Discussion is probably the most important part of a meeting such as this, but my experience is that the speaker has to say something to get it going. Please do not bother to make any notes, unless you particularly want to. The main points of this talk will be very soon on my website - www.samuelbrittan.co.uk. And of course I am happy to respond to questions and observations on any subject, even if I have not mentioned them in my talk.

Economic Humbug

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 that are popularly regarded as common sense economics, but which are really self-serving beliefs by business spokesman or out-of date sermonising by politicians.

One example is structure snobbery - the belief that certain sectors of the economy such as manufacturing, are inherently superior to other sectors such as hamburger stands or self-service laundries. Another example is the British espousal of the level playing field. This may be a natural cliché for spokesman with a public school background, but is nevertheless is in danger of ruling out all the conditions under which international, or even inter-regional, trade can take place.

A prize example of bogus economics recently occurred when the National Institute of Economics and Social Research carried out a report for Britain in Europe. This stated that British trade with the rest of the European Union accounts directly for 2.7m jobs and a further 0.5m indirectly via firms that export intensively to the EU. To the fury of the National Institute a distorted version was leaked to the Daily Express on February 18 which stated that up to 8m people could lose their jobs if Britain pulls out of the European Union.

Not merely was there no mention of 8m jobs. But the NI report did not even say that 3.2m jobs would be lost. No long run effect at all was expected on employment levels; and even for the first two or three years the temporary job loss was put at 50,000 with an appropriate response from monetary policy and 175,000 without such a response.

Whether the leak was due to unscrupulousness or stupidity I do not know. Indeed, it is more worrying if it was due to stupidity. For this suggests that the campaigners for Britain in Europe do not understand the difference between jobs being related to a market within a particular institutional arrangement, and all the jobs being lost without replacement if a country leaves that arrangement.

Even after the Institutes director, Martin Weale, had intervened with a protest and clarification, a letter to the Times (February 21, 2000) signed by among others a former Chancellor of the Exchequer, (Kenneth Clarke), claimed that it was shown that 3m British jobs depend on our full access to the Single Market.

But as the actual Institute report points out, not all exports to the EU would be lost if Britain were to leave. (After all, Switzerland sells a higher proportion of its exports- 60 pc to the EU the UK; and it is not even in the EU). The imposition of tariff and other barriers could make the EU a more difficult market. The result would be a once-for-all reduction in economic welfare, as output would be 2 per cent lower than might otherwise have been expected and real national income 1 per cent less. But this would be an efficiency, not an employment loss. Initial job losses would put downward pressure on wages and prices, so that those losing their jobs could price themselves back into work; and monetary policy would normally be expected to cushion the effects.

This quite amazing howler of Britain in Europe is the first cousin of another howler: which says that all the workers now engaged in making arms for sale to dubious regimes such as Indonesia or Saudi Arabia would have to live on the dole if such exports were to be stopped.

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 dubious argument or piece of special pleading which some distinguished economist has not advanced at some time.

The Mythology of Exports

I want to devote most of my time to one fallacy, closely related to those I have mentioned, but which might not be so obvious. I refer to the whole concept of national export drives: the Export Credit Guarantee Department (ECGD), official exhibitions to promote British goods in embassies abroad, Royal visits to dubious regimes, receptions for unpleasant dictators at Buckingham Palace, the Queens Award for Exports. The lot.

The reason for the choice of subject is my recent interest in the contradiction between the British Governments claim that it is pursuing a foreign policy with an ethical dimension and the still strong official drive to promote arms 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 the 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.

The basic fallacy is not to realise that exports, like investment, are a cost and not a benefit. If we could finance the imports that British citizens want to buy without any exports - say by interest free loans from overseas with indefinite repayment - we would be better off. Of course this would require a period of adjustment. But such adjustments are necessary after any kind of economic or industrial change. And in the world as it is, exports are a waste of resources and serve no purpose if they are not paid for, or are paid for very late and on a heavily subsidised credit basis and with a strong political risk factor.

The Balance of Payments Obsession

The post World War Two generation of political and economic leaders was brought up on slogans and posters such as export or die,the dollar drive and even on one occasion exporting is fun.

As a junior journalist I was invited to a business conference when the then prime minister, Harold Macmillan, was due to give an address on the need to export more. One greatly daring conference organiser sent a message to Number 10, hinting that the speech was boring. Macmillan evidently had the same opinion. He abandoned the official text and instead looked back to a still earlier world where prime ministers did not have to worry about the balance of payments, which looked after itself.

