Money and Power E-Book

Vince Cable

• Herausgeber: Atlantic Books
• Kategorie: Geisteswissenschaft
• Sprache: Englisch
• Veröffentlichungsjahr: 2021

Beschreibung

Through economics, our politicians have the power to transform people's lives for better or worse. Think Deng Xiaoping who lifted millions out of poverty by opening up China; Franklin D Roosevelt whose 'New Deal' helped the USA break free of the Great Depression. Or Peron and his successors in Argentina who brought the country to the brink of ruin. In this magisterial history, economist and politician Vince Cable examines the legacy of 16 world leaders who transformed their countries' economic fortunes and who also challenged economic convention. From Thatcher to Trump, from Lenin to Bismarck, Money and Power provides a whole new perspective on the science of government. Examining the fascinating interplay of economics and politics, this is a compelling journey through some of the most significant people and events of the last 300 years.

Leseprobe

MONEYandPOWER

SIR VINCE CABLE was MP for Twickenham for 20 years and is former leader of the Liberal Democrats. He was Secretary of State for Business, Innovation and Skills and President of the Board of Trade in the five years of the Coalition government from 2010 to 2015. Before entering Parliament he had a variety of roles as an economist in government, international organisations, academia and business, latterly as Chief Economist at Shell. He is Visiting Professor in Practice at the London School of Economics and the bestselling author of The Storm: The World Economic Crisis and What It Means. He has also published After the Storm: The World Economy and Britain’s Economic Future and the autobiography Free Radical.

MONEYandPOWER

The World LeadersWho Changed Economics

VINCE CABLE

First published in hardback and trade paperback in Great Britainin 2021 by Atlantic Books, an imprint of Atlantic Books Ltd.

This paperback edition published in 2022.

Copyright © Vince Cable, 2022

The moral right of Vince Cable to be identified as the author of this work has been asserted by him in accordance with the Copyright, Designs and Patents Act of 1988.

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‘The ideas of economists and political philosophers are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves quite exempt from any intellectual influences, are usually the slaves of some defunct economist.’

John Maynard Keynes, The General Theory ofEmployment, Interest and Money (1936)

‘Almost every political question has an economic aspect and almost every economic question has a political aspect.’

Charles P. Kindleberger, Power and Money (1970)

Contents

Introduction: Politicians and the Politics of Economics

 1 Hamilton: The Economic Founding Father

 2 Peel: Free Trade

 3 Bismarck: The Economics of ‘Iron and Blood’

 4 Lenin: From War Communism to State Capitalism

 5 Roosevelt: The Keynesian Revolution Without Keynes

 6 Erhard: The Social Market and Ordoliberalism

 7 Erlander: The Social Democratic Model Made Real

 8 Perón: Peronism and Economic Populism

 9 Park: The Development State and Hypergrowth

10 Lee: The Eclectic Economics of Lee Kuan Yew

11 Thatcher: Thatcherism and Its Cousin, Reaganomics

12 Deng: China’s Economic Architect

13 Manmohan Singh: The Quiet Reformer

14 Balcerowicz: Big Bang Theory and Practice

15 Abe: Japan Pioneers Abenomics

16 Trump: Trumponomics, Economic Nationalism and Pluto-populism

Conclusion: Sixteen Politicians: Sixteen Varieties of Economics

Acknowledgements

Notes

Index

INTRODUCTION

Politicians and thePolitics of Economics

Economic policy making is not just a technical matter for economists. Through the actions of political leaders, it has the power to change millions of people’s lives for better or worse. It is at the centre of the decision making that every world leader needs to make. And it defines the legacy they leave behind.

Political leadership matters in economic policy. Policy may have its origins in economic theory and analysis of past experience. But it is politicians who put it into practice, who oversee it and who are judged by its results. None of the current leaders of the USA, China, Japan, India or the main European countries are professional economists but they all defined their leadership objectives largely in economic terms. They are now being tested and judged by their performance. This is even more true when the world is reeling from the economic fallout of the biggest pandemic for over a century.

Economic performance may be just one of several claims on political leadership. National survival, physical safety, order, social cohesion, personal freedoms: all matter to various degrees. However, for most of the post-war era, the priority has been the raising of living standards and economic wellbeing.

In practice, a lot of economic policy making is delegated to unelected officials and made on the advice of technical experts, like central bankers, regulators and trade negotiators. Economic outcomes will often depend on market forces rather than political preferences. But it is the politicians who set the framework of public debate and its tone; who set the level of expectations; who pass laws and regulations; and who represent national authority in relation to the wider international system. And their political power goes with responsibility for its success or failure.

Most political leaders complete periods in office having made little more than a few, historically inconsequential tweaks to established policy that was working well enough already – or perhaps riding an economic trend beyond their control. But some have been highly consequential, indeed transformative. These are the individuals on whom I wish to focus.

In recent years, one political figure has emerged – Donald Trump – who could certainly be regarded as transformative, though not necessarily in a positive way. He set out a distinctive approach to economic policy. At its heart has been economic nationalism and trade protection, a fundamental change from the economic leadership role that American Presidents have adopted for a century. The Covid-19 pandemic, in its early stages, reinforced that approach – one which his supporters have dubbed Trumponomics. Now that Trump has been defeated and his agenda rejected by the American voters, it is tempting to regard Trumponomics as an aberration. Time will tell, but there is plenty of evidence that the economic nationalism he has unleashed will endure. Indeed, the Biden administration has continued his ‘America First’, protectionist, trade policy.

Trump isn’t the first politician to be credited with a disruptive and personalized approach to economics. Margaret Thatcher gave us Thatcherite economic policy and her US contemporary gave us Reaganomics. The Japanese Prime Minister, Shinzō Abe, who presided over an unorthodox approach to the Japanese economy, gave birth to Abenomics. The affectation of personalized branding probably originates with Rogernomics, used to describe the radical change of direction taken by Roger Douglas when he was Finance Minister for the New Zealand Labour government in the early 1980s.

