Don’t know much about John Brunner? Neither do I. While researching Bert Kelly and Paddy McGuinness, I stumbled upon outstanding mentions. These 10 Brunner essays hint his specialty was opposing indicative planning. Items 9 and 10 are Australian publications, 1 to 8 are English. The appendices include a revealing yet mysterious Brunner profile.
1. “The dash for planning,” The Listener, May 10, 1962, pp. 795-96, 817.
2. “The flight from reality,” The Listener, May 17, 1962, pp. 835-37.
3. “The debate on economic growth,” The Listener, June 7, 1962, p. 997.
4. “La trahison des entrepreneurs,” Statist, February 26, 1965, pp. 562-63.
5. “What use is the National Plan?,” New Society, March 25, 1965, p.13-14.
6 “‘Plan’ — or fraudulent prospectus?,”TheSpectator,Sept17,1965,p.345-46.
7 “New-style planning — some misconceptions,”TheBanker,Feb’66,p.113-9.
8 “The Plan is dead — long live the Plan!,”TheSpectator,Apr 1,’66,p.396-97.
9 “Indicative planning — an alternative view,”EconomicPapers,’74,p.21-9.
10 “The cult of the official bum steer,”TheNationalTimes,July4-9,’77,p.57.
i. David Potts, “Australia’s top business economists,” The Australian Financial Review, February 13, 1981, pp. 34-35, excerpts.
ii. Highlights of Bert Kelly on indicative planning.
Whether or not we are all socialists now, it would certainly appear that we are now all economic planners. One would have more faith in this remarkable and almost overnight conversion if it had been accompanied by any serious analysis of the way the planning machinery might be expected to operate, but as Mr Leslie disarmingly admitted in a recent talk on the subject (published in The Listener of March 1) he had “no idea how the planners will set about their job”, and the same seems to go for everyone else.
The less sophisticated of the new-style planners seem to imagine that it is only necessary for the Government to announce a target rate of growth of, say, 4 per cent a year and this of itself will ensure a faster growth rate. The National Economic Development Council said “Let there be growth” and there was growth. This is pure make-believe. The reaction of the average industrialist to this sort of confidence trick is likely to be some such remark as “I’ll believe it when I see it”. Moreover, even if industrialists really believed that the economy was going to grow faster from now on, many would not be impressed by the intelligence. The relationship between the rate of national growth and the rate of increase in demand for the product of the individual entrepreneur is often felt to be extremely tenuous. As one currently engaged in investment decisions, I would regard the country’s overall rate of growth as having little bearing on the likely trend of demand for the product of my industry and still less bearing on my own company’s sales. And before anyone suggests that the industry I work in — the newspaper industry — is atypical, perhaps he would care to name a typical one.
It is partly because they recognise the limitations of this sort of target practice that the more serious planners advocating planning industry by industry. They also seem to feel that planning on an industry basis is justified by the need to correlate the haphazard and unco-ordinated plans of businessmen. They appear to hold the view that industry at present is blundering about in the dark unaware of what its customers, suppliers, and competitors are up to. But no evidence has been adduced to show that component manufacturers, for example, take no account of the plans of assemblers when formulating their own decisions on investment. No instance has been quoted of producers of raw materials acting in total ignorance of the intentions of the fabricators who buy their products. There have certainly been cases where suppliers and customers have reached different conclusions, but this is because it is often possible for two equally informed people to reach a diametrically opposed conclusion on a matter of this sort.
It cannot be said too often that there is no merit in consistency as such: it is only worth putting all one’s eggs in one basket if one can be sure what is going to happen to the basket. And here we reach the nub of the problem. The long-term forecasting of industrial trends — and good planning presupposes good forecasting — is still no more of a science than it has ever been.
There seems to be a widespread myth that economists are in some way uniquely qualified to make such predictions. The explanation presumably lies in the fact that industrial trends tend to be expressed in economic language — sales, stocks, prices, etc. — and that economists, with the aid of highly sophisticated models and immensely detailed input-output tables, are becoming increasingly adept at relating economic data. But economics is an essentially derivative study. The causes of economic phenomena frequently lie far outside the ken of economists. To form a view on future sales of a particular product one has to take account of technological developments, politics, sociological changes as they affect consumer taste, and, above all, the human factor. (One industrialist recently told me that the future of his firm largely hung on the appointment of the chief engineer in the nationalised industry which too much of his output, and he certainly was not implying corruption.) In none of these fields of knowledge can economists claim any special skill, and in each the need for judgment is paramount.
The Ridley Committee’s Forecast
If proof is needed of the unscientific nature of forecasting of this sort, one has only to look at the record. Every industry’s cupboard is littered with old skeletons of forecasts that have gone awry; and if a choose to illustrate the point by reference to the fuel industries, this is not because the efforts of fuel forecasters are egregiously incompetent. Rather it is because, the fuel industries being publicly owned, their forecasts and the subsequent outcome are more exposed to public view. They are also industries where no one could possibly deny that there has been a continuing exchange of information between suppliers and customers, and where there has been every opportunity for collaboration over long-term forecasts. If benefits are to accrue from such co-ordination, one would certainly expect to find them in the fuel industries.
Probably the fullest and most high-powered energy forecast in this country since the war was that of the Ridley Committee in 1951. The economist on it, Professor Arthur Lewis, was someone who has made a particular name for himself as an authority on the processes making for economic growth, and it also included some of the country’s best minds from industry and technology.
The Ridley Committee chose to project trends over a period of a decade so as to forecast consumption of the various kinds of fuel in the years 1959-63. Having just obtained consumption figures for 1961, we are now in a position for the first time to compare the out-turn with the forecast for the mid-year of their range.
The Committee expected that total consumption of energy expressed in terms of coal equivalent would rise by 16 per cent between 1951 and 1961. In fact consumption went up 9 per cent. This relatively minor error can be ascribed to the faster than expected growth of fuel efficiency and the slower than expected growth of the economy as a whole. Nobody, however, invests in energy as such. It is demand for the individual forms of energy which one really needs to forecast accurately, and here the unhappy experience of the Ridley Committee is a perfect example of the point made earlier, that even if the overall rate can be correctly predicted, it has little bearing on the growth of the component parts.
Changes in Fuel Used
The consumption of coal used directly fell by 28 per cent between 1951 and 1961, whereas the Ridley Committee expected it to decline 4 per cent. Consumption of coke and manufactured fuel slipped 1 per cent against their forecast of a rise of 41 percent. Gas consumption, again in terms of coal equivalent, dropped 4 per cent over these ten years; Ridley reckoned it would rise 27 per cent. Electricity consumption, for which they had predicted a 38 per cent increase, actually rose 84 per cent, and the consumption of oil, to be exact of the so-called black oils, rose 249 per cent against the Ridley Committee’s forecast of an 82 per cent rise.
If the extent of these errors (and they have been repeated again and again since the war by other so-called energetic forecasters) should give the latter-day planners pause for thought, the reasons for them are still more significant. The error lay in the Committee’s failure to foresee the massive shift that was to occur during the nineteen-fifties towards oil and electricity. For a start, the committee made what another celebrated group of fuel forecasters, the Robinson Committee, once described as “the sort of mistakes of general optimism or pessimism that are likely to affect at a given moment all who attempt such forecasts”. The Ridley Committee, making their prognostications under conditions akin to those of a siege economy at a time when the electric fire was regarded as positively anti-social, could hardly be expected to visualise the dramatic increase that was to occur in domestic consumption. Not only did they underrate the growth of total demand for electricity; they anticipated that industrial consumption would rise much faster than domestic consumption, whereas in fact the opposite has taken place.
But it was not only that the Ridley Committee failed to foresee the sociological trend which made fuels like oil and electricity so much more attractive to an increasingly affluent society. There was not just what economists call an income effect. The prices of these fuels also fell relative to those of their competitors. The price of electricity fell owing to an unexpectedly sharp reduction in the capital costs of coal-fired generating plant, the same reduction in capital costs that threw out so many of the more optimistic forecasts of atomic energy’s prospects. This development was inherently unpredictable, as were the reasons for the fall in oil prices. Here, too, there have been unlooked-for technological bonuses, but still more important and even less predictable were the political factors which unloosed a flood oil on the markets of western Europe. First and foremost of course there was Suez. The direct cost of this operation was only a small part of the total economic damage done. The faulty forecasts it gave rise to have landed us with a bill which it will take many years to pay off. Other contributors to the glut of oil in western Europe have been producer countries bringing pressure to bear on the oil companies to boost their output, the Russians wanting to get a foothold in foreign markets for reasons at least partially political, and American independent companies, unexpectedly frustrated by the high level of protection in the United States market itself.
Oil and Coal Prices
It would be wholly presumptuous for us to expect to do any better in the sixties than Ridley did in the fifties. Leaving aside the possibility of further action by the Government to alter the differential between oil and coal prices by measures such as the fuel-oil tax, it is possible to make out a perfectly plausible case both for believing that oil prices will continue to fall relative to coal and for believing that oil prices will not go ahead faster than coal prices. On the one hand there remains a huge quantity of shut-in oil capacity overhanging the market and depressing prices, while coal continues to be a highly labour-intensive industry in which higher wages lead almost automatically to higher prices. On the other hand the activities of the Organisation of Petroleum Exporting Countries could conceivably lead to a hardening of oil prices even before the long-predicted shortage of reserves materialises; and if the most recent productivity trends in the coal industry are any guide, and Lord Robens’s hopes for his new coal-cutting machines are well founded, coal could very well improve its competitive position vis-à-vis oil.
No less imponderable are the trends of gas costs, under the influence of liquid methane and underground storage, or atomic energy costs as new types of reactor are developed — even the costs of electricity from existing reactors is shrouded in doubt since we have only the vaguest idea how long they will last; but this should be enough to show that fuel forecasting is no more of a science than astrology. And if this is true in an industry where there is the maximum exchange of information, where there are hardly any exports, and where the nature of the product ensures a comparative stability of demand, how much more true is it of forecasting in more volatile industries. By all means let us try to make forecasts, but to put much faith in them and in plans based on them seems to me to be folly.
Nor is rolling planning, by which long-term targets are modified each year in the light of changing circumstances, any answer. In industries where investment takes several years to bring into commission and decades before it begins to pay off, it is useless telling people two or three years after the decision to invest has been taken that it now looks as if demand may be 25 per cent less than was originally expected. This is precisely the position the coal industry now finds itself in.
To all this a socialist might answer: “This proves what I am always saying about Conservative planning. Planning will only work if you make a forecast and see that people stick to it.”
It is certainly true that the Government can do a good deal to ensure that its plans are fulfilled. It can manipulate demand with the aid of indirect taxation and hire-purchase controls; it can restrict imports; it can find various ways of encouraging this industry and discouraging that. But the implications of such a policy go much further than some degree of interference with consumer choice. One is that we could stand to lose all the fruits of improved technology that had not been foreseen and of imports which had turned out to be cheaper than expected. Again, this is in fact more or less what has happened already in the fuel field. Because the Government recognises some responsibility for saddling the coal industry with excess capacity, it feels obliged to deny British industry the cheap coal and oil it could obtain from abroad, thus inflating our whole cost structure relative to that of our competitors. Another and somewhat paradoxical consequence of so-called full-blooded planning is that the Government would actually end up having less control over the economy than when it started. If the coal industry is guaranteed a demand of 200,000,000 tons a year; if the motor industry is promised an annual sale of 1,500,000 new cars in the home market, and if consumption of tooth-picks is not to fall below a certain figure, the Government’s chances of correcting the inevitable imbalance that will sooner or later occur in its external transactions will be nil (whatever else can or cannot be legislated for, exports cannot).
Finally, and this question needs to be asked of any form of centralised planning, socialist or Conservative, how, even assuming demand for a product is correctly forecast or can be underwritten without difficulty, is this demand to be met by the various firms making the product? More specifically, even if we knew that the market for motor-cars in 1970 would be twice as large as it is now, should we assume that all the existing firms have the same percentage hare of the market as they do now? Such an assumption is obviously unrealistic — there is a strong case for still further reducing the number of British motor firms — but anyone who knows anything about Whitehall would see the absurdity of expecting the National Economic Development Council to tell a firm that there is no longer any place for it in an industry in which it may have thrived for a generation or more.
