QUOTE OF THE MONTH (bonus)

'In a study of growth in Western economies since the war, from which he hoped to draw lessons for the U.K., [Nicholas] Kaldor argued that the rate of growth of a modern economy is fundamentally determined by the rate of growth of output per worker in manufacturing, and that this, in turn, is determined by the rate of growth of demand for manufactures. In these two straightforward propositions, Kaldor synthesised the central insights of the classical economists and of Keynes, and verified the peculiar role of manufacturing. He also made clear why productivity growth is a characteristic of manufacturing as a whole. As a particular manufacturing industry grows, its operations can be broken down into a number of specialist activities. This division of labour both increases output per worker in that industry and spills over into other industries. A new specialist toolmaker, for example, may as well provide tools for the motor trade as for textile machinery. So, in a modern industrial country, all sectors are closely linked to each other. One industry's output is another industry's input, and their destinies cannot be separated.

          Growth of demand for manufactures may come from growth either of the home or of the overseas market. In most countries it is the growth of the home market which is the major factor, for not only is the home market by far the dominant element in total demand – typically 80 per cent or more of the output of manufacturing industry is sold at home – but foreign markets are, by definition, less easy to manipulate. A country which relies heavily on export demand to maintain its rate of growth is likely to be dangerously exposed to the slings and arrows of world-market fortunes. So, although a high rate of growth of export demand can be a major stimulus, a high level of foreign trade is no guarantee of success. Of Britain's total domestic production from all industries, 18 per cent comprises exports of manufactures. The corresponding figure for Japan is only 9 per cent.

          … High growth of demand gives productivity growth, which, via price and non-price factors, gives competitive success, which in turn gives high growth of demand, which gives productivity, which gives competitiveness – and so on and so on. This is the principle of cumulative causation.

          The system can work in reverse too. Low growth of demand gives low productivity growth, which gives competitive failure, which gives low growth of demand, which gives low productivity growth … downhill all the way. A country which grows relatively slowly will see its relative position decline as others capture its markets at home and abroad. In the market system zero growth, however ecologically desirable, is impossible. For zero growth begets low productivity growth and so erodes the competitive position of industry until demands falls away completely and zero becomes negative: a recipe for clean air and human misery.

          When demand for manufactures ceases to grow, productivity may still rise as old factories are shut down – even though no new ones are built. Suppose, for example, that the whole of British industry were shut down apart from the Fawley oil refinery on Southampton Water where the value of the output of refined products per worker is enormous. At a stroke output per worker employed (and there wouldn't be many workers) would rise more rapidly than anywhere in the world. Then it would stop rising, for there would be no other factories left to close. Reducing the number of workers on out-of-date machines yields similarly limited productivity gains. This degenerate productivity growth occurs in most slumps and is just what has happened to British industry over the last couple of years, as large sections of British manufacturing have been closed. It is the swansong of a dying industry. Britain may be the best in the world at producing Rolls-Royces, but this will hardly be much good in the battle with Volkswagen, Renault and Datsun.

          It is one of the enduring fallacies of economics, shared by economists of left and right alike, that market economics are revitalised by a slump to emerge “leaner and fitter”. Lean certainly, fit perhaps – fit, and out of date. Reconstruction, which requires investment, takes place in a boom. It is the dynamic of growing economies that ensures true productivity growth. In the market economy the principle of cumulative causation ensures that success breeds success and failure breeds failure.'

– Lord Eatwell, as he now is, writing in 1982 in his book Whatever Happened to Britain?, in which he argued for a more protectionist trade policy.

Although the point made by Lord Eatwell may be sound, it should be recalled that 'Throughout the 1980s British manufacturing firms prioritised dividend payments in preference to R&D; with profits rising 6% a year, dividends rising by 12% a year, while investment rising by 2% a year' (see The Ponzi Class: Ponzi Economics, Globalization and Class Oppression in the 21^st Century, chapter 8 The Monetarist Experiment, by Michael William – available from Amazon, Kindle and direct from CreateSpace). Manufacturing output in Britain continues to fall.

It is truly remarkable that in reporting the Autumn Statement from the Chancellor, Philip Hammond, while much has been said of the ballooning government debt and the continuing failure to reduce the government spending deficit, nothing has been said about the balance of trade deficit.