What they did not teach you in the economics course
Samuel Brittan: Oxford Prepared for 13/12/00 but not delivered

There was a famous book entitled What They Did Not Teach you at Harvard Business School. I was inclined to call my talk What They did not Teach you in the Oxford Economics course. But I cannot claim to know exactly what is taught is such courses. And of course I realise that you are not taught all the same things, as you go to different courses with different tutors and read different textbooks.

It is however amazing how few books there are on how economic systems actually work. On the one hand there are strictly academic books which concentrate on quantitative techniques and mathematical relationships on which students can be examined, but which do not answer very directly the questions that practioners of history or government have about the economy. On the other there are numerous voices from other disciplines, or no discipline at all, which make strident assertions such “the rich getting richer and the poor getting poorer” picked up from a few media headlines.

I find it striking that so many of the people who come to talk to me about recent economic events or government policy come from the faculties of politics and modern history. At the end of the day it does not really matter from which faculty studies come, so long as their work is enlightening. But in my experience professors of politics, international relations or sociology do not - with a few distinguished exceptions - deal well with economic issues, irrespective of their political views.

The content of textbooks, is often called in highbrow circles “The neo-classical - Keynesian synthesis”. But I have been warned by Oxford academic friends that many students regard this as simply “economics“ and I would have to explain that it is only one variety of the subject.

My own view is that this synthesis is fine as far as it goes and needs to be taught, even if different authors put a different emphasis on the neo-classical and the Keynesian parts of the synthesis. But all the varieties leave out important matters.

More years ago than I like to think of, I made a list of what were then new developments in economics, which were hardly known to many British practitioners. (Participation Without Politics, Institute of Economic Affairs, first edition 1975, last published 1979). Some textbooks now mention them, but they still receive far too little emphasis.

1. The application of the theory of competition to the political market and to the struggle for votes and power. This is now known as Public Choice and some mainstream textbooks pay it a little bit of lip service but hardly more. As I then wrote, “Much British thinking on economic policy is rendered worse than useless by a sharp contrast between the faults of real world markets and the actions of some non-existing and improbable, ideal, benevolent and omniscient government.“

2. The analysis of property rights and the effects of alternative allocations on the use of resources. We all have our own views on whether the distribution of property rights can be improved. But it is not property rights, but their absence, which is anti-social. It is because no one owns pleasant vistas, or the ocean bed that market disciplines do not apply and that governments have to go in for clumsy attempts and direct regulation such as the EU Common Fisheries policy.

3. The economics of benevolence and charity. This is a worthwhile branch of mainstream economics in its own right, made specially topical by Gordon Brown ’s big extension of tax relief and other incentives to private benevolence. An incidental benefit of this subject is that it brings home to people, in a way that no abstract argument can, the difference between privately chosen and selfish aims.

4. The most interesting trend in my opinion has been the development of political and moral philosophy with the conscious aim of throwing light on questions such as the just distribution of property rights, the legitimacy of coercion by a democratically elected government, the appropriate extent of state power and much else. Those of you interested in political and moral philosophy will still probably find these matters discussed under the heading of “Rawls and Nozick”, although there are many other contributors. You cannot make a thoughtful contribution to economic policy without at least a nodding acquaintance with this kind of discussion.

5. The analysis of markets as a discovery procedure in a world where tastes and techniques are changing and information scarce and expensive. You cannot overcome this criticism just by adding a few differential equations to the neoclassical system so thsat the analysis can be called “dynamic“ and the mathematics made more complicated.

The point of this criticism is somewhat different. It is about the need to study the operation of markets as a system for tackling, however imperfectly, the interactions between human beings. Again this has been made much more concrete with the fall of the Iron Curtain and the disappointing experience that many former Communist countries have had in rebuilding their economies. This applies especially, but not only, to Russsia itself.

The point that many western advisers missed was that it was not enough to remove controls on prices and wages, to privatise a few state industries or even to balance the budget and introduce currency convertibility. None of these things will work properly without a whole lot of other institutional changes, such as an effective legal system, the rule of law and a state which can police it, clear and secure property rights and a social safety net. Not to speak of the introduction of standard western accounting and banking techniques, which are less and less known the further you move from the German/Polish frontier towards Moscow and the former Soviet Far East.

So far as these “new“ types of thinking are known at all, it is as imports from the United States. But in fact at least one of these approaches (markets as a discovery procedure) were originally made by Austrian economists and imported via the USA. It is about time to remind people that Adolf Hitler was not Austria’s only contribution to the modern world.

The two main alternatives or supplements to the neo-classical mainstream might be called the “Austrian approach” and the anti-globalisation left. The Austrian school is ultra free market, while the anti-globalisation Left is very sceptical about the liberalisation of capital markets or even free trade negotiations and would be quite sympathetic to those who demonstrated in Seattle and Prague.

They nevertheless have a surprising mount in common. They both emphasise market capitalism as a process and distrust the idea that it is a solution to a set of equations. Both emphasise political and legal institutions and the exercise of power. The left wing critics have at last got beyond the Marxism dismissal of institutions as mere superstructures and and now regard them as an influence in their own right.

Unfortunately there is no fully satisfactory statement of either critique which I could recommend to you to plough your way through. Two interesting books have come across my desk. One is entitled Institutional Economics by W. Kasper and M.E. Streit. (Published by Edward Elgar). This gives basically the Austrian point of view, but is brought to life by data from recent economic history and by the researches of American economists on the history of economic growth and on the role of transaction costs. The other book, which presents the left-wing critique is entitled An Alternative Textbook, by Hugh Stretton, published by the Pluto press. (They are both available in paperbook.)

