 
Economically we are not an island; nor can we hope to make ourselves 
one. Tired as one is of being reminded of it, it remains a fact-
and therefore the more irritating. To what extent does it condition the 
sort of programme outlined earlier in this pamphlet for more rapid growth? 
The answer to this needs another pamphlet ; what follows is an outline 
sketch of it. 

The doctrine is widely proclaimed that exports are the key to expansion. 
Taken by itself this is obvious nonsense. There is no reason why the 
key should be exports any more than imports ; and no insurance that, if the 
necessary balance2 between them is successfully maintained, the door will 

1 Mr. A. E. Jasay (Paying Ourselves More Money, Westm1nster Bank 
Review, May, 1962) argues that labour may have to trade some loss of its 
rela1ive share of the national income for more rapid progress towards affluence. 
My argument leads to the same conclus.ion, but for different reasons. I do 
not think, as he does, that more rapid growth depends on investing a higher 
proportion of the national income, but (at any rate in the first instance) on 
reaJis,ing the full potential yield of the inveSJtmen1 we are achieving. It is in 
corroot,ing the disharmony which has prevented this thlllt, =rding to my 
argument, the share of ~ages and salaries must be eXJpooted to fall from its 
present (and non-maintainable) level. 

2 • Ba·lance ' does not imply equality between them, but whatever excess 
of exports over imports is needed to provide for aid to under-developed 
countries (e.g. the Ll!Jbour Par,ty's official It per cent. of national income) and 
for reducing our net external indebtedness. 


OUT OF STAGNATION 

ne

not still be barred by difficulties with the capital account. But the doctrine 

So 

appears to have the authority of O.E.C.D., and has carrie? weight ~ith 
the government in the last year or so as a reason for delaymg expansiOn. 

O.E.C.D. has actually committed itself to the view that the U.K. should 
raise the ratio of exports to total output to a permanently higher level. '1 
We should not be influenced by any such ratio-mongering. It is true that 
during the 'fifties as a whole the Gross Domestic Product grew faster than 
exports; but between 1954 and the end of the decade exports grew slightly 
faster.2 It is again true that during the last three years of the decade 
imports took to rising very rapidly and outpaced the growth of exports. 
But whether the higher ratio of imports to national income which resulted 
is to be t:~.ken as a permanent feature of our situation, calling for steps 
to achieve a permanent increase in the ratio of exports, is doubtful. If 
it could be shown that the higher propensity to import was due to the 
removal of controls, interpreted as a transition to a permanent era of 
freer trade, there would be a case for adjusting our export ratio accordingly. 
But from the detailed study by the National Institute of Economic 
Research,3 it seems that this is only a minor part of the explanation. The 
major part is held to be lack of competitiveness of British manufacture.\ 
(the class of imports which has increased most markedly), a failure made 
the more startling by the fact that it occurred on home ground. What its 
correction would imply is a fall in the ratio of imports to national income, 
not a rise in the ratio of exports. But whatever set the sights of O.E.C.D. 
on this misguided objective; it is dangerous for the U.K. to increase the 
vulnerability of its economy by depending more heavily on foreign trade. 
Sometimes the risk may be wor~h taking ; if, for example, by specialising 
on certain goods and exploiting a particular advantage in producing them, 
we can import more of certain other goods than we could get by ma,king 
them ourselves. But without good reason, to raise the degree to which the 
level and growth of our national income depends upon events outside 
our control, is asking for trouble-as should be obvious to anyone who 
has read the economic history in the 'fifties. 
Exports and Expansion 

But the proposition that exports are the key to expansion might be 
interpreted in a milder and more acceptable way. It might mean that 
more rapid growth can only be sustained if it is led by the growth of 
exports. As the economy's capacity to produce expands, a~ the lahour 
force grow~ and the capital stock increases, demand must also expand 
to absorb Jt. But as demand expands so will imports, and the growth 
process may have to be checked for the sake of the balance of payments. 
Exports, however, have the particular virt•Je that they c:tn provide the 

~Economic Survey of U.K., March, 1962. 

2 Measured by volume; visible exports only. 

3 NatiC!na/ _Jnstit_ute Economic Revie-w, May, 1961. See al-so Sir RoyHa~rod (Fmancwl Ttmes, November 27th, 1961), who agrees that the increase 
~f Imports at the end of the 'fifties was out of line wi•th what could be expected 
m ~he long run, although he does not echo the National Institute's explanation

of 1t. 


