Mills, John. How to Make the Economy Grow
John Mills Institute for Prosperity
July 2024
ISBN: 978-1-3999-9156-8.
John Mills has been writing for many years about the sluggish and even non-existent growth of the British economy. There is much he says with which I strongly agree, but there is one matter where I strongly disagree. I come to his latest book with this mix of agreement and disagreement.
Mr Mills says:
In 1950, 25 per cent of all manufactured goods sold overseas worldwide were made in UK factories. Now, only 2.3 per cent are made in the UK. If services and commodities are included, over the same period, total UK exports fell from 10.2 per cent of the world total to 2.9 per cent – a ratio fall of over 70 per cent. (p.5)
This loss of market share has been accompanied by stagnation of living standards compared with other countries:
In 1950, GDP per head in South Korea was $770, compared to $6,907 in the UK. In 2023, the corresponding figures were $56,552 and $57,492. By 2023, Korean living standards had risen from 11 per cent of the UK level to 98 per cent. In 1990, GDP per head in Poland was less than a tenth of ours, but estimates based on World Bank data project Polish living standards overtaking ours by 2030. (p.4)
He blames this lack of progress on the progressive decay of British manufacturing.
Where I agree
Where I agree with this book is that industrial production in Britain is lower than it should be in a country that has a growing economy in which ordinary people share the benefits of growth. The focus on financial services produces an economic system where the big gains are at the top of the income pyramid, while a largely unskilled working class has to get by with a combination of low-paid ancillary jobs – cooks, cleaners, drivers, and the like – make-work jobs in a worthless bureaucracy, and outright unemployment.
We need a larger industrial base if we are to return to the greater economic equality and the greater social harmony of before 1979. We also need a larger industrial base if Britain is to remain a power of any note in the world and is able to defend itself.
I agree with much of his diagnoses of where we are. I agree with many parts of his solution – but I will speak of these later. For the moment, I want to move to where I disagree with Mr Mills.
Where I disagree
This is with his central insistence that the low rates of British economic growth during the past few generations – and specifically the need to reindustrialise – can be addressed by devaluing the pound.
Mr Mills assumes that a lower pound will increase demand for British goods. He spends a lot of time discussing the Marshall Lerner condition – whether the sum of elasticities of demand and supply for imports and exports is greater or lesser than one – and trying to calculate by how much a certain devaluation would bring about a certain increase in exports, and therefore of prior industrial production.
The obvious objection to this approach is his belief that a managed devaluation will not be hit at once by higher tariff barriers abroad. This is unlikely. I am not sure about the rules of the Word Trade Organisation, but I do suspect that there is permission to retaliate with trade barriers against a country that is explicitly devaluing for the purpose of undercutting producers in other countries. Whatever the rules may be, I have no reasonable doubt that any advantage gained by devaluation will be offset almost at once by higher trade barriers of one kind or another from America and the European Union.
But let us assume that a lower pound really will increase foreign demand for British manufactures. The problem is that the sort of manufactures for which demand is very elastic tend to be goods that are sold on price alone. These tend to be low-grade manufactures – things like cheap textiles, cheap pots and pans, basic electronic goods, and the like. These are already made about as cheaply as they can be made in the Far East, where labour costs are still very low, and which have large economies of scale.
Even if Britain could capture a share of the market in such goods, the British economy would be trapped at the bottom end of the industrial market – dingy factories, filled with workers necessarily paid wages at something like subsistence level, and a tendency to improvement that may take generations to bring us back to where we were even in 1979, which was hardly prosperity.
Where we need to focus is at the upper end of the market in manufactured goods, for which the demand is more or less inelastic – things like specialist steels and aeroplane engines. Grant us these areas of production, and a high and stable rate of exchange for the pound becomes a benefit. It improves our terms of trade. It raises the price of goods that foreigners have no reasonable choice but to go on buying. It lowers our own input costs. It allows us to buy larger volumes of imports to improve our own standards of living.
This is not an industrial base that can be called into being by a pound that is permanently declining in value. Indeed, though Mr Mills keeps arguing to the contrary, a declining pound will bring domestic inflation. It does not need in principle to do this. A lower exchange rate can be combined with a restrictive monetary policy. Dr Gabb once told me that this was done by the Czechoslovak Government between 1990 and the dissolution of the country in 1993. However, given where we are, anything that allows the politicians to inflate without bringing on an immediate balance of payments crisis is best avoided. Since the Second World War, British Government have been principled inflationists. Regardless of which party was in power, their favourite solution to every economic problem has been lower interest rates. Leave aside the first three years of Margaret Thatcher, the only times a British Government as followed even a vaguely sensible monetary policy has been when the pound was fixed against some external standard.
What Britain really needs
In order to bring about the new and high-quality industrial base that both Mr Mills and I want, we need to focus on other things than the exchange rate. We need lower taxes. We need fewer regulations. We need to give up on net zero green policies that have put on us the most expensive electricity in the world. We need a much smaller and a much less active government. If there is any place for government help in the growing of this new industrial base, it must be confined to things like shifting the focus of our education away from useless social science subjects – and I mean here vast university departments teaching various shades of leftist sociology, not the teaching of Greek and Latin – towards science and technology subjects. If need be – and I am not sure they would be necessary or even wholly wise – there may be room for selective tariffs to nurture what are genuinely infant industries.
To be fair, Mr Mills does himself suggest many of these policies. But for him, they are supplementary to his main plan of achieving industrial prosperity by competitive devaluation. Instead, they are not supplementary, but should be the prime focus.
Of course, in order to bring about these economic changes, there must be sweeping political change. An economic revolution must be preceded by a political revolution. Ultimate power in this country lies with a monied interest that uses the country as a base for its shady operations. This ultimate ruling class is at best indifferent to the general state of the British economy and of ordinary working people. At worst, it prefers our slow national decline and our economic stagnation, because a more dynamic nation might raise up competing interest groups. We need a new political order, in which the present ruling class that does well personally from our morbid focus on financial services has been swept away and replaced by a system of government that is concerned with the wellbeing of ordinary working people.
But this is another matter. For the moment, it is enough to say that competitive devaluation is the last way to pull the country out of its present stagnation.
