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• Keynes, Hayek, the LSE, and manufacturing.

By NICK O’HEAR [The Fortnightly Review] – On 4 August this year, BBC Radio 4 broadcast a debate from the London School of Economics between Keynesians and Hayekians.

The issue they were debating was how to get the world out of the current economic mess. Keynesians took the position that, despite huge and growing government debts, we should hold our nerve, spend more to boost a faltering economy, and thereby create more wealth and more tax. Hayekians simply thought that national debts are far too great, we must swallow the bitter pill and spend less. Keynesians countered that the economy would shrink even further, thus compounding the problem.

One doesn’t expect much from the LSE, and the debate lived up to our expectations. The argument meandered along these lines until a vote of cheers came down apparently in favour of the Hayekians. Perhaps these were cheers of relief that this tedious debate was over and, as announced, they were all off to the pub.

ONE THING THAT STICKS out about economists is how reluctant they are to discuss numbers. At the LSE, they argued this issue in purely qualitative terms. Surely, to the public who suffer the consequences, there is only one question: “By how much will we be better or worse off?” We are left with the feeling that the economists don’t know what they are talking about. If they have never done the numbers, undoubtedly we are right.

In my article “The beauty of Quantitative Easing” (published in The Fortnightly Review 30 October 2010 and online here), I did go into numerical detail and predicted that inflation would grow to around six percent – one up for The Fortnightly Review over the LSE!

Today, the world stock markets are in disarray. Our underlying problem is that government debts in the UK, US and Europe are increasing rapidly. This is because governments are spending more than they are raising in taxes. Take the US for example.

Fig. 1 (chart: Wikipedia)

This picture is mirrored in the UK and across Europe. The average national debt is 80 percent of GDP and growing. In the UK, the government takes £540 billion in total tax and spends £680 billion. The excess of £140 billion is nine percent of GDP. We are living above our means. We spend nine percent more than we earn.

The Keynesian argument is that we incur government debt in bad times and pay it off during good times. If the bad time was the Second World War, the good times were that period of austerity in the decade after it, when we all paid a huge national debt down.

Fig. 2 (chart:

The UK National Debt is growing today as fast as it did in war time. By any normal standards, these are the good times. If we are to get to grips with this problem we all have to accept that we are poorer than we think. Spending our way out of spending too much has not worked. We have been doing it for the last 20 years. Our governments are addicted to overspending. Modern day Keynes is the economic equivalent of methadone to junkies.

Wealth is judged by the number and size of cars, houses, holidays, good food, health care and the like. If we want to become wealthier, we had better make more of these goods or at least make goods and provide services to those who do make them. You do not have to be Keynes or Hayek to see this. Perversely, the growth has been in the public sector, that part of the economy that makes nothing. The recipe for recovery is to get more of the population doing something useful.

WE ARE ALL HELL BENT on doing the opposite. I visited Rugby last summer; the midland town where I was an engineering apprentice. Next to the railway line, British Thompson Houston, later AEI, then GEC Machines, built large electrical machines and control panels. There were front offices and a main drive lined with huge Victorian buildings, cathedrals to manufacturing. They had uninspired names; Building 4, Building 29. The training school was in Building 1 where, experienced and kindly men taught us to use milling machines and lathes and how to become men ourselves.

It is no longer there – none of it. All that remains are the concrete floors now cracked and weeds push through. A solitary building still stands; a single decaying tooth. The front offices, replaced by tarmac, are now a car park. This is no scene of urban renewal. What a waste!


We built good machines. Don’t take my word for it; ask the mining engineers in the LaRonde mine in the Province of Quebec. There, in the frozen north of Canada, are a pair of our DC motors, probably 40 years old, still driving the winding gear and still hauling millions of tons of ore from 2000m below. The engineers said that they don’t break down these machines. But I knew that. In 1966 the rolling gear in a steel mill seized up and the 18 inch diameter shaft of the DC motor sheared. British Steel returned the motor for cleaning and a new shaft, nothing very surprising except the BTH nameplate gave the build year as 1906. For all I know the motor is still running. If not, it is another victim of the wanton destruction of manufacturing.