OUT OF STAGNATION 

necessary demand at the same time as benefiting the balance of payments. 
So if exports are the leading sector in the growth pro..>:!ss, there is always 
a cushion to prevent the demand required for the full employment of 
capacity from rubbing against the balance of payments. This is reasonable 
enough, but not very helpful. It is like a driver in congested traffic who 
says, 'I could move faster, if only the car in front of me would move 
faster.' It is a bit more reasonable than saying, 'if only I were to move 
faster, the car in front would move faster,' but in solving the problem 
it gets us nowhere. For the means by which exports can be expanded 
more rapidly are not likely to be found independently of those which 
will cause a greater rate of growth of output per man generally. If we 
can achieve that, there are some grounds for hoping that exports will not 
lag behind. Another National Institute enquiry, among ninety engineering 
firms of varying sizes, found that those which had expanded their output 
most rapidly had also expanded their exports most.l By itself this is a 
small piece of evidence, but it confirms the impression often given by 
business men when they pronounce on the matter, that they have in mind 
some optimum ratio of exports to total output and like to keep to it. If 
this is so, then anything which helps their output to expand, within the 
limits of their capacity, will help their exports also. Certainly if output 
is low, it will be more difficult for them to absorb the particular overheads 
involved in cultivating foreign markets. Obviously any measures by which 
exports can be independently pushed ahead are worth exploring. N.E.D.C. 
is particularly well placed to take a hand here ; and serious consideration 
should be given to the suggestion by Mr. Wernly2 for a new semi-public 
organisation to take over the foreign trade functions of the multiplicity of 
bodies (Board of Trade, Foreign Embassies, Trade Associations, Chambers 
of Commerce, and so on), among which export promotion is now confusedly 
dispersed. But the main prescription for success in exports is to 
keep our eyes on creating a more healthy rate of growth of output per 
man throughout the economy. There are better ways of helping a child 
to grow than stretching its neck. 

Will the growth policy which we have outlined make our exports 
more competitive and-what is just as important-our imports less competitive? 
A higher rate of growth of output per man will not achieve 
this, if wage rates rise faster too. In the later 'fifties our competitiveness 
was being squeezed from both these directions. But if we correct the 
disharmony as proposed, we shall simultaneously relax both the downward 
pressure on output per man and the upward pressure on wage rates. 
This double-pronged attack should enable us to move successfully against 
competitors both in our home market and abroad. The problem will still 
remain, of course, of preventing wages and other incomes from spontaneously 
trying to forge ahead of output per man, but one problem is less 
than two_ 

1 National lnstit.ute Economic Review, January, 196I. It is also noticeable 
that on the nat<ional scale our exports seem to expand most when outputgenerally is expanding. 

2 The Times, February 2nd and 3rd, 1961. 


OUT OF STAGNATION 

An International Currency 

Or rather two problems are less than three. For this brings us to the 
most serious impediment of all to achieving faster growth, and one which 
(except on a very long view) we cannot expect to dissolve as faster growth is 
achieved. This is put in our way by the fact that sterling is an international 
currency whose status we are trying to maintain on a very narrow margin of 
reserves. Because overseas countries hold balances in sterling, which they can 
require us to convert into gold, very much greater than the gold we possess, 
we are wide open to the influence of fluctuations in their international transactions 
and have only a thin cushion against temporary fluctuations in 
our own. If, for example, India runs into a deficit (as in 1957), or if plans 
of industry to raise the level of stocks coincide, or if the government makes 
a minor misjudgment in the control of demand, the gold reserves are not 
enough to absorb these influences-the point of having reserves of this useless 
metal being that they should-until they can be diagnosed and rectified. 
Rapid action has to be taken to check the loss of reserves, in case other 
sterling holders should become nervous, withdraw their balances, and 
drain the reserves far more than the original influences justified. During 
the 'fifties the action which the government favoured was to raise Bank 

n 

0

Rate and other interest rates in consequence and to restrict credit, with 

fl 
this would hold down imports and drive exports abroad. Thus the ·:lefence 
of sterling has been an independent cause of our failure to make o:.~r 
investment ' effective ' ; and the hope of doing so by turning it in a laboursaving 
direction will be frustrated unless we can remove the necessity for a 
high cost of capital and the u.1certainty engendered in industry by perpetual 
interference with demand. Because of what we have said earlier, 
a solution of our sterling problem is not a sufficient condition of this, but 
it is a highly necessary one. 

