I am always very pleased to have the opportunity to talk to businessmen; although I hasten to assure you this is not just because I am married to one!
For a long time I have felt that your contribution to society is widely misunderstood and constantly maligned by those who should know much better. I am sure there are some of you who feel much the same about politicians. If you are anything like your counterparts in the United Kingdom you sometimes despair of us, wondering if we can ever see your point of view.
You may have had good reason to come to this conclusion. Politicians can be infuriating and cause difficulties for you especially when they go for the short-term advantage, at the expense of the longer term.
Dare I say to you though that there are times when you do not fully appreciate the constraints under which democracy has to operate. We politicians have to argue the case. We have to persuade and convince a wide range of interests that what we propose is fair and reasonable. The trouble is that what is fair and reasonable often differs according to your own particular view-point. The point has seldom been made better than it was in “Tom Brown 's Schooldays” . [end p1]
“He never wants anything but what's right and fair. Only when you come to settle what's right and fair it's everything he wants and nothing you want. And that's his idea of a compromise” .
Doubtless this approach to bargaining will not be outside your own experience.
I welcome this chance to share with you some thoughts about economic policy, particularly on its impact on businessmen.
First, unlike some of my fellow politicians, I am convinced that you and your colleagues are the best suited to be the creators of wealth in society. We in government can only consume and transfer it. This wealth-creating role which is your calling, demands enterprise and risk-taking, efficiency and competition.
In the result, people gain the benefits of choice, value for money, a variety of jobs—and what I might call a taxable capacity. Without this taxable capacity politicians could not provide the services which only government can perform, or find the finance for the education, welfare or other services.
This is a simple and obvious proposition. Yet some governments, not of my colour, have completely misunderstood this. They appear to think they can do almost anything better than anyone else, not least wealth-creation. They have displaced private enterprise with an ever increasing array of State run institutions.
But all the evidence points to the conclusion that governments are far less capable of running trade and industry than is private enterprise.
Wealth creation is not the natural or proper role of Government. The politician's role is to set the circumstances in which the wealth-creators—you—can use all your talents to play your chosen role in society. [end p2]
We fail you, if we do not provide them. You fail us if you are not then enterprising. What almost everyone wants is a long period of economic stability which is the only sound basis for steady expansion. You will be quick to say that if that's what is wanted, we haven't been very successful at providing it!
I do not want to shift the blame. It is the Government's job to take the decisions. But before deciding on a line of action, we do naturally seek the views of professionals such as economists. The trouble is that their advice, whether on the measures or the time, is not exactly united.
The action they propose doesn't always turn out to be possible or correct. This is not surprising since economics is not an exact science, and up-to-date information is not always easy to obtain.
What we politicians want to say to economists is this:
Help us to understand what causes the peaks and troughs of the business cycle, and help us to try and iron them out. Attempts to do this since World War II have not been very successful, politicians seem to have had a propensity for getting the timing wrong, and sometimes they have reinforced the very trends which they have been attempting to eliminate. This sort of experience has led them to try to control more and more of the economic system. This in turn has merely led to a reduction in its efficiency.
Perhaps as politicians we have ignored or failed properly to understand certain economic laws although I trust that we realise that they will not be suspended merely because we don't understand them. [end p3]
Or is it that we have concentrated too much on the short-term effects of policies?
Have we failed to see the long-term effects or have we deliberately taken a chance that something would turn up before the adverse longer term consequences would make themselves felt?
A French political economist, Frederic Bastiat, writing a hundred years ago, put it this way:
“In the economic sphere, an act produces not only one effect but a series of effects of which the first alone is immediate … it is seen. The other effects emerge only subsequently; they are not seen … it almost always happens that when the immediate consequence is favourable, the later consequences are disastrous and vice-versa.”
He went on to define a bad economist as one who confined his advice to the immediate visible effect regardless of the evil to come, and the good economist as one who took into account both what could be seen and what should be foreseen.
Doubtless he would have expected the good politician to act similarly.
It sounds like an “iceberg effect” . If you only take into account what can be seen, you will soon run into trouble and founder on what cannot be seen but which we know is there and can be foreseen.
Looking at the economic history of the past ten years it seems to me that too much attention has been placed on the seen effect and far too little on the unseen consequences of economic policy.
So that we may not make the same mistakes again, I will try and illustrate the point with five examples. — Public expenditure and its effect on-the private sector. — Price control and its effect on industry. [end p4] — Over-manning. — Inflation and unemployment. — Severe rent control.
Public expenditure and the effect on the private sector
In modern times, an increasing number of people and organisations have turned to governments to provide more services. Many of the causes they plead may be very worthy, but the resources required for them together may add up to more than the economy can support.