But even before this recent fashion, the association of a particular approach to economics with political leaders is well established. The economic transformation of modern China is attributed to Deng Xiaoping. Before that, the post-war German Wirtschaftswunder – or economic miracle – is credited to the work done by the then Chancellor Ludwig Erhard. F.D. Roosevelt’s New Deal represented a decisive break with the economic policies which preceded it even if it was not, as often claimed, an early example of Keynesian economics. The economic tradition in the US of strong federal government intervention to protect domestic industry has long been described as Hamiltonian. The British commitment to free trade has been commonly attributed to Robert Peel and his abolition of the Corn Laws. Populist economic movements can acquire their own ‘ism’: Peronism has been a dominant theme in Argentine life for most of the last eighty years.

These examples raise a bigger question about the links between economics and politics: between economic policies and the politicians who gave effect to them. The history of economics is commonly treated as the history of economists and their ideas; rarely as the history of their application and the politicians who applied them.1 Such an approach is limiting at best.

I was prompted to write this book by the experience of having spent over fifty years at the interface between politics and economics: as a British MP, then Cabinet Minister, preceded by years as a candidate, campaigner and pamphleteer; and as an economist carrying out research or teaching economics in universities and think tanks, or advising companies and governments on economic matters. I saw enough of each to want to understand the connections better.

Specifically, I wanted to understand the politicians who brought about some of the big economic transformations in modern history: the adoption in practice of the idea of free trade; the use of government intervention to support industrialization; the attempts to counter mass unemployment; the reconstruction of economies destroyed by war; the creation of new models of capitalism, such as ‘social democracy’ or ‘state capitalism’; the attempts to achieve rapid economic development in poor economies; the attempt to create a communist economic model and latterly the attempts to dismantle communism. I am interested in the key political figures who drove these changes; what motivated them; which economists or schools of economic thought they drew upon and how they found them. But more broadly, I want to highlight a forgotten history: of the exchange and application of ideas which happen at the nexus of politics and economics.

From time immemorial, organized societies have had their politics and have also been concerned with economic questions around trade, monetary exchange and increasing wealth for personal gain or glorification or wider societal benefits. Some embryonic trade theory was recorded in Ancient Greece.2 Genghis Khan is said to have had an early understanding of globalization and a ‘borderless world’, though it is difficult to judge this claim in the absence of any written source. Medieval monarchs and Chinese emperors alike had rules and principles governing the issue of coinage, the operation of markets for essential consumer goods and payment for labour. Some of the standard texts of the history of economic thought trace modern thinking about economic matters to seventeenth- and eighteenth-century Britain and pre-revolutionary France.3 However, in this book, I have decided to begin around the end of the eighteenth century and the start of the nineteenth century when there was a step-change in the sophistication of economies with the emergence of more complex, industrializing societies, and when recognizably modern, democratic institutions became apparent.

Politics and economics converge and sometimes collide when politicians feel that they have to promise and deliver some combination of improved living standards, lower inflation, lower taxes, better public services, fiscal rectitude and sometimes a cocktail of different – and perhaps incompatible – objectives. There are also occasions when the consensus of economists’ advice runs directly counter to what is politically attractive, or deliverable: insisting on fiscal and/or monetary discipline when this produces unpopular ‘austerity’; opposing controls on rent, wages, prices and foreign exchange transactions; promoting user charges (for example, tuition fees, road charges or payments for health services); applying the ‘polluter pays principle’ to energy use; insisting that there is no such thing as a fixed supply of employment when politicians wish to ‘save jobs’; advocating the superiority of taxes on land (or property) rather than income; expressing a preference for free trade rather than ‘protecting’ domestic producers. The politician’s wish to hold or retain power may well lead to promises which are attractive to voters – like an abundance of free things – but which cannot in reality be delivered without help from the supernatural. Magic money trees grow easily in many soils. ‘Good’ politics and ‘good’ economics coexist less frequently.

There has, on the other hand, long been an understanding that the two cannot be separated. Adam Smith wrote An Inquiry into the Nature and Causes of the Wealth of Nations but also The Theory of Moral Sentiments which explored the ethical – and essentially political – issues behind economic judgements.4 Karl Marx insisted that the political system and the workings of the economy were interwoven and both subordinate to class interests.5 Charles Kindleberger was one of the few economists to weave together a narrative of economic history which incorporated the politics of national sovereignty, imperialism and war.6 There is, now, an emerging economics, or political economy, which tries to incorporate an ethical dimension and incorporates the role of civil society and the role played by ‘good citizens’.

But there are also differences of approach. Economists tend to be concerned with ‘positive’ statements: the description of often complex sets of relationships which explain why ‘if x, then y’. Critics will argue that this pretence at scientific method often confuses correlation and causality, though there are quantitative techniques to help distinguish the two. A generation of students has been brought up on various editions of Paul Samuelson’s Foundations of Economic Analysis, which started by distinguishing positive economics from ‘normative’ judgements about what ought to be and what is desirable: the language of politics.7 A classic example of the difference is provided by another economics Nobel Laureate, James Meade, whose textbooks on The Theory of International Economic Policy were classics of positive economics, but who also wrote a narrative of what economically literate policy makers should be doing: The Intelligent Radical’s Guide to Economic Policy.8

That is not to say that politics (including a ‘normative’ approach to economics) is simply a sounding off of likes and dislikes; politics is about how to reconcile different demands and interests, conciliate between opposing views and establish an agreed basis for the distribution of rewards (or hardship). Bernard Crick observes: ‘There is no end to the praises that can be sung of politics. In politics, not in economics, is found the creative dialectic of opposites.’9

I try to pursue the links between economics and politics through individual politicians. Carlyle once observed that ‘history is the study of great men’ and I adopt that approach. It can reasonably be argued, however, that the study of ‘great men’ (and women) is to trivialize economic history: to reduce it to the world of ‘good’ and ‘bad’ kings in the manner of 1066 and All That.10 It ignores the power of technological change, demographics and migration, nutrition and medicine, changing social mores and popular movements. E.H. Carr’s What is History? represents that austere approach to history which minimizes the contribution of famous individuals.11 And much of the critical commentary on the market-based transformations of the last few decades tends to dismiss individual leaders as mere flotsam on a tide of ‘neoliberalism’.