It is a fair retort to the heretic who believes it is everyone else who is out of step to ask him why this should be so; and certainly the reasons for this dash for planning require some explanation. Probably the most important was that last year the Government had reached a complete economic impasse. After ten years of Conservative rule, inflation was as rampant as ever, the reserves were running out fast, and none of the Government’s various economic remedies — incentives, Bank rate, higher investment — seemed to be adequate for the job. Thoroughly disillusioned and in a state of near desperation, the Government went back on almost everything it had previously stood for. Economic planning, a national wages policy, and the Common Market suddenly became fashionable.
The Government’s volte-face, however, was only made possible by a similar and slightly less hasty shift of opinion in certain circles in industry. The new-found interest in planning in Tothill Street was a direct reaction to the stop-and-go policies of 1959 and 1960. Although the craving for certainty is always strong in industry, businessmen on the whole are fairly well resigned to the ups and downs of a market economy. These are seen as part of the rules of the game, and though attempts may be made to modify them with the aid of restrictive practices, ups and downs of this sort can be lived with. What struck industry as intolerable was when the Government, so far from damping down these fluctuations, appeared to be adding to them.
It is ironic, to say the least, that industry should have reacted to stop and go in 1959 and 1960 by plumping for more forecasting and planning in 1962, since it was largely errors of forecasting exacerbated by political considerations at the time of the last general election that were responsible for the boom and subsequent squeeze. These forecasting errors were virtually universal and have been well documented in an article by the then editor of the National Institute’s Economic Review, which certainly cannot be accused of being prejudiced against forecasting, and short-term economic forecasting is much easier than long-term.
But there is another and deeper reason for the sudden conversion to planning. Mr Leslie mentioned the wide-felt need for “greater political coherence”. At the risk of being thought cynical I would suggest that this is really just a form of wishful thinking, something to which I believe we as a nation are peculiarly prone at the moment. For reasons connected both with traditional attitudes and recent circumstances we are reluctant to face up to the fact of conflict. This weakness has bedevilled our policy both in Europe and Africa and has had a considerable influence on our new addiction to planning. Rather than recognise that a higher rate of growth represents a serious challenge to deeply held values and customs, we prefer the easy way out apparently offered by the N.E.D.C.
There has been something a little unreal about the discussion of economic growth in the last year or two. I suggested last week that the dash for planning was, in part at any rate, the product of wishful thinking, of a refusal to face up to awkward fact and ineluctable choice: this escapism seems to have infected the entire debate on growth.
A long and rather scholastic argument has taken place on the relationship between the rate of economic growth and the level of demand. One school of economists believes that a more rapid rate of increase of demand will not only provide an immediate stimulus to growth, it will also help to reduce unit costs, thereby making us more competitive and better able to sustain a higher long-term rate of growth. The trouble with this view is that the very act of expanding demand beyond a certain point encourages employers to bid up the price of everything including labour so that wages and unit costs rise faster than ever. The result, as experience shows, is all too likely to be a balance of payments crisis.
The logical corollary of this policy is a depreciating exchange rate, but this, the ultimate economic solecism, is something which few even of the most radical members of this particular school of economists are prepared to contemplate. Instead they advocate a national wages policy, a notion which is almost as vague as economic planning. It is also much in vogue and for similar reasons. A wages policy satisfies our yearning for political coherence at a point at which we are particularly sensitive to conflict. It does so, however, by trying to tackle the symptoms of our social divisions, rather than their causes. Uneasily aware that we still live in a deeply divided society, and feeling guilty about it, we try to repress the thought. We do this by buying off wage claims so as to avoid any open manifestation of conflict.
Proof of this repression is our almost neurotic fear of strikes. We rationalise this fear in all sorts of ways. We tell ourselves that strikes are disastrous for industrial relations, whereas, as many sociologists will argue, a good official strike can have considerable therapeutic value. We kid ourselves — ask any member of the middle classes without a professional interest in the subject — into believing that strikes are far more prevalent in this country than elsewhere, whereas the number of days lost through strikes in Britain is not only trivial compared with the days lost through sickness or injury, it is also less than in many comparable foreign countries: less than a third as high per hundred employees as in the United States. Our mass media further encourage our neuroticism by purveying entirely meaningless figures of production supposedly lost through strikes, when output can usually be fully made up except in the case of perishables and industries working to capacity.
It is true that the government has recently adopted a rather more phlegmatic attitude in face of strike threats, but its moral and electoral position has been so weakened in the process that its chances of maintaining this stance seem remote. Instead of a handsome gesture before the event — a major redistribution of wealth, for example, in the form perhaps of government bonds to reduce the inflationary consequences, or legislation to mitigate the class war in industry by making everyone with more than, say, a year’s service salaried and entitled to a month’s notice — all we have is a trivial one afterwards together with vague incantations about an incomes policy, the new label for a wages policy.
Arguments against a Wages Policy
A wages policy is not a new idea. We hanker after one whenever wages threaten to get out of hand, but here have always been two overwhelming arguments against such a policy. They have never been satisfactorily answered and on this occasion they have been conveniently forgotten. The first is that a wages policy requires that union leaders should abandon their whole raison d’être, that of doing their utmost to improve the wages and conditions of their members. The second objection is that foreign experience has consistently shown that wages policies make no significant difference to the rate of increase in wages. That this is still the case is shown by recent Swedish experience. Earnings in Sweden have risen 10 per cent in each of the last two years, although their national agreements only provided for increases of 3.5 per cent in 1961. This will not stop us casting envious glances at countries like Sweden whenever wishful thinking gets the better of us, but it must throw considerable doubt on the thesis that the recipe for growth is a rapidly rising level of demand laced with an incomes policy.
The other school of thought (one might almost call it the London School) has no illusion that attempts to speed up growth by inflating demand are liable to be self-defeating. It argues in consequence that demand should not be expanded faster than productive capacity. Unfortunately, however, we are given little guidance on what determines productive capacity.
Economists, with one or two notable exceptions, have usually equated productive capacity with the quantity of investment and seen a higher level of investment as the key to faster growth. This prescription appealed particularly to those whose puritan instincts made them regard all investment with favour and almost all consumption with disapproval, but it did seem to get some prima facie support from the figures. Fixed investment as a percentage of gross national product was significantly lower in the U.K. than in several countries whose rate of growth was higher. Now, however, with the percentage for this country having climbed steadily fro, under 15 per cent of the gross national product in 1951 to over 19 per cent last year without there being any apparent effect on our rate of growth, this explanation is beginning to look inadequate. Doubts are further confirmed by comparing the relationship of capital to output in this country with similar ratios in other countries. Our capital stock certainly does not seem too small.
It is becoming apparent that quality of investment, by which I mean the form it takes, its timing, location, and the use that is made of it, are at least as important as its physical quantity. Indeed higher quantity may be no more than the concomitant of lower quality. Here I believe we come to the heart of the matter. Our productive capacity has not grown faster because we have consistently allowed the selection and utilisation of our investment to be influenced by non-economic considerations. Growth, in short, has had a low place on our scale of values.
A Purely Materialistic Concept
Economic growth is a purely materialistic concept. The rate of growth is usually defined as the rate of increase in gross national product or in gross national product per head, that is productivity, gross national product itself being the sum of all goods and services for which money changes hands. It takes no account therefore of unpaid work. For example, if mothers leave their homes to work in offices or factories, this is wholly beneficial from the point of view of growth; the effect on the running of the home or the upbringing of the children is ignored. Nor does gross national product include any allowance for changes in the amount of leisure or changes in what for want of a better word might be called amenity. These changes often take place at the expense of growth and vice versa.
Indeed hardly a week goes by without some well-publicised example of productive investment being frustrated by amenity considerations, and yet never is there the slightest recognition that the principle of growth is involved. To quote a few such examples, all of which have attracted public attention in the last few weeks. The Treasury’s failure to estimate and control the cost of its own buildings and of these next door to Downing Street provoked a good deal of acid criticism. No one seemed to take the point that the productivity of men asked to build within an existing façade and inhibited by all sorts of other respects must be lower than that of men rebuilding from scratch. The £600,000 spent on doing up the three houses in Downing Street is, after all, enough to build a fair-sized housing estate, bearing in mind that it does not include the cost of any land.
A similar conflict between growth and amenity, though the amenity on this occasion was a national park rather than a historic building, was provided by Manchester Corporation’s attempt to use Ullswater as a reservoir. No one denied that this was the most economic method of supplying Manchester’s needs — it was even suggested at one stage that the scheme was objectionable precisely because it was the most economical — but none of the many advocates of greater economic growth who opposed the bill saw any contradiction between their support for the one thing and their opposition to the other. The alternative, as far as Manchester is concerned, is either to dam up a lot of little puddles all over the Lake District or Pennines or to build a distillation plant. In either case the capital costs and probably operating costs will be far higher, and industry as well as the domestic user will have to pay more for their water.
Gas at Winchester
Then again there is the case of the hole in the ground under Winchester, which the Gas Council presumed to want to fill with gas. This is not at all a revolutionary idea — it is used safely and effectively in the United States, Russia, and France — and for a small capital expenditure it would enable the gas industry to cut out a good deal of high-cost capacity, thus considerably reducing both current and capital costs. But here, too, economic growth had to give way before amenity in the shape once more of old buildings, although on this occasion it is not altogether obvious why the owners of old buildings should be more entitled to complain than the owners of new. Again there was no hint that economic growth was at all relevant to the argument.
It is true that neither the Ullswater nor the Winchester project is finally torpedoed, but to a large extent the harm is already done. Apart from the fact that timing is the essence of good investment and “better late than never” does not apply in the case of capital expenditure, the effect which these incidents have on those wanting to invest in new projects is discouraging to say the least. Whatever view, therefore, one takes on these issues, it is clearly ridiculous for us to clamour for more growth while putting every obstacle in the way of new buildings and clapping preservation orders on old buildings as soon as they reach the end of their economic life. If we are in earnest about growth, we shall have to look more critically at the rights of property owners, the power of planning authorities, and all the other things done or not done in the name of amenity.
But amenity is not the only non-economic consideration which has been allowed to prejudice investment decisions and frustrate growth. Political considerations have also played their part. For example, they led to the setting up of a motor industry in Scotland at the precise moment when distance from continental markets became all-important; they were the cause of the split strip mills, again just when steel capacity began to outrun demand and there was the greatest need to be competitive; they have frequently been responsible for uneconomic investment decisions in nationalised industries. There are always good arguments for interfering in this way — even a new Crusader made sense to some people — but the general effect is not conducive to growth.
Then there are social considerations, for instance our attachment to a pattern of life which necessitates vast outlays on equipment purely to meet peak loads. There are several methods of dealing with this situation, but they all involve upsetting existing arrangements. Rather than do this we prefer to let load factors in such important industries as gas and public transport deteriorate further. Thus if productivity and growth were our criteria, we should be charging people who travel at the peak period (by and large the commuters) more than those who travel at other times, but this would be contrary to pre-war policy and is therefore unacceptable. We could stagger hours. This, admittedly, would be slightly inconvenient for some people, particularly those who do business together and like therefore to keep the same office hours. But why, for example, do shops and offices in central London have to keep the same hours? If office hours all began and ended, say, half an hour earlier and shops all opened and closed half an hour later, this would not only spread the load on the transport system; it would also provide office workers with the change of shopping after work. At the moment they all have to do it in the lunch hour, thereby creating a further peak-load problem for the stores.
The same applies to our holiday arrangements. Because so many of us have to take our holidays at the same time, more hotels are needs than would be necessary with a more even spread, and the increasing pressure to build coast roads that would operate far below capacity for 99 per cent of the year. Here, too, traditional practice for schools, bank holidays, and so on is given precedence over growth. If the new Member for Orpington wants to do service to the cause of growth, he could start by getting his illustrious forebear’s Bank Holiday Act repealed instead of complaining about overcrowding on his constituents’ train service.
