Economics

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THE NATIONAL ECONOMY

Background

Britain ranks about 75th in size among the countries of the world, with about 0-18 per cent of the world's land area. In population, approaching 2 per cent of the world's inhabitants, it ranks tenth. In density of population it is fourth: of the major countries, only Japan, Belgium and the Netherlands are more crowded; and there are nine times as many people to the square mile in the United Kingdom as in the United States. In world trade, it ranks third, accounting for nearly one-tenth of the total. It takes about a fifth of the world's exports of primary products, and provides about one-sixth of the world's exports of manufactured goods.

Britain, from its own soil, provides only about half of the food it needs, and-apart from coal and low-grade iron ore-it has few natural resources; thus it is the world's largest importer of such products as wheat, meat, butter, fodder grains, citrus fruits, tea, tobacco, wool, and hard timber. In return, it is one of the world's largest exporters of aircraft, motor vehicles, electrical equipment, chemicals, textiles and most types of machinery. No other country has such a small proportion of the working population engaged in agriculture (only about 3 per cent).

The United Kingdom is also the central banker of the sterling area, an area with a quarter of the world's population. Many countries outside the sterling area use sterling in their international transactions, and it is the currency in which about one-third of the world's trade is conducted.

The economy before 1939

During the nineteenth century Britain secured a leading position as world manufacturer, merchant, carrier, banker, and investor and so was able to support a rapidly increasing population at a rising standard of living. During the period from 1870 to 1890 British industrial expansion had the clearest lead over that of other countries. Between 1890 and 1914 growing industrial competition from Europe and North America began to make itself felt, but its effects on Britain's staple export industries, particularly cotton textiles and coal, were offset by the general rise in world trade, by the continued demand for British textiles from India and other eastern countries, and by the continued high level of overseas investment.

The new problems confronting British industry and trade in the twentieth century became apparent after the first world war. Textiles from India and Japan, where labour was cheaper, established themselves firmly in the large eastern markets, to a great extent replacing the more expensive and often higher quality British products. The extension of the world demand for coal was slowed down by the increasing use of oil, while coal from the newer European mines competed keenly with British coal.

In the old-established branches of the vehicles and engineering group of industries (for instance, locomotives, ships and textile machinery) world demand fell away after a brief post-war boom, and Britain failed at first to gain a compensating share of the expanding world trade in the new types of engineering products (for example, vehicles and electrical goods). Most countries were tending towards self-sufficiency, and some sought deliberately to protect nascent and even established industries by tariffs and (later) quotas and exchange restrictions.

Income from overseas investments and a substantial improvement in the terms of trade (the price of exports relative to the price of imports) cushioned the effect of a fall in the volume of exports, and imports remained high. The loss of export markets led, however, to a contraction of Britain's staple industries - coal, cotton, iron and steel, and the older branches of engineering. The result was heavy unemployment, the general rate of which averaged 14 per cent of the working population in the years 1921-39, reaching a peak of 23 per cent in 1932, when the slump in world trade was at its worst. In districts relying mainly on one or other of the staple industries, the rate was much higher.

After 1932 an improvement in the levels of production and employment took place, stimulated by an increase in home investment which was aided by the policy of cheap money, by some revival in world trade and, after 1935, by the armament programme. The decade saw a strong expansion in the vehicles, electrical, chemicals and aircraft industries, while the construction of 3 million houses brought about a large growth in the building and ancillary industries. By 1937 average real income per head was about 14 per cent higher than in 1929.

Effects of the Second World War

The second world war is estimated to have run down British domestic capital by about ^3,000 million, through shipping losses, bomb damage, and arrears of industrial maintenance and replacements. Some ^1,000 million worth of overseas investments were sold, nearly half in North America, and new external debts of ^3,000 million were accumulated. By 1944 exports had fallen to less than one-third of their 1938 volume as a result of the war effort.