Yet it is possible to overdo the impersonal. When future generations look back on the twentieth century with the same detachment as we currently see the Middle Ages, it will very likely be a tale of three destructive monsters (Stalin, Hitler and Mao) as well as the less memorable and more anonymous people who helped to create unparalleled prosperity and technological advance in Europe and North America and who lifted poor countries out of centuries of destitution.

The heroes of economic progress include, but are not necessarily, politicians. When the definitive history of the 2008 financial crash and its aftermath comes to be written, the individuals who will stand out from the murk are the unelected technocrats in central banks, notably Ben Bernanke of the US Federal Reserve and, later, Mario Draghi of the European Central Bank. The ‘rules-based’ international system which evolved in the post-Second World War era and underlies its success has depended on the effectiveness of those who led and steered the General Agreement on Tariffs and Trade (GATT; later the World Trade Organization), the Bretton Woods institutions, the European Commission and numerous regulatory bodies.

And I am struck by the fact that the countries which sit at the top of the league table of human welfare and happiness – Denmark, Finland, Sweden, Norway, the Netherlands, Switzerland, Australia, Canada, New Zealand, and, among developing countries, Botswana and Costa Rica – have generally not produced individual leaders who are credited with their economic and social progress. The ‘Scandinavian model’, a remarkably successful and stable variant of modern capitalism, has largely depended on low-profile political leaders to design and deliver it.

But the cloak of anonymity does not fit for most of the big economic changes achieved through shifts in policy. For very many countries, certainly today, former US President Bill Clinton’s dictum ‘It’s the economy, stupid’ defines the priority issues for their government. Politicians get elected or chosen in large part because of expectations that they can deliver better economic outcomes than their predecessors and their competitors. I use the phrase ‘economic outcomes’ loosely to refer not just to economic growth and improvement in living standards but to low inflation and low unemployment and the quality and abundance of public services. Economic performance is, of course, only one benchmark; issues of national identity, security, corruption, ethnicity and religion can be important too and, in some cases, transcendent. But economic performance matters.

And success or failure accrues very often to individual political leaders, rightly or wrongly. Some of the world’s most significant countries have a – powerful – presidential system (the US, Russia, China, France, Brazil, Mexico, Nigeria, South Africa). And while there are constitutional checks and balances provided by independent institutions like central banks or the scrutiny and law-making power of legislatures, presidential leadership can be decisive in economic matters. Not only that, some parliamentary systems are quasi-presidential with personalized leadership (the UK), and the current appetite for ‘strong men’ leaders has reinforced the trend (Turkey, India). One of the few countries in which political leaders traditionally enjoyed short and inconspicuous periods in office – Japan – has now produced its own brand of personalized economic policy: Abenomics.

So, who are my individual politicians? Those I have identified could be credited with radical or even revolutionary change in the way economic policy was conducted. Some did so with a clear understanding of what was necessary and willed it to happen; others were facilitators of changes that were becoming necessary, perhaps without fully understanding the significance of what they were doing. Some were democrats operating within parliamentary rules; others were autocratic. Some delivered almost unambiguous benefit; others were divisive or did harm as well as good or created economic systems which were not sustainable. Some were team leaders; others were idiosyncratic individuals. Some were, or claimed to be, economists. But, for the most part, the big economic policy reforms and transformations were carried out by political figures who were not economists and lacked any background in economics: soldiers, lawyers, engineers, businessmen, trade union leaders, aristocrats and revolutionary agitators. Yet they got their ideas from somewhere. Keynes referred rather disparagingly to ‘practical men, who… are usually the slaves of some defunct economist’. I will seek to establish who the ‘defunct economists’ were but emphasize the decisive role of the ‘practical men’ too.

There is an argument for starting in pre-revolutionary France where one of Louis XIV’s key ministers, Jean-Baptiste Colbert, established an economic rationale for active state intervention – dirigisme. Similarly, François Quesnay, an influential figure in the court of Louis’ successor, developed not just ideas (including the opposing doctrine of laissez-faire) but changed tax policy to reflect those ideas.12 The leaders of the French Revolution, then Napoleon, introduced economic reforms which helped to shape economic development. Napoleon swept away many of the monopolistic protection rackets and guilds which were a feature of pre-revolutionary France; encouraged training in engineering; established a framework for monetary control through the Banc de France; and introduced standardized rules and systems, like metrication, helpful to business and trade. But economic transformation was very much incidental rather than central to his mission: that of military conquest.

The same could not be said for Alexander Hamilton in the USA, the first leader I discuss. He was a central figure in the creation of the United States, a politician who thought deeply and wrote clearly about economic policy at the end of the eighteenth century in a way that no politician in the modern sense had ever done before (and few have done since). Many of his ideas for the economic modernization of his newly independent country have had lasting relevance and I seek to establish how crucial they were. How did he acquire his subsequent reputation as an advocate of trade protectionism when his main intellectual inspiration was Adam Smith? How far is it legitimate to see Hamilton as a forerunner of Trump’s popular economic nationalism or was he instead a pioneer of evidence-based approach to policy, liberal values (like his then unfashionable disdain for slavery) and an enemy of populism? Thanks mainly to the eponymous Broadway musical and his colourful private life, Hamilton has become a well-known historical figure but his contribution to economics is less well recognized.

The British Prime Minister Robert Peel is known for the adoption of free trade in the battle over Corn Law legislation in the 1840s which moved Britain decisively from a protectionist to a free trading orthodoxy which has remained intact, pretty much, for the subsequent 175 years. Unlike Hamilton, he had no pretensions to original economic thinking and was, first and foremost, a practical politician. How far was his big economic policy achievement a result of the political exigencies of the time and how much was owed to the intellectual heritage of Smith and the economist-politician David Ricardo? How was he able to progress from being a member of a government long regarded as the most reactionary in the last two centuries to a hero of working people; from being the founder of the Conservative Party to a rebel who then split it for two decades; and, crucially, what were the steps which took him from defending protectionism to rejecting and fighting it?