Then again we could work more shifts. This could have a most beneficial effect on growth, both in manufacturing industry itself and in the public utilities. The difference in the electricity industry’s load factor between those areas which contain a lot of industry working shifts and those areas which have not this advantage can be dramatic. We are currently investing over £300,000,000 annually in an electricity system which lies idle for over half the year. The fact that we have one of the worst load factors in the world is not wholly due to our aversion to shifts, but this is certainly one of the reasons.
The usual argument against those who advocate more shift working is to ask where the extra labour is coming from in a more or less fully employed economy. This question is itself rather revealing, suggesting as it does that it is inconceivable that the more efficient firms should draw workers away from the less efficient. And here of course we are up against what is probably the chief cause of wasted investment and low productivity in industry today. Work-sharing agreements on both sides of industry — the employers such as those in heavy engineering share out the orders, their employees share out the overtime — ensure that far more capacity is kept in being and productivity grows much less fast than it could if output were concentrated on the most efficient. The overmanning of machines and work norms well below what could be produced are the workers’ equivalent to the many ways which managements have found of getting round the Restrictive Practices Act. And resale price maintenance allows retailers to limit the competition and keep in being far more shops than would be justified if growth were the yardstick.
But it is no good blaming industry for preferring co-operation to competition; it is only reflecting the values of the society in which it operates. To a man we believe in the by no means contemptible doctrine of “Buggins’s turn next”. We do not care to admit it: the press does not hesitate to lecture people on the virtues of competition while throwing up its hands in horror at the sight of dog eating dog. The advertising world, which one might have regarded as the embodiment of competition, is no less appalled at the slightest suggestion of “knocking” copy. The Stock Exchange, which also might be though likely to uphold the virtues of competitive enterprise, regards advertising by individual stockbrokers are the worst possible form, and academics may favour competition for everyone else but are damned if they are going to recognise the facts of the market place and pay those of their scientific colleagues who may be in short supply more than the rest of them are getting. In general we have no difficulty in reconciling our belief in competition with our condemnation of keeping up with the Joneses.
This ambivalent attitude to competition is typical of our whole attitude to growth. We see nothing odd in applauding growth and in the same breath denigrating the affluent society, salesmanship, profits, and all the other appurtenances of growth. The truth is that as a nation, whatever we may say, we are just not growth-minded. It is notorious that wherever one finds a dynamic expanding firm in this country one can be almost sure that a so-called outsider is running it — an American, a Jew, or just occasionally a Scotsman. And it is not only as producers that we are suspicious of economic change; we are no less conservative in our role of consumers and ordinary citizens. When, incidentally, will the authorities realise that the only way to make British Railways solvent is to close the whole system down and reopen it as an ancient monument?
In many ways this is rather endearing and civilised, and there is much to be said against a faster rate of growth; though one might be more sympathetic to those who sought to obstruct growth if they themselves were a little more ready to do without cars and telephones and hot and cold running water. A strong case can also be made for faster growth. What is indefensible is the sort of double talk and wishful thinking in which we are indulging at present. It really is a delusion to think that yet another committee of top-level businessmen and trade unionists, or even a fillip to demand, can materially influence our rate of growth.
Contrary to another popular misconception, our rate of growth in the supposedly stagnant nineteen-fifties has not been low by historical standards or by comparison with the rate of growth in countries such as Scandinavia, which started the decade from roughly comparable positions. Now, with the arears of the last war almost everywhere made good and the United States no longer prepared to buoy up world trade by running down its reserves, we may be hard put to it even to maintain the recent growth rate. To do significantly better calls for little short of a revolution in our attitudes, customs, values, and institutions. We would have to create a much more ruthless, competitive, materialistic society. We are fully entitled to say we do not want such a society. We are not entitled to demand faster growth and expect business and indeed life, to continue as usual. As Mr Foster would say, let us “only connect”.
Sir, — Perhaps I might be allowed to comment on the two letters on this subject in The Listener of May 24. One of them has taken a facetious point literally, while the other seems to have missed the main point altogether.
I must apologise to Mr Bonwit and anyone else who took seriously my remark about turning British Railways into still more of an ancient monument. I see now that this is too sensitive a matter for risqué jokes. And yet one sometimes wonders what goes on in Dr Beeching’s mind as he contemplates the success of the Bluebell line and the ecstasy which greets each new addition to the railway museums. And what must he have made of the story in last Thursday’s Guardian solemnly entitled, “Industrial monuments in danger of destruction”?
Mr Nath is a more serious case. He ducks the questions I asked in order to elucidate the issues and then accuses me of distorting the problem with half-truths.
Let us assume for purposes of argument that it is desirable to co-ordinate the investment plans of individual firms in an industry by means of a central agency. What then? Will the capacity laid down correspond exactly to the expected demand for the industry’s product? Will each firm install enough capacity to preserve its present market share? Will any allowance be made for new entrants? How will this share of imports be calculated, depending as it does so largely on the future level of tariffs? If only the planners would stop talking in slogans and get down to answering questions such as these, the discussion might became a little less unreal. But this of course would give the game away.
Mr Nath’s second argument for planning — that centralised decision-taking is more democratic than the decisions of millions of consumers in the market place — provides the cause with much of its emotional appeal. This is too big a question to go into properly here. Suffice to say that this argument implies a touching belief in the beneficence of government (in this country usually Conservative); a romantic idea of the way decisions are taken in practice in Whitehall; a defeatist attitude to the possibility of using taxes and subsidies to ensure that prices reflect social costs and benefits; and an acceptance of a degree of inequality which gives some consumers far more votes in the market place than others. Not subscribing to any of these tenets, I remain, as far as centralised economic planning is concerned, Yours sceptically,
If Mr Enoch Powell sometimes tends to exaggerate, this is hardly surprising. It is not easy to make oneself heard above the babel of establishment voices. Thus he may have been going a bit far when he remarked that “the safest posture for an industry confronted by Socialism would be not to have an organisation or spokesmen at all”. That representative bodies should put their members’ case to the government is, after all, an essential part of democracy. What is true, however, is that, in doing this, industry’s present spokesmen seem to be in serious danger of betraying their members’ interests.
All representative bodies are wont to argue that what is good for their members is ipso facto good for the nation. The NFU, for example, would have us believe that higher agricultural subsidies are in the national interest just as the coal industry likes to suggest that it is clinging to 200 million tons of coal a year out of concern for the public weal. This is all part of the game and no harm is done provided Ministers recognise it for the special pleading it is.
Recently, however, we have been witnessing a quite ludicrous reversal of roles and arguments. The leaders of British industry have allowed themselves to be persuaded that what Mr George Brown imagines to be in the public interest is necessarily in the interest of their members. They are thus found advocating policies for which their members appear to have no enthusiasm, which many of them regard as unworkable and which are against their long-term interests.
A good illustration of all this was the recent Gallery programme on incomes policy in which Mr Brown took part. It not only demonstrated that rank and file employers and employees were at one in regarding an incomes policy as laughable; Mr Brown’s performance can have done nothing to allay their doubts. Although his typical reaction to questions which he ought to have resolved long before setting up any machinery, was to tell his interrogators not to rush their fences, every now and then we got a real insight into the way his mind is working. When, for instance, he was asked whether an incomes policy would not hold back the expanding firms in need of labour, he delivered himself of the view that:
if you’re going to arrange things so that a few can win, then of course you’re going to make the whole of the rest of it pretty well anarchical. Now I don’t think we can have this thing just for the one or two who might win in that situation. I prefer order in society.
But this “anarchy” is precisely what the competitive economy is all about. It is pure humbug for our employers to denounce steel nationalisation because the industry would lose its competitive edge by the change, while subscribing to Mr Brown’s doctrines.
And it is not just support for an incomes policy which is quite incompatible with the raison d’être of employers’ organisations. The whole infatuation with Neddy is equally contradictory. The country’s industry is currently forecasting for the benefit of Neddy exactly what individual firms expect to be doing every year from now until 1970 — producing, consuming, employing, investing, exporting, importing, the lot. The industrialists filling up these forms, knowing as they do how difficult it is to forecast their requirements even a year hence, must realise how absurd an exercise this is. And yet not one of their leaders has had the temerity to say so. They have not even seemed at all concerned about the use which is to be made of such information.
Either nothing will ever come of this mountain of statistical soothsayings in which case their collecting involves an appalling misuse of resources or they will be used to ensure conformity with the National Plan. Where they appear inconsistent the culprits will be whipped into line.
Take labour requirements, for instance. It now appears to be received doctrine in Whitehall that companies cannot be trusted to do their own planning because they work on the assumption that they will be able to recruit all the extra labour they need. As this may not in practice be possible, something, we understand, has to be done about it. But what?
The answer presumably is that firms in a particular industry or area will be asked to modify their plans to ensure that their demands do not outrun the likely labour supply. Since it is almost inconceivable that any company will be forbidden from expanding altogether, the probably outcome is that each will be allowed to proceed with a scaled-down plan. In other words each company will expand by uneconomic increments. We saw what this can lead to with the ill-advised decision to divide the last steel strip mill in two. And this example shows that it is not only a hypothetical shortage of labour which may cause central planners to encourage stunted development — it could be an imaginary shortage of raw materials, investment goods or even of demand for the finished article.
We will of course be told that normally, so far from wanting to curb development, it is Neddy’s aim to accelerate it. In other words the National Plan will be more not less ambitious than the sum of individual plans would have been. But do our industrial leaders want to see their members browbeaten into investing more than they think wise? Or are they reckoning on a quid pro quo in each case with private industry, too, having demand for its product underwritten by a grateful government?
This whole approach is patently inimical to the economic philosophy which these spokesmen are supposed to espouse. Once it is accepted that the gentlemen in Whitehall can forecast best, there is no real case for preserving a lot of autonomous units (in the form of private firms). Why waste time haggling with recalcitrant businessmen about their particular part in the Plan? Far simpler to let the planners execute the Plan themselves with the aid of state-owned enterprises.
If this is what “order in society” ultimately comes down to, why have our employers’ leaders been so slow in the uptake? A cynic might observe that the pass has been sold because we have too many captains of industry wondering where their next title is coming from. A slightly more charitable explanation is that many of them find competition a good deal more attractive in theory than practice. Having been harried for years past over their market sharing activities, it is rather a relief to find that these practices have suddenly become almost respectable.
But probably at the root of it is the familiar combination of good intentions and muddled thinking going back over a number of years and reinforced recently by the desire both the give Mr Brown the benefit of the doubt and to avoid incurring the odium of having frustrated his wishes. Perhaps with the formation of the BCI a little more intellectual rigour and detachment will be forthcoming. They are certainly overdue.
The National Plan for the next five years, which is to “revitalise and modernise the whole economy,” is now being worked out. The Department of Economic Affairs is using the little Neddies, in their absence the trade associations, and the nationalised industries to ascertain the likely output and requirements of individual industries up to 1970. Through the appropriate body, each major firm is being asked to indicate its expected output, manpower needs, consumption of materials and fuel and investment (broken down by regions). All this information is to be fed into the National Plan, which is expected to be published in July.
For an operation that is supposed to release the country’s energies and generate a sense of national purpose, the National Plan is being conducted in a surprisingly hole and corner fashion. The questionnaires that industry is being asked to answer are being given a restricted grading and the usual press briefings have been absent. The aim seems to be not to allow the Plan to become the subject of controversy and thus alarm the so far pliant British businessman.
In itself there is little wrong with asking firms to forecast their needs. All companies have to take a view of the future. The trouble starts when it comes to collating these projections. For, although the firms filling in these forms have been told to work on two common assumptions laid down by the DEA — an increase of 1.5 per cent in the labour force and an overall growth rate of 25 per cent between now and 1970 — these are secondary considerations as far as most companies are concerned. Even if they accepted these premises and knew what weight to attach to them (knew the income elasticity of demand for their products) they would have little bearing on their forecasts. Far more important is the likely appeal of their products vis-à-vis those of their competitors, which depends on such intangibles as relative prices and qualities, rival sales efforts, changes in consumer tastes and, most imponderable of all, the impact of new products. No two firms in the same industry will make the same assumptions about such matters. The returns they submit will thus be mutually contradictory (even assuming that each does its honest best to estimate its future). In particular there is a strong possibility that each firm will count on expanding its own share of the market.
