The solution to making the British - or any other economy - perform better is essentially a comparatively simple one to understand and implement, once the key policy requirements to increase the growth rate are grasped. It is to create the macro-economic conditions which will enable market forces to generate the investment and business opportunities, the low unemployment and the fiscal balance required, combined with containing inflation at acceptable levels. Of course, other measures will also be required. Good government is needed in all circumstances. The key point is that if the macro-economic conditions are right, other policy initiatives can be made to work with the grain, reinforcing success on the economy. If the macro-economic conditions are wrong, however, no other mix of policies will be successful for very long.

The British economy will only perform better when the direction of the policies which all the ideology surrounding the current economic policy framework supports is reversed. Instead of having high interest rates, we need to have them as low as possible. To achieve low interest rates and to provide plentiful credit for industrial expansion, we need a plentiful and not a tight money supply. To produce an environment which tends to encourage the type of investment which generates very high growth rates to locate in Britain instead of China, we need a much lower exchange rate. To avoid both retaliation and the exchange rate appreciating again, we need to keep our foreign trade close to being in balance, allowing our imports to expand as our export earnings increase, and avoiding trade surpluses. In these conditions, it is relatively easy to escape fiscal deficits, thus helping to avoid stoking up unnecessary inflationary pressures. If a growth rate of 5% to 6% was then achieved, taking one year with another, the inflation rate, on all historical experience, would be likely to average around 4% per annum.

Why are much lower interest rates and a looser money supply important?

Low interest rates may not be necessary to encourage directly the type of investment which produces high growth rates. This kind of investment is so profitable, and its pay back so rapid, that the rate of interest charged to finance it is of marginal significance. Similarly, a plentiful money supply is not essential to encourage highly profitable investments, because they are easy to finance. The main reasons, therefore, why the availability of credit in the economy generally needs to be as wide as possible, and the price charged for it, which is the rate of interest, as low as possible, lie in other areas. The first is the redistributive effects generally which low interest rates have within the economy. The second is the impact on the power relationship between borrowers and lenders which is substantially determined by the ease and with which credit can be obtained, affecting total investment in the economy. The third, and much the most important, is the major impact which both interest rate and monetary policy have on the exchange rate.

Why do low interest rates redistribute power and money in the economy?

While high interest rates may not discourage highly profitable investment, they have a depressing effect on important but less profitable investment opportunities in both the private and the public sectors. They also dampen down consumer demand, which is an important component of demand generally, which needs, generally speaking, to be encouraged rather than discouraged. High interest rates also clearly redistribute income from borrowers to lenders, thus increasing the negotiating position and prestige of holders of wealth vis à vis creators of it, bankers and financiers as against manufacturers and industrialists, the City vis à vis the rest of the economy, and the establishment as against the nouveaux riches. In particular, high interest charges have a deleterious effect on the finances of the government, as a major borrower, with substantial further redistributive effects. Tight money and high interest rates therefore both have direct effects on the economy, and reinforce the position of those most prone to support the ideology justifying their existence.

Why is the exchange rate so critical?

The exchange rate is so critical because it determines, to a greater extent than any other factor, whether or not any economy will attract more or less than its fair share of the type of investment and business opportunities which increases economic output. Whether these activities get located in larger or smaller quantities in Britain, on the continent of Europe, in America, in the Pacific Rim, or anywhere else in the world, is largely a function of overall costs in different locations. This is not just a question of wage rates, even after these have been adjusted for productivity, important though they are. On average, wage costs only make up a little over 60% of total costs across the world. The remainder goes to other factors of production, such as interest, profits and land. For a wide range of production of goods and services, where the technology is known and generally available, decisions as to where facilities for producing them will be located, and their likelihood of prospering thereafter, will depend largely on the comparative cost of all factors of production taken together. It is the exchange rate, and its movements upwards or downwards in relation to other currencies, which determines the relative costs of production in one economy rather than another, and hence where the high return, rapid pay off investment and business development, so critical to growth, will take place.

The remorseless fall in value of sterling vis à vis other major currencies has not, unfortunately, made Britain more competitive. It has not even kept up with the fall in competitiveness which low investment and high inflation from which the British economy has suffered. This is clearly shown by government figures, particularly the index for Relative Unit Export Values. This measures the average rises or falls in British export prices compared to those of the rest of the world. Since the most competitive position reached in the early 1970s, British export prices for goods and services have risen about 40% more than those of the rest of the world on average. This is overwhelming and incontrovertible evidence of the over-valuation from which Britain suffers so grievously.

Why should we aim to avoid a trade surplus?

Many countries with competitive currencies have run trade surpluses, thus investing substantial sums abroad. Germany, Japan and Taiwan are obvious examples. There are, however, major disadvantages to such a policy. First, it tends to destabilise the world economy, because any country's surpluses have to matched by deflation generating deficits elsewhere. Second, it can encourage retaliation. Third, trade surpluses tend to push the value of the currency back up again, thus defeating the original objective. Fourth, the domestic economy is likely to grow faster if it invests at home rather than abroad.

If there is full employment and if tax revenues from a growing economy are buoyant, it is much easier to keep the government's revenues and disbursements in balance than when the economy is growing slowly and unemployment is high. Fiscal balance has other advantages. If there is no Public Sector Borrowing Requirement, and the economy is growing fast, government debt is bound to fall as a percentage of the national income, thus improving the government's financial position. Avoiding public borrowing reduces inflationary pressures. Indeed, the ideal combination of policies for fast growth and containable levels of inflation is a relaxed monetary stance combined with tight fiscal discipline, which is not an unmanageable constraint if government expenditure rises more or less in line with a rapidly growing GDP.