My next choice might be said to be an unusual one: Otto von Bismarck. He was primarily concerned with statecraft and diplomacy, including the use of war to further his central objective: the creation of a powerful, unified German Reich out of Prussia and the miscellany of German states. He showed little or no interest in economic policy. So how did he come to be a key player in a customs union (the Zollverein) together with what is now called ‘regulatory convergence’, providing a model which later became a central feature of economic integration schemes like the Single Market of the EU? How was he persuaded to switch the new Germany from a free trading liberal economic tradition, which he initially espoused, to protectionism, both for agriculture and to promote industrialization (travelling in an opposite direction from Peel)? And how did a man with a well-advertised contempt for socialism, even in its mildest forms, come to establish the first, albeit crude, welfare state based on social insurance, long before such ideas took root in other major countries including Britain? Although not a politician in the conventional sense – he was authoritarian and had an aristocratic disdain for his social inferiors – he was, by necessity, a politician who had to navigate the treacherous waters of an emerging German democracy. The case of Bismarck illustrates a more general question, which is how far a major economic transformation, like the modernization of nineteenth-century Germany and its emergence as a major, and militaristic, state, can sensibly be attributed to an individual?

An entirely different strain of authoritarian politics came from Lenin, who was the first leader to try to put communist economics into practice. His ideological mentors – such as Marx and Engels, and J.A. Hobson – were long on analysis of the failings of capitalism and imperialism but short on economic remedies. In particular, The Communist Manifesto is some way short of being a policy manual. Economic policy in the Bolshevik state was largely made on the hoof, often under conditions of war and civil war, by Lenin and his henchmen such as Trotsky and, later, Stalin. So how did Lenin design the command-and-control central planning system, later developed, brutally, by Stalin? Was the ultimately unsuccessful establishment of central planning Lenin’s main economic legacy or was it the pragmatic use of markets, especially to incentivize peasant farmers, in the New Economic Policy which became a template for later Soviet reformers, under Perestroika and, more successfully, in the post-Mao Chinese reforms of Deng Xiaoping?

The inter-war period produced several political figures who contributed massively to the way we think about economic policy. Franklin Delano Roosevelt (FDR) has long been lionized as the first political leader to apply Keynesian economics. I look at the evidence around whether the Roosevelt of the New Deal was indeed influenced by Keynes or macroeconomic policies of a more conventional kind. And who converted him to the use of government borrowing to finance public investment – a countercyclical policy which earned him a big place in the history books? Did the New Deal actually achieve all that much in fighting mass unemployment as against other factors (for example, Hitler and war)? Later, how far was the creation of a rules-based international economic system for trade and finance a legacy of Roosevelt in particular?

My first post-1945 politician is Ludwig Erhard. Unlike my previous examples, he was unusual in being both a politician and an economist. He developed his liberal economic ideas in a think tank during the Nazi era and during wartime and applied them during the early post-war years as German Finance Minister and, then, Chancellor. How far can he be credited with the remarkable economic recovery of post-war Germany? What was his role, alongside Konrad Adenauer – the first post-war Chancellor – in the development of the concept of a ‘social market’ which combined a strong commitment to the competitive disciplines of the market with a strong state? How far is Erhard responsible for the austere ‘ordoliberalism’ which has dominated German economic thinking until today and has been carried forward into Europe’s economic and monetary union?

A post-war politician who created a quite different economic tradition is Juan Perón, the first of a succession of leaders espousing Peronism. Peronism is sometimes described as archetypal economic populism; but what does ‘populism’ mean in this context? Its policies have frequently led to economic crisis, even chaos. So why do Argentines keep returning to them? How far does Peronism explain the failure of Argentina to maintain its position – of a century ago – as a rich, near-developed country? How far does Peronist Argentina represent the last attempt to salvage an economic model from fascism, neither capitalist nor communist? Or is it – at least in its modern form – an attempt to apply Catholic ideas of ‘social justice’?

A contrasting economic model is Swedish social democracy, which for many years was (and even now is) regarded as the most successful attempt to synthesize the best from capitalist and socialist systems: an open market economy with a generous welfare state. Georges Pompidou’s description of paradise as ‘Sweden with sun’ captures that optimism. The Swedish social democratic model was not launched on the world by one political leader but evolved, effectively, over four generations of long-serving leaders: Hjalmar Branting, Per Albin Hansson, Tage Erlander and Olof Palme. However, of these, Erlander merits individual attention as the longest lasting and the leader who saw the biggest advances in the Swedish welfare state combined with economic success. I seek to establish the role of the prestigious Stockholm School of Economics and some of its leading members – Gunnar Myrdal and Bertil Ohlin – in creating the Swedish model. And I ask how far the subsequent difficulties, and loss of support for the Social Democrats, are a fundamental flaw or a remediable problem.

The post-war era is characterized by the emergence (or re-emergence) of Asia as a major economic powerhouse and the shift of the world’s centre of economic gravity eastwards. Asia’s economic breakthrough, or ‘take-off ’, occurred in sequence starting with Japan in the 1870s. The reforms associated with the restoration of the Meiji dynasty were one of the main transformative economic events of the nineteenth century. But it also appears to have been an achievement of genuinely collective leadership under the figurehead emperor. I shall deal here with some of the individual Asian leaders who built on the Meiji legacy. The post-war era saw the emergence of the so-called NICs (the Newly Industrialized Countries: Korea, Taiwan, Singapore and Hong Kong). Two of these owe their transformation in large part to individual political leadership. South Korea emerged from extreme poverty at the end of the Korean War to – what is now – a developed-country standard of living following the reforms after a military coup led by General Park. The Park reforms raise the question of how far his ideas were based on a Japanese model of industrialization and government support and how far they reflected Western ideas, including the growth-based development ideas of the Kennedy administration. Park’s experience also challenges Western ideas of liberal democracy. How far can seriously illiberal and undemocratic regimes act as a – necessary? – midwife to economically successful development and, ultimately, democracy? I have also looked at the semi-democratic model developed by Lee Kuan Yew, who led Singapore’s modernization for close to half a century. Unlike South Korea, Singapore is a city state and has always been open to trade and investment; but (unlike the Western caricature) the Lee model involves substantial government involvement as a facilitator of growth and guarantor of (strictly enforced) rules.