This point can be readily illustrated by the newspaper industry. The chairman of the Newspaper Proprietors’ Association happens to be Cecil King who has already gone on record with his prediction for 1970. Mr King believes there will only be three national dailies in that year. Now, however much Mr King may be exaggerating, most people would probably agree that some existing newspapers will be out of business by then. But is it likely that any of the other six dailies (even if they knew which they were) will submit nil returns? Even if they accepted in their heart of hearts that their demise was likely, they could hardly be expected to announce the fact in this way. The result is that the figures put forward by the NPA will not only not represent the view of their chairman; they will probably be contrary to what every individual member believes to be the collective outcome.
Or take another industry in which Mr King also happens to be interested — wallpaper. Paul Chambers has announced ICI’s intention of winning a considerably larger share of the market than his current 10 per cent. There is no reason for thinking the Wall Paper Manufacturers, whether under their own auspices or Mr King’s, intend giving up their present dominating position. The sum total of forecast shares will thus almost certainly exceed 100 per cent.
The statistics that are being put together by trade associations and little Neddies for onward transmission to the DEA will therefore be almost valueless, a point which the department does not seem to have grasped. When the latter get hold of the figures, they will be set against other equally dubious figures emanating from supplier and customer industries, and against the model for the economy as a whole conjured up by the DEA. A process of “mutual adjustment” will then take place. What this euphemism means is clear from a remark in the directive accompanying the questionnaire, namely that the information is needed “in order to give some guide to the amount of revision of firms’ existing plans which will be required to bring them into line with the National Plan.”
To describe this process of revision and adjustment as the purblind leading the half blind would only be a slight exaggeration. For there is no more reason for thinking the DEA’s macro-economic model will be any better guide to the future than the predictions of individual industries. If, as most economists will admit, we have but the haziest idea of where the economy will be at the end of 1965, what possible reason is there for putting our faith in the DEA’s estimates for 1970? And yet, on the strength of these estimates, industries are going to be solemnly asked to adjust plans that would often never have matured in any case. Take imports, for instance. Undeterred by the hopelessly inaccurate import forecasts in the original Neddy report, the DEA is once again working out what rise in imports can be tolerated. If, as seems possible, the sum total of import forecasts from individual industries exceeds the DEA forecast, industry will be called on to cut back plans for bringing in imports which in many cases would never have entered the country anyhow.
Vague hopes, not thought
One’s inclination is to treat this lightheartedly, but if the Plan is to be taken seriously, it is only right and proper to ask how industry is going to be induced to revise its plans, what sanctions are to be brought to bear. There is no evidence of any thought having been given to this question. Instead vague hopes are held out here as elsewhere (in the prices and incomes field) that everyone will cooperate in the national interest.
Given that we are left to speculate on the inducements, an obvious possibility is that the government will encourage firms to get together to ensure that the planned capacity of industries is more closely tailored to what is thought to be the likely demand. The little Neddies seem to be on the verge of this already.
Now industry may not be all that averse to such an arrangement. To be able to carve up their markets on the almost inevitable basis of preserving existing shares and keeping out newcomers with the full blessing of the government is a consummation all too devoutly wished by many industrialists. It is, however, quite inimical to competition and any such encouragement would make a mockery of the government’s declared intention to act against restrictive practices.
Another way in which it might be feasible to influence industry and make parts at any rate of the Plan come true would be if some of the demand figures could be underwritten, either by means of government purchases or by taxation and tariff policy designed to ensure that consumption of a particular product was kept in line with the forecast. So far government departments appear to have been distinctly chary of committing themselves in any such way. Those industries, who were ingenuous (or disingenuous?) enough to expect spending departments to help fill in the questionnaire — for example, appear to have received pretty dusty answers. And who can blame Whitehall? It may well be under different management by then and anyway, like other customers, its tastes change and requirements alter, particularly, as we know only too well, in the light of changing technologies.
But while little practical help in forecasting, let alone in underwriting, demand has hitherto been offered in Whitehall, such a guarantee would certainly be possible. And here too it is by no means clear that industry would reject the idea. The National Coal Board for one would welcome such a departure. But while it might make it easier for the forecasters to predict demand for particular products, it would do nothing to facilitate the control of the economy generally. The very reverse. The more sacred cows of this kind to which the government is beholden, the greater will be the burden of adjustment falling on the rest of the economy. And that adjustment will be called for from time to time is absolutely inevitable, if only because the government has no jurisdiction over events outside the country.
Not only is the future inherently uncertain; it is not even clear that collective forecasting and planning helps us to anticipate it better. At any rate the record of such planning in recent years gives us no grounds for optimism, and it is not just bad luck. There are several reasons which make collective crystal-gazing so highly accident prone.
One is that so many such forecasts fall into the trap of confusing the desirable with the probable. Wherever so-called responsible bodies are gathered together, the wish becomes father to the thought and all sorts of political and other non-economic considerations are allowed to cloud the issue. A prize example of this sort of fallacy was the late lamented 4 per cent. A figure which was never more than a distant hope was treated as an accomplished fact with the result that the budgetary position has been prejudiced for years ahead.
Another common source of error in collective planning is its tendency to plump for the respectable, middle of the road prediction. Representative bodies cannot be caught out taking offbeat views. Examples of where the majority view has misled us are legion, but one of the most unfortunate victims has been the NCB. Urged by government committees and conventional opinion of all kinds to plan to meet an annual demand of 240 million tons, it now finds itself struggling to keep demand at 200 million.
A third cause of failure in central forecasting is the feedback effect which such forecasts are liable to exert. Since they are usually well-publicised, they tend to be self-defeating, however accurate they might have been if kept in camera. A classic case here was the view widely held and promulgated 15 years ago that primary products were going to be in increasingly short supply. The upshot inevitably was a massive increase in investment in primary production and a worldwide commodity surplus from which the primary producing countries are still suffering.
Like religious devotees
Talking to people who regard the case for a National Plan as self-evident is an experience very like talking to other religious devotees. They assume that all morality/economic growth would come to an end without a higher purpose/overall plan. This extraordinary readiness to swallow the case for the Plan has various explanations but perhaps the chief one is the semantic confusion which surrounds the word.
As the dictionary demonstrates, the word “plan” has several meanings but two sharply contrasting definitions stand out. On the one hand it means “a scheme of action”; on the other, “a representation or map”.
Planning in the first sense of the word is obviously vital for all executive agencies, in industry and elsewhere. They have to be continuously devising and implementing schemes of action, and correcting them when they fail to come up to forecast — all this invariably at the expense of the schemes of action of others.
This species of planning is rarely open to the government, which is not as such an executive agency. Government planning is much more akin to map-making, to drawing up charts that people may or may not follow. This kind of planning at second hand is essentially a matter of reconciling the “schemes of action” of others, which of course is why coordination and integration are never far from the lips of government planners and why the virtue they rate most highly is consistency. (It is in the interests of consistency that firms filling in the questionnaire are urged to assume that “overseas markets are in an average state” in 1970. To the average industrialist such remarks look suspiciously like average nonsense.)
Just how much value there is in this sort of representational planning is clearly debatable. Give the damage that too much reconciliation may do to the competitive drives of businessmen and given the government’s very limited powers of clairvoyance, I would argue that its value is nil. It is certainly not axiomatic, as the directive accompanying the questionnaire implies, that “there is an urgent need for an agreed Plan in which government and industry can work together”.
The National Plan contains few major surprises. The central assumption of 25 per cent growth remains, thus implying a still faster acceleration over the later part of the period 1964-70 than had been originally envisaged. A more than proportionate increase in exports and public expenditure and a less than proportionate increase (21 per cent) in private consumption had already been intimated. And it is, of course, anticipated that the balance of payments will be well and truly in the black in 1970.
But the nagging doubts that have been felt all along about this “frame of reference” or “guide to action” also remain. In particular, just what precisely is its status? Is all this figuring supposed to enumerate what we can achieve by 1970, or what we will achieve or what we should achieve? At different moments the Plan appears to be subscribing to all three interpretations, but the three are really quite incompatible.
What we can do is essentially a matter of capacity. This, as any economist knows, is a highly elastic term, but that we could grow at an average rate of 3.8 per cent per annum over the six years in question goes almost without saying. If, for example, demand could be channelled to where the unemployed resources of men and machinery exist, if we could change the attitudes of men and managements, if the international environment were helpful, we certainly could reach the magic figure. But then “if ifs and ans.” …
What, therefore, of the Plan seen as a comprehensive, forecast of the economy in 1970, a sort of glorified market research operation? In many places the Plan purports to represent what will happen, but appearances can be deceptive. Thus “the aggregate of industries” final estimates combined with estimates for the Central and Local Government sectors gave a total increase in output between 1964 and 1970 of 25 per cent. But this was not always so, we gather. “The original estimate by industry gave a significantly lower increase in total output and showed a different pattern from that finally put forward.”
The mind boggles at the arm-twisting which must have gone on behind the scenes and at the end of it there were apparently three recalcitrant industries which refused to adjust their forecasts for the benefit of the planners. This might not have mattered were they three tom tiddlers. Since they happen to be the motor industry, the mechanical and electrical engineering industries and the fuel and power industries the so-called discrepancy is perhaps unfortunate.
No less suspect and still more crucial are the estimates of foreign trade in 1970. Between 1954 and 1964 the volume of imports rose by an average of 5 per cent a year. Between 1964 and 1970 it is scheduled to rise 4 per cent annually despite the postulated rise in the rate of growth. Exports by contrast are supposed to rise 5.25 per cent a year in volume compared with an increase of 3 per cent a year over the previous decade. These are highly desirable changes of trend but can hardly be called forecasts.
Indeed, even the planners from time to time have to give up the pretence that their forecasts deserve to be taken at their face value. Even that already celebrated and wholly fatuous forecast of the “manpower gap” in 1970 (obviously if you run the economy flat out you will get a shortage of labour) is admitted to be of “no great significance” … “given the difficulties of forecasting supply and demand for labour for five years ahead.”
The National Plan is therefore in essence neither a serious measure of potential nor a genuine forecast bf future developments but a political manifesto, a blueprint of what the Government feels ought to be done. Now there is nothing necessarily discreditable about a political manifesto and this one contains many laudable objectives, but it is humbug to pretend that they are not primarily political. As the Plan itself puts it, “a choice has had to be made between many desirable aims.”
Thus many people would dispute the need for public expenditure to absorb an increasing share of the national product, particularly if they realised that a higher share in constant prices is a much higher share in current prices owing to the known propensity of public sector prices to rise faster than average. Others would doubt whether the greater agricultural autarchy visualised by the Plan (albeit in somewhat vague terms) was desirable, implying, as it almost inevitably does, higher relative food prices or greater subsidies. Others again would even question the aim of 25 per cent. If it involves giving up the prospect of longer holidays (Mr Brown has already denounced this trend as a threat to his cherished target) or allowing in more immigrants (the recent restrictions have also caused serious heart-searching in the DEA) many would prefer, rightly or wrongly, to ditch the target.
The need for clarity about the status of the Plan is not just a question of intellectual honesty or semantic purity. We have already seen in the lamentable episode of 4 per cent the harm that can result from confusing the likely with the hoped-for. Our unhappy economic experience of the last year was largely due to the chicken-counting that preceded it. There is, alas, little evidence that the authors of the National Plan have really learned this lesson. As they see it, the success of the Plan depends to a large extent on people believing it will be successful.
The other danger of this sort of Plan may seem paradoxical in view of the brave words of its foreword written by Mr 1970 himself:
To make the Plan work requires above all an acceptance of change. For the manufacturer, changes in what he makes, what he sells, and where he sells it; for the worker, changes in what he does, where he does it, and how he does it, and for all of us a different approach to prices and incomes. Change will often mean disturbance, and we must take care of the effect it has on individuals. But without change there c6n be no opportunities and no rewards.
So far from accelerating change, the Plan may actually inhibit it.
