PUBLIC INVESTMENT AND STABILISATION
| Published date | 01 June 1967 |
| Author | R. W. BATES |
| Date | 01 June 1967 |
| DOI | http://doi.org/10.1111/j.1467-9485.1967.tb00763.x |
PUBLIC INVESTMENT
AND
STABILISATION
R.
W. BATES
I
THE
White Paper
on
Public Investment in Great Britain, published
in
1960.’
revealed a marked change (although described as a
‘
develop-
ment
’)
which had taken place over a fifteen year period, in the British
Government’s attitude towards public investment.
As
is well known,
the
1944
White Paper on Employment Policya stated quite clearly
the Government’s belief at that time that variations in the level of
public investment would contribute materially towards the stabilisa-
tion of economic activity. This belief was held, with declining con-
fidence, throughout the nineteen-fifties. By
1960
it could be admitted
officially that
‘
in the event, however, the role of public investment in
preserving the balance of the economy has changed from that envis-
aged
in
1944’;
and the Government would
in
future ‘seek as far as
possible to avoid interference with investment plans which have been
approved
’.‘
The experience which gave rise to this policy change is significant.
However, much
of
the discussion of this experience has been couched
in rather general terms and the present article attempts to be rather
more specific, in that we shall consider in some detail the particular
case of the nationalised electricity supply industry in Great Britain
during the
1950s.
The article has two main objectives. Firstly, we
attempt to define more precisely the way in which investment was
actually manipulated as a stabilisation variable, indicating the kind
of problems which were raised by this form of manipulation. Secondly,
in the light
of
our discussion, we examine the logic of the
1960
policy
change, in order to discover whether or not public investment is an
efficient macroeconomic stabilisation variable. This second objective
is perhaps the more important, in
so
far as it is hoped that the dis-
cussion will have certain implications for future economic policy.
11
In
practice, investment programmes in the public sector have nor-
mally been manipulated
in
a
downward direction, and stabilisation
Crnnd. 1203.
Cmd. 6527.
Crnnd. 1203,
para.
9.
Ibid.,
para.
10.
138
PUBLIC INVESTMENT AND STABILISATION
139
policy has therefore generally acted as a one-way operation.
A
pre-
vious article has shown that,
of
the ten investment programmes for-
mulated
by
electricity supply during the 1950s, seven were altered
upon Treasury request, all in a downward direction, although the last
two, for 1958-59 and 1959-60, were subsequently revised upwards after
a change in macroeconomic
condition^.^
These investment cuts can
be dovetailed fairly easily with changes in the United Kingdom’s
external position, although capacity limitations in the investment
goods industries and rearmament tended to aggravate balance of pay-
ments difficulties in the early 1950s. This is not to say that other policy
objectives, particularly the control
of
inflation ‘per se’
can
be
ignored. Nevertheless, the external position appears to have been the
critical factor which determined the timing and extent of variations
in the investment programme. The two programmes for which in-
creased expenditure was eventually authorised also fit into this general
scheme. Authorisation occurred at
a
time when reserves and the
balance of payments had improved sufficiently to require
no
further
specific measures (i.e. mid-1958) and the worsening domestic situation
could be tackled without undue concern for the external position.
In-
creases in both programmes were designed to act directly upon
activity in the engineering and allied industries, where employment
had fallen substantially during 1958. Thus, expenditure was steered
directly into the industries where demand increases were required
and secondary, or multiplier effects were not relied upon.
Investment cuts appear to have been employed in the face
of
balance
of
payments difficulties partly because
of
the general effects upon exports
and imports, and partly because
of
the particular effects upon certain
important export industries. One imagines that the general effects
were argued from the standard theory that a fall in demand and
activity will lower imports through the marginal propensity to con-
sume imported goods and through producers’ reduced requirements
for imported raw materials etc. Substitution effects are also liable to
be important. Deflationary measures, when successful, will reduce
the price
of
British exports relative to the exports of foreign com-
petitors, and goods produced to meet domestic demand relative to
imported foreign substitutes.
In
addition, there has been a belief that
by reducing domestic demand pressure (of which investment is a con-
stituent part) exporters are encouraged to
seek
more orders from
5See
R.
W.
Bates, ‘Stabilisation qolicy and Investment
1950-1960,
with
Special Reference
to
Electricity Supply
,
Yorkshire Bullefin
of
Economic
and
Social
Research,
Vol.
18,
No.
1,
May
1966.
The seven programmes
in
question
are
those
for
1950, 1951, 1952, 1955-6, 1956-57, 1958-9
and
1959-60.
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