Do-It-Yourself Economics

Continuing an occasional series in which public figures make dogmatic economic assertions that, while enduring and popular, are otherwise inexplicable. The term was coined by David Henderson in his 1985 Reith Lectures, Innocence and Design.

The government must do more to help our businesses compete in overseas markets, just as rival countries’ governments do.

Digby Jones, Director-General of the Confederation of British Industry, The Guardian, 26 January 2004

The government has economic duties that are important and extensive. Those I would list at a minimum are providing public goods, levying taxes in a way that is widely accepted as fair rather than arbitrary, controlling inflation, maintaining an adequate level of demand, managing public borrowing such that the budget balances over the course of the business cycle, dealing with negative externalities that aren’t efficiently corrected through the marketplace, providing social benefits and redistributing income in order to tackle poverty. These are ambitious goals with no obviously correct way of accomplishing them; any government that could claim tolerable success in them will have done a worthwhile job and a public service.

To claim that in addition the government has a duty to ‘help our businesses compete in overseas markets’ is a gross and impertinent non sequitur. I have read Jones’s article several times, and I have no idea why he issues this stern injunction. Actually, that’s not strictly true: the clue lies in his preposterous designation of other countries as ‘rivals’. So they may be on the football field; they are not rivals or competitors in the international economy.

The notion that government should promote exports is a hangover from the post-war period when exchange rates were fixed and sterling was not a convertible currency. The term ‘balance-of-payments deficit’ became a recurring feature of British politics in that period, when official reserve transactions (which are an important part of the balance of payments under a fixed-exchange-rate regime) were a separate part of the national accounts. But advanced industrial economies with floating exchange rates and relatively free capital flows do not have balance-of-payments problems: a deficit on current account will always be balanced by a surplus on capital account. If a country is buying more goods and services from the rest of the world than it is selling, then it must also be selling more assets to the rest of the world than it’s buying.

Countries can certainly suffer from adverse currency movements (up or down) if they run a mix of policies that is inconsistent with stable inflation – but the remedy is already within the remit of what the government’s legitimate responsibilities are (in the UK, the independent operation of monetary policy to meet an announced inflation target). Governments have no business whatever in promoting exports, which are a cost and not a benefit: they are what we give up in order to purchase things we want. What is particularly outrageous about the assertion of the Director-General of the CBI is his insistence that government take upon itself, at taxpayers’ expense, the promotion of a sectional interest – namely his members.

I support Tony Blair against his allegedly Left-wing but almost invariably reactionary critics on many things: Iraq, top-up fees, foundation hospitals, the lot. But there’s one thing I don't defend him on. His critics claim he pays too much attention to the business lobby, and – oddly enough, and for reasons that they probably wouldn’t recognise – his critics are right. Blair does place too high a regard on the judgements of industrialists, who are merely one lobby among many others and who have no more necessary expertise in economic management than the most obdurate trade union leader. I draw the analogy deliberately, as a brace of television programmes this week to mark the twentieth anniversary of the miners’ strike reminds me of the economically insupportable demand of the then miners’ leader that no pit should ever be closed on economic grounds. Nonsense it may have been (and was), but the National Union of Mineworkers is a shadow of its former self, while to this day one can rely on the CBI to come up with destructive tomfoolery.

Comments

[GrimReaper]

I once listened to a company director explaining that Government should lend money to Third World governments at low interest rates in order that they could buy British exports. During his speech, he remarked that "of course, there is a history of never paying the money back...". Exports were A Good Thing, even as a free gift.

[David Gillies]

I've a lot more time for the Institute of Directors than the CBI. The latter is stuffed with people like Jones - the sort of corporatist mendicants that, as a libertarian capitalist, I execrate. If TB really were a friend of industry, rather than a friend of 'Industry', he'd light a bonfire under the mound of pettifogging blather that Whitehall, in concert with Brussels, has promulgated in the last few decades.

[Kieron McNulty]

Dear Oliver and Co

You really are consistent liberals! its refreshing to see a principled approach to economics. It is of course completely bonkers and ignores all of history but it is great. keep up the good work!

yours

Kieron