the object of restraining the gtfowth of home demand in the hope that 

No rapid and radical solution is possible. We cannot opt out of 
having an international currency, as we might out of having military bases 
abroad or keeping an independent deterrent. After all, the sterling balances 
held by other countries are theirs, not ours. To repudiate them, to default 
on our debts, would be unthinkable. To block them would not be much 
better, and might severely upset the development plans of the many underdeveloped 
Commonwealth countries which hold them. To declare them 
inconvertible-that is, to allow them to be used only for buying goods from 


a

the United Kingdom or from othetT countries (if any could be found) which 

li 

would accept sterling in payment without demanding gold in exchange-
might seem to have more justification in that it was the Tories' policy 
of extending convertibility which did so much to increase the vulnerability 
of our economy to temporary and speculative movements across the 
exchanges. But it is one thing to say that convertibility should not have 
been extended so quickly, and quite another to say that rights given should 
be taken away. Nor could this be done without damaging the Commonwealth 
and particularly the pooretT members of it. We could hardly expect 
them to be soothed by being told that there were British goods which 
would do them just as well as the European or American goods which 



OUT OF STAGN.o\TION 

we were stopping them from getting--even if we could step up our production 
to supply them. The damage would be greater than this, however; 
a gaping hole would be blown in the world financial system. Countries 
which had held a substantial amount of sterling in their reserves, relying 
on its convertibility to make it generally acceptable in transactions with 
other countries, would find themselves suddenly uncovered ; and a scramble 
for gold would begin whose consequences would be disastrously 
deflationary. 

Reducing the Danger 

Thus we have to hve with our international currency, and it will be 
potentially dangerous for some time to come. Although they will not 
remove it, there are some steps which we should take to reduce the danger 
somewhat. First, when the revival of our competitive power has restored 
the surplus of exports over imports to the £300 million required for aid 
to under-developed countries, the prior charge on any further surpluses 
that accrue must be the accumulation of foreign currency reserves,1 or 
for second-best the liquidation of short-term sterling debt. These purposes 
must be given clear priority over further aid or more overseas investment 
or quicker dismantling of tariffs.2 Secondly, we must firmly resist pressure 
from the city for further relaxations of exchange control, unless it is quite 
clear that they will not worsen the threat of volatile foreign money in 
London which hovers over our gold reserves. Such relaxations will be 
claimed as enabling the City to attract more foreign business and add to 
the country's overseas earnings ; but since they began to be made, the 
dividends have been poor. Thirdly, when interest rates have come down 
to a more reasonable level, we should offer the opportunity to holders 
of sterling balances to fund them by converting into longer-term stock. 
The price, a higher rate of interest than we would otherwise have had to 
pay, will be worth the advantage of having them in stock which it is 
difficult for them to liquid(llte in a hurry. Fourthly, since some of the 
under-developed countries plainly regard part of their sterling balances 
not as reserves to be held but as capital to be spent in the course of their 
development plans, we should attempt to negotiate with them an orderly 
prog.ramme of withdrawal, so that they will not add to the pressure on 
sterling in an unforeseen way at awkward moments. 

These are long-term and slow-acting means of reducing the danger 
arising from the low ratio of our international reserves to our international 
liabilities. In the shorter term, must we simply reconcile ourselves to 

1 Not necessarily gold reserves, since co-operation wirth the U.S. monetaryauthorities, now in similar difficuLties to ours, may require us to hold dollars 
rather than convert them into gold. This is obviously in our interest if theywill do the same for sterling. Nor do I suggest that we should aim for a 
Tegular surplus of any given size for this purpose. This must vary with the 
sta.te of the world economy and be determined oppor1:unisticaUy. Attemptsto run large surpluses, which we do not 'put baok ' by investing abroad, are 

deflationary to the rest of the world. 

2 If we a1re inside E.E.C., of course, our freedom will be limited. But we 
may be able tJO limit the pace at which capital movements are !Teed, and resist 
undue acceleration of the time-table for tariff reduction. 


40 OUT OF STAGNATIO ' 

having our programme of more rapid growth harassed and hampered 
because of temporary or externally-induced fluctuations in our bala~ce 
of payments? This is a matter of finding means to abso~b them which 
do not impinge on the level of internal demand. For even If we can drop 
monetary policy as the main regulator, the current policy set-up w0uld 
require internal demand to bear the brunt through some other means. 
What can we do instead? 