This is not just a question of the tacit encouragement the Little Neddies give to market-sharing and other devices for preserving the status quo. Any figure for 1970 (other than those in the industrial annexes) is liable to acquire a certain aura. When therefore the inevitably unforeseen eventuality occurs and it becomes desirable to revise such a figure, it will be that much less easy to do so. We saw how difficult it was to wean the coal industry from its attachment to 200 million tons (all credit, by the way, to the Plan for its much greater realism in this particular respect) and we saw the process in reverse with the quite unpredicted breakthrough of the gas industry. Had a five-year plan been launched in 1955 or even 1960 the gas industry’s prospects would have been underrated and the underestimate would have made it that much harder for them to have got the necessary capital out of the Government to respond to their new opportunities. Who knows indeed that the same error is not being made again?
The planners deny that any such restrictionism is intended and maintain that the Plan is highly flexible — what they call a rolling plan. But they cannot have it both ways. If the Plan is likely to be continually amended, this will seriously detract from its supposed therapeutic value as far as expectations are concerned. For why should any industrialist invest on the basis of the present estimate of demand in 1970, if it is liable to be drastically reduced even before his new plant comes into operation?
If the Plan was the price we had to pay for the many necessary reforms mentioned in it — the proposals for retraining, for reconstructing our ports, reducing defence expenditure and other items in the somewhat comically-named check-list — I suppose we would have to bear with all this intellectual skulduggery. But have we really reached such a pass that we are no longer capable of taking any action in this country without reference to a more or less illusory picture of the future?
This craving for certainty is no doubt something deeply human. Psychologists would see it as having a lot to do with the belief in an after-life, and the popular papers have long ago learnt to exploit it with their horoscopes. Is it really necessary for the Government to indulge us further and do so moreover in a thoroughly ambiguous manner? It is as if newspaper proprietors, not content with exploiting their readers’ frailties, actually told their Old Moores what they had to say.
Much of the discussion on the National Plan has focussed on the particulars of its projections rather than on the fundamental nature of the planning exercise. Some pertinent observations on this theme were recently made at Cambridge by Mr John Brunner in an address to the Marshall Society that merits a wider audience; a condensed version is presented below.
What is meant by planning? In his own brief foreword to the National Plan Mr Brown describes it variously as a “statement of Government policy”, a “guide to action”, and a “picture of the potential growth of the economy four or five years ahead”. Elsewhere it is described as “the basis for greater economic growth”, a “frame of reference” and a plan to “help private industry gauge the future demand for its products”. There is evidence here of some intellectual confusion, notably as to whether the plan is predictive or prescriptive.
All governments are liable to find themselves explaining their policies one way to one set of people and another to another. But a further reason for this ambivalence is the almost religious belief that latter-day planners have in the power of faith. If only people would believe something was likely, this in itself, it is argued, would go a long way to ensuring its fulfilment. The salvation by faith school took such a beating over Neddy’s earlier 4 per cent target, that the nostrum is somewhat played down in the plan itself. It remains, however, a central part of its philosophy and is symbolised in the figure of 25 per cent as the target.
But while the politicians may have their special reasons for ambiguity, what of those academics who use the same think-of-a-number techniques? In many ways these academic forecasters are much more clearheaded about the status of their figuring. For example the Cambridge Department of Applied Economics in its Exploring 1970 states quite explicitly that its results:
are neither forecasts of what we expect to happen nor indications of what we think would be ideal. They represent our best estimates of the consequences of assumptions which would yield an improvement on the status quo but might well fall short of others which would lead to even better results.
How this fits in with the quotation from Alfred Marshall cited in Professor Stone’s foreword, is obscure. As the great man said: “A chief purpose of every human action should be to suggest the probably outcome of present tendencies”, but this is a very different operation from Exploring 1970 on the assumption that present tendencies will be significantly altered.
The National Institute’s version, The British Economy in 1975, also discusses its raison d’être in some detail. Thus:
Lessons of rather differing kinds may be drawn from the projections in the different parts of the study. The special studies of particular sectors are intended to emphasise the importance of long-term policy decisions and to give some guidance about possible lines of policy … The projections for consumption may be regarded as predictions … The projections for investment in industry and trade are … rather arbitrary … The projections for foreign trade are neither forecasts nor statements of policy … They are statistical illustrations.
But while the nuances of this hybrid exercise are recognised, there is more than a suggestion in both studies that given the end, the means by which it is to be reached can be established scientifically. Just how scientific a process this is can be seen by a comparison of the balance-of-payments projections in the three studies. All three agree that by the end of the period under review, we need a fair size surplus. How is this to be brought about? One obvious consideration is the growth of world trade in manufactures over the period. The National Plan assumes it will be much the same as in recent years; the National Institute sees it slowing down to less than half the rate of the previous decade; Exploring 1970 does not seem to hold any view of the matter. As to Britain’s share of this international trade, the plan assumes it will continue to fall slightly; the National Institute trusts it will rise; Exploring 1970 expresses no opinion. The DEA assumes the volume of British exports will rise by an average of 5.5% a year between 1965 and 1970. The Cambridge DAE on the other hand expects it to increase 4.1% per annum from 1960 to 1970 and by considerably less in the later years of the period, while the National Institute plumps for a figure of 3.7% a year from 1960 to 1970 with the rate of increase tending to go up. As for the relative value of these exports, the National Plan expects a bonus from improved terms of trade of £180 millions by 1970 compared with 1964; the National Institute expects a £675 millions gain by 1975 over 1960 and the Cambridge economists credit themselves with nothing from this source.
[The three studies referred to are The National Plan (HM Stationery Office, 30s), The British Economy in 1975, by W. Beckerman and Associates, for the National Institute of Economic and Social Research (Cambridge University Press, 80s) and Exploring 1970, Dept of Applied Economics, Cambridge University (Chapman and Hall, 21s). The long-term projections in these studies have been compared in the National Institute Economic Review, November 1965.]
Much the same disparity of view is evident in respect of the other items in the three balance-of-payments forecasts. This disparity cannot be explained away by differences in the periods covered by the three. Nor can it be attributed to the peculiar difficulty of forecasting the make up of the foreign balance. The National Institute study shows that deriving industrial outputs from a predetermined pattern of final demand or industrial investment from industrial output calls for assumptions about technical co-efficients hardly any less heroic. As they so rightly say, “the difficulty is not of finding a method which can produce a satisfying proliferation of figures but of finding too many methods, each of which gives very different figures”.
Economic forecasting is an inevitably subjective procedure once it is admitted as all three sets of planners admit, that the past is never more than a limited guide to the future. Moreover in a period in which the rate of change is supposed to speed up, the past becomes still less relevant. Judgement therefore is indispensable to forecasting and with it the ever-present danger of bias.
This bias, as psychologists know, can take many forms. Temperamental optimism or pessimism, excessive dependence on the fashion of the moment or equally an excessive scepticism about new developments, a tendency to take certain variables more seriously than others because they are more easily measured and lend themselves better to econometric treatment, a very human wish to be proved right which makes one cling to any evidence that things are working out as originally anticipated and inclines one to discount any evidence to the contrary, these are all forms of prejudice with which the forecaster has to wrestle. Having to tailor one’s forecasts to fit in with some predetermined pattern of final demand is merely an additional occupational hazard.
There is no great difficulty about manipulating forecasts to achieve some pre-selected target. With the aid of the computer plausible and coherent models can be set up in such a way as to defy disproof ex ante. Where one is dealing with the unprovable almost anything goes or can be made to go, provided always the end result is consistent. Economic forecasters sometimes appear to assume that because a model of the future satisfies the test of consistency, it is ipso facto accurate and objective. Generally, one gets the impression that consistency now runs a good second to godliness (if it hasn’t already overtaken it) in the modern economist’s scale of values. But so far from safeguarding us against error, the quest for consistency may actually provoke it, where it causes, say, a figure of demand that happened to be accurate to be adjusted to conform with a figure for supply that was not.
Analogy with industry
Another very popular misperception is the assumption that what is good for ICI is good for Britain. Paradoxically enough this fallacy seems to be held most fervently by those who were least ready to accept Charles Wilson’s claim that what was good for General Motors was good for the USA. The context is admittedly somewhat different. It is argued that because ICI and other large public companies engage in a form of long-term planning, the Government should therefore do the same for the economy as a whole. This analogy breaks down at several points.
That large firms do engage in long-term planning is undeniable. It is also true that the character and object of this planning may be as ambiguous as that currently being undertaken by Whitehall. Often it originated in the efforts of accountants to achieve greater budgetary control over spending departments. In other cases it has evolved from the needs of production planners who have a natural interest in the short-term demand for their product if only to ensure that the necessary components are to hand. Other plans in industry arose from the need to allocate capital expenditure which called for some long-term view of the financial resources available and of the likely trend of sales and profits. This in turn demanded market research. Only comparatively recently have the business economists moved in with their own particular concepts of planning — linear programming, regression analysis, and the like.
But whatever its antecedents, modern industrial planning is characterised by one function above all others. It is the management tool par excellence. Indeed it is about all that enables the board of large multi-plant concern to keep a grip on the organisation, and at the same time respond to the suggestions and promptings of the man on the spot, be the spot the shop floor, the research laboratory, or the market place. Industrial planning is synonymous with control and can be seen as a feedback process without which managers and managed would have little opportunity of influencing each other systematically. A plan may be fallible and the preparation of it gives rise to all manner of problems, not least because it is seen as a means of control. If, for example, figures written into a firm’s plan come to be regarded as the yardstick of performance and can be held against those who provided them in the first place, there will be a natural tendency to exaggerate requirements and underestimate likely achievement. But without a plan large-scale enterprise becomes more or less unmanageable.
It is tempting to assume that because a Government also has a number of regulatory functions, it too should have a similar sort of plan. The parallel, however, is a false one, at least in an economy anything like our own. It seems to rest on a misplaced notion of authority in a democratic society. The relationship of the Government to the autonomous units which constitute private industry, and even to the nationalised industries with the considerable independence they have come to enjoy, is quite different from the hierarchical one existing within a business organisation.
The word “hierarchical” is not intended to imply that boards of directors ride roughshod over the views of their subordinates. They could not even if they wished, and the plan to which they finally commit their organisations is the result of much compromise, both as between the centre and the periphery and between the conflicting interests of the various departments — sales, production, etc. But once a plan is drawn up the company is unreservedly committed to it. It may not be fully achieved for reasons beyond the firm’s control, e.g. the general state of the market, tax changes or the behaviour of competitors, but failures due to the shortcomings of their own staff will not be easily tolerated by higher management.
The Government’s plan is something quite different and more vicarious. Except in the case of its own spending departments, it has no direct authority over operational units. Moreover, most operational units in private industry do not even have direct contact with the Government. The Government’s wishes have to be mediated through the agency of trade associations and other representative bodies. Thus even if by dint of persuasion and the threat of extramural sanctions the Government could induce such a body to heed its wishes, the latter has no ultimate authority over its members. Moreover these members are not only autonomous; they also have to compete with each other. If therefore they choose voluntarily to co-operate in any Government plan, this co-operation will stop short at measures likely to disturb their competitive relationship.
The difference between the Government’s National Plan and the plan of an industrial company is, broadly speaking, the difference between indicative and imperative planning. The former is a declaration of intent which can only be implemented permissively and at second hand. The Government can obviously take all sorts of measures to influence the general state of the economy but its scope for intervention at first hand is limited. Moreover, the difference is not only one of ownership and structure; it is also one of purpose. The Government cannot commit itself unreservedly to one particular objective. Even 25 per cent growth is only one of the present Government’s objectives. Already it has been jeopardised in the important matter of manpower by coming into conflict with another obligation of Government — the preservation of social harmony (whether the Government was right to take the action it did over immigration is irrelevant in this context).
By contrast the plans of industry have a relatively clear and stable purpose — to maximise long-term profits. It is easy to provide examples of tycoons who are either unconscious of pursuing any such aim or are too benighted to know how to; we all know of the crudity with which many businesses calculate the future rate of return. But the fact that not every industrialist has heard of discounted cash flow or that many of them waste their company’s substance on expenditure that makes little obvious contribution to profits does not gainsay the general proposition that industrial planning is designed to maximise long-term profits and that the latter provide a widely accepted measure of achievement. No such measure exists for the Government planner. He may think that growth is, but even among economic priorities it is now taking second place to a sound balance of payments. In the absence of the corporate state, therefore, any resemblance between the blueprints of Government and plans of industry is more apparent than real.