He could have meant the pre-1914 gold standard or the floating exchange rates of the 1930s. He gave the impression that either was better than the post-war period when prime ministers had to award prizes for exports or launch campaigns for import saving. Needless to say the audience was soon eating out of Macmillan's hands, although most people there had no idea what he was really talking about.

The balance of payments pre-occupation goes back many centuries. Mercantilist writers in the 16th, 17th and 18th century, campaigned for a favourable balance of trade and for an inflow of gold and silver. These writers were refuted as conclusively as anything can be in political economy by 18th century members of Scottish Enlightenment such as David Hume and Adam Smith.

During the period of rapid world economic growth towards the end of the 19th century huge current account surplus and deficits built up, as a counterpart to the flow of savings to capital-hungry developing countries. Canada is believed to have had a deficit of over 7 per cent of GDP in the first decade of the 20th century; Australia had one of 3 to 4 per cent. A counterpart of these deficits was the British surplus which rose to 6 per cent per annum in the decade before the first World War. These deficit and surplus percentages are far higher than any of the imbalances about which commentators have moaned in recent decades.

The origin of both the export drive and the reinvention of so-called balance of payments problem was in the immediate post-war years when sterling was on a fixed exchange rate and was also inconvertible. The financial policy regime was then one of suppressed inflation which tended to spill over into the balance of payments, and which was held down by a mixture of controls and exchange rate overvaluation.

It was moreover a world with strict controls over capital flows. These controls could not be severe enough to protect determined speculators from launching an attack on a suspect currency, but they were enough of a deterrent to the regular flows of capital across borders which normally finance imbalances on the current account.

By contrast we are now back in a world of relatively free capital flows. There are bound to be large imbalances between countries with high savings ratios and relatively few investment outlets and other countries, such as the United States. which have low savings but many investment opportunities. Moreover we now have floating exchange rates.

And advanced industrial countries with floating exchange rates never have balance of payments problems. They may have suffered from unwelcome downward pressure on their exchange rate due to financial markets distrust of their policies or of fears about domestic inflation. If so, such fears should be tackled directly.

In today's circumstances export drives really amount to the diversion of public resources towards special interest groups under the guise of patriotic slogans. The Export Credit Guarantee Department is expected to balance its books, taking one year with another. Whether it will continue to do so remains to be seen in view of the high volume of credits outstanding to dubious regimes. But we should remember that nearly all other public enterprises are expected to earn a real rate of return of 6 per cent by the Treasury. So ECGD represents a diversion of resources from more profitable to unprofitable uses.

Competitiveness

Closely related to the export drive fallacy is the cult of competitiveness in the speeches of politicians and business leaders. There is a limited sense in which one country can be said to be uncompetitive. This is if, at the prevailing exchange rate, it cannot attract sufficient voluntary inflow of overseas investment to cover a current deficit. Or, to be more accurate, it can only do so at penal interest rates associated with an unnecessarily low level of employment and economic activity.

Such a country needs to adjust its nominal cost levels either by holding back wages, or by doing this by the back door and devaluing its currency. Its problems have no very direct connection with industrial performance, the morale of workers and all the other virtues with which it is wrongly linked in ministerial rhetoric.

But the most important thing to bear in mind is that competitiveness is a comparative term. Not every country can be more competitive against every other. The attempt to do so is a wasteful and damaging zero-sum game. Against whom should the world be more competitive? The moon? Or Mars?

The Jobs Argument

Perhaps the best thing to do in front of an academic audience in my remaining time is to list some of the standard arguments in favour of state support for export promotion.

The most popular argument for subsidising exports is the effect on jobs. It is in fact the silliest, but let us give it a running. If export aids and incentives to import substitutes were spread out evenly across the whole range of British overseas trade, the effect of abandoning them would simply be to lower the nominal exchange rate, so that exports became more profitable without special aids and imports less so.

It is only plausible to argue about job effects because export aids are not spread evenly across the board, but are heavily concentrated in one sector, namely heavy capital goods with long delivery periods and even longer periods of payment.

And in this sector arms sales are the largest single component, amounting according to some estimates to between a fifth and a third of ECGD expenditure. Now if official help were removed it is indeed likely that arms sales would have to contract relative to other kinds of expenditure. If arms sales were cut by a third - so that they went mostly to NATO alliess rather than to countries with dubious regimes - about 40,000 workers might be involved. The argument that jobs derived from exporting weapons cannot be replaced is akin to the argument for keeping open uneconomic coal for the sake of employment.

We are up against the myth that full employment means the same employment. In fact well over three million people leave the unemployment register each year even in recession periods, over half of them for new jobs or training. It is indeed almost certainly easier for arms workers, many of whom have a wide range of skills, to find new jobs than it was for miners, whose training was far more specific.

