Inflation, Growth and International Finance

Alec Cairncross

• Publisher: Routledge
• Year: 2016
• ISBN:
  9781317227106
• Edition: 1
• Topic: Economics
• Subtopic: Economic Theory
• Index: Economics

This book, originally published in 1975, deals with the sources of economic growth, inflation and the prospects of bringing it under control, floating exchange rates and restrictions on international capital movements. Although aimed at the non-specialist, professional economists willa slo find the book stimulating.

Chapter 1 Government and Innovation

DOI: 10.4324/9781315623801-1

I

For many years it has been the practice of the British Association to call on a natural scientist, almost invariably a Fellow of the Royal Society, to deliver this address. No professional economist has ever done so before and no one with any claim to be regarded as a social scientist has done so since 1935 when Lord Stamp spoke on ‘The Impact of Science upon Society’. An economist, elevated to such dizzy isolation, must find it hard to decide what to say to his colleagues in other disciplines. It would perhaps be legitimate, when so many non-economists have used this occasion for an address on economics, to reciprocate by looking at the activities of the natural scientists through the eyes of an economist. But with the caution natural to one who has spent nearly twenty years in the Civil Service, I have hedged a little and stopped half-way, choosing a subject half of which at least is home ground.

My subject is the role of the Government in innovation and I shall be using innovation in a limited sense to mean the generation and absorption of technological change. I shall not be talking about the advancement of science as such, dear though that subject may be to this Association. My concern will be less with science and what goes on in the laboratory than with technology and making things for the final consumer, individual or corporate. The question that I want to ask is essentially a political one: what can a government usefully do to accelerate technological development? I shall bring in science only to the extent that it is drawn upon by technologists and so affects economic activity. To this extent—but only to this extent—I shall be reviewing how the government of an individual country like Great Britain can harness the application of scientific knowledge to social and economic advancement.²

¹ Presidential Address delivered to the Swansea Meeting of the British Association on 1 September, 1971. ² I am indebted to Mr M. Fores for clarification of the distinction between science and technology. See, for example, his ‘Price, Technology and the Paper Model’ (Technology and Culture, October 1971). For another view of technology, linking it with invention and ‘sub-invention’, see Jacob Schmookler, Invention and Economic Growth, pp. 5–9.

These are familiar themes, on which, as on all great matters, there is nothing very new to be said. I do not stand before you as an innovator. The issues involved are of great practical importance to us all and it is better to debate them in this Association rather than, as commonly happens with questions to which no one knows the answer, on political platforms. Not that the Association has neglected them. As far back as 1952 it set up a Committee at the Belfast meeting ‘to study the problems of speeding up in industry the application of the results of scientific research’. This led eventually to a series of important studies of technical progress by two distinguished economists, Professor Charles Carter, now Vice-Chancellor of the University of Lancaster, and Professor Bruce Williams, now Vice-Chancellor of the University of Sydney. Since then the Association has returned to the subject on a number of occasions and governments have taken it up with more enthusiasm than discernment.

II

Let me begin by asking why we should want technological innovation at all. Indeed some of you may wonder whether we do want it and whether it does more harm than good. I might reply with Bronowski that, on the grand scale of evolutionary history, technology has made man what he is so that ‘to quarrel with technology is to quarrel with the nature of man’.¹ It was the unprecedented step ‘from using rudimentary tools … to making them and keeping them for future use that … sent man off breakneck at a speed unmatched in three billion years of terrestrial life’.² In the more humdrum terms of economics it is natural to want technological innovation if it is on balance useful: if it adds to the wealth of the country or relieves poverty and hardship. The case for more rapid technological innovation broadly coincides with the case for faster economic growth. You may not find this case persuasive or you may think that, with increasing affluence, there are good grounds for a less wholehearted dedication to the pursuit of wealth. If so, I hope that you will bear with me if I do not turn aside to argue the pros and cons but pass them sternly by. I am going to assume that, rightly or wrongly, governments want faster growth and that it is this that kindles their interest in science and technology.

¹ J. Bronowski, ‘Technology and Culture in Evolution,’ Cambridge Review, 8 May, 1970, p. 141. ² Ibid.

I do want to insist, however, that technological change has been the mainspring of economic and social progress over the past two centuries, and that it remains the chief source of our increasing affluence. Whatever may be said to pooh-pooh or deride economic growth—and economists are not behindhand in these flights—no one would want us to go back to the mode of living of 1770, still less to the lower standards to which present population would be reduced if we abandoned every improvement in technology since then.

