Wee Willy Hutton

The man is gobsmackingly awful in his economics I\’m afraid.

The sound and fury, though, disguised a more complex reality. In both Britain and France the coalition in favour of nationalisation after the war extended well beyond the left-wing parties and the trade unions. British Conservatives and French Gaullists, along with businesspeople and professionals, were strongly in favour for the same pragmatic reasons that lay behind the nationalisation of Northern Rock. In the circumstances of 1945, the idea that private companies, who had only survived the Thirties via trade protection and price-fixing cartels, and who, in France, had collaborated with the Nazis, were going spontaneously to spearhead the reconstruction of devastated war-torn economies was risible. The propositions of a Thatcher or Milton Friedman would have been met with gales of derision. The state had won the war. It now had to win the peace by mounting programmes of investment and modernisation that were beyond the capacities of the private sector.

That this was the mantra I agree: although it should be remembered that Hayek\’s "The Road to Serfdom" had already in fact been published. Will goes further:

France had thought through the practicalities of nationalisation more carefully. It was evident that the postwar French private sector needed support in every way – with finance, markets and capacity-building – that only careful state planning could provide. Planning was the pragmatic response to French capitalism\’s chronic weakness.

OK, that is indeed what they thought.

In Britain we refuse to accept the proposition, chasing after the chimera of 100 per cent private-sector solutions and regarding nationalisation as a prohibited taboo. As a result we have never invested in making public ownership work, despite its necessity. After all, Northern Rock was preceded by the renationalisation of the railway infrastructure and the nationalisation of one of London Underground\’s contractors, Metronet. If we want the best from our public utilities and infrastructure, these may well be the pragmatic precursors of more. How much better to try to do public ownership well, rather than follow the British fiction that it should not be done at all.

Ah, but, you see, if you want to build a scientific case (and we do all agree that economics is a science?) then you don\’t just look at what happened in one or two places. You set up a hypothesis (nationalisation and planning good for growth, say) and then go and look, not for cases that support the contention, but for those that refute it. For the fact that two countries grew with such nationalisation and planning shows very little: perhaps all countries, whatever their economic systems, were growing in that period?

What you\’re supposed to do as a good little scientist is to look for evidence that disproves your hypothesis. Only if you are unable to find such disproof are you able to say that your hypothesis has turned into a thesis which now stands, until someone does indeed (if ever) find the disproof that overturns it.

And we have to hand an example that does indeed disprove the hypothesis. Adenauer\’s Germany:

The radical new policies adopted by Adenauer\’s post-war Christian Democrat government transformed a sclerotic economy. Between 1951 and 1960 the Federal German economy doubled in size.

The pre-war economy was dominated by price cartels. In the Weimar Germany, no less than 2,100 separate cartels were established by 1930. Under the Nazis, economic frreedom was further constrained. By 1938, roughly 50 per cent of total German output was subject to cartels of one form or another. After the Second World War, the Allies banned cartels, but various forms of price fixing continued.

During the war, and in the immediate post-war period, the German economy was planned down to the smallest detail.

But post-war Germany was led by a group of politicians who rejected the wartime and pre-war orthodoxy of extensive state intervention in the economy. Influenced by Ludwig von Mises and the Freiburg group of economists, they preferred to employ the price mechanism as the key feature of what would be called the Social Market Economy.

Ludwig Erhard, Director of Economic Administration in post-war Germany – later he became Federal Chancellor – was a founding figure of the Social Market Economy. He believed that only under a free market economy could an individual find true freedom, and that only a free society and free economy would deliver the wealth needed for humane social policies and programmes.

Erhard masterminded the introduction of a new currency in 1948 and lifted price controls. He cleverly waited for a weekend to announce his bonfire of controls, knowing that the Allied powers would not be back in their offices until the following week, by which time it would be too late to countermand him. He argued: "We must find our way back to a market organisation free of controls. In place of interventionism, we must insist on personal responsibility and performance. The market is not a diabolical invention to subdue particular classes. On the contrary, it is the only organisation of economic life which creates a just and optimal distribution, a function which no collectivist authorities can replace."

The results of the new free-market policy, adopted in the British and American occupied zones, were outstanding; in contrast, the French and Russian occupied zones remained shackled in poverty. Adenauer commented in his memoirs that: "Every politician who is concerned with questions of economic order should be urged to study the course of events in the Anglo-American zone since June 1948." Arguably they should have studied the United Kingdom too, where rationing and other wartime restrictions were not removed until the 1950s, by which time Germany was well on the way to overhauling the UK economically.

A notable feature of the Social Market Economy was the strong commitment to curbing inflation through the adoption of monetarist policies aimed at maintaining the value of the D-Mark. The Bundesbank refused to underwrite cost rises and unsustainable wage demands by engineering an over-expansion of the money supply. Economic policies were targeted at opening up markets to prevent the misuse of resources and the creation of inefficient monopolies.

Exploiting the new trade freedoms ushered in by the European Economic Community, Germany trebled its exports to five EEC states – France, Belgium, Luxembourg, Italy, and the Netherlands – between 1958 and 1962.

A bonfire of the controls on the economy, a much much lighter hand in the planning process, a concentration upon not ownership, but the eradication of monopolies….that produced vastly better results than the planning and nationalisation which Hutton recommends.

We also have the example of Hong Kong, which went from being entirely destitute after the war to being richer than the UK today: and they even refused to collect GDP figures for the first few decades of that surge in growth, for fear that some planers might do something with them.

The question thus is not whether Statism produces growth: pretty much any not entirely lunatic economic system will do that, given the onward march of technology. It\’s whether Statism produces more growth than non-Statism: and the answer there is pretty clear. It produces less.

So we shouldn\’t do it.

And to think that Wee Willy is a Governor of the London School of Economics.