Is planning rational?
Another widespread source of confusion is the assumption that this exercise in wish fulfilment, whose implementation is largely discretionary, represents a “rational” approach to economic management. Behind this assumption lies the itch to anticipate the future that is such a feature of our times. Sir Robert Shone described it thus in his recent lecture to the Royal Economic Society:
Man likes to feel in some way that he is determining his own destiny. It is not psychologically acceptable simply to say to the individual, “Struggle for your own ends and this in some unspecified way and to some unspecified extent will work out all right for your own good and for the good of the community of which you are part.”
But one can sympathise with motives without necessarily accepting the conclusions.
Even if the plan amounted to no more than a genuine attempt at a co-ordinated forecast, it by no means follows that it would be more rational than what might be called atomistic forecasting. As mentioned earlier, forecasting is peculiarly susceptible to the zeitgeist. An agreed forecast therefore will represent little more than the numerical expression of the zeitgeist at a particular moment in time. So far from being the resultant of random errors it will therefore be a statistically biased prediction.
If in these circumstances everyone then acts on it, the inevitable errors may be harder to remedy than if no such centralised forecast existed. Where forecasting is decentralised there will, of course, also be errors, but since these errors are much less likely to be consistent, they are for that reason alone more easily corrected. Moreover this theoretical possibility is supported by the political facts of life. The centralised forecast not only makes for inflexibility in the sense that it compounds errors; by attaching some more or less explicit official approval to the forecast it makes it harder to get errors recognised. This inflexibility is further aggravated by the inevitable tendency of all collective forecasters to match demand and capacity as nearly as possible. This after all is what they mean by coherence. The result, of course, is that any excess demand can only be met with great difficulty.
But these are not the only reasons for doubting whether the publication of coherent forecasts is really such a rational procedure. Let us assume that contrary to all our experience the forecast might have been accurate. The mere fact of its publication will frequently bring about its undoing. A well-known example here was the prediction so confidently made after the last war of a serious deterioration in Britain’s terms of trade. That these forebodings never came to pass was in part at least because primary producers took them to heart. Plantations were planted, mines were sunk and the terms of trade moved steadily in our favour.
The self-defeating character of published economic forecasts can also afflict more formalised predictions such as those of the Board of Trade’s regular investment intentions survey. If firms learn that capital expenditure is due to be cut back x per cent next year, they may easily decide to reduce their own capital commitments more or increase them less than they had originally intended. The result may be that the actual fall turns out nearer 2x per cent.
There is, however, a still more compelling reason for questioning the claims of the planners to a monopoly of rationality. The plan on their own admission is not a forecast. People who act on it therefore will be doing so as an act of faith, faith in the willingness of everyone else to act in the same spirit. This can hardly be called rational conduct, particularly when we have such recent experience of the believe-it-when-I-see-it attitude of most businessmen. It is an open question whether the original Neddy rate of 4 per cent could ever have been sustained without running into inordinate balance-of-payments troubles even if everyone had behaved as if it would be. But in fact people did not act as if what hadn’t happened before would happen now, and anyone who was sufficiently credulous or patriotic to have taken the Neddy projection seriously would have been left out on a limb.
There is no particular reason for thinking things will be very different next time. A few more companies may be induced to adjust their plans “in the national interest”, but if some work on one assumption and some on others we are back where we started. After all even in the present state of disorder which planners so deplore, firms are making assumptions, implicitly or explicitly, about the future rate of growth, though they may not work to common assumptions. All that is likely to be achieved by collective targetry on the lines of the plan is that one or two firms may raise their sights and blame the Government if and when the target is lowered, in part perhaps because the others haven’t followed suit.
Even if one accepts that for some reason yet to be vouchsafed every firm in the country does in fact accept the overall targets decreed both for the economy and for its particular industrial group, how is the individual company to interpret this intelligence for its own policy? The point here, of course, is that these targets have little meaning without some mechanism for allocating market shares, a problem which is very well illustrated in the plan itself.
Not only are the planners and the motor industry collectively at odds about likely demand for vehicles in 1970 — the planners expect home and export demand to rise by an average of nearly 5.5% a year from 1964 to 1970 whereas the industry’s joint forecast is of an average annual increase of 3.6%; there is also a wide discrepancy between the industry’s collective view and “the sum of the increases in their own output foreseen by the individual major firms”. Put another way, the overall rate of growth of the economy and even of its own industry may be far less important to a particular firm than its market share.
THE corpses continue to be trundled out. First it was the late lamented 4 per cent growth rate. Now the 25 per cent target of the National Plan. Can incomes policy be far behind?
But will the bodies lie down? Not on present showing apparently. So far from their supporters admitting they were wrong and apologising for misleading the country, they have now started blaming those who took their advice. There’s nothing wrong with the idea of a National Plan, we are told, it’s just a pity that it’s been bungled in practice.
In the last week or two we have seen several remarkable feats of intellectual agility on the part of erstwhile friends of the Plan. The National Institute of Economic and Social Research, the DEA’s alter ego, blandly announces that:
It seems likely that at the end of the year the basic output target of the National Plan will have to be reappraised. In the first two years of the Plan, output is likely to have risen slightly less than 21 per cent a year. For the 1970 target to be reached, it would have to grow in the remaining four years by an average of about 4.5 per cent a year. This seems rather too ambitious an objective.
This a mere six months after the Plan for 1970 had been promulgated with all the attendant ballyhoo that already seems so ludicrous. And this from an organisation whose own long-term plan was even more ambitious.
The DEA of course argues that it never intended that the National Plan should be unalterable but the changes now envisaged are much too large and sudden to be explained away as so much “rolling planning”. As another old planophile, the Financial Times, puts it:
the next Chancellor will have to act … in the knowledge that the delayed effects of his actions could … destroy all chances of anything remotely like the National Plan targets being fulfilled.
But the National Institute’s iconoclasm is not confined to questioning the magic figure 25. It even spits on that most hallowed of all concepts: the rate of growth of national output itself. It observes almost en passant that:
it might be better if the Plan’s objective were stated in terms of output per man-hour or man-year, rather than in terms of output. It is perfectly legitimate for people to wish to take part of the increase in their standard of living in the form of a shorter working week or a shorter working life.
And so say all of us. But while welcoming the long-overdue admission by this important school of economists that a measure of economic welfare that not only ignores increased leisure but regards it as negative is somewhat inadequate. one wonders whether the NIESR realises the full implications of what it is advocating. It is not just that whole sections of the Plan would need rewriting: what in particular becomes of the celebrated manpower gap that so recently mesmerised the nation? (It even received the final accolade of no less than five programmes on BBC-2.)
For once productivity replaces output as the objective, the case for keeping old men working and enticing middle-aged women out of the home collapses. They may make some marginal contribution to output but their employment is almost bound to lower productivity. If the NIESR has its way, one of the Plan’s main policies — stepping up the labour force — will be seen to be positively detrimental to its fulfilment.
And there are other friends at court, too, who, consciously or otherwise, have been making a mockery of the Plan. Take Mr George Cyriax for example. Now Mr Cyriax might not be worth taking if he were just any old economic pundit but he is not only extremely well thought of; he is also a consultant to the Prices and Incomes Board. It is therefore of some significance that he should admit that the results of eighteen months of planning and the employment of 550 people at the DEA on a budget of £2 million “have so far been very small.” Not, of course, that we should conclude from this that planning has more political than economic content. Such thoughts are said to be only worthy of the “Tory right wing” (Mr Cyriax might equally have added “or the Socialist left wing,” but then they too are beyond the pale). No, the Plan must go on for the astonishing reason that businessmen enthuse about it on account of its supposed similarity with the long-term targets they set their own companies.
If businessmen really believe that their own form of planning bears any serious resemblance to that currently being promoted by the DEA they must be extraordinarily naïve or ill-informed. Certainly Mr Cyriax is fully seized of the difference. Planning “to an efficient private employer is to argue the problem, to set financial targets based on cost of capital and risk and then to demand that the targets are met.” By contrast the “great weakness” of national planning has been “the failure to find a satisfactory formula to see that action does follow targetry.” Et to Brute.
It must be said that Mr Cyriax’s own remedy is something less than convincing. He seems to believe that accountability to the Plan can be achieved via a company’s annual report. Among the objections he overlooks are: (a) virtually no company can relate its own output to the output targets of the Plan because of differences of coverage and classification; (b) even if it could, there is no necessary virtue in each company in an industry increasing its output by the same percentage; and (c) there is anyhow no necessary relationship between conformity to the Plan and profitability and it is in terms of the latter that a Board has to account for its stewardship to its shareholders.
But enough of Mr Cyriax. What is clear from all this is that even the Plan’s best friends are now prepared to tell it that it stinks, at any rate in its present form. Already the Plan is seen to be the very negation of planning: its forecasts erroneous, its objectives misjudged, its control mechanisms non-existent. And yet it was this travesty of a plan to which almost the whole country subscribed last September and which all three parties acclaimed in the House of Commons four months ago.
It is the propensity of the nation and its opinion-formers in particular to fall for such quackery which is much the most disturbing aspect of the whole sorry business. Again and again we are taken in like this. Why?
It would require a sociologist to give a definite answer, but there do seem to be certain common appeals in all the panaceas which have been peddled these last few years. They all purport to be modern (even if in fact, like incomes policy, they are as old as the hills), numerate (even if their statistics, as in so much cost-benefit analysis, are just pulled out of the air), purposive (even if the object is to substitute an ersatz patriotism for a sense of purpose at the levels where it really counts), and painless (even if the subsequent adjustments are made all the more painful). If today’s nostrums satisfy these requirements, they have an excellent chance of being taken up and, once taken up. remarkable powers of survival. George Brown’s body may be a-mould’ring in the grave, but this Plan goes marching on.
That the case for national economic planning should be receiving such an indulgent press at present is not altogether surprising. At any time it has a superficial attraction. If individuals try to plan their lives, and companies even more so, why shouldn’t the nation do likewise? The case always seems all the more persuasive after the stop phase of the stop/go cycle when businessmen feel their already difficult life has been made all the harder by supposedly unnecessary fluctuations engendered by government policy or, as they sometimes see it, lack of government policy. On such occasions so-called indicative planning is presented as rational, coherent and purposive, and to express scepticism about it is to appear incorrigibly obscurantist. It will be the burden of this paper that it is in fact the support for indicative planning which is irrational, incoherent and evidence of a serious lack of individual purpose.
In all such discussions it is obviously desirable to try to agree on what we are talking about even if we can agree on little else. Let me say therefore that I am defining indicative planning as a concerted attempt by government and industry to project and enable industry to meet future demands for its output. I would emphasise the words “concerted”, “project” and “enable” which, as I understand it, distinguish indicative from imperative planning. “Concerted” suggests that the endeavour is a joint as well as orchestrated one, “project” implies that forecasting has some part in the exercise, and “enable” indicates some degree of permissiveness, although the whole operation would seem fairly pointless if no onus was placed on anyone to make the projections in question come true.
The other point of departure from which, hopefully, we can all start out concerns the object of the operation. Until recently there was little dispute on this score. Indicative planning was required to raise the rate of economic growth. Of late I have heard it seriously suggested that such planning should be designed to slow down the rate of growth of G.D.P. This, however, I imagine would still be regarded as a somewhat eccentric viewpoint and the vast majority of indicative planners would at least seek to increase the rate of growth of net economic welfare (measurable or not as it may be) whatever their misgivings about G.D.P.
The Plan Qua Forecast
The first point of difference which separates believers in indicative planning from unbelievers concerns the reliability of economic fore- casting and the scope for improving it. Admittedly the faithful when embarrassed on this account will often point out that indicative planning is not just a glorified market research operation. But part at least of their case rests on what they see as the superior forecasting ability of government and industry working in close consultation. It seems to me that this claim contains a large element of wishful thinking compounded of faulty analysis.
For a start it assumes that government is better placed to forecast demand for an industry’s product than are the firms in that industry. Not only is there no evidence, either here or abroad, of government’s superior ability, and I say this regretfully since industry would be only too happy to have the accuracy of its forecasting improved: there is a very real reason why official forecasts are likely to be less reliable than those of outsiders.
