Balogh's Contributions

The relevant question to ask about Balogh is, therefore, not what theoretical innovations did he make, but what were his key contributions to applied political economy? In the long period up to 1964, before he worked full time in government, four stand out.

Second, and of much longer-term significance, there was his understanding of inflation within the context of a world in which, post-Keynes, the macro­economy could be stabilised. He saw earlier than anyone else the need for an incomes policy based on social consensus for the Keynesian policy revolution to be complete. In 1938, Joan Robinson had noted that the guarantee of full employment would fundamentally alter the bargaining position of employ­ees, but it was Balogh who not only noticed what she said, but also saw its implications for policy. As early as 1941, Balogh wrote of the need, if full employment was to be maintained in the post-war period, for ‘a co-ordinated price and wage policy, with tribunals to enforce equity and prevent hardship' (Balogh 1941: 13).

Here, as in so much else of Balogh's work, we see his understanding of the importance and complexity of power. Full employment gave fresh power to both employers and employees and so, he argued, in return for guaranteeing full employment, the State had the right to expect that unions and major firms would keep to their sides of the bargain—the power of the three groups being held together in a social contract. That such an incomes policy, mostly voluntary but ‘buttressed' (a favourite word of his) by State institutions, should prove so difficult to establish does not in any way diminish the force of the insight.

Third was Balogh's work on international payments. Out of his many con­tributions in this field undoubtedly the most dramatic and the most impor­tant was his campaign in 1945 against Keynes's view of Bretton Woods. Kaldor's comment was that was this was ‘one of the rare occasions I know of when Keynes was clearly in the wrong' (Kaldor 1985). Here, we see one of Balogh's best moments as well as one of the clearest examples of his approach.

In a nutshell, his criticism of Bretton Woods was that it entirely ignored the context. It attempted to impose a generalised move to free trade and an early abolition of capital controls and so a return to exchange rate convertibility combined with a system of international reserves proportional to world trade. Fine, in theory, but Balogh's point was that this took no account of the par­ticular situation at the end of the Second World War when the world econ­omy was in fundamental disequilibrium in international payments. The war had strengthened and increased the capital stock of the USA, but seriously damaged that of Europe. It had also placed the UK, in particular, in a position of extreme illiquidity (since sterling was still a reserve currency, massive bank deposits were held in sterling, capable, at a moment's notice, of being switched to other currencies).

Today, many people still write as if the Bretton Woods system ran relatively smoothly from 1944 until its demise in 1971, the implicit assumption being that Balogh was proved wrong. Yet the reverse is the case. First, there was the convertibility crisis in the UK in mid-1947; second, there was the Marshall Plan of 1948 for Europe; and third, that this plan had already been preceded by nearly $16 billion of US piecemeal aid in the years 1945-1947. None of these were remotely envisaged by the architects of Bretton Woods. All are vindications of Balogh's predictions.

Balogh's fourth contribution lies in his work on development and interna­tional trade. Here he emphasised the importance of agriculture at a time when many countries were paying too much attention to industry. Alongside this, he was a constant advocate of rural education—as well as a critic of those countries which wanted to develop expensive hospitals and universities before they had provided for basic skills or primary health care. Moreover, there is a connection between his ideas on the role of education, training and technol­ogy in the process of development and his approach to international trade. Taking it for granted that technical progress would not be random, he saw, far earlier than most, how, if technology could be harnessed and mobilised, this would have positive and cumulatively beneficial effects on a country's share of trade, on investment and on growth.

Together with Paul Streeten, he also produced devastating critiques of the highly influential mathematical growth models, such as the one introduced by Solow (1956). Their joint article, “The Coefficient of Ignorance” (Balogh and Streeten 1963), demonstrates all too clearly how much the extent to which these theoretical articles were fundamentally a cover for how little economists actually knew about the processes of development.

When, in October 1964, Balogh moved into government^[100] there was, of course, no sudden disjuncture in his thinking. Both his strengths and his weaknesses were on full display: a brilliant critic, but a dreadful contributor to committee proceedings or Civil Service papers; unmatchable antennae and an extraordinary ability to see to the heart of things, but too impatient and with interests too diverse to bring about lasting change. Just as in his academic work, there was too much activity. He spread his energies far too wide and too thin. In the course of this, he not only exhausted himself, he also reduced his impact. Too many people received too many intemperate notes—and notes that were far from self-explanatory (even when the recipient was sympathetic to the Baloghian point of view).