Perhaps we should remind ourselves more often that income levels have risen fourfold here and in other industrial countries in less than a century and that the greatest beneficiaries have been the manual workers at the bottom of the social scale. It is not because we work harder or longer that we are better off than our forefathers: hours of work are much shorter and the physical effort involved is generally a great deal less. We are better off because of the enhancement of productivity that rapid technical change has made possible. It is mainly this that has produced the rise in the living standards of the mass of the population, hardly perceptible from year to year but adding up to a revolution in each successive generation. In spite of social disasters of all kinds—wars, revolutions, slumps—by which from time to time the improvement in income per head has been interrupted, this improvement now continues at an increasing pace which in no major industrial country is less than 2–3 per cent per annum—well above any previously sustained rate of advance. Even in Britain, where the low rate of growth is a matter of reproach, productivity is rising three times as fast as in the nineteenth century when we led the field.

It would be absurd to attribute the whole of this improvement to technological innovation. Something is due also to the expansion in world markets, the accumulation of capital, better education, new methods of business organisation and so on. But all of these take second place to advances in technology and some are themselves largely the fruit of those advances. There would have been little expansion in world trade, for example, without the steamship. More rapid capital accumulation would be to little purpose without a progressive improvement in new equipment. And so on.

If one looks back, it is the introduction of new products and new techniques that increasingly dominates the process of growth. Technical change, once discontinuous and erratic, is now sweeping us along and transforming our environment and style of life.

If this is what dominates the process of economic development, it is obviously of first-class importance to know to what extent more rapid technological innovation can itself be fostered by deliberate policy. Which of the different elements involved—and obviously there are quite a number—can the Government usefully influence? How should it set about influencing them? These are not questions to which a conclusive and unanimous answer is ever likely to be given: we are dealing with political attitudes as well as hard facts. Attitudes change from one generation to the next and so does the scope for government action. Some people are predisposed to believe that government action could accelerate economic progress while others are sceptical.

A hundred years ago the dominant philosophy was that governments should stand aside and not get in the way of individual effort to translate more skill and knowledge into a more efficient use of resources. The function of government was seen as one of maintaining a social and political framework within which technical change could occur rapidly, promoted by the spur of profit and the pressure of competition. The framework might be adjusted as technological and social factors interacted, creating new needs and fresh tensions, but innovation was left to take place sporadically within the private sector of the economy in response to commercial pressures and opportunities.

In these circumstances technological innovation in Britain and abroad owed little to government support in any form. It would be difficult to name any invention of importance in civilian life made by a government employee or at government expense in Britain before the Second World War. It is true that efforts were made in various countries and at various times to encourage new industries; but this rarely meant singling out some departure in technology for official support. One well-known exception was the prize offered by the British Government at the beginning of the eighteenth century for the development of an improved chronometer. The Government was also, by virtue of its spending power, in a position to assist the more rapid diffusion of technical improvements. An example of this was the use of mail subsidies to Cunard in the 1840s by the British Post Office which accelerated the introduction of passenger steamship service across the Atlantic. But in general the Government regarded patents as the appropriate way of encouraging the innovator and competition as the appropriate way of promoting rapid diffusion of the innovation.

To all this defence provided a major exception. From a very early period governments were interested in promoting inventive activity and accelerating changes in the design of weapons for defensive purposes. Where they were the buyers, they had a direct interest in seeing to it that the products offered to them were in advance of those available to potential enemies. This did not mean that governments were very successful in their efforts to improve weapons by additional expenditure. Indeed many of the more important developments took place almost in defiance of governments, as is apparent, for example, in the case of the Spitfire in the 1930s. But, successful or not, the objective of governments usually embraced the need to improve weapons technology long before any similar objectives were expressed in relation to private industry.

Over the past century defence has come to seem less the exception than the rule. Governments are now as anxious to see civil industry adopt the latest technology as they are to be up-to-date in the military sphere. What is much more to the point, they are far more deeply involved in what civil industry does and far less willing to assume that what it does from self-interest will produce the best results. Without quite nationalising so-called private industry they have semi-nationalised a great deal of it. They have accepted the role of managing the entire economy in the interests of full employment, economic growth, and other broad objectives of policy. In discharging this role they have greatly enlarged the public sector of the economy: in the United Kingdom, for example, public authorities employ one man in four and over 40 per cent of the national income passes through their hands. The State has thus acquired wider functions, wider powers and greater leverage on the economy.

For the first time technological innovation as a major source of economic growth has become an object of conscious government policy. This has coincided with two important developments with which I should like to deal at some length. The first is the growth of a widespread belief in the power of governments to use science for economic ends. The second is the growth of expenditure on research and development and of attempts to help private industry by government expenditure on technological innovation.

