THE WEALTH OF THIS NATION

Every nation needs leaders with extraordinary ability if ordinary people are to prosper. May I congratulate the Guardian on establishing the Young Businessman of the Year Award to honour those with extraordinary ability in industry.

May I also congratulate the winner of this year's Award, Mr. Geoffrey Cross, on the splendid contribution he has made to enhancing the success of his company, the prospects of those who work for it, and the reputation of British industry. Alas, I cannot always be as complimentary about some of our political leaders.

It will come as no surprise if I admit to lacking the Denis HealeyChancellor's talent to perceive lights at the end of tunnels, economic miracles around corners, silver linings, new horizons, crocks of gold at the end of rainbows. After all I do not share Mr. Healey's ‘manna’ approach to political and economic life which seems to me to represent the constant triumph of hope over experience.

Such colossal optimism may be truly indispensable to England soccer managers and to the chairman of the National Enterprise Board, but I think we are entitled to expect a more hard-headed empirical approach from the Chancellor of the Exchequer. [end p1]

I do not suggest that all our economic difficulties are the fault of Mr. Healey. Indeed it must be left to economic historians to explain why, under the same world conditions, we have done so poorly in comparison with our overseas competitors. What I do complain of is that neither the present Government nor its parliamentary supporters have seriously attempted to recognise the nature of our problems, let alone to analyse their cause and to suggest remedies accordingly.

If we can diagnose the British disease correctly then at least we have a basis for prescription; if we merely prescribe more of the medicine which has already made the disease worse, then we must expect a recurrence of the same symptons in an even more acute form.

Unless we make a dispassionate assessment of past economic performance as a prelude to action, we are likely to continue along a path of drift and decline. The result will be a Britain as shabby and stagnant, as regulated and restricted, as drab and decayed as an Eastern European satellite.

The starting point of my own assessment will be the uncontroversial assumption that a society which is dependent on world trade for rising prosperity, high employment levels and the elimination of poverty must seek these objectives through increased productivity and constant innovation.

We need higher productivity because our competitors already have both a higher and a faster growing out-put per man. And we need innovation because we must constantly adapt our response to a ceaselessly changing world. There can be no escape from our difficulties via a siege economy. That route would lead to a poorer society, isolated from the opportunity and potential which change brings. [end p2]

Unfortunately we have forgotten what our forebears knew: that the processes necessary to raise productivity and to stimulate innovation are largely beyond the powers of government to achieve directly. What government can and must do is to create the right framework and climate within which enterprise can flourish. Government is a user, not a creator of wealth; its job is to facilitate the creation of wealth by individuals, and by industry and commerce.

There is a need, of course, for a public sector but its scale should be limited by considerations as to what the private sector cannot itself do, and by what we can currently afford, bearing in mind that the public sector has to be paid for by the private sector.

But government has dismally failed to provide the sound and stable framework of laws and institutions which business requires to prosper and it has equally failed to encourage a public opinion conducive to the creation of wealth. In fact, our education system has encouraged successive generations to look upon the making of wealth as lacking in intellectual respectability, and to regard the entrepreneur as less worthy than the teacher, don or civil servant.

Moreover, government has clogged up the processes by which an economy responds naturally to change by driving up interest rates, destroying incentives, and pre-empting resources that otherwise would have flowed to the private sector. Any impulse for innovation which has survived this relentless discouragement has then been subjected to the endless demands of a burgeoning bureaucracy. As for the stability that all businesses want to plan their future, that has been destroyed by policies of demand management which have led to chronic rates of inflation but which have failed lamentably to achieve their declared objective of full employment. Such perverse results as these lead to the view that our economic armoury is largely stocked with boomerangs. [end p3]

Just as fundamental as government's inability to create the right framework for enterprise has been its largely unobserved practice through a range of policies of driving up the demand for goods and services whilst actively discouraging their supply. As an approach to economic life this has as much to recommend it as trying to drive a car with one foot hard on the brake and the other hard on the accelerator.

Demand has been significantly increased:-

By the policies of demand management, which in addition to the ill effects I have already spoken of, have pumped excessive spending power into the economy; and by subsidies which appear to lower the price of goods but which of course have to be paid for through taxation—or financed by borrowing, or simply met by creating new ‘paper’ money.

At the same time the supply of goods and services has been discouraged:-

By excessive government spending resulting in high taxation and high interest rates;

By the impact of direct taxation at every level of income, discouraging high earners, investors, managers, and workers and the poor alike;

By dividend control which has discouraged investment;

By high labour overheads such as those imposed by the inappropriately named Employment Protection Act; and

By the payment of untaxed benefits which seem likely to have discouraged some workers from seeking employment. [end p4]

But there is worse still. Some of our policies have achieved the rare distinction of simultaneously increasing demand while reducing supply. Rigid price control does exactly this. It discourages the provision of goods and services because it diminishes or wipes out profit margins. It increases the demand for those goods and services subject to the controls because it enforces artificially low price levels. A special, vivid and long standing form of price regulation is the control of rents on privately owned accommodation. This has discouraged land-lords from reinvesting in new property and led to the prompt sale of rented dwellings the moment they have become vacant. It has also lengthened the queue for the dwindling number of remaining flats and houses which are privately let, and has encouraged existing tenants to stay put. Thus, measures which were introduced in the name of compassion in order to help the least well housed have probably achieved the opposite. This is another case of a policy which has turned out to be a boomerang. But my main point is that such controls—whether on homes or groceries—are bound by their very nature to encourage people to demand more goods, while reducing the amount and variety available.

If this analysis is correct it suggests some of the changes that are needed. It is evident that we must restore our economic health in several important respects. We must encourage the provision of goods and services, instead of positively hindering it. We must interfere less with the market process which tends naturally towards equilibrium between supply and demand. Above all we must applaud successful businessmen, a policy you have been practising through this Award for several years.

Providing that we are resolute it should be possible to move towards a more balanced budget, gradually removing controls on pay, prices and dividends, and reducing government spending in order to cut borrowing, direct taxes and interest rates. And we shall help to create the climate in which it is once again worthwhile to start and build up a business—and in doing so to increase employment and wealth. [end p5]

It should also be possible to curtail the flood of legislation and regulations, which as we have seen, have so often had the opposite of the desired intention.

I suspect it may be somewhat harder to change the climate of opinion when there is so little understanding—some of it wilful—of the process of wealth creation. And it will be equally hard to encourage higher productivity since to a large extent our success will depend on moving resources from the areas of the economy which are not productive to those that are. This will necessarily involve a determined effort to reduce the overmanning which has been a feature of our economic life for a long time.

However, if we recognise that economic change brings new opportunities for prosperity alongside the need to alter ingrained attitudes and work practices, then our future will be immeasurably brighter.

The Government is now engaged on what it calls the Great Debate on Education. It seems to me that what is even more vital is a Great Debate on how to create the wealth which goes to pay for education, the social services and a rising standard of living for future generations.