Perhaps the political figure who did most in the twentieth century to drive economic transformation was Deng Xiaoping, who led post-Mao economic reform in China. How far was the subsequent emergence of China as an economic superpower down to those reforms and to Deng personally? How did an ex-soldier and communist revolutionary, political commissar and bureaucrat come to have such an exalted status as an economic reformer? How did he manage to synthesize the ideas of Lenin and Mao with those of Milton Friedman and Asian contemporaries like Lee Kuan Yew? How do we fairly judge someone who is regarded by many (Chinese and Westerners) as a heroic figure who lifted hundreds of millions out of poverty, and by others as a brutal communist dictator who killed many people in cold blood to stifle democracy?

In the West, a major shift in economic paradigm occurred in the 1980s with the emergence of Margaret Thatcher in the UK and Ronald Reagan in the USA. Thatcherism and Reaganomics were about radical deregulation, privatization and tax cutting. I focus here on Mrs Thatcher whose reforms, arguably, were more far reaching. How and when did Mrs Thatcher become converted to the ‘free market’ economic thought of Friedrich Hayek and Milton Friedman? What were the different elements of Thatcherism in practice and how did they – for a while – attract popular support? Ronald Reagan’s approach to economic theory was a little less structured; it is said that he was converted to radical tax cutting when Arthur Laffer showed him the ‘Laffer Curve’ on a table napkin at dinner, demonstrating that cuts in tax rates may generate more revenue. How did Reaganomics differ from Thatcherism? And what are the legacies of both?

The biggest transformation in recent decades has been the liberalization – and dismantling – of socialist, planned economies. I have chosen two contrasting cases, one revolutionary, the other evolutionary. They both involve leaders who were economists turned politicians. The first is Leszek Balcerowicz, the author – as Finance Minister and Deputy Prime Minister – of the Polish ‘big bang’ or ‘shock therapy’ designed to move Poland from a failing (and hyperinflationary) communist economy to a capitalist market economy in a very short period of time. How did he himself migrate within a decade from communist economic orthodoxy to the Solidarity movement to free market convictions? Was his programme a success? The question posed by some critics is how far the Balcerowicz Plan was his and his Solidarity government’s and how much was transported from US economists (notably Jeffrey Sachs) and Washington institutions. Why were gentler, slower, more gradual, options disregarded?

The other case was the more modest but still substantial reform programme in India enacted by Manmohan Singh as Finance Minister and, then, the even more modest reforms which he enacted as Prime Minister. What influenced his intellectual journey, which went from Cambridge Keynesian economics and Nehruvian socialism to market reforms in partnership with the International Monetary Fund (IMF) and the World Bank? How much of India’s recent impressive economic growth can be explained by those reforms? How do we evaluate the career of someone who introduced and presided over – apparently successful – reforms but also headed a government steeped in corruption and scandal (though not his own)?

The 2008 global financial crisis created a new set of challenges for economists seeking to understand and interpret the post-crisis world and for politicians offering the public solutions to some of the legacy problems: slow growth; accumulated private and public debt; fragile financial institutions; public sector austerity; historically very low interest rates; and growing public frustration. Political leadership is coming from an unlikely source: an otherwise insignificant party machine politician in Japan, Shinzō Abe. Abenomics belatedly reflects the fact that Japan suffered a severe financial crisis almost two decades before the West and spent much of that time trying and failing to escape what has come to be understood as ‘balance sheet recession’, whereby the outstanding debts of companies inhibit future investment. The question I address is: has the, now retired, Abe (together with his Finance Minister, Tarō Asō) found an answer? Who were the economists who moved beyond conventional thinking to offer the Japanese political class a new approach? Is Abenomics working, economically and politically? And could it be applied elsewhere?

I complete my biographical selection with a controversial choice: Donald Trump. This choice is not inspired by admiration. President Trump did great damage, especially to America's reputation as a democracy. My choice does not seek to imply that he was a serious economic thinker; his attention span was notoriously short, and his thoughts were expressed in tweets and pithy soundbites. He was believed not to read his adviser’s briefs or even to listen to challenging ideas.

So how far are his ideas random expressions of his gut instincts or part of a radically different, and consistent, approach to economic policy which appears to be reshaping the world? Has he succeeded in reinstating the nation state as the key economic actor and relegating global and regional economic rules and institutions? Over two and a half centuries after Adam Smith demolished the idea, does ‘America First’ inevitably lead to ‘mercantilist’ trade policies where all countries simultaneously try to cut imports and promote exports? How far did he also succeed in upending orthodox monetary and fiscal policy? We do not yet know where Trumponomics will lead but we have to acknowledge its importance and – so far – its political appeal to a substantial base.

These are the stories I want to tell: of men and women who fought their way to positions of political power and used that power to change, in radical and far-reaching ways, the direction of economic policy.

I have omitted some of the technocrats and national or international civil servants who have made a major contribution to economic policy: governors of central banks, heads of international agencies with an economic mission, key economic advisers. A good example of a massively influential technocrat was Jean Monnet who established, after the war, the French Commissariat général du Plan and as much as anyone laid the foundations for France’s ‘Thirty Glorious Years’ of growth, as it was called. He then went on to be a key figure in establishing the European Economic Community. But he was never elected to public office and was the servant of French Presidents and Prime Ministers.

There is no African. It is possible that, as this century evolves, the centre of global economic gravity will shift to Africa following the demographic trends which will, in due course, make Nigeria and Ethiopia, in particular, major economic powers. Post-Independence Africa is not, however, a great economic success story. But precisely because of its exceptionalism there is a case to be made for Seretse Khama’s Botswana: a stable, democratic country which has, apparently successfully, learned to manage its resource wealth competently. But it is yet to be more than a small, isolated, oasis of good practice. In other countries, serious economists achieved political power, like Mwai Kibaki in Kenya, but they did not demonstrably achieve significant change.

The only Latin American, Perón, established a tradition of populist economics associated with failure. Venezuela now vies with Zimbabwe as the textbook example of how political leaders can destroy a potentially wealthy – and successful – economy. Are there happier examples? It seemed plausible to argue five years ago that Luiz Lula and the Brazilian Workers’ Party had established a workable social democratic model which combined growth and social welfare, fiscal and monetary discipline and an entrepreneurial approach to state enterprise building on the legacy of Getúlio Vargas from the 1940s and 1950s. But it now appears that the political structure was rotten and has seemingly not survived.

