It is a fashionable but fallacious view that there can be any substantial separation of functions of this kind. Decisions about the levels and structures of interest rates and supplies of liquid funds, about levels and compositions of government expenditures and sources of revenue, and about the encouragement and infrastructures of different sectors of industrial and commercial activities, will all have their own and often contradictory effects upon price inflation, employment, capital and current balances of international payments, budget surpluses or deficits, distribution of income and wealth, and so on. Successful recovery, and thereafter successful maintenance of prosperity, demand a single, carefully considered, jointly planned and jointly operated economic strategy.
Mr Dow gives the simple but cogent example of the need for some centralised decision whether the interest rate should be reduced to 5 per cent to aid the recovery of capital investment, or held at a sufficiently high level to prevent a depreciation of the pound, which would inflate import prices. But there is a host of other equally important interactions between monetary, fiscal and economic policies which must be judged centrally as a single whole.
In addition, your 'plan for recovery' fails to stress one other basic requirement for sustained recovery, which even the eagle eye of Mr Dow fails to illuminate. A central feature of your programme is the expansion, in one form or another, of monetary expenditure on domestically produced goods and services, to promote production and employment. But in our imperfectly competitive economy, when the market for the product of a particular firm expands, the management can respond either by producing a greater output, investing in more capital equipment and employing more workers at unchanged money prices and wage rates, or by raising its prices and so the wages and dividends of the existing workers and capital resources.
It may be true that, with the present extremely high levels of unemployment, there can be a substantial real expansion with little extra price inflation; but soon (perhaps when unemployment has been reduced from 3 million to 2 million), we will again be forced to adopt a restrictive policy to fight the threat of renewed runaway inflation.
By far the most difficult and important problem in our economy is how to ensure that increased demand leads to increased output rather than to higher money prices. If this basic problem could be solved, the rest would be child's play. But no one gives any thought at present to this problem, the solution of which will be found to require much more radical and extensive changes in our financial and economic institutions than is generally recognised, and which requires discussion not in a short letter but in a rather long book.
J. E. MEADE
The writer was awarded the Nobel Prize for Economics, 1977.Reuse content