Exchange Rates 
We could, if necessary, allow the exchange rate to fall. There are 
obvious objections to doing this at all often, and it is best in principle to 
reserve this remedy for deeper-seated trouble with the trade balance, 
such as if our prices had got seriously out of line with those of other 
countries. It would rob the holders of sterJ,ing of part of the purchasing 
power of their balances-though not, of course, over British goods-and 
many of them could ill afford that. Since sterling is an international 
currency, devaluing it is bound to risk widespread speculative repercussions. 
as those who failed to see what was coming determine not to be caught 
again next time. At the present time the repercussions would not be confined 
to sterling; they would certainly include fears that the dollar too 
might tumble. Irrational and unjustified as such fears might be, we have 
to avoid provoking them, not merely for the sake of good relations with 
the United States (which we need on the monetary front for the defence 
of sterling), but because lack of confidence in both of the major currencies 
would precipitate a scramble fer the world's supplies of gold, in which 
the winners would be those who lost least in the ensuing slump. 

Direct Controls 

Thus the logic begins to point towards a return to direct controls on 
imports and a stiffening of exchange controls on capital transactions. Any 
sane man will wince at this, and not merely because of the problem of 
administering them. Much is made of this by civil servants temperamentally 
disinclined to doing so, but there are genuine anti awkward difficultie . 
The major deterrent, however, to the use of import restriction~ under 
present conditions is that they would have to be so severe. In the days 
when the Sterling Area was a going concern, the import restrictions called 
for at a time of pressure on sterling would be imposed not only by the 

U.K. but also by the other members of the Area. This co-operation in 
restraint was po sible because the Sterling Area countries had a privileged 
acce. s to the gold re erve ; they were free to convert their sterling into 
gold or dollar when the rest of the world (out ide the Dollar Area) wa 
not. And It had the great advantage that for every product whose import 
a member of the Area restricted, some sub titute within the Area might 
be found ~ the Tones extended convertibility rights to all countnes. to 
' re tore the tatu of sterling a~ an international currency.' the pnvlleged 
po 1t1on of the terlmg Area countries di appeared and with it the ba~t 
for co-operation. on equently if we \\ant to defend sterling to-day b' 
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OUT OF STAGNATION 

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means of import restrictions, we must impose them on ourselves alone.1 
And since there are many things which we import for which it is hard to 
find substitutes at home, this means either that the scope for them is 
smaller or that their severity will have to be greater than in the past. 
Nevertheless they would have to be accepted if they were the only alternative 
to meeting balance of payments difficulties by the growth-inhibiting 
policies of the Tory 'fifties. 

The Monetary System 
At the present time, however. we are not compelled to accept that 
they are. There is now a chance of reform in the international monetary 
system, which could result in relieving us of some of the burden of our 
mternational currency. A new mood of co·operation and some practical 
measures have emerged from the demi-monde of Central Bankers towards 
checking and absorbing speculative movements across the exchanges. The 
International Monetary Fund has turned itself into .a more effective lubricant 
of the mechanism for offsetting temporary disturbances in its members' 
balances of payments, and its Managing Director has gone on record that 
deflation is the greater danger now facing the world. Of particular significance 
is the fact that the disappearance of the post-war strength of the 
dollar has brought the Americans into the camp of those who have an 
;nterest in reform, although they do not like to say so, for fear that others 
may then question their determination and ability to maintain the dollar's 
rate of exchange. Resistance to reform, and particularly to reform of the 
radical kind which would involve superseding the gold-exchange standard 
,n favour of some kind of managed international money, is strong among 
European bankers whose reserve position has improved immensely in recent 
years. But all in all the balance of forces is favourable enough to justify 
our giving priority now to the pursuit of reform. The chance of obtaining 
any significant degree of reform would undoubtedly be prejudiced if we 
were to resort to import restrictions and severer exchange control, though 
possibly it might be aided if we left no doubt that these things were in the 
back of our mind and could be brought to the front by failure. Not only 
would they prejudice the chance of reform ; they would also diminish the 
current willingness of other countries and of the International Monetary 
Fund to assist us when sterling is in difficulties. 
So the logic which appears to point towards direct controls, as means 
for insulating a programme of more rapid growth from external disturbances, 
need not be accepted as immediately compelling. Instead we should 
forward in every way we can the campaign to alleviate the strain on the 
two key currencies, sterling and the dollar, so that speculation and temporary 
fluctuations in our balance of payments can safely be absorbed by 

1 A few years ago I aq~;ued (The Listener, January, 1958) that this Sterling 
Area co-operation mi!Jht be able to be revived. largely on the grounds that the 
policies whioh we might otherwise be compelled to adopt (deflation or deva·luation) 
would be even more damaging for the o!Jher Sterling Area countries than 
oo.operaJtive import restriction would. I still think that this is true, but that 
the other Stei'Iing Area couilltries will only be brou~ht to see it in conditions 
whioh threaten a severe world slump. 


