This pamphlet argues that none of the deficiencies in Britain's economic performance set out above was inevitable. They are all the result of mistaken policies, which could and should have been different. With a clearer understanding of the policies which needs to be implemented to make the British economy operate better, all the problems which have dogged us in the past, to our very heavy cost, could be avoided in future.

The root cause of Britain's poor economic performance has been a general failure among policy makers in this country to understand what makes economies grow quickly, and thus to implement policies here to allow this to happen. Instead, Britain's early successes during the Industrial Revolution, followed by the long period of political stability this country has enjoyed over the last two centuries, have allowed ideas, prejudices, perceptions, webs of overlapping interests and policies to develop, which have almost invariably operated to worsen Britain's economic performance to a greater extent than has happened elsewhere.

There is a well established historical tendency for economies which do relatively well to peak and then to fall back in comparison with new challengers. There are five identifiable reasons why all economies which begin by getting ahead, tend later to slow down relative to others, and are liable to be overtaken. All of them have applied with particular force in Britain for an exceptionally long period of time. First, being in business, particularly manufacturing, has always involved disadvantages compared with other occupations, and unless it is adequately remunerated it will not attract the talent needed to enable it to compete successfully. The opportunities which political and social stability allows for bleeding talent out of the business world, however, is the main cause of reducing economic performance. Second, those who accumulate capital wish to receive the highest returns they can on their investments, including receiving as much as possible on those paying interest. Many are not particularly averse to seeing those coming up behind them held back by the difficult economic conditions which high interest rates generally entail. Third, the successes initially achieved in the domestic economy open up international opportunities which mean that those in favoured positions have a world stage on which to play, making them less interested in what is happening at home. Fourth, humanity feels more secure with an ideology to justify what it perceives to be in its interests, so a superstructure of ideas tends to be developed to support its actions. Fifth, long periods of political and social stability encourage the establishment of organisations, associations, networks, clubs, educational systems and pressure groups, all of which tend to reinforce the status and view of the world of those in advantaged positions.

The universal problems with being in business is that the commercial world is risky, it involves continuing attention to petty detail, it mostly lacks glamour, it involves endless haggling about money, it exposes lack of talent uncomfortably quickly, and it generally entails hard work. Small wonder, therefore, that many of the most talented people, with a wide choice of career, shy away from the commercial world unless the remuneration in prospect is high, as it is, for example, in the City. The problem, however, is that the main sources of economic growth lie almost exclusively in manufacturing and commerce, and not in academia, the professions, the media, or even in the secondary world of financial services. The more, therefore, that any country discourages its most talented people from going into commerce, and particularly manufacturing, the worse its economic performance is likely to be.

Why does old money prefer high interest rates and investment overseas?

Inevitably, those with established positions prefer to see their assets returning the highest possible return, and high interest rates help this process. Early economic success, such as Britain achieved in the first half of the nineteenth century, also leads to the accumulation of wealth which can be invested abroad, as well as at home, insulating to a significant extent those who are well off from the failings of the domestic economy. Large scale investment income from abroad pushes up the international value of the currency, discouraging outlays in the domestic economy on manufacturing plant and equipment exposed to international competition. Poor returns from manufacturing then strengthen the hand of finance against industry.

Hardly surprisingly, these processes encourage a view of the world where being in trade is held in low esteem, thus reinforcing all the other pressures discouraging talent from going into business. On the other hand, earnings from being in the professions, the City, the media and even some parts of the academic world - none subject to the same sort of international competition as much of the business world, and all subject to political manipulation - tend to rise, adding further reinforcement to prevailing value judgements. It is a short step from here for systems of ideas to be developed justifying high interest rates, tight control over the money supply and high exchange rates. The monetarist ideas now fashionable, with a remarkably strong hold over the British establishment despite their manifest weaknesses, are but the latest exposition of a view of the world going back at least as far as the views held by the Currency School at the beginning of the nineteenth century in Britain. This view of the world is then reiterated in newspaper articles, academic journals, clubs and boardrooms throughout the country, creating an environment where any dissent from its main tenets tends to be regarded as eccentric and unbalanced.