There are many eventualities which may be all too likely and yet which no government forecast can entertain — rates of inflation, changes in parity, declines of particular industries are a few such examples. No government can possibly announce that it is contemplating a long-term rate of inflation of, let us say, 6 per cent, or a rate of appreciation or depreciation of its currency of, say, half as much, even when its expert advisers believe that such assumptions are the most realistic or at any rate least unrealistic possible.
This is not just a theoretical argument. It is only necessary to look at the ill-fated British National Plan to see how government avoided all reference to the parity in it, although the weight of expert opinion at the time it was drawn up was that devaluation of sterling was inevitable during the period covered by the plan, and this of course duly transpired half-way through this period.
And it is not only government which is inhibited from telling the truth as it sees it in such forecasting confrontations. Industry too must have its reservations both in relation to what it tells government and in respect of what it tells its competitors. For in such circumstances any prediction it offers to government is liable to be taken down and used in evidence against it. Industry can thus be hoist with its own petard. On the other hand, a nicely pitched forecast may also produce some desired response from government anxious to see it or some other figure reached. The forecast therefore becomes a highly political figure.
Forecasting is also a competitive weapon since a major element in business success has been and is the ability to forecast more accurately than one’s rivals. Companies therefore participating in collective forecasting will be reluctant to disclose their full hand if they have reason for believing that they are thereby telling their competitors something they may not have appreciated otherwise.
For all these reasons the figure an individual company proffers in these circumstances is highly suspect, and such is the uncertainty attached to all such forecasting that it will be impossible to prove ex ante that the figure is wrong. Let me give an illustration.
In recent years a wide disparity has existed in the forecasts of demand put forward by the major companies in the Japanese steel industry. Roughly speaking, these forecasts of demand and hence of output and capacity in 1975 ranged from a high which implied that two-thirds more steel would be required four or five years hence to a low of only a one-third increase. The difference amounted to 30 million tons of raw steel. It was no coincidence that the higher forecasts came from companies anxious to expand and the lower from those wanting to consolidate their predominant position. It is still not clear which forecast will turn out the more accurate.
But leaving aside these special inhibitions placed on government and industry when swapping forecasts, economic history provides no evidence that forecasting accuracy is a function of the numbers employed in making the forecast or the formal skills possessed by the forecasters.
It is sometimes assumed that assembling large numbers of producers and customers in an industry is a condition of improved forecasting. This, however, neglects the fact that already large-scale industries at least go to considerable trouble to gather information and form a view on long-term demand for their product (with or without benefit of outside consultants) and if they do not always get it right, this is seldom because of any unnecessary ignorance of their customers’ current intentions.
Nor does assembling so-called experts provide any guarantee of forecasting accuracy. Formal expertise in economic prediction is largely associated with ability to explain past trends and the past is at best a very approximate guide to the future, at least where long-term economic forecasts are concerned. Any econometrician worthy of the name can find equations which provide good fits to explain the past, but this is no proof that the equation will hold good in the future. Moreover, as any statistician knows, it is often possible to derive several trend lines, all of which are compatible with past experience and yet which, when projected into the future, provide wildly different forecasts.
There is thus a large component of judgment called for in all long-term economic forecasting and this judgment tends to be very much influenced by the mood of the moment. Collective forecasting, therefore, however much those involved would like to think of themselves as being objective and independent, will do little more than represent the consensus of the time and we all know how shortlived such a consensus can be. In this respect, alas, there is no safety in numbers.
And yet another reason why collective forecasting can go so wrong is that, since the end product is usually a widely publicised forecast, it is liable to have a feedback effect which upsets it. A private fore- cast by contrast is at any rate unlikely to prove its own undoing. An area where negative feedback is common is commodity forecasting, predictions of gluts and shortages almost invariably being self-defeating. Other forecasts, it is true, can be self-fulfilling, particularly those related to parity changes, but either way the widely promulgated forecast not only involves predicting what would have been the out-turn but also the effects of its own publication on the out-turn.
The Plan Qua Target
As I suggested earlier, at this point believers in indicative planning tend to fall back on the argument that forecasting accuracy is not really essential for such planning because the future levels of demand, output, etc. stipulated in the plan are targets, not forecasts. This only raises further difficulties, however. What then is the basis of the targets and how, for instance, is industry going to be persuaded to shoot for them if they differ significantly from what might have been expected to happen anyhow?
For traditionally the main purpose of the plan has been to produce an improved economic performance. The main objective will be a more satisfactory rate of economic growth, but subsidiary targets might include an improved balance of payments or higher level of employment or lower rate of inflation. The targets for individual industries are set as necessary to the achievement of these overall aims. But what if industry doubts the economy’s ability to reach the desired growth rate or questions the assumed relationship between its own output and that of the economy at large or disputes the share indicated for exports and imports? In these circumstances there is no reason for thinking that industry will cooperate unless the plan has teeth. Sticks and carrots will be necessary to make certain the desired amount of capacity is installed and then, if the plan is to retain its credibility, demand may have to be underwritten.
The underwriting of the plan is easier said than done. The public sector can no doubt be ordered to behave in conformity with the plan, with what possibly devastating results can be seen from the experience of the British electricity industry. The latter was forced to install enough plant to meet the government’s 4 per cent per annum economic growth target and has been landed with surplus capacity ever since. The private sector, however, tends to be less amenable. (It is partly because it is not an arm of government that the analogy between planning by industry and indicative planning breaks down.) It has responsibilities to others besides government. Private industry cannot just sit on its hands and blame the plan if the latter turns out to have been misleading. The underwriting therefore has to be pretty convincing, if necessary involving such earnests of government intentions as subsidies or tax reliefs to customers and restraints on imports.
For industry to be convinced, it will want to be assured that government is committed to its plan as long as firms are stuck with the investment they put in on the strength of the plan. In fact they can never be thus assured since no democratic government can bind its successor in this way and even governments of the same persuasion have a certain tendency to eat their words.
And there is an even more fundamental and commonly overlooked problem than this. While planners talk about industries and what this or that industry should be able to produce, industry itself thinks, produces, sells and invests at the level of the firm. With certain notable exceptions the firm and industry are by no means the same thing.
Industries are, after all, little more than statistical categories of no great significance in this context. It is the individual company often spanning several of these categories which counts and whose behaviour has to be influenced for the plan to work. Individual firms as members of this artificial entity called an industry can pay lip service to whatever figure is agreed on as that industry’s target level of investment or output, but what they as companies do about it is a quite different matter.
Ensuring an industry’s full compliance with the plan thus entails allocating new capacity and markets among the various firms in it. This in turn involves the establishment of legalised cartels, something which most of the more dedicated followers of planning fashion would normally be expected to regard with distaste.
Even in a country such as Japan, with a 1ong history of intimate relations between government and private industry, legalised cartels are regarded as purely temporary arrangements calculated to provoke the wrath of the Fair Trade Commission if kept in being too long. In France with its strong dirigiste tradition the Commissariat du Plan has frequently found itself in situations where the whole and the sum of the parts differed because the capacity planned by individual firms has no resemblance to the total envisaged for their industry in the plan. The leading member of the awkward squad in France has been the automobile industry. In Britain, the National Plan was abandoned before reaching the point of trying to allocate market shares. In all the Anglo-Saxon nations, however, the restrictive practices legislation in force makes market sharing arrangements illegal and governments view them as inimical to economic growth. Underwriting the plan by guaranteeing firms’ markets against competition may be a condition of getting it implemented, but it is not a step to be taken lightly with its obvious risk of featherbedding for existing producers, never mind the discouragement to new entrants.
And there is another and more general reason why government must be very chary about underwriting the plans of large sectors of the economy. Inevitably at some stage or another it will be blown off course. With the best of economic forecasting and management, something, maybe of overseas origin, will happen sooner or later to discomfit the planners and, if they have undertaken not to disturb much of the economy, the rest will suffer inordinately in the necessary process of adjustment. The price of stability for some is greater instability for others.
From all of which I conclude there is nothing particularly rational about trying to gear an entire economy to an agreed set of targets when there is no reason in theory or practice — look at the record of national plans round the world in both developed and underdeveloped nations — for expecting these targets to be fulfilled and no acceptable method of getting people to abide by them. For everyone to work on the same set of assumptions merely makes it harder to adapt to unforeseen circumstances and take advantage of unexpected opportunities when they arise. To ensure that people act on the same set of assumptions requires a degree of control over the economy which is quite incompatible with the idea of indicative planning as it is generally understood.
It would, paradoxically enough, be easier to justify such a degree of control if we had sufficient foresight to be able to predict demand with complete accuracy, for then the economy would become hopelessly unstable in the absence of complete control over supply.
Only so long as parents cannot predict and determine the sex of their children can a laissez-faire policy be afforded. The moment parents have this ability, the state may have to intervene. Likewise with the economy, though here one is on safer ground in suspecting that perfect foresight will never be vouchsafed to us.
Indicative Planning for Australia?
All this may seem a bit remote from the Australian scene. Yet I believe it is in fact extremely relevant to the local debate. Moreover, there is nothing peculiar to Australia which makes indicative planning a more realistic affair here than elsewhere. If anything, it is still less viable in the Australian context.
One of the most common proximate causes of the undoing of national plans is the foreign balance, and the more open an economy, the more serious the problem. Australia has a relatively high degree of dependence on overseas transactions. Exports as a percentage of G.D.P. are much higher in Australia than in the U.S., somewhat higher even than in Japan and not all that much lower than in Britain. In addition there are substantial capital inflows and invisible outgoings. The former may be falling as a percentage of G.D.P.; the latter are not. A large slice of the economy therefore is more or less outside government control.
Australian exports are also highly volatile as a result of their large commodity content. This makes it particularly difficult to predict their values as we have seen in the last year, but even commodity export volumes are subject to sharp fluctuations in response to stock changes, etc. And it is not only export forecasting which is complicated by Australia’s dependence on primary production. In the short run the whole level of economic activity can be significantly affected by the vagaries of the weather; in the longer run the prospects for economic growth will depend materially on a highly unpredictable factor, the success or otherwise of mineral exploration.
The current hankering after a national energy policy illustrates some of the problems which indicative planning is up against in a country such as Australia. We are blessed undoubtedly with copious supplies of the main fuels. But what demand is or should be for the various fuels at particular dates in the future will depend on the precise price of the different fuels at particular locations. Availability, however, will in turn depend on demand, so forecasts in this area are to a large extent circular. One might add, so is the national energy budget. Exports, we understand, will depend on the proving of reserves, themselves a function of price. But the proving of reserves in turn depends on the likelihood of markets being available in the event of success. To go on proving up reserves merely to add to the sum of human knowledge is hardly a sensible use of resources. Thus is a national energy policy largely chimerical, as other nations with few of Australia’s problems in this regard have found. The British have been yearning for such a policy ever since the last world war. They have never succeeded in forecasting the market shares of the various fuel industries correctly; last time they tried they even forecast the total demand for energy quite wrongly.
Nor at the political level is Australia at all well suited to indicative planning. Politicians may be fickle at the best of times, but certainly the continuity which is basic to all such planning is not facilitated by three-year parliaments. Nor again is the Federal system conducive to unity of purpose and consistency of approach, particularly when the division of power between the Federal and State governments is itself subject to dispute and revision.
It would be idle therefore to imagine that Australia is likely to succeed where others have failed with indicative planning. Certainly the forecasting record of the Vernon Committee provides no grounds for optimism on this account, but then it was precisely the sort of factors I have outlined, e.g. mineral exports, which proved their undoing.
Some Alternative Suggestions
These observations will no doubt strike supporters of such planning as somewhat negative, not that there can be any obligation to support ideas which involve a significant use of resources for no apparent benefit. It might be appropriate therefore to end on a rather more constructive note. In doing so, one asks: what exactly is indicative planning in Australia designed to achieve?
If the answer is as suggested earlier “a higher growth rate”, there are surely many more direct methods of achieving this end than by going through the rigmarole of indicative planning. For economic growth is compounded of numbers employed and output per head. Unless it can be shown that the faster the rate of growth of the labour force, the slower the rate of growth of productivity, then it would seem to be ludicrous to be contemplating a long-term reduction in immigration while seeking to jack up the rate of growth of output.