OUT OF STAGNATION 

varying our reserves and prevented from upsetting the balance of internal 
expansion. In this campaign the particular line of attack is less important 
than the ultimate objective. Every economist carries a plan in his knapsack, 
and each of them is likely to be so much better than the present 
situation that too much time should not be wasted discussing their rival 
merits. In any case nothing should be all~wed to delay the adoption of a 
soundly-based programme of growth, such as we have outlined. For since 
it aims to remove the basic disharmony in our economy, which has generated 
inflation, hampered the growth of productivity, and lowered ()Ur 
competitive power, it ought itself to contribute to greater confidence in 
sterling and thus ease its own pass:tge. 

The Common Market 

Finally a word about the Common Market. To my mind the strongest 
economic argument against joining has been that we would lose independence 
in our foreign economic policy. Whatever is exactly meant by the 
clause in the Treaty of Rome ,which requires the signatories to regard their 
exchange rates as a matter of common concern, we should pJaiqly lose 
room to manoeuvre this weapon. And direct controls would become useless 
because they could not be applied to a vital sector of our foreign 
trade. If these were needed in order to maintain steady growl!:. uninterrupted 
by the external disturbances to which we were particularly 
liable on account of the over-extended internation::J.l position of st~rling. 
then we should stay out unless other arguments for going in were strong. 
There are other arguments for going in; but in the past they have never 
seemed to me to have the stren:;th to preva:il. Now, however, T am not so 
sure. For in the first place there is little hope of getting a group of 
countries, such as the old Sterling Area, with whom we could co-operate in 
the application of controls. And in the second place it now seems worthwhile 
to seek a solution along multilateral lines of a problem which has 
ceased to be merely a British one. This is not to say that a solution of 
the key currency problem will be brought nearer by our joining the Common 
Market. We may have pleasant dreams of calling in the stron1! re-;prve 
position of the Six to redress the balance of our own ; but to them this 
would be more like a nightmare. The point is rather that a solution 
of our own liquidity problem no longer requires us to stay out.! 

8. The Role of 'Planning' 
HITHERTO we .have said little about.the ~art to be played in a programme 
of more raptd growth by plannmg tn general and by N.E.D.C. in 
particular. How can they help? 

1 Since writing the above there has b:::en pub'i&hed the E.E.C. Commission's 
Action .Programme on J?l11inning a!ld mon~ry. uolicy. The part of this which 
deals w1th monetary policy recogmses the onn::tnle of mutual assistance be'wecn 
members, in which sterling might find useful support: but to m'tke the form. 
extent and conditions of this s,tisf~ctory would probablv reauire a struggle.
Dr. Erhard's ho&tility ~o the Action P•rogramme was ma·inlv due to its endorsement 
of plannin&. While this hostility wa5 ill-oonceived ~ nd regrettable, if 
does not necessanly extend to the proposals on monetary policy. 


OUT OF STAGNATION 

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Some think very little, on the grounds that N.E.D.C. is clearly neither 
intended nor equipped to do any 'real socialist planning'. The criticism 
is just, if 'real socialist planning' is intended to mean something which 
w:>uld be recognised by planners in Eastern Europe and the Soviet Union, 
namely an integrated system of production decisions defining the allocation 
of labour, capital and materials between producing units and embodying 
directives and incentives to get them where they should be. There is no 
point in dis::ussing the adaptation of such a system to the U.K., not merely 
because the opportunity is unlikely to arise for applying it, but rather because 
in most of the countries which do apply it, it is beginning to have a 
very old-fashioned look. When an economy is very backward or under 
siege, the pla:-~ne;'s task is not difficult, since it is carried out against a 
background of general shortage. The major particular shortages stand out 
sharply for his special attention. The question whether there is too much 
of this and too little of that does not arise; there is too little of everything, 
and more of almost anything i3 a success. But as the standard of living 
rises, the range of what people want to have widens and their tastes become 
more variable. The planner's targets are less likely to be right, since people 
will be varying their choices; and because he no long:!r has the safety valve 
of a general shortage, which can be opened to absorb any surpluses resulting 
from his unavoidable mistakes, he must adapt the mechanism of his planning 
system to strengthen the link b~tween production and demand. As the 
communist countries move out of backwardness and siege conditions, a 
great deal of discussion is centering round this problem. 