Period since 1945

In the two decades since 1945 Britain has experienced, with few interruptions, a steady growth in output of goods and services and a high level of employment. New inventions and technological advances and shifts in world demand have altered radically the character of British industry. Industries in which new techniques have predominated, notably electronics, aircraft, motor and chemicals industries, new branches of machinery construction, and petroleum are contributing a significantly larger share of the total output and of total exports and providing wider employment opportunities for an increasingly skilled labour force. Expenditure on industrial and scientific research is increasing steadily and facilities for technological education have been greatly enlarged.

At the same time, Britain has had to deal with some persistent economic problems; in particular, to fulfil its overseas obligations and to maintain its traditional role in world commerce and finance, it has needed to achieve and maintain a substantial balance of payments surplus. While exports of both goods and services have maintained an upward trend, in some years the rate of increase has been insufficient to pay for a rising volume of imports (almost all quantitative restrictions on imports having been removed), to meet defence commitments abroad and to provide for overseas investment and economic assistance to developing countries.

The persistent rise in prices, a continuing problem shared with most other countries, has been a central factor in the framing of economic policies. During some periods it stemmed from an excessive pressure of demand-exports, investment at home and abroad, personal consumption, defence and other public expenditure both at home and overseas - on the nation's resources, but more recently the tendency for money incomes to rise faster than production, thus raising costs, has been a more dominant influence. The Government is, therefore, increasingly directing its efforts towards working out policies for relating increases in money incomes to the rate of economic growth and evolving machinery for longer-term planning of the economy.

National Economic Development Council

The National Economic Development Council (NEDC) was set up in February 1962, originally to examine the economic performance of the nation with particular concern for plans for the future in both the private and the public sector, to consider uses of national resources and to seek agreement upon ways of increasing the rate of sound economic growth. The NEDC was reorganised in November 1964. The principal responsibility for preparing a national economic plan was taken over by the Department of Economic Affairs but the NEDC is the designated body for the discussion of policies and through which the involvement of both sides of industry in the formulation and implementation of the plan is secured.

The chairman of the NEDC is the Secretary of State for Economic Affairs. Other members are the President of the Board of Trade, the Minister of Labour, the Minister of Technology, the Chief Industrial Adviser, a number of representatives from both sides of industry, and several well-known economists. The Council, which meets at frequent intervals, has its own permanent staff (not members of the Civil Service) under a Director-General. By mid-1965 it had published a number of reports on factors affecting the rate of growth of the economy, including the results of inquiries into the prospects for growth of a cross-section of industry. To assist it in this aspect of its work a series of economic development committees have been formed. They are concerned with particular industries and consist of representatives of management, trade unions, government departments and others with special experience.

Economic Planning

In recent years the main objective in government economic policies has been the achievement of faster economic growth. A framework of longer-term economic planning and consultation is being evolved within which the aim is for increases in productivity, industrial efficiency and real incomes to be reconciled with a high and stable level of employment, a favourable balance of payments and the promotion of social justice. A new government department, the Department of Economic Affairs, was set up in October 1964 to be responsible for economic planning. It works in close consultation with the Treasury and other government departments. A Ministry of Technology was set up at the same time, to stimulate a more rapid application of scientific and technological advances in British industry. A number of other bodies dealing with economic planning and consultations have been in existence for some years; they include the National Economic Development Council (NEDC), the National Joint Advisory Council (NJAC) and organisations dealing with the special problems of Scotland, Wales and the English regions.

The Department of Economic Affairs

The Department of Economic Affairs has been given the responsibility of framing and supervising the plan for economic development and for the general co-ordination of action to implement the plan, including, in particular, policies for industry, the regions, incomes and prices, and economic growth. It works with representatives of both sides of industry directly and through the National Economic Development Council.

The department is organised into four inter-related groups: an Economic Planning Division concerned with the preparation of medium-term, long-term and very long-range forecasts of the development of the economy; an Industrial Policy Division which is closely linked with the NEDC's Economic Development Committees (see below), and considers and reports on the problems and obstacles to growth in individual industries; an Economic Co-ordination Division, concerned with the application of prices and incomes policy, the relationship of public expenditure programmes to the use of resources and economic growth and efficiency, and the implementation of the growth plan; and a Regional Policy Division responsible for regional policies and planning.