By far the most important evidence that fast growth - at 5% or 6% per annum can be combined with inflation running at an average of no more than about 4% a year - is the wide range of historical experience in many countries where these conditions have been fulfilled. Telling examples are the evidence from across Europe in the 1950s and 1960s, Japan over an even longer period, and many of the Pacific Rim countries now. Of course, relatively low and stable rates of increase in the retail price index will not occur automatically. Competent management of the economy is always required. There is, however, no reason to believe that the combination of high growth and moderate inflation which has been achieved in many other times and places cannot be attained in Britain.

How can we move from present policies to having a competitive currency?

The steps which need to be taken to bring the external value of the currency down are straightforward. The money supply needs to be expanded to accommodate a considerably larger volume of transactions. Interest rates need to be reduced to about the level of inflation, thus becoming approximately zero in real terms, as they were in Britain in the 1930s. The central bank - The Bank of England in Britain's case - needs to have a clear policy of reducing the exchange rate, backed by unequivocal statements from the government to this effect, and needs to manage the country's external finances to reinforce the chosen policy. The government needs to pursue a expansionist policy, to stop a trade surplus materialising.. Again, there is plenty of historical experience to show that policies of this kind are feasible and will achieve the desired objective.

How far would the value of sterling have to drop?

There is a strong trade off between the competitiveness of the currency and the rate at which the economy will grow, and a range of choices which can then be exercised. One objective would be to reduce unemployment by a burst of growth, taking up the slack in the economy, but then to achieve no higher a growth rate than about 2.5% to 3.0%, which would be needed to stop unemployment rising again. Some fairly simple calculations show that an exchange rate of about DM 2.20 and $1.20 in present conditions, would be needed for this policy to be successful. If the objective was to increase the growth rate to 5% to 6% per annum on a sustainable basis, a much larger drop in the value of sterling would be required, to about DM 1.80 and $1.00. Intermediate positions could be chosen, producing intermediate results.

It is very widely believed that devaluation cases inflation, and indeed this is a central tenet of the monetarist view of the economy. There is, however, almost no empirical evidence that this proposition is true, and a large amount showing that it is false. If an economy is already at full stretch when a devaluation takes place, as happened to France at the end of the 1950s, there is likely to be a sharp but very temporary increase in inflation, as happened on that occasion. If the economy has slack capacity, given reasonably competent management by the government, there is likely to be no increase in inflation at all, or even a reduction, as, for example, was the British experience after we left the ERM in September 1992.

Why does devaluation not increase inflation?

A devaluation is bound to push up the cost of imported goods and services, although often the increase in costs is not fully proportional to the reduction in the value of the currency, as those selling to the devaluing country absorb some of the costs. If domestically produced goods and services do not become relatively cheaper, the devaluation will not achieve its objective. There are, however, often overlooked factors which significantly offset the increased costs of imports. First, lower interest rates, always associated with depreciation, are themselves heavily disinflationary. Second, as domestic production increases, there is an initial benefit from bringing unused capacity into operation at little extra cost, followed by economies of scale as the economy continues to expand. Third, if production is switched to the domestic economy, whose costs are now lower than imports, the prices charged for it will necessarily be lower than those from imported goods at the new exchange rate. Fourth, much higher levels of economic activity, combined with reducing unemployment, provide the government with opportunities for tax reductions which can themselves be directly disinflationary. Reducing taxes on labour, and thus labour costs, is a clear example.

Again, some fairly simple calculations show that these countervailing factors should, in most circumstances, offset completely the inflationary impact of rising import costs, if a devaluation is well managed.

The way to avoid the economy overheating is to ensure that as few impediments as possible are put in the way of allowing those parts of the manufacturing and service sectors best placed to take advantage of a competitive exchange rate to expand rapidly. The key to fast growth, while avoiding overheating, is to increase output to match rising demand, not to have to cut back demand to match stagnant or slow growing output. To achieve this objective, the government will have to have appropriate taxation, planning, educational and training policies. It is, however, much easier to design and execute these sorts of policies effectively when the economy is expanding, and demand is rising, than when there is deflation and rising unemployment.

Britain's share of world trade is now less than 5%, so a devaluation of sterling would not be a major upset to the world economy, even if it did affect other countries adversely. There is, however, no reason why it should. Provided we did not run a trade surplus, if we made our economy grow faster, Britain would become a bigger, and not a smaller market for the rest of the world's exports. If our exports became better value, as a result of a lower pound, other countries could hardly reasonably complain on this score. In these circumstances, other countries might envy our higher growth rate, but they would have the option to follow our suit. Of course it is not feasible for all countries to devalue at the same time, but it would be possible for the whole world to grow faster if interest rates were lower, and monetary policies more accommodating. This benign state of affairs will only happen, however, if individual countries decide to adopt such policies, adjusting their exchange rates to make them possible and sustainable, without generating predatory trade surpluses.

This is the wrong question. The real issue is whether the world can afford not to have global output increasing more rapidly. There are two very powerful arguments in favour of higher world growth. The first is that high population growth is heavily associated with poverty, and containing the size of the world's population is the single biggest issue facing the world's future. Raising growth rates, especially in the poorer parts of the world, is therefore likely to be the best route to stabilising the world's population at a manageable figure. This is only likely to be feasible, however, if the developed world feels secure enough to lower import restraints on third world exports. For this to happen, growth rates in the developed world will have to be higher, so that unemployment can be lower. Second, on a very wide range of environmental issues, from global warming to refuse disposal, from providing everyone with adequate fresh water to containing emissions to keep the air breathable, the solution is to spend more money. Extra resources for environmental purposes are much more likely to be available on the required scale if the world economy is growing fast than if it is static or declining.