THE RETURN OF BEGGAR-THY- NEIGHBOUR POLICY / THE FINANCIAL TIMES COMMENTARY & ANALYSIS ( HIGHLY RECOMMENDED READING )

The return of beggar-my-neighbour policy

By Samuel Brittan

Published: August 26 2010 23:14

Ed Miliband, a candidate for the UK Labour leadership, recently remarked: “I hate what David Cameron is doing to this country.” I sometimes feel the same way, but I suspect for very different reasons.

The academic name for the economic policy into which the British prime minister has stumbled is “mercantilism”. According to the Encyclopaedia Britannica, this is “the economic theory and practice common in Europe from the 16th to the 18th centuries that promoted government regulation of a nation’s economy for the purpose of augmenting state power at the expense of rival national powers”. Among its doctrines was that the trade balance must be favourable, meaning an excess of exports over imports. Of course, mercantilist thinking has moved on since the 18th century. Instead of coveting gold and silver, modern mercantilist politicians talk of promoting employment. But there are many common threads between the old and the new mercantilism. One of them is the identification of the national interest with that of chosen national corporations, even though we are not allowed to talk of “picking winners”. The modern version is sometimes called corporatism. The economist David Henderson once called it “do-it-yourself economics”, while I preferred “businessmen’s economics”.

But I now think the best name is “beggar-my-neighbour” economics. This was coined by the leftwing Cambridge economist Joan Robinson – no market fundamentalist she. By this she meant that because governments were unwilling or unable to promote output and employment by domestic means they had to resort to trying to promote it at the expense of other countries.

The evidence for this beggar-my-neighbour turn is all too abundant. UK citizens are exhorted to take their holidays at home. If French and German holidaymakers heed similar exhortations, who gains? The Foreign and Commonwealth Office is being treated as a trade promotion ministry and diplomats are to be replaced by businessmen. Of course, none of this is new. A notorious report on the FCO made similar recommendations more than 30 years ago. The current prime minister is partly following in the footsteps of Tony Blair; but while the latter’s soft protectionism was concentrated on the arms industry, Mr Cameron is trying to spread the net much wider. Do I have to add that not every country can have an export surplus? And countries now in surplus, including China and Germany, are not going to spend their way into payments deficit because of exhortations by the UK or even the International Monetary Fund.

Many of my professional colleagues who hanker after the pre-1980 version of capitalism simply do not remember the endless nagging and exhortation, the exchange controls and travel restrictions, and the attempts to second-guess consumer demand, miscalled “planning”.

It is no accident that beggar-my-neighbour trade policies are associated with what I have previously called Tory Bourbonism in fiscal policy, by which I mean treating the national budget as if it were the budget of a private citizen that has in some sense to be “balanced”. If so-called Keynesian policies for using fiscal policy to manage demand are disavowed and monetary policies prove inadequate, we are left with only export promotion and import discouragement to promote recovery.

What Tory fiscal Bourbonism and corporatist trade policies have in common is the “fallacy of composition”. This is defined by the Oxford Dictionary of Philosophy as that of “arguing that because something is true of members of a group or collection it is also true of the group as a whole”. The fallacy was explained to budding economists in Paul Samuelson’s multi-million selling introductory textbook, but for all the good it has done it need never have been printed.

Beggar-my-neighbour policies are sometimes justified by the collapse of a bogey called “market fundamentalism”. In fact, the baby is being thrown away with the bathwater. The classic case for competitive markets and free trade was made centuries ago by thinkers such as Adam Smith, John Stuart Mill and Richard Cobden who never expected markets to clear instantly or their participants to have a “correct” model of the economy in mind. Nor did they depend on an excessive deference to financial markets or to derivatives, which had mercifully not been invented. Ranged against them was the old Tory party, which unashamedly backed the landed interest. To be fair, however, the greatest Tory prime minister of the mid-19th century, Robert Peel, changed his mind after listening to a Cobden speech against the corn laws. Turning to a front-bench neighbour, Peel remarked: “You must answer him; for I cannot.” Peel was predictably disavowed by most of the Tories, among them the much overpraised Benjamin Disraeli.

As this is still (just) the holiday season the kindest note on which to end is to suppose that Mr Cameron is consciously or not echoing the sentiment of Calvin Coolidge, US president in the mid-1920s, that “the chief business of the American people is business”. But Coolidge also said many much wiser things, such as: “I have never been hurt by what I have not said”, and: “Four-fifths of our troubles would disappear, if we would only sit down and keep still.”

Copyright The Financial Times Limited 2010.