Both are massive volumes presented as textbooks on the American model. One feels that the idea is to produce material for American type universities in which class instructors can assign selected chapters on which students would be examined. Needless to say nobody in Oxford requires such spoon feeding!

I must admit that I was particularly entertained by the treatment very early on in the Stretton volume of the saying of the American writer Ralph Waldo Emerson, “Make a better mousetrap and world will beat a path to your door.” The author shows how a person who adopts this advice too uncritically may well go broke instead. Some firm may come up with an effective mouse poison: or Friends of the Earth may persuade a government to declare mice an endangered species.

Nevertheless the Stretton viewpoint, if taken too far would, according to my reading of recent history, be a very poor recipe for emerging countries trying to leap out of the cycle of poverty. It would even be highly risky for developed countries, such as Germany, France or Italy, who need to step out of their comfortable cycle of rigid labour markets generous welfare payments tied to premature retirement ages and high unemployment if they are to cope with ageing populations.

The problem with Institutional Economics is that it tries to smuggle in a highly contentious point of view - which goes much further than any Reaganite or Thatcherite administration has dared to go in its distrust of regulation, redistribution and the welfare state. Nor does it present the mainstream analysis of, price, output and national income determination, which the authors not only accept but depend upon.

For instance a considerable amount of space is devoted to “rent seekers“, who try to gain special favours from governments and wish to sabotage free trade. But without some formal explanation of Ricardo theory of international trade and, the circular flow of income and the role of both nominal and real exchange rates, the case is not really made. The Stretton book, on the other hand, does cover the conventional textbook aparatus of demand and supply, better, if grudgingly. But it is in my view quite inadequate on macroeconomics.

Both sets of authors would have done much better to have written shorter essay type books suitable for reading by either students or the proverbial intelligent layman. My advice would be to glance at both the “Austrian“ and the Stretton alternative textbooks and read the passages which interest you and follow up the references to more original work; but they are supplements rather than complete alternatives to conventional textbooks.

In my remaining few minutes I would like to switch tack completely. When talking to business or political audiences, a favourite technique of mine is to expose what I regard as economic humbug. That is to demolish beliefs which are popularly regarded as common sense economics, which are really self serving beliefs by business spokesmen or out of date sermonising by politicians. Indeed I sometimes call the fallacies I try to demolish as “business economics”. There have been two notable recent attempts to do this. One was by David Henderson, formerly head of economics at the OECD, entitled Innocence and Design, (Basil Blackwell 1986), based on his 1985 Reith lectures. The other is Economic Fallacies by Geoffrey Wood, (Institute of Economic Affairs 1999.

[One problem about such attempts is that many of these are not strictly logical fallacies but can seem to be true on the basis of certain occasionally plausible assumptions. For that reason I prefer to call them Lumpeneconomics after the German word used by Karl Marx to describe the Lumpen prolateriate that is ill educated workers who did not understand their own interests and took to casual rioting, ultra nationalist demonstrations or criminal acts instead of attending discussion classes on the dictatorship of the prolateriat].

Favourite examples include structure snobbery - in other words the belief that certain sectors of the economy such as manufacturing are inherently superior and that other sectors such as hamburger stands or Chinese laundries are inherently inferior.

Another example is the cult of competitiveness in ministerial speeches and exhortation. But competitiveness is a comparative term not every country can be more competitive against every other. Against whom should the world be more competitive? The moon? or Mars?

Another such slogan is convergence, especially in relation to European Monetary Union. I will be happy to discuss the limited sense in which convergence is required afterwards. Many of the Great and Good want convergence not merely matters relating to inflation but in terms of real performance in output, employment and productivity. The worst example of this is the British espousal of the level playing field. This may be a natural cliche for spokesmen with a public school background, but is in danger of ruling out all the conditions under which international, or even inter-regional trade can take place.

In my experience no amount of economic training can prevent people from uttering these fallacies if it pays them to do so. One problem about driving them out is that there is no fallacy or piece of special pleading which some distinguished economists has not advanced at some time. There is a more important reaspon. Suppose, for instance, you are an economist at the Department of Trade and Industry. Ministers from all the main political parties insist that the UK must be “more competitive“ (at the very same time as the Bank of England follows an interest rate policy which makes us less competitive in one of the few meaningful senses.)

Such an economist may nevertheless think that the UK like any other country can improve its economic performance and tries to massage the word competitiveness into meaning better performance. This undoubtedly leads to less bad policy than if they followed the immediate instincts of the politicians. The harm arises if they gradually begin to believe their own phraseology or if it misleads the readers of their own White Papers.

I shall nevertheless assume that I do not need to labour why these ideas are fallacies to an audience such as this and instead concentrate on one of the most deep seated fallacies at all - and one where even this audience may need some persuasion.

I refer to the whole concept of national export drives: the Export Credit Guarantee Department (ECGD), the exhibitions to promote British goods in embassies abroad, Royal visits to dubious regimes, reception for unpleasant dictators at Buckingham Palace, the Queen’s Award for exports. The lot.

The reason for my emphasis is my recent interest in the contradiction between the British government’s claim that it is pursuing a foreign policy with an ethical dimension and the very strong official involvement especially on the part of the DTI in promoting arm sales. A very popular view is that such arm sales may be undesirable, but that they help promote jobs, growth and employment. Therefore a balance has to be drawn between these two considerations - a compromise always appeals to so called practical man.

I have come to the conclusion that we will never really stop dubious arms sales until the myth of the export drive is nailed once and for all.