III

Popular faith in the economic potential of science is not hard to understand. It found forcible expression in Mr Wilson's speech in this very town seven years ago. Many people have argued that if governments can put a man on the moon or produce atomic bombs by mobilising the scientific and technical brainpower of the country they should be capable by a similar concentration of resources of eliminating human poverty and distress. It is often suggested that if it was right in wartime to build up teams of scientists and spend heavily on the development of new weapons of destruction it must be equally right to follow similar strategy for the purposes of peace. To those who think along those lines it hardly matters that the British Government has yet to launch a satellite successfully, much less put a man on the moon, or that there is a rather fundamental difference between a single consumer and a single project with a clearly defined objective and innumerable consumers wanting a multiplicity of things and exercising their preferences in unpredictable ways. Science is thought of as the modern Aladdin's lamp which, if rubbed the right way, can work miracles.

This belief in science—and I mean science rather than technology—has been given added intensity in Britain by the disappointment felt in the rate of economic growth over the past twenty years. Comparisons are drawn with countries that were in ruins only a few years ago and have now achieved higher levels of output per head than the United Kingdom without ceasing to chalk up a faster rate of growth from year to year. There is less recognition that the divergence between British and continental rates of growth is of long standing, extending back for almost a century, or that the British record since the war compares very favourably with that of earlier periods in which we now take pride. It is still widely felt that industry has fallen down on the job. What more natural than to turn to science in which Britain has an outstanding record and press the Government to let science come to the rescue of the economy.

If indeed science could do the trick the British Government would be well placed to take the action necessary. It is by far the largest employer of staff with a scientific training. If all government demands are added up, they absorb two out of three of those qualified scientists and technologists in Britain who work in industry or in government research establishments. About two-thirds of all expenditure on research and development is financed by the State and of this the amount spent on defence alone exceeds the total spent by (private) civil industry on research and development.

There are, of course, many people who would be sceptical of the ability of governments to make the right use of scientists and technologists. They would say that if the rate of growth has been disappointing, this is because governments try to do too much already. The last thing that governments are equipped to do is to promote industrial innovation. They can never spot the real winners because they are far too clumsy, ignorant and bureaucratic. Instead they are likely to go in for expensive prestige projects that tie up scarce design teams until another government comes in and scraps the whole affair. Do not let us be blinded by this talk of science, they might say, when nothing could be more unscientific than a government.

I have some sympathy with this view. I would not dispute that we should be on our guard against the tendency in modern life to call for government action whenever things are thought unsatisfactory. It is an illusion to suppose that governments can do everything or that government action is always for the best. They have their limitations like every other human agency and these limitations are most evident when we ask too much of them. If we want to encourage innovation we must face the possibility, to put it no higher, that there is very little that governments can do about it or at least that they would be well advised to find indirect rather than direct ways of operating on it. We must take governments as we find them, not as idealised, infallible do-gooders.

But we cannot shut our eyes to the powers and responsibilities that governments already possess. The greater the area of the economy which is owned or controlled by the Government, the greater, almost by definition, must be its role in technological development. To take the extreme case of a collectivist economy like the USSR where the whole of industry is owned by the Government, who else but the Government can apply scientific knowledge to industrial innovation? In a mixed economy like Britain, the Government's powers may be less extensive but it is in a strong position to influence almost every industry of any importance whether by providing a market for its output or by offering financial assistance for specific purposes or by abating taxation or by taking measures to regulate competition, limit prices, and so on. It is unthinkable that where the Government has such influence it should deliberately refrain from bringing it to bear on technological development and from seeking to increase industrial productivity by encouraging innovation.

But is it science that the Government should be seeking to make use of for this purpose? This is far from self-evident. What science yields is knowledge but knowledge by itself need not give rise to any improvement in the practical arts. This is obviously true, in the short run at least, of advances in pure science. But even in applied science much of the research that is undertaken may have no immediate application or, where it has, may ...

Table of contents

• Cover
• Halftitle Page
• Title Page
• Copyright Page
• Title Page
• Copyright Page
• Dedication
• Contents
• Introduction
• 1. Government and Innovation
• 2. Reflections on Technological Change
• 3. Economic Growth in Britain
• 4. Inflation
• 5. Incomes Policy: Retrospect and Prospect
• 6. Doubts about the Trend towards Floating Exchange Rates
• 7. International Capital Movements: the Future of the Controls
• Index of Names
• Index of Subjects