Perhaps the most uncomfortable success story in modern times is that of General Pinochet in Chile. He is reviled for overseeing systematic murder and torture during his dictatorship, after a military coup in 1973. But he also, influenced by the Chicago-based economists Milton Friedman and Arnold Harberger, embarked on a radical programme of fiscal stabilization, welfare reform – particularly pensions – and market liberalization. The economic medicine worked, leading to sustained recovery and poverty reduction and admission to the OECD; democracy was restored; and Chile appeared to have broken free of the dispiriting cycle of failure which has enveloped most of the rest of the continent. But a revolt in 2019 against extreme inequality cast doubt on the stability of the model.

Through my examples, I hope to better understand the links between good (and bad) politics and economics. Often politicians get things badly wrong. If it were straightforward to convert political power and good economic advice into economic success, there would be more Singapores and Germanies and fewer Venezuelas and Zimbabwes. Nations fail. Many do. And some fail persistently. The authors of Why Nations Fail, Daron Acemoglu and James Robinson, observe: ‘achieving prosperity depends on solving some basic political problems… Explaining world inequality still needs economics to understand how different types of politics and social arrangements affect economic incentives and behaviour. But it also needs politics.’13 And, sometimes, politicians emerge who make a big difference. That is my focus here.

1

Hamilton: The Economic Founding Father

The closing decades of the eighteenth century were the first period in which recognizably modern political and economic ideas came to dominate. It witnessed the first stages of what would become the industrial revolution in the UK. The period also spans the American and French revolutions when ideas of ‘left’ and ‘right’ and liberalism and nationalism found full expression. It saw the publication of Adam Smith’s Wealth of Nations (1776) building on the work of John Locke and David Hume. The book’s ideas helped to frame the debate around trade – and wider economic policy – for much of the next century and beyond; indeed, its legacy lives on today.

In the new United States, Alexander Hamilton (1755–1804) was at the centre of political and economic life: as a revolutionary soldier; then leading politician; as co-author of the US Constitution; and as economic policy maker and thinker (most prominently as George Washington’s Treasury Secretary). According to American economist Douglass North, as Washington’s Treasury Secretary, Hamilton was responsible for ‘the most important developments for subsequent growth in the economy… as [his policies] formed the monetary and fiscal underpinnings of the new nation. The first established a sound credit basis; the second was an important beginning of an elaborated capital market.’1 Hamilton set out the framework for America’s industrial revolution and private enterprise economy and for a system of trade protection to support manufacturing – widely copied elsewhere in the subsequent two centuries. His approach to economic policy was perhaps best summarized by his biographer Nathan Schachner, who noted that he had read and absorbed Adam Smith but had adapted his ideas to the particular needs of newly independent America.2 He also anticipated the future needs of a developing market economy for financing business and government. He established the pragmatic formula which has served most successful governments well in the US and beyond: he was an enthusiastic supporter of business and markets but also promoted strong government.

Hamilton attracted much attention for other reasons: his colourful upbringing amid the slave-owning communities of the Caribbean (and his own antipathy to slavery); his brilliant military record as a youthful aide-de-camp to Washington in the War of Independence; his role in framing the new American Constitution and the party system of the fledgling democracy; his contributions as a poet, essayist, lawyer, financier and businessman, educator and political theorist; and his venomous personal feuds and polemics with political opponents, including future Presidents Jefferson, Madison, Adams and Monroe, culminating in an early death aged forty-nine in a duel at the hands of Vice President Aaron Burr. His life and death are sufficiently exotic to have generated a popular musical. He was one of two of the Founding Fathers never to have become President (the other being Benjamin Franklin who was considered too old for office at the time of Independence). However, as the man who established the foundations of American capitalism he is, arguably, as significant a figure as any of those who were.

The Revolutionary

Hamilton has had many biographers3 – latterly, and most comprehensively, Ron Chernow.4 But for our purposes, a few details are important to establish the context. He was born on the Caribbean island of Nevis before moving to the Danish colony of St Croix. Both islands’ economies were based on enslaved people working the sugar plantations. What are now territories renowned mainly for tourism were then important cogs in the world economy (the British tried to obtain Guadeloupe from France in return for Canada).

His family life would now be described as ‘chaotic’. He was illegitimate. His relatives would probably be dismissed today as ‘white trash’. He was fortunate, or enterprising, enough to be taken under the wing of a trader who employed him as an apprentice clerk. He also attracted the attention of a wealthy patron who encouraged his love of reading and writing (as a teenage journalist) and paid for the young Hamilton, aged seventeen, to go to North America to study, never to return.

One enduring legacy of his Caribbean upbringing was his fervent opposition to slavery. He was a strong abolitionist, which lay in part behind his subsequent quarrels with Jefferson especially, but also Madison, who held people in slavery. And his approach to economics was based in large part on his insight that economic strength came from innovation, enterprise, education and manufacturing technologies, not from exploiting enslaved people and raw materials. Long before the Civil War he identified the underlying strength of the industrial North as being its industry as against the agrarian, plantation, economy of the South (his crucial work in developing manufacturing was later acknowledged by Abraham Lincoln).

Soon after Hamilton embarked on his college education he was caught up in the colonial uprising against the British crown. He achieved early recognition as a nineteen year old, reportedly making a stirring speech at a mass meeting in support of the Boston Tea Party rebels in 1774. And when military hostilities broke out a year later, Hamilton supported the revolution, albeit initially with a journalistic pen rather than a sword. His writings, alongside his legal studies, did betray a tendency, later held against him by his political enemies, to disdain disorder and the populist politics of the uneducated common man. In the current era, he would perhaps have been marked down as an intellectual elitist and apologist for the ‘establishment’, despite his humble origins. His speeches at that time also demonstrated his preoccupation with the fact that economic relations with the colonial British authorities were heavily one-sided and needed rebalancing. In one of his pamphlets he foreshadowed the mature Hamilton: ‘we have food and clothing in plenty: as for those articles we import from abroad, why not manufacture them ourselves?’5

By the following year (1776), however, Hamilton was founding and leading an artillery troop of sixty-five men and within months had come to Washington’s attention for his courage under fire and organizational ability. In the early days of the war, when the rebels were mostly in retreat, Hamilton’s reputation grew and, aged twenty-two, he was one of Washington’s aides-de-camp and a lieutenant-colonel, rising to become, in effect, Chief of Staff. In the years of warfare which followed he would become a heroic soldier despite Washington’s instructions to stay away from the battlefield and he greatly improved the logistics of Washington’s army. But he also found the time to devour books on classical philosophy (Hobbes, Cicero, Bacon) and history and economics (particularly Adam Smith); to marry into a rich and socially respected family; and to develop a clear philosophy, shared with Washington, for post-revolution America. They envisaged a federal rather than confederal state, with a national army, a strong executive and national unity.