In the pure theory of a private enterprise economy, the link between 
production and demand is provided by profit ; if there is too little of something, 
the profit to be made by producing it rises and induces businessmen 
to do so. The lubricant of profit is sometimes too heavy, often clogged by 
other elements in the system (such as the dominance of salaried management), 
and capable of flowing in the wrong direction (as when monopolies 
are powerful). But if not fully effective, it is indispensable. Many socialists, 
however, to whom the bureaucratic apparatus of Soviet planning would be 
repugnant, claim that the economy should be shifted from a basis of production 
for profit to one of production for use; and they refuse to regard 

N.E.D.C. as a piece of genuine planning because it is clearly not set to do 
this. It must be recognised that the antithesis between production for proflt 
and production for use is entirely false. This should be suspected by anyone 
who has asked himself: 'What is the test of what is of use?' If he were a 
planner in a backward or siege economy a number of 'useful' things would 
leap ta his eye at once. In an economy on the verge of affluence, where 
choices are open and variable, no simple test is available. Thus production 
for profit and pnduction for use cannot be alternative ends, towards which 
different criteria will carry us concerning what is to be produced, when, 
where and how. P~ofit, in fact, as a t:!St of whether people want particular 
things, is a relevant and important test to apply in the process of deciding 
what should be produced. The error of laissez faire is not that it uses this 
test. but that it would like to make it exclusive, failing to realise (or deliberately 
failing to notice) that it is often insufficient, or to recognise society'~ 

OUT OF STAGNATION 

moral right to supersede it by other tests which it may evolve of what is 
socially desirable. Yet if planners are denied the use of this test, in an 
economy whose real income is as high as ours, it will be as if we have 
provided them with offices, desks and secretaries, but nothing to write with. 

There are of course many ways in which the role of profit in determining 
what shall be produced requires to be qualified. They fall into two main 
classes. First there are the cases where profit leads to a production decision 
which is inefficient from the point of view of society as a whole, either 
because it does not accurately take into account all the social costs and 
benefits involved, or because market conditions allow more to be extracted 
from the buyers than the goods cost to produce. Secondly there are the 
cases where, taking full account of social costs and benefits, we prefer 
some other production decision-for example, that education should be 
provided regardless not merely of ability but also of willingness to pay. 
The purpose of planning is to arrive at rational production decisions in 
these two sets of cases. In this it is clear that N.E.D.C. possesses limited 
opportunities. In the first place much is already done in other ways. The 
government itself provides a mass of goods and services free or for less 
than they cost. The redistributive element in taxation helps to make ability 
to pay a more accurate indicator of personal wants. Nationalised industries 
accept notions of providing a 'public service', which they allow to influence 
their pricing and investment policies. Legislation against restrictive practices 
by business aims to improve the competitive mechanism which rewards 
those who succeed in anticipating people's wants and penalises those who 
fail. All these, except the last, are now under attack; but whichever way 
the trend is, N.E.D.C. has no power to influence it. In the second place, 
where the profit criterion yields distorted production decisions, their correction 
will usually require fiscal or regulatory devices (subsidies, taxes, 
licences) which N.E.D.C. may usefully and authoritatively suggest, but is 
neither empowered nor equipped to operate. And in the third place, where 
the weighing of costs and benefits is to be superseded altogther in favour 
of other social objectives, an unrepresentative body like N.E.D.C. can have 
nothing to say at all. 

Thus, although the false antithesis between production for profit and 
production for use only draws a red herring across the argument, it is true 
that to describe what N.E.D.C. can do as 'planning' is, like the title of 
King of Kings, which is enjoyed by the Shah of Persia, somewhat of an 
exaggeration of its powers. What then can it contribute to the achievement 
of a more rapid rate of growth? 

Indicative Planning 

First, it can contribute something by developing the technique which 
is described by the rather self-contradictory phrase 'indicative planning . 
This involve confronting knowledge of the independently formulated production 
plans of industry with knowledge of the quantitative relationships 
between supplies and output in each, and using this confrontation to pm-
point the incon i tencies that eem like!~ to ari e. The attempt to remove 
the -e tatist1cal incon istencie will then yield a set of targets which. though 

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OUT OF STAGNATION 

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unenforceable, will indicate to the various industries that their plans may 
have been too optimistic or too pessimistic when viewed in the light of the 
e:onomy as a whole. They may still prefer to back their own judgment 
rather than N.E.D.C.'s; but the rest of us can be happier about this if they 
have be::n florced to think twice about it. Quantitative forecasting in economics 
is in its infancy, and will demand a good deal of inspired guesswork 
from N.E.D.C.'s professional staff. But from continuous statistical exercises 
it should be possible to identify major distortions in the growth 
process, such as the disharmony between the growth rates of capital and 
the labour force, which has been at the bottom of our troubles in recent 
years. 