What are the results of all these tendencies?

The result of all these pressures is that Britain has developed a powerfully entrenched culture which militates strongly against running the economy successfully. The conditions which actually produce a high level of economic performance are exactly the opposite to those created by the intellectual and cultural ambience in Britain. There are four essential conditions needed for high and sustainable rates of growth to be achieved, combined with low rates of unemployment, fiscal balance and moderate rates of inflation. First, the British economy needs to be able to attract at least its fair share of the investment and business opportunities which generate high growth rates. Second, it needs to be able to operate on full throttle, without constraints on expanding its output which cause high levels of unemployment. Third, it needs the combination of high growth and low unemployment to cope with the problem of fiscal balance. Fourth, it needs the rapid increases in productivity resulting from fast growth to contain inflationary pressures, and to create a consensual wages climate where claim moderation can be combined with full employment.

What sort of investment and business opportunities generate high growth?

The economies which have grown most quickly have all done so by garnering to themselves an exceptionally large amount of investment with high returns and very quick pay off periods. This is the key to fast growth. Much of this kind of investment is to be found in manufacturing, mostly in light industry, although some is also to be found in the service sector. A large majority tends to be undertaken in the private sector. It produces a bewildering variety of goods and services, with two common characteristics. One is that once the initial prototypes of the goods or services concerned have been produced, subsequent production involves rapidly falling costs. The second, which flows from the first, is that nearly all these goods and services are internationally tradable. This type of investment is very profitable, generating ample returns to pay for subsequent waves of investment, thus explaining the cumulative fast growth rates so typical of rapidly expanding economies.

Why do fast growing economies have low unemployment?

Fast growing economies tend to have low unemployment for two related reasons. The first is that they do not suffer from balance of payments constraints. Although account needs to be taken of invisible earnings and overseas investment, basically it is the success of their manufacturing and services sectors which ensures that there are enough exports available to pay for all the imports their economies need to buy. The overall level of demand can therefore be maintained at a high enough level to keep everyone who is able and willing to work in employment. The second is that the rapid increases in productivity in these economies can all be used to increase living standards rather than to generate increased unemployment. Anyone made redundant by technical or market changes can easily be re-employed elsewhere in the economy. The cure for unemployment is not, therefore, the supply side remedies, such as more education, training and subsidised investment, so readily accepted as being appropriate by many policy makers and commentators in Britain. It is to increase the overall level of demand. This is not to deny that education, training and investment are needed. Of course they are, provided appropriate macro-economic policies are in place to ensure that the better qualified labour force and the investment will all be put to good use when they come on stream. If these conditions are not fulfilled, however, the money spent will be wasted

Why do rapidly growing economies usually manage to avoid fiscal problems?

Any economy with low unemployment and a rapidly rising tax base is bound to be in a better fiscal position, other things being equal, than a slow growing economy with high unemployment.

What happens to inflation if the economy grows fast?

There is no international or historical evidence to support the widely held view that very low rates of inflation either generate, or are compatible with, high rates of economic growth. During the long boom period in the 1950s and 1960s, all the developed economies had annual inflation rates which averaged, over the period, about 4%. Even Germany, with conditions of legendary wage restraint at the time, and with memories of the great inflation of 1923 still very much in many people's memory, had an average rate of increase in the retail price index of 2.7% per annum. The impetus for high rates of investment and growth comes from expectations of rapidly increasing sales at home and abroad, not from low inflation rates. Once growth is established, keeping inflation very low is also an impractical objective, because of leading sector inflation. This arises from the fact that productivity growth is unevenly spread across the economy, leading to an averaging up process. Those with outputs where productivity cannot be increased, but which are still required, have to have their incomes increased to keep them working at their original occupations, thus sharing in the overall increase in prosperity. The key point about inflation of this type is that while it will affect the domestic price level, it has almost no impact on the prices for goods and services exported abroad. In the areas of the economy where these goods and services are produced, productivity increases tend to rise more quickly than wage and salary costs