January 2013 newsletter – The letter of the 364

Dear Sir,


As one of the signatories of the famous letter signed by 364 economists I am, of course, gratified by Professor Neild's clear demonstration that, in the event, our letter was justified. However, I would like to set the record straight on one small point.

This is that I cannot agree with his assertion that Mrs Thatcher’s Employment Acts, together with the higher unemployment levels to which he refers, had been important in directly reducing the rate of wage increase in Britain. In an article in the Economic Journal [Vol.96, March1986, pp. 39-54] by me and a then young econometrician [Tim Jenkinson, who is now Professor of Financial Economics at Oxford University] we showed that the fall in the rate of inflation in the early 1980s was only the indirect effect of higher unemployment in the Western world as a whole, in that it led to a dramatic turn-round in the ‘flex-price’ commodity markets and hence in import prices. The fall in the prices of primary product imports in the OECD countries as a whole between 1980 and 1982 followed a sharp rise in these prices in the preceding two years, so that the turn-round in these prices was between 50-60 per cent [depending on which price index is used]. Tim's calculations combined time series and cross-section data for many European countries. Wages were shown to simply follow the previous year’s change in prices, with unemployment having very little direct impact, so that there was no Phillips curve.

One of our conclusions, therefore, was that ‘it is not futile for the industrialized countries as a whole to deflate in order to reduce inflation. It is just that if they do so the inflation will be reduced by the resulting fall in commodity prices, not by moving out along their national Phillips curves, insofar as there are any’. In short, as I emphasized in ‘How the Battle Against Inflation Was Really Won’ [Lloyds Bank Review, Jan 1985], the main victims of the deflationary policies pursued in the rich countries were, on the whole, the primary product producers in the poor countries.

Wilfred Beckerman, 
Balliol College, Oxford, 
and University College London

Dear Sir,

I am grateful to Wilfred Beckerman for reminding me of the great importance of the rise and fall of primary prices in causing inflation and its easing. Somehow it slipped my mind. I apologise.

Robert Neild
Trinity College, Cambridge

Dear Sir,

As one of the 364 economists who signed the famous or infamous statement criticising the 1981 Budget (see Robert Nield’s article in the October Newsletter), it is worth noting that the controversies stirred up by the statement are still alive and kicking. Economists of the IEA persuasion consider the 1981 Budget to be one of the most significant positive events of the post-war era and, further, they think that the views of the 364 economists were wholly incorrect and indeed laughable.

On a personal note, I was chosen by the IEA to defend the gang of 364 in a series of events celebrating the 25th Anniversary of the 1981 budget which culminated in an IEA publication, Were 364 Economists All Wrong? which appeared in 2006. My contribution to this volume was expanded in an exchange with Tim Congdon in the December 2006 issue of Economic Affairs. Subsequently I re-entered the lion’s den when I took part in a 2011 Witness Seminar with many of those who were closely involved with the 1981 Budget.

I leave to the other members of the 364 to decide whether or not my defence was successful. My basic strategy was to ignore the statements about economic theory despite their being described by Robert Nield as irrefutable. I simply took the view that any defence of them which I put forward was unlikely to persuade the average reader of IEA publications. My focus was on the simple statement that ‘present policies will deepen the depression’ mainly because the fact that the economy started growing immediately after the 1981 Budget was felt by many to be the clinching argument against the 364. The nub of my argument was that a growing economy is perfectly consistent with a deepening depression so long as the rate of growth of the economy is less than that of potential output. This was indeed the case for at least two years after the budget as evidenced by the fact that unemployment continued to rise over this period.

Those interested in the details can consult the relevant articles but the fact that these issues are still the subject of debate shows the 1981 Budget remains a highly contentious event.

Steve Nickell
Nuffield College, Oxford

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