Targets 
Secondly, the publication of a set of targets is of particular importance 
in that it suggests a commitment to a certain rate of growth. To 
establish a commitment, however, needs more than numbers on a printed 
page: and the most important part of N.E.D C.'s work will be the studies 
that it is undertaking of the obstacles that may lie in the path of faster 
growth. To establish confidence that a steady rate of gt10wth will be maintained 
is vital to creating the conditiJns for the necessary shift of investment 
in a labour-saving direction. For the major changes in methods of 
production which will be necessary themselves involve a substantia·! 
commitment of capital by industry which will not be likely to occur unless 
uncertainty is reduced to the feasible minimum and businessmen can look 
ahead to a clear horizon. To get industry thinking in terms of a steady rate 
of growth is more important in the first instance than getting it to envisage 
a faster rate; indeed, the latter should follow the strengthening of confidence 
in a steady rate, in so far as this creates the conditions for the adoption 
cf major labour-saving innovations. When N.E.D.C. was first established. 
many people put their faith in its evolving a technique of planning by 
incantation, of talking up the rate of growth by declaring an optimistic 
intention to which industries would accommodate themselves for fear of 
being left behind. Its published inte!ltion to think in terms of 4 per cent 
per annum seems to reflect the influence ,of this school of thought. Such 
incantation can work, as Hugh Dalton found in 1946 when he talked the 
rate of interest down to below 2! per cent; but as Hugh Dalton found in 
1947, it is not enough to maintain the achievement in the teeth of the 
objective circumstances. A certain judicious optimism is the best spirit in 
which to approach the problem of stimulating growth ; but it is more important 
to establish that the rate can be maintained. And this will partly 
depend on the success with which N.E.D.C. can identify the obstacles which 
lie in the way. 
Thirdly. the effectiveness of N.E.D.C. will greatly depend upon the 
relations which it can develop with the management both of private industry 
and of public enterprises. In time it may wish to evolve formal techniques 
of consultation, and no doubt it will have to grapple with the problem 
of equipping itself with teeth to sink into the fleshy rumps which sit heavily 
on the boards of certain backward industries. But it will always have to 


OUT OF STAGNATION 

rely a great deal on sheer pmdding; and the influence which it can exert 

p

in this way will depend o;1 the closeness of the informal contacts which it 
can develop. 
Fourthly, N.E.D.C. should develop a special effort in certain sectors 
where the conditions offer the chance of planning in a more positive sense; 
that is, of a joint industry-N.E.D.C. adoption and pursuance of definite 
targets for production. The contribution that N.E.D.C. would make to such 
a co-operative venture would be the statistical services that it could offer in 
connection with production programming, and the fact that it would bring 
the industry concerned closer to the ear of government. A good sector to 
start with would be that of exports, not only on the grounds of their special 
importance, but because in many fields they tend to come from the minority 
of large firms in the industry, rather than being dispersed throughout it. 
This is not to suggest that the habit of exporting should not be extended as 
widely as possible; and probably a concerted attack on the export problem 
by the leaders of the industry in co-operation with N.E.D.C. would help to 
bring the others in. Other sectors of industry with a high degree of ooncentration 
also present favourable fields for such experiments in more positive 
planning (though steel already has its own), and will be the more amenable 
to the extent that public policy intends to deal firmly with monopolies. 
But in choosing where to experiment, N.E D.C. should also have regard 
to the likelihood of success; for in its early years it needs more than anything 
else to establish its position in the economy by demonstra,ting that it 
can actually achieve something tangible. 
Fifthly, N.E.D.C. should keep a permanent watch for the distortions 
which arise when social and private costs diverge and the competitive 
search for profit yields a defective allocation of resources. In a congested 
island, with many large productive units, and a substantial public, sector 


n

in which the relation between costs of production and prices charged is a 

se 

good deal looser than it is in much of the private sector, competition is 
often bound to determine inefficiently how much of what should be pro-

as

duced and where. As we have said, N.E.D.C. has no power to correct these 

tlu

distortions, but it should continually concern itself with identifying them. 
A watchdog that barks, even if it never bites, is better than none at all. 
Here again there are particular sectors which need immediate attention, 
such as the transport system as a whole, the supply of energy 'iS a whole, 
and the location of industry. 