The Terms of Trade

A slightly more respectable argument is that relating to the terms of trade. A royal visit or a small amount of official publicity, or arm twisting by the Foreign Office, might enable a company to sell more overseas at a given price or to sell a given amount of goods at a higher price. This enables the home country to exchange exports for imports on the slightly more profitable terms.

The argument has very little application in a highly competitive world where a country of the size of Britain has little monopoly power. If e-commerce means anything at all this should vanish completely as buyers are able to find the most competitive offer unaided by royal visits.

A further argument relates to small exporters, who might not have the resources to engage in the required market research and export promotion. But surely this kind of thing is the job of market research and advertising agencies, chambers of commerce and industry associations. If it does not pay them to engage in such and promotion, it is because government support agencies are providing these services on a free or subsidised basis.

Although weak, the small firms argument is probably the least bad one for export promotion. But such small firm assistance accounts for a minor proportion of all the resources devoted to the export drive and accounts for far less than the ECGD spends on promoting arm sales for the benefit of very large companies.

Others will Take the Trade

The favourite business argument, which one hears particularly, but not only, in relation to arms sales, is that if the British government does not promote them, the American, French or Chinese or other governments will, leaving Britain as usual as the mug. I am all for international disarmament treaties; and there are indeed agreements limiting export credit in general and arms sales to dubious regimes in particular.

But supposing that other countries do not go all the way? It is like saying that you should not stop knocking your head against a brick wall until your friends have also stopped knocking theirs. Or to drop the metaphor: national resources should be left to where they enjoy the highest rate of return even if this causes a squeal from companies that have been used to being feather-bedded.

Infant Industries in Disguise

The most highbrow argument is the so-called new international trade theory. This focuses on dynamic economies of scale and the possibility that the advantage will be with those key companies that obtain an early foothold in world markets.

Paul Krugman, who was one of the pioneers of these theories, was very quick to disown attempts to apply them in practice. For he noted that it was difficult to decide in advance which were the industries worthy of official support - and the choice is necessary, because you cannot support all industries at the same time. In addition he observed that government help was most likely to be given to the industries that lobbied successfully or could make an emotional appeal, rather than where the theoretical case was most plausible.

In any case, these so-called new international trade theories have been known for well over 100 years. Alfred Marshall writing at the end of the 19th century was well aware that companies or industries subject to economies of scale could not be perfectly competitive if they were to cover their costs. And the argument for temporary help for industries to establish a foothold was well known to John Stuart Mill in the mid-19th century when he christened it the infant industry argument. Later on he said he was sorry he ever thought of it because of the way it was abused by so many lusty infants claiming protection and by the difficulty of removing a subsidy once it was given.

What strikes me most in examining all such arguments is how limited and speculative they are. Even if they have greater validity than I suppose, they do not amount to the threat of national bankruptcy or mass unemployment which the proponents of export drives believe would otherwise stare us in the face if we abandoned them .

Political and Moral Implications

Subsidised credit for exports of major capital goods have far worse effects than the simply economic ones. Western nations are undoubtedly rich enough to waste some resources. As Adam Smith said, There is an awful lot of ruin in a nation.

The worst effects are political and moral. They are both illustrated by the instance of the Pergau Dam in Malaysia in the mid 1990s when the Conservative Government overturned a publicly minuted reservation by the Permanent Secretary of the Department of Overseas Development and insisted on supporting credits for this dam.

One of the unstated arguments for going ahead was that this would act as a sweetener to persuade the Malaysian government to buy other goods, including arms, from Britain. On the other hand arms sales are justified because they are supposed to persuade governments that buy them to use British equipment in their capital projects. Thus one bad consequence is called in aid to support another; and Third World despots are encouraged to devote still more resources to military spending or prestige projects of dubious value.

More recently a Labour prime minister is said to have overruled the Foreign Secretary and insisted on the Government being minded to finance the Ilisu dam project in Turkey, which will flood several valleys with sites of unique cultural and religious value to the Kurds. You can imagine what this will do to promote ethnic harmony inside Turkey.

All these follies are supported by the myth that exports are valuable for their own sake, however small the return the British nation gets from them. Business lobbyists are able to persuade a succession of prime ministers ranging from ultra-dry Conservatives to New Labour that, if the Government does not support them, their overseas rivals will win the contracts instead. I wish we had a prime minister with the analytical resilience simply to reply Let them.

When General de Gaulle was told that if the French left Algeria the Russians would take their place, he replied, I wish them much joy of it. The same applies to European or other governments who want to throw away their national resources on exports - often arms or other products detrimental to genuine development.