I don’t know why they closed the Rugby site down. I had moved on many years before, although I often regret that decision. It was not because the workers or the unions were working to destroy capitalism. In fact the workers were dedicated. The unions defended the interests of their members with wisdom and restraint. Nobody liked slackers but there were hardly any; not the workers, not the engineers, not the salesmen, not anybody. It was not because we could not compete on price, quality or design. We were up against Siemens, Brown Boveri and ASEA and they found us tough competition.

GEC was run by Arnold Weinstock, a discrete and determined man who did not waste money on expensive offices. He raised the value of the company to £35bn. After he retired the company was placed in the hands of George Simpson, described by The Economist as “a stolid Scottish accountant.” His inspired idea was to reposition the company as an IT and communications business. After a few years, the value had collapsed to less than £150m.

THIS STORY IS REPLICATED all over the land. When I started work, there were 8 million employed in manufacturing, today there are just 3 million. The decline started under Thatcher, who was so keen to break the unions that she also undermined entire industries. Arthur Scargill, in his most apocalyptic predictions, did not forecast the virtual end of mining in the UK. The number of open pits has dwindled from 170 in 1988 to just six today.

We were (and still are) told that we must replace our smoke stack industries with high value activities. Heavy industry is said to have little intellectual value and that sort of work should be done by the East. Financial services are talked of as an industry, and an industry where developed nations can thrive in the modern world.

The world has turned upside down. It is not true that banking, insurance and the stock exchange represent a summit of intellect. Furthermore, anybody with a laptop can do it. This sort of service is easily vulnerable to competition from enterprising people anywhere. It is absurd to think that the Chinese or Indians will meekly let us cream off their hard earned wealth. They can do this for themselves and, because they can, they will. The same is true of software.

Engineering and manufacturing are much more difficult. Engineers can easily grasp the principles of accounting and finance. The reverse is not true. Bankers can’t do Fourier Analysis, don’t understand electro-magnetism, haven’t heard of a McLaren Series and don’t look forward to a bit of calculus. But it is more than that, I might have been able to calculate the power of an electric motor but I could not, for weeks of trying, get a coil winding machine to work properly. On his return from sickness 45 years ago, Ben Burrell did. I have never worked out how but he taught me an important lesson. In manufacturing we need everybody. It is the fact that we combine different talents that makes it work. And by the way, for all his sense of self importance, the average financial man would not make it as a semi-skilled worker.

I am angry but most of all I am sad. What we inherited from our Victorian fathers was wonderful and we junked it as though it was worthless. Let us hope that our successors, the Indians and Chinese make a better fist of it. In the meantime we had better reconcile ourselves to a future scratching a living from the left-overs of the eastern world.

Nick O’Hear is chairman of Tension Technology International, Ltd. The BBC Keynes-Hayek debate is rebroadcast online here.

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Cor Das
Cor Das
10 years ago

Very well analysed Nick, and being a follower of Keynes myself I think just wait and see is the best solution. In my opinion we have more a psychological problem than an economical. Trust in the future will restore the economy. We need inspiring political leaders to reinforce this trust and to give people the confidence to invest. Also some restrictions in spending especially in non productive sectors will help. As always in troubled situations there is not one magic sollution, but a combination of remedies that will get us out of this mess. You have contributed by strating this… Read more »

10 years ago

I sincerely sympathise with your emotions. A well written piece based on personal experience and anecdotes. I think it is imperative that we get our basic economics right to unmask the forces of darkness which are the cause of this mischief. By the way, Ludwig von Mises’ “Human Action” is on my bookshelf, but regretfully largely unread. I have read several of Hayek’s books which I enjoyed. Before that, Milton Friedman sparked off my interest in economics and politics in the late 70-ies. Henry Hazlitt’s “Economics in one lesson” is invaluable and distinguished by it’s brevity. But we must not… Read more »

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