But although there is much that N.E.D.C. can do to show the way to 
faster growth, and to enlist the co-operation ,of industry in following it, the 
ultimate test is the willingness of the government to commit itself to priority 
for such a policy. And commitment means not merely establishing the conditions 
under which the growth of the capital stock can both be maintained 

and be adapted in the labour-saving manner required. It also means defending 
them. And the defences will remain weak so long as we continue to 
exhaust ourselves in uninhibited struggles for higher money incomes and 
in maintaining the international status of sterling. If we want to enjoy the 
green pastures of a povertyless society, we must expel the sacred cows 
which are trampling them underfoot. 


OUT OF STAGNATION 

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le, 

Postscript, January, 1963. 
Since this pamphlet was first written, unemployment has risen, the 
threat of depression has grown more senious, and the new Chancellor, in 
his 'little budget' of November, has tried to do something about it. This 
does not lead me to revise the foregoing analysis. Some may think it odd 
to be recommending the introduction of more labour-saving techniques 
at a time when unemployment is increasing, and is becoming a general 
and not only a regional phenomenon. To dispel this impression,' I will 
Pisk boring the reader by repeating the ma·in features of my analysis. I 
contend: 

(I) 
that by the standards of our own past we have had since 195:1 
a relrutively rapid rate of growth of our nationa:l stock of capital 
equipment; 
(2) 
that no similar increase has occurred (or can be expected to occur) 
in the growth rate of our potential labour-force ; 
(3) 
that since we have not adapted ourselves to this new situation 
in our economy, by investing in an adequately labour-saving way, 
there has been a persistent shortage of the labour needed to 
operate our growing stock of capital ; 
(4) 
that the shortage of labour has led to government restrictions 
on the demand for goo::ls and services ; 
(5) 
that in so far as the growth of demand has thus been held down 
to the rate which is consistent with the growth of the labour force 
and the avoidance of excessive demand for labour, it has inevitably 
fallen short of the rate which would keep the growing stock 
of capital equipment fully occupied. 
The end result of this process is the situation in which we now find ourselves, 
with capital more than adequate for current levels of demand in 
a growing number of industries, further investment being discouraged, and, 
as the effects of this spread, men also being lai'd off. The possibHity of 
this happening is suggested on page 17. 

For the future, the problem is complicated in the short term by the 
recent worsening of the economic climate, but for the long term does not 
differ from what I have outlined. The first thing that is required is to 
recreate the confidence which will 'persuade businessmen not to cancel 
investment plans and precipitate a classic slump involving 6-10 per cent. 
unemployment. Mr. Maud'ling's measures to inject purchasing power into 
the economy are oddly . chosen for this purpose. Some broadly-based 
stimulant to demand would have been preferable to special favour-in 
the form of reduced purchase tax on cars-for an industry which . does 
not particularly deserve it, combined with an incentive to invest offered to 
businessmen who are becoming increasingly conscious of the ineffectiveness 
of much of their investment in the past decade. To stimulate investment 
without a broad enough ·injection of purchasing power to ensure that 
it will pay is like stre~gthening the roof of a building whose foundations 
are about to collapse. 

Once confidence has been restored and a collapse of investment has 


OUT OF STAGNATION 

been averted, the long-term task begins which I have ,outlined in section (5) 
above. One of the measures suggested there is now part of the Chancellor's 
intentions; namely, to reduce ~he working life of capital equipment 
for tax purposes. He has a:lso added something of his own by giving 
especially generous treatment to buildings and plant for research. But 
the suggestion that businesses should be allowed to choose their own rates 
of depreciation, he has rejected. The timid reasons which he gave for 
rejecting it are not encouraging. 

We have to adapt ourselves to the facts of .our economic situation. 
We have to reconcile the slow growth of our labour-force with the accelerated 
growth of capital which ~e are able to achieve. To bridge the gap 
we must invest in a more labour-saving way. What is particularly important 
is that we should not be frightened off .this vital task by the prese;,t 
unemployment. The present unemployment is the result of measures 
~temming from our failure to invest in an adequately labour-saving way. If 
we can overcome this fa1lure, then incomes and the demand for goods and 
<>ervices can rise more rapidly without creating a shortage of labour ; 
because demand is rising more rapidly, the growth of capital will be 
justified; and because the growth of capital .will be justified, we shall 
emerge from the heavy shadows of depression into the invigorating sunlight 
of sustained growth. 


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