Politics and Policy

In the closing stages of the war against the British colonial authorities and before winning recognition for heroism at the Battle of Yorktown in 1781, Hamilton focused his attention on practical policy issues, especially regarding the economy.

The United States at that time was a small, agrarian country. There were no cities with a population of more than 50,000 in an overall population of 3 million. There was virtually no industry: only one cotton mill in 1791 (there were around 100 by 1808). The economy was badly damaged by the restrictions on exports to Britain (they fell from £1.75 million in 1774 to £750,000 in 1784). And there was double-digit inflation as a result of the demands of the war, greatly reducing the value of the dollar against gold.

In 1781, as the end of the war drew near, Hamilton produced a blueprint for dealing with fiscal crisis involving federal taxation, the creation of a national bank, the use of bond markets and foreign borrowing to raise credit for the government, and a system of public debt management. His contemporaries were also shocked by his open acknowledgement of the useful role of what he called ‘moneyed men’: the fiscal crisis ‘links the interests of the state with those of the rich individuals belonging to it’.6

A year later he published the ‘Continentalist’ essay which advocated higher tariffs – albeit moderate and effective – on a range of goods, mainly for revenue reasons. Protectionism was the norm in Britain. As a result, US exporters faced severe duties on wheat, tobacco, rice and fish. So, Hamilton was reflecting the mercantilist orthodoxy of the day which valued exports over imports and trade surpluses over deficits. Although he had read and been impressed by the arguments of Adam Smith – the ‘division of labour’ and the ‘hidden hand’ of the markets –‘free trade’ had little attraction to him. Indeed, his priority was to restore solvency and pay soldiers. Such a task needed taxes, especially import duties (collected by a strong centralized government machine).

His writing, at this stage, also betrays his contempt for populism and easy solutions, pandering to ‘what will please, not what will benefit the people’.7 Nonetheless, he opted for the grubby world of politics and became a member of the Confederation Congress (representing New York).

In the aftermath of the War of Independence, Hamilton maintained a polymath existence as lawyer, politician, journalist and campaigner (against slavery). He established a (private) bank for New York, providing the first stock ever to be traded on the New York Stock Exchange. In one of his few lapses of judgement on economic matters he dabbled in real estate speculation in upstate New York rather than Manhattan where he would have made a fortune. He also showed the first signs of the trait that was ultimately to destroy him: an inability to resist being dragged into public arguments of invective and innuendo with political opponents. On this occasion, his opponent was the powerful Governor of New York, George Clinton. Inevitably some of the mud stuck (which included the then controversial suggestion that he was mixed race or, alternatively, the illegitimate son of George Washington).

His major contribution to posterity in these years followed from his participation as one of the fifty-five delegates from twelve states to the Convention which produced the American Constitution. Revered today as having almost religious significance, the Constitution was hammered out over months of often acrimonious argument amid much skulduggery, somewhat removed from Benjamin Franklin’s later description of it as ‘the most august and respectable assembly he was ever to see in his life’.8

The dominant intellectual influence on the Constitution was a series of essays – the Federalist papers – authored by Hamilton and Madison, which appeared in 1787. Though they would later quarrel bitterly, at that stage they were close collaborators and shared a similar view of the necessary balance to be struck between the federal government and the states. Similarly, they broadly agreed on how to achieve the necessary checks and balances between the executive, legislature and judiciary and between order and liberty. Their essays, which Hamilton often had to write in a hurry between his legal cases, are now regarded as seminal works.

Hamilton’s distinctive contribution to the papers reflects his antipathy to over-powerful state politicians and to demagogues who claim to speak for the popular will. More positively, he sketched out the commercial benefits of economic union and common monetary policy. And he managed to insert his economic philosophy, which could have come out of the mouth, or pen, of Adam Smith, that monopolistic vested interests are bound to pursue their own interests and so need to be regulated.9 Hamilton’s contribution was not merely to pump out the words; he was able, with Madison, to win – from a minority position initially – the federalist case, and then get the new Constitution approved by the states, most crucially in the recalcitrant state of New York.

The Treasury Secretary

Once the Constitution was agreed, the way was open to choose the first President: at that time, by an electoral college of state representatives, not by party or popular vote. Hamilton was determined that Washington should become President: the only man, he believed, with the stature for the job. Washington, once persuaded to run, was the clear favourite but Hamilton managed, with his characteristic lack of tact, to make a mortal enemy of John Adams, the only other plausible candidate, who became the new Vice President and, in due course, the second President of the USA. Hamilton’s reward was to become Washington’s first Treasury Secretary in 1789. At that time, it was the most powerful executive position in the new administration (one of only three, the others being Secretary of State – Jefferson – and Secretary of State for War). It was also a highly sensitive post since the new state needed to raise taxes, and taxation was potentially the flash-point for differences between federalists and the states. Yet he was clearly the best-prepared candidate for the job, having spent years reading and drawing up a detailed blueprint for government.

Within hours of being appointed he had raised a large loan for the federal government (from the Bank of New York which he himself had established) and then another from a new Philadelphia bank. Historians are agreed that he was an administrative genius who combined theory and practice, rapid decision making and careful systems building. To all intents and purposes, he became Washington’s Prime Minister, though parallels with government today are somewhat misleading (he had thirty-nine employees, the State Department five and the Department of War only two). He and the other brilliant minds of his generation were deployed creating a new state for just over 3 million people (excluding 700,000 enslaved people) with an administrative apparatus which today would be expected in the lowest tiers of local government. The juxtaposition of greatness and pettiness, visionary constitutional design and small-minded personal jealousies can only be understood in that unusual context.

