Chapter 91 Section 9 The Temptation of "Stability"

The allure of Germany's more tightly regulated capitalist model stems not only from Germany's own admirable economic success, but also from a perpetual desire for security and stability.This desire leads policymakers to trade off the risky unpredictability of free markets for the delusional assurance of orderly order.This explains why there is currently a tendency in industry to advocate state intervention, despite the discredited economic theory that underpins it.This also explains two other things of great concern at the moment.First, to seek a new framework capable of maintaining monetary stability, overseen by international organizations along the lines of Bretton Woods; second, to believe that genuine protectionism offers the only hope against new, costly Destructive competition by low producers.Each of these views has been advanced by eminent advocates, the first of which was Paul Volcker's Bretton Woods conference committee, and the second of which was Sir James Goldsmith.

Throughout my lifetime in politics, the pursuit of currency stability has done much harm.Nigel Lawson did damage to the disinflation that my own government had enforced by keeping the pound on the Deutsche mark between March 1987 and March 1988.Later, the pursuit of rigid parity within the exchange rate mechanism of the European Monetary System plunged the UK and other European countries into needlessly severe recessions.But in any case, as Professor Milton Friedman has pointed out, the experience with fixed exchange rates under the Bretton Woods regime conceived in 1944 - which ultimately failed in 1971 - makes it difficult to justify the benefits it sometimes achieves. Praise is justified.In fact, it was only intended to be implemented for 8 years (from 1959 to 1967), but even in those years, it did not abandon exchange rate movements.Moreover, the inflation of the 1970s actually started in the last years of the Bretton Woods regime.Its eventual downfall reflected the inflation of the 1970s and the reluctance of sovereign states to bend their interests to rigid exchange rates, thereby introducing into their own the inflation or deflation of other economies.All experience shows that attempts to fix exchange rates have in fact not enhanced stability, nor confidence, except for a short time.They only guarantee some adjustment in the event of economic crisis and political discord.Talking about "rebuilding Bretton Woods" is just nostalgia, we can't do that, in fact we can't even do that.As Sir Samuel Britton, a prominent and original supporter of the Exchange Rate Mechanism, recently wrote: "A fixed but adjustable (linked) exchange rate of the Bretton Woods or Exchange Rate Mechanism style may no longer be A realistic choice must be a straightforward choice between floating exchange rates or full currency union with partner countries".For reasons I've mentioned elsewhere, I'm adamant about floating rates.Sir Samuel may be pushing for an alternative, but we all know we can't stop halfway.

I agree more with Sir James Goldsmith's analysis of the international economic situation.Sir James was right to call attention to the challenge posed by foreign competition to costly and overregulated European industry, which he saw inevitably leading to a fall in real wages and a sharp rise in unemployment— Unless we build protectionist barriers around the economically developed countries in Europe.The findings suggest that competition in emerging markets has indeed begun to drive down real wages and is raising unemployment in parts of continental Europe.These are real issues that we must deal with.

But the benefits of free trade do not lie in the fact that participating countries have similar cultures or institutions, or that they have the same economic potential.Mutual benefit comes from exploiting the relative advantages of various countries.Sir James believes that 4 billion people are now joining the world economy, creating what he calls "an entirely new kind of competition", although he may be exaggerating its immediacy and scale. The figure of 4 billion seems to include the world's population, men, women and children, excluding developed countries.Not all of these people will participate in the world economy anytime soon either, and the economic potential of the low-wage workers we are competing with in China and the former Soviet bloc is also very different.

Naturally, the experience of the "Four Tigers" in Asia shows that at least among the newly industrialized countries, industrial technology and living standards will improve rapidly in some countries.But there will be two outcomes from this: they will cease to be low-wage competition; and they will increasingly become a market for exports from other countries, including Western European countries.Competition will again benefit all. Granted, even though the West will prosper in absolute terms, it may still have some practical problems that we need to address relatively speaking.However, as the jobs of unskilled workers in Western countries have been jeopardized by low-cost competition, greater flexibility in the labor market, well-targeted training and retraining schemes, and grants to the poorest living under current household credit provisions are needed. family with purposeful help.

One must also ask why the so-called dividing line between trade-friendly and trade-unfavorable should coincide with the external borders of the European Union.Within the European Union, countries vary widely in development, potential and labor costs.The logical conclusion of Sir James's argument was the imposition of national or even regional and sub-regional tariff rates, but it was precisely because these barriers to trade were removed at that time that the Industrial Revolution—on which our prosperity was originally built On the basis of one created the conditions.Tariff rates and quotas have other undesirable consequences.As Brian Hindley has pointed out, they discriminate against exporting industries by raising the exchange rate.They risk prompting retaliatory actions by other countries.They also help to create international tensions to the point where a poor (but militarily powerful) country excluded from a market will decide it is worth using force to gain entry.

I welcome Sir James Goldsmith's involvement in the debate on the future of Europe and agree with his support for sovereign nation-states, but I find it ironic that he is prepared to give the European Union's central body a say in trade and industrial policy There is so much power.Decisions about which industries to protect or not to protect are decisions for which politicians and officials must be strictly accountable.Such discriminatory policies encourage patronage, corruption and abuse of power.James was right to be skeptical of the Federalists, who were bound to make the most of these policies, and who had a long track record of failure.So I disagree.But Sir James forced me and other conservative, "free-traders" to reexamine our arguments in the light of the dramatic changes in the global economy following communism.

This century has witnessed unprecedented political and economic experimentation.Models of central control have been experimented with in various ways, from social democracy or democratic socialism under various names, to the ideologically non-ideological, technocratic totalism.Liberal models of decentralization were also experimented with, most notably in the UK and US in the 1980s.The accounts of the century, which can now be drawn up, send an irresistible message: the collectivist system has failed, whether judged politically, socially or economically.By contrast, the enforcement of orthodox liberal principles has turned some countries and continents better off.

Naturally, this gigantic experiment was sadly unnecessary.State monopolies and centrally regulated economies ultimately can never mobilize human talents and energies.Nor can their similar, milder means of coercion. It would be good if it were believed that the lessons had now been sufficiently learned, that mankind would hereafter avoid these terrible mistakes, and that, at least in economic policy, we would adhere firmly to those principles which experience has shown to be effective.Unfortunately, as one of our greatest poets reminds us: This has been the case since the birth of human beings, and it will be the same in the future——

Since society began to evolve, only four things are certain: A dog never tires of eating, a pig never tires of a pen, a fool's burned finger is bandaged, and tremblingly stretches back into the fire; After all this a splendid new world shone forth, when man was rewarded for his existence, and none for his sins, just as water was destined to wet our bodies and as fire was destined to burn, With terror and murder, the gods of copybook titles are back again! Rudyard Kipling: The Gods of Copybook Headings (1919)