As for increases in per capita output, there is much that could be done directly to accelerate the rate of productivity growth. In particular a higher rate of investment in industries where Australia enjoys comparative advantage would seem to be indicated. This first of all requires a more rational tariff structure so that the more efficient industries are encouraged to expand at the expense of the less efficient. The Tariff Board’s move towards a uniform effective rate of production is clearly conducive to this end, although the Board does not always seem to be aware of the contradiction which can arise from simultaneously advocating a uniform effective rate and the removal of unused protection.
The poor rate of increase of labour productivity in Australian manufacturing industry is only partly due, however, to the pattern of investment. The level of investment has also been inadequate and here the most suitable remedy would seem to be to allow plant and equipment to be written off much more quickly for tax purposes. Australia has one of the most illiberal tax structures in the world from this point of view. As a result, manufacturers are encouraged to keep their plant in operation for excessive periods of time to the detriment of labour productivity, which suffers twice over from low operating productivity due to lack of capital per man and excessive employment in repair and maintenance.
There are of course many other measures which could usefully contribute to a higher rate of economic growth. Further encouragement to competition, not only in secondary industry, but also in the flabby tertiary sector of the economy, would be one of them. I hope, however, enough has been said to establish that it is a non sequitur to argue that, because we have only a moderately fast rate of growth, we must needs introduce indicative planning. There is no evidence that such planning has accelerated the rate of economic growth else- where. (The record of France, for instance, is no better than that of West Germany, and in so far as the French economy has performed well since the last world war there are plenty of more plausible explanations.) And there is, as I say, no reason for expecting Australia to be the exception.
Alternatively, indicative planning may be viewed primarily as a means of overcoming uncertainty. While the present penchant for indicative planning among Australian businessmen may be thought to reflect rather discreditably on those concerned — they are after all paid to exercise judgment in conditions of uncertainty — there is no need to make their task still harder. Again, however, it is far from clear that indicative planning is going to help them.
It does not, for example, require such a plan to mitigate the stop/go cycle. What this basically requires is a bit of political courage at the moment in the business cycle when the economy 1s on the upturn but there are still resources under-employed. Every stop is the product of the previous (over-exuberant) go and it is a truism of economic management that by the time all the necessary indicators are in and it is crystal clear what needs to be done, it is already too late. By the same token, sharp and demoralising changes in the exchange rate are the result of failure to make more modest variations in good time, variations which this country is ill-equipped to make through its adherence to a fixed exchange rate.
Another practical step that Canberra could take to make at any rate short-term forecasting easier would be to improve the forward indicators available for the purpose. At present this country is poorly served in this respect with the lack of order figures, both new and outstanding, a particularly glaring omission.
Looking rather further ahead, government could do something to illuminate the future by enumerating its plans for the public sector more than a year ahead. While this would be of some value, however, particularly to those industries which sell largely to government instrumentalities, it would be unwise to set too much store by such a reform in view of what was said earlier about government’s limited ability to deliver.
Finally, and to those who support indicative planning as a step in the direction of imperative planning, I would suggest that so far from furthering their aims, indicative planning if implemented is likely to bring the whole concept of planning into disrepute. So far from representing a happy mean between market and socialist economies, it would be truer to say it combines the worst features of both. Also liable to be brought into disrepute, incidentally, is the standing of the economics profession. While indicative planning tends to inflate the demand for (and egos of) economists, their reputation will get a bit tarnished when disenchantment sets in, if British experience is anything to go by.
Once again, the cult of the bum steer known as indicative planning appears to be gaining adherents.
Businessmen faced with more than usual uncertainty start hankering for guidelines; politicians feeling the need to be seen doing something are attracted by an initiative that provides the appearance of novelty and rationality; and there are always public servants and economists who relish the enhanced power and status which indicative planning seems to offer.
It is typically a response to economic adversity. After all, it was the 1961 recession which gave rise to the Vernon Committee, just as it was against a background of low economic growth that the British National Plan was launched shortly after.
It was when US policy-makers were near despair two years ago that the Initiative Committee for National Economic Planning found so much support in the Senate and elsewhere.
And now in Australia, the dashing of unrealistic economic hopes provides fertile ground for similar ideas.
What is indicative planning? some might ask.
Such an intellectual muddle defies precise definition, but most of its protagonists see it as a co-ordinated medium-term projection of the economy in which government, industry and others participate. As such, it appears eminently rational, which is very much part of its appeal.
The first fallacy on which it rests is that the more forecasters you assemble, the more accurate the forecast. There is no evidence to support the idea that the mean or consensus forecast is the correct forecast.
One reason is that forecasters never operate in a vacuum. They tend to share the same perceptions of past and future, to be subject to the same moods and intellectual fashions. There is thus no safety in numbers and this is true at the international level, as well as national level, as a recent article in the Economic Journal on the forecasting record of the OECD demonstrated all too clearly.
In addition, if the consensus forecast is widely publicised, this alone can influence the outcome in perverse and unpredictable ways, but these are but a small part of the objection to indicative planning.
Much more important is that it involves governments in a public statement of intent. For governments can seldom publish honest economic forecasts. No government can afford to be seen contemplating rising unemployment or inflation, little or no economic growth or a change of any sort in the parity. And yet a forecast which precludes these possibilities is not worth the paper it is written on.
Idealists who believe governments are the personification of truth find it hard to accept such strictures. They should ask themselves why it is that the Federal Treasury has for five years overestimated the economic growth rate in the Budget papers. The reason is that forecasting error is human, but to err on the pessimistic side is imprudent. It embarrasses one’s political masters and encourages the populace to clamour for reflation.
At this point, the indicative planners tend to shift their ground. They stop pretending they are engaging in a glorified market-research exercise and suggest their projections are targets rather than straightforward forecasts. The element of uplift sounds fine, but it raises the question of what the government is going to do to ensure its targets are met.
Typically the answer is by instructing its instrumentalities and bribing the private sector to conform to its wishes.
The inducements can take many forms and commonly they are either at the expense of the consumer or taxpayer. Moreover, the more certain favoured sections are underwritten, the worse the adjustments called for elsewhere when the plan gets blown off course, as inevitably it must. For no government can predict and control all the outside influences which are liable to divert it from its chosen path.
On the other hand, if no such inducements are offered to go along with the plan, then it lacks credibility and no one tries to meet their target.
The British National Plan was blown off course (by a balance-of-payments crisis) soon after it was promulgated, but not before the public sector had been forced to act on it. The electricity industry, in particular, put in far more capacity than was warranted on the strength of the 25 pc economic growth foreshadowed over the six years of the plan (1964-70). In fact, only 15 pc growth was achieved and the subsequent drought of orders has brought the British heavy electrical industry to its knees.
(This has recently had echoes as far away as Australia where the Victorian SEC is understandably chary about placing an order for Loy Yang on a well established British supplier whose lack of domestic business is finally forcing him into the arms of a competitor.)
Yet another problem about indicative planning is that governments cannot commit their successors. So it is something of a charade — at best a waste of time; at worst a serious misuse of resources, paving the way for the corporate State. Its genesis is invariably a loss of nerve on the part of government and industry, although its ostensible purposes vary according to time and place.
Thus the newfound justification for indicative planning in Australia is that it is necessary to deal with something called structural change. The manner in which this particular wheel has been re-invented is in itself evidence of the whirligig of intellectual fashion.
But the indicative planners really ought to make up their minds whether they object to the market mechanism because it is too effective, or not effective enough, in bringing about structural change. We would then at least know what we were debating.
Appendices for Economics.org.au readers
If communication is the art of survival in the business world, the artists are economists.
While economists are not noted for their flair for communication, the fact is that Australia’s most respected — and highly paid — economists are well versed in the language, if not always quite the business, of business.
On the judgment of economists surveyed in the private sector in Melbourne and Sydney, six business economists were singled out as being the most respected among their peers and, more importantly, were considered to be the most influential in the companies they serve.
In fact, since it transpired that economists do not really respect other economists, influence within a company was the deciding factor.
Surrounded my the mystique of exogenous variables and seasonally adjusted compounded annualised money supply growth rates, most economists in the private sector are, above all, image makers.
Publicists with qualifications, economists lend respectability to a company.
The low key economists are the true hidden persuaders. They tend to report to senior management, explaining how economic trends will affect the company’s operations, and providing forecasts of economic variables.
The next three economists were equally respected, but, unlike the winner, also attracted some flak.
Mr John Brunner was so low key he insisted on scratching himself from the survey. The appeal was dismissed.
An Englishman with the “Big Australian”, Mr Brunner is BHP’s chief economist. The BHP position seemed to have secured him a place as an influential economist, since many nominating him remarked that they knew little about him. One called him “eminent in his field”, another a “bit disappointing.”
After studying at Oxford University in the early 1950s where he sat at the feet of one Tony Crosland, he seems to have left the place with somewhere between a Bachelor degree in economics and a Master’s degree. He said he “had never taken up either” officially.
He punctured his very halting description of his career with comments directed against many of his peers. Economists “are employed to be fashionable,” they are a “luxury which only large companies can employ” (which, he added, have headquarters overseas anyway) and are taken “much too seriously.”
He disliked the “high profile” approach and said economists were not soothsayers anyway.
He is 54, has been at BHP for 11 years and previously had “a humble background in Western Australia.”
Bert Kelly wrote about government planning issues hundreds of times. Here are several examples:
- A Modest Member of Parliament [Bert Kelly], “Farming’s only certainty is of being wrong,” The Australian Financial Review, September 8, 1972, p. 3.
- Fred’s Feeling: Counterpatriotic country contrarian – A Modest Member of Parliament [Bert Kelly], “Farmer Fred takes it all in his stride,” The Australian Financial Review, March 9, 1973, p. 3. Reprinted in Economics Made Easy (Adelaide: Brolga Books, 1982), pp. 25-27, as “Going Against the Tide.”
- A Modest Member of Parliament [Bert Kelly], “Tell us what to do next, they bleat,” The Australian Financial Review, January 17, 1975, p. 3. Reprinted in Economics Made Easy (Adelaide: Brolga Books, 1982), pp. 149-51, as “Free Enterprise (1).”
- Sound economics calls for quiet from government — A Modest Member of Parliament [Bert Kelly], “The accent is on the indicative,” The Australian Financial Review, April 23, 1976, p. 3. Republished in Economics Made Easy (Adelaide: Brolga Books, 1982), pp. 142-43, as “Indicative Planning.”
- Can government kiss it better? — A Modest Farmer [Bert Kelly], “When I buy cattle, why does Fred start to sell?,” The Australian Financial Review, March 31, 1978, p. 3.
- Government intervention and advice can be harmful, even when right, even for those it tries to help — A Modest Farmer [Bert Kelly], “An election must be looming!,” Stock and Land, November 29, 1979, p. 15. [I used that source because the AFR edition was a bit garbled at “Planting compassion on the Apple Isle,” The Australian Financial Review, November 30, 1979, p. 11.]
- Against guidance by government — A Modest Farmer [Bert Kelly], “Telling the country where NOT to go,” The Bulletin, September 15, 1981, p. 115.
The first and fourth Bert Kelly essay in that list has him making his buckets of champagne comment. Here are two later times he makes the same allusion with a little extra spark:
Politicians should have burnt on their breasts or on some broader part of their anatomy, the message that any servant of the government who can correctly foretell the supply and demand situation for any mineral for even one year ahead is not for long working for the government; he is shortly sitting in the south of France with his feet in a bucket of champagne.
~ A Modest Farmer [Bert Kelly], “He’d soon have his feet in a bucket of champagne,” The Australian Financial Review, November 17, 1978, p. 3.
“Remember the bucket of champagne.” This is shorthand for a longer sentence: “Any government servant who can foretell correctly the supply and demand situation for any product one year ahead, let alone five, is not for long working for the government: he is soon sitting in the south of France with his feet in a bucket of champagne.”
~ Bert Kelly, “Case for ministers staying home,” The Bulletin, May 8, 1984, p. 120.