The National Plan, covering all sectors of the economy and prepared in consultation with both sides of industry, was published in September 1965. Its aim is to increase the gross domestic product by 25 per cent between 1964 and 1970. At 1964 prices, the production of goods and services should, therefore, go up by ^8,000 million a year by 1970. It will be necessary to increase productivity by 3-4 per cent a year, investment by 5^ per cent a year and exports by 5^ per cent a year over the plan period. Four essentials to the plan are a sound balance of payments, improved efficiency in industry, a balanced regional development and increased investment.

Regional Economic Planning

Policies for the regions of Britain aim to bring about a more even spread of economic stability throughout the country; to maintain the individual character of the regions; and to modernise and improve the environment. Detailed studies of the regions have therefore been put in hand by successive governments.

The regional development programmes published in 1963 for central Scotland and north-east England seek to stimulate industrial diversification and growth by the modernisation of the regions, including the identification of 'growth zones' in each region, i.e. areas where the factors for rapid and substantial economic growth are most favourable. Extra public service investment on housing, roads and other services is being concentrated on these focal points. A study of south-east England, which concentrated on housing and land use problems, was published in March 1964. Its proposals for dealing with the expected population increase there over the next 20 years are under review by the Government.

The Government has established a wider system of regional councils and boards to provide effective machinery for regional economic planning. The councils are concerned with the broad strategy of regional development and the best use of the regional resources. Economic Planning Councils were set up in February and March 1965 for Scotland, Wales and the northern, north-west, Yorkshire and Humberside, east Midland, west Midland and south-west regions of England and two further councils were announced in August for East Anglia and south-east England. Each council consists of about 25 part-time members widely representative of experience in the regions. The councils have no executive powers; they assist in the formulation of the regional plan.

The Regional Economic Planning Boards consist of civil servants representing the main government departments in each region. In the English regions the chairman is an official of the Department of Economic Affairs. In the case of the Scottish and Welsh Boards the chairmen are officials of the Scottish and Welsh Offices. The task of the boards is to prepare draft plans for the region and to co-ordinate the work of the various government departments in implementing the final plan.

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Economics and the Economy

Every group of people must solve three basic problems of daily living: what goods and services to produce, how to produce these goods and services, and for whom to produce these goods and services.

Economics is the study of how society decides what, how, and for whom to produce.

By goods we mean physical commodities such as steel, cars, and strawberries. By services we mean activities such as massages or live theatre performances, which can be consumed or enjoyed only at the instant they are produced. In exceptional circumstances, society may find that some of the questions about what, how, and for whom to produce have already been answered; until the arrival of Man Friday, Robinson Crusoe need not worry about the 'for whom' question. In general, however, society must answer all three questions.

By emphasizing the role of society, our definition places economics within the social sciences, the sciences that study and explain human behaviour. The subject matter of economics is that part of human behaviour which relates to the production, exchange, and use of goods and services. The central economic problem for society is how to reconcile the conflict between people's virtually limitless desires for goods and services, and the scarcity of resources (labour, machinery, and raw materials) with which these goods and services can be produced. In answering the questions what, how, and for whom to produce, economics explains how scarce resources are allocated between competing claims on their use.

Because economics is about human behaviour, you may be surprised that we describe it as a science rather than a subject within the arts or humanities. This reflects the way economists analyse problems, not the subject matter of economics. Economists aim to develop theories of human behaviour and to test them against the facts. In Chapter 2 we discuss the tools economists use and explain the sense in which this approach is scientific. This does not mean that economics ignores people as individuals. Moreover, good economics retains an element of art, for it is only by having a feel for how people actually behave that economists can focus their analysis on the right issues. Before examining the tools of the trade, it is helpful to have a clearer understanding of the problems in which economists are interested.