In an effort to provide them taxation is increased. When that becomes inadequate, governments turn to borrowing large sums of money, which at some time have to be repaid.
The seen effect of saying yes to higher public expenditure is more welfare services, more education, more roads and other public utilities, public subsidies to transport, etc; all involving more employment in the public services.
The unseen effects are these:
1. High taxation on individuals removes the incentive for harder work or new initiatives.
2. High taxation on companies drains them of money needed for working capital or new investment. Expansion is thereby curtailed and obsolescent machinery is not replaced. Too little investment today will result in too few jobs tomorrow.
3. Interest rates rise because the government is borrowing so heavily, while company returns are insufficient to meet the cost of borrowing at those rates.
Once again the future is sacrificed. For a debt and interest burden is hung around the country's neck. [end p5]
The seen effect is of a cosy, benevolent government handing out sums of money and creating a lot of jobs in the public sector.
The unseen effect is that the life-blood of the productive sector is drained away and its capacity to build tomorrow's prosperity is irreparably damaged.
You have watched this happen. So have we.
The second example is:
Very strict control of prices of the sort which we have experienced for three years.
The immediate seen effect is good.
Some prices are lower than they would have been.
A very popular cause. [end p6]
The unseen and longer-term effects are these:
— Profits are depressed, and with them resources for investment; again, that means fewer jobs in the future. — Nationalised industries which are called on similarly to restrain price increases, require larger subsidies which means another burden on taxation. — A large and costly bureaucracy is built up both in commerce to deal with the whole complicated paraphernalia of controls and in Government to administer the system.
Again, the seen short term effect is desirable, but the unseen, long-term effect is one of incalculable harm.
Third. Overmanning in Industry
This has been with many of us for a very long time, but in Britain is worse than in competitor countries on the European continent.
The seen effect—people are kept in jobs.
The unseen effect—the cost of employing more people than the industry needs drives prices up so that the goods cannot compete in the international market. In a country like Britain, the whole company could be put in jeopardy and all jobs lost.
The immediate effect—jobs are saved.
Long-term effect—more jobs are lost, and business is lost to more competitive producers.
Fourth—Inflation and unemployment
In the early stages of inflation industry booms. There is full employment and to some an ‘acceptable’ level of inflation, acceptable that is to a certain school of economists who would say that it lubricates the wheels of industry.
The seen effect—the immediate situation seems all right, [end p7] except for those living on fixed incomes.
The unseen but inevitable longer term effect is that inflation cannot be contained and accelerates. Goods are priced out of the market and people are thrown out of jobs.
Early action to cut inflation causes a little unemployment immediately.
Failure to take that action leads to rampant inflation and severe unemployment, which in turn can damage the whole fabric of society.
This is the lesson Germany learned between the wars. What a pity we didn't learn from her, but have had to experience some of the consequences ourselves.
The seen effect is an early boom.
The unseen effect is inevitable depression.
Fifth—Severe rent control
The fifth example is in a slightly different sphere, but it illustrates the point every bit as clearly.
In Britain we have had domestic rent control, in one form or another, for nearly sixty years.
In later years it has included commercial rents as well. To prevent extortionist rents and the exploitation of people's basic need for a roof over their heads is no bad thing. To force rents below a reasonable level is another.
The seen and immediate effect of controls which hold down rents is popular at least with tenants.
The unseen but longer term effect is that property falls into decay because rents are insufficient to maintain it.
No new private property for rent is built, and soon there is a [end p8] chronic shortage of all rented accommodation.
These are but a few examples.
You will be able to think of many more.
It is obvious that if policies are formulated only on the basis of what can be seen immediately and ignore what should be foreseen in the future, the ‘iceberg effect’ will become the Titanic effect!
And who suffers? We all do if we refuse to face reality until it comes face to face with us. Then there is no alternative.
There is a part for all of us to play.
It is the economist's job to help us accurately to predict the immediate and longer term effect of various alternative policies.
It is the politicians' job to warn the people of the consequences, and to win their support for the prudent course of action, because ultimately its success will depend on the measure of consent it commands.
But politicians can't do this job alone.
You in industry and commerce are in powerful positions and in daily contact with thousands of people who never wish to listen to politicians.
You have to put over the message as well.
It amounts simply to this. A nation's continuing health and prosperity depend on the continuing health and prosperity of its industry, whilst today's profits mean tomorrow's jobs.
Or, put another way, today's greed means tomorrow's want. [end p9]
The dialogue must be conducted between employer and employee, between governments and trade associations and trade unions, in order to secure the wider understanding we must have.
We need good and active leadership all the way through society. Not only from governments, but at all levels in every firm in every community.
Each one of us has his responsibility.
Each one of us might well be guided by Harry Truman 's famous slogan—
“The buck stops here” .