Hamilton’s solution to the problem of how to finance the new state was in the form of a fifty-page report. It was typically clear-minded and radical. American governments would need to borrow at affordable interest rates for the foreseeable future; so, debt markets must be efficient and the federal government must always be trusted to honour its debts. He made explicit something we now take for granted: that the national debt will never be repaid. The task of fiscal policy is to be able to service the national debt and to maintain confidence that government can continue to borrow in the markets on good terms. If greater confidence in government securities were then to drive up their price, rewarding speculators, then so be it. By the same token, higher bond prices meant lower interest rates benefiting the economy. Furthermore, confidence in government securities would enhance their status as collateral for private business borrowing and thus for expansion of the money supply, which he saw as essential to maintaining economic activity (his writings on the quantity and velocity of money in circulation show a remarkably modern approach to monetary policy). To uphold confidence that the government would always honour its obligations to creditors, expanding government debt would have to be financed, through a sinking fund, by taxation. For this he proposed luxury taxes on wine and spirits as well as tea and coffee (which had the merit of being foreign-made luxuries). He was, in fact, no stranger to radical tax proposals, having offered a tax plan in 1781 to Governor Clinton of New York which included a flat tax on land, dwellings, servants, lawyers and ‘on the privilege of remaining a bachelor’ (which was rejected by the state legislature).

For a youthful revolutionary who had so eloquently denounced British taxes on tea to come out in favour of higher taxes on tea was bad enough. His proposed whisky tax threatened to produce a rural revolt against duty enforcement inspectors and an armed force had to be assembled to head it off. His whole approach to taxation and debt management, which was based in part on policies already employed in Britain, suggested to some – implausibly – that he was a British spy. This allegation was fuelled by his defence of Anglo-American trade as it revived after the War of Independence.

But his debt management strategy caused real anger among those who saw themselves as losers. The debt was of three kinds. There was foreign debt which Hamilton insisted should be honoured in full to maintain credit worthiness; few dissented. Then there was the debt of the states which was to be assumed by federal government; this opened up bitter disputes over the fairness of the settlement (as, for example, between Georgia and Massachusetts, fuelling a long-term grievance). For some, this measure was Hamilton’s greatest achievement. He effectively put the United into the United States. We can see today in the European Economic and Monetary Union the crucial importance and the difficulty of sharing debt obligations in a union of independent states.

But the main bone of contention was domestic debt, much of it held by relatively poor people – artisans, traders and farmers – many of whom had acquired war debt for patriotic reasons. Creditors were offered the market value or the original issue value – which sounds fine, except that many of the creditors were desperate to sell for cash and were often, also, unsophisticated investors prone to scams. Hamilton’s measures inspired confidence in the market, which drove up the price of government stock, enriching those investors who had been smart enough to snap up large holdings. Fortunes were made from speculation, which fed Hamilton’s reputation as a friend of ‘fat cats’, often portrayed as greedy Northerners, and led to accusations against him, and others, of insider trading.

Despite the political backlash, Hamilton got his measures approved by Congress. He then embarked on an even more ambitious project: the establishment of a strong national bank based on the experience of the Bank of England, the Bank of Amsterdam and other European banks. It was to be privately financed (with government backing and a government share in the profits) and its purpose was to stimulate credit to business, which he saw as crucial to the development of the economy. There was strong opposition from those who distrusted banks, who resented ‘speculators’ or who thought that this was another wheeze to fleece the rural populations and the South. Nonetheless, the bank was approved by Congress and went on to become the Federal Reserve.

Although the debates around the central bank and budget policy were technical and often parochial, there was a bigger purpose in Hamilton’s work which marks him out as a giant figure in US history, bigger than some of the more illustrious Founding Fathers. At least on economic matters they – Jefferson and Madison in particular – represented a pre-capitalist vision of America including an agrarian system based on enslavement. One historian describes him, not unjustly, as ‘the creator of American Capitalism’.10 He was unapologetically in favour of enterprise and self-improvement. He consistently supported measures to create the conditions under which business could flourish, including private property rights, patent protection and legally enforceable contracts.

Hamilton was able to maintain the momentum behind his reforms in part because of tangible improvements to the economy. Thanks to America’s improved credit standing, long-term interest rates on public debt fell from 6 per cent to 4 per cent, which was a vital improvement when public debt service counted for over half of federal expenditure. The easier availability of credit sparked economic recovery. Although there were no GDP figures, some measure of the state of the economy can be gauged from the tone of a private and confidential note sent by Washington to Hamilton in July 1792. It listed twenty-one grievances Washington had heard about Hamilton’s policies but acknowledged that ‘the country was prosperous and happy’.11

But the grievances were taking a growing toll on Hamilton’s reputation. Not least was the impact on public opinion of a speculative boom and bust cycle in the shares of the new Bank of the United States, with allegations that Hamilton (who had impeccable financial integrity and refused a salary) was somehow involved in favouring his friends. To compound these reputational issues, he was caught up in a scandal resulting from an adulterous affair. His many enemies, now led by Jefferson and Madison, had plenty of ammunition.

While Hamilton was fighting these battles, he was also writing – and promoting – a classic paper, Report on Manufactures, which helped to define one of the great economic controversies of the nineteenth century, not just in the USA but, later, in Germany and Japan, and indeed to the present day: the circumstances under which the national interest requires the protection of new industries, particularly manufacturing.

Trade Policy, Infant Industries and Economic Nationalism

Hamilton’s Report on Manufactures, presented to Congress in December 1791, was the product of what would now be called ‘evidence-based decision making’. He personally wrote numerous letters to correspondents all over the world to establish the prevailing nature of manufacturing. The state of development of American industry was well behind its competitors and summarized by one correspondent as ‘we have no capital. We have no knowledge of the business. We have no skilled workmen. We cannot compete with English goods.’12 Hamilton argued that he was neutral between manufacturing and agriculture, but he lauded the positives of the former, including the capacity for specialization (he also commented on the use of child labour – and had no problem with it). But the Report on Manufactures also led Hamilton into the controversial territory of challenging free trade orthodoxy.

I have noted earlier that while soldiering during the War of Independence, Hamilton read voraciously and he was very familiar with Adam Smith’s An Inquiry into the Nature and Causes of the Wealth of Nations