The truth is that, in his interaction with the Whitehall machine, Balogh was, in many areas, running against the whole grain of thought—‘pissing into the wind', as he would have described it. This was especially so where he was demanding ever tighter exchange controls, and the imposition of import rationing. On exchange controls, he made much less progress than he wished and on import controls no impact at all. The government chose an import surcharge instead.

Yet despite all this, the case for regarding Balogh's work during his period within government as being of significance remains impressive. First, there were many policies that can either be directly attributed to him or where he played a significant role. The centrality of incomes policy, the formation of the Department of Economic Affairs, the creation of the Industrial Reorganisation Corporation (the IRC), the emphasis on indicative planning plus the need for changes in the industrial structure, and the frequent attempts to tighten exchange controls, all bear his mark.

Second, there was his anticipation of, and his role in, the gold crisis of March 1968. The UK had devalued in November 1967. What has passed almost unremarked was how close Britain came to a second devaluation just months later.

As we now know, the eventual outcome was one in which gold was allowed to float on the private markets but remained fixed for official settlements. According to Morris (2007: 150), the Chancellor of the Exchequer at the time, Roy Jenkins, was irked by Balogh's interventions, as were some of the Treasury mandarins. Yet the fact remains that it was Balogh who first warned the Prime Minister of the threat, that it was Balogh who pressed for the con­tingency planning of severe exchange controls, and that, if no such plans had been prepared, the UK would have had no leverage whatsoever.^[101]

A third Balogh contribution, in my judgement substantially his largest, is the role that he played in maximising the benefits to the UK of the discovery in the North Sea, first of gas and then of oil. Balogh's first concern was with the question: ‘How much of the North Sea belongs to the UK and how much to Scandinavia?' In 1958, the UN Convention on the Law of the Sea had proposed that the dividing line should be halfway between the relevant shore­lines (see UN 1958). However, Balogh discovered that, in the particular case of the North Sea, the shallow shelf that extends from each coast is much wider on the UK side so that the deep trench is much further to the east.

Blocked on this front, Balogh turned his attention to maximising the ben­efits to the UK from those discoveries of gas which did lie on the British side of the line. This led him into a second battle. Most of the civil servants dealing with the problem had been imbued with the supposed beauty of the unfet­tered benefits of the price mechanism and so felt that the market should be left to itself. Balogh, in contrast, saw that, with prevailing gas and oil prices being well above extraction costs, there were potentially huge monopoly profits to be made. His solution was to use the power of British Gas, then publicly owned, as the single purchaser to impose a monopsony price.

This sounds obvious. However, two struggles were required. First, even when the likelihood of large profits had been established, the “conventional wisdom” of the Civil Service still held that using monopsony power in this way was neither needed nor justified. Second, and more difficult, was the question: At what level should the price be set? Balogh's view was that multi­national companies would inevitably understate the size of hydrocarbon dis­coveries and overstate the true cost of extraction.^[102] Alongside this was his fear that civil servants would be over-persuaded of the views of the companies, either because, as he saw it, they were amateurs, or, more dangerously, as his stage whisper to me implied, they would be thinking too much about possible lucrative employments once they retired from the Civil Service.

That Balogh's interventions had a major effect is hardly in doubt. In 1966, an agreement was reached for a delivered price of 5 old pence per therm. By 1967, following much tougher negotiations, the price was close to being set­tled at 3.2 old pence, but Balogh briefed Wilson against this and in 1968 a settlement of only 2.87 old pence was achieved, with resulting savings to the UK of billions of pounds (see Morris 2007: 162).

The third area in which Balogh intervened was with the exploitation of oil in the 1970s. Here, again, he made major contributions, particularly in the face of fresh problems. To start with, there was no monopsony buyer of oil so this route to capturing the monopoly profits for the UK did not exist. Second, the other obvious alternative, taxation, faced a difficulty. In 1973, the Public Accounts Committee (PAC), a select committee of the British House of Commons, uncovered the fact that major oil companies were operating a highly successful tax avoidance scheme. Their accounting arrangements were such that they showed sufficient “apparent” losses on their non-UK opera­tions to more than offset any UK profits. The result was that they hardly ever paid any UK tax (see Public Accounts Committee 1973). How did this come to light? Only because the then Chair of the PAC (Harold Lever, followed by Edmund Dell), plus the special adviser to the PAC, Professor Robert Neild, had received intensive briefing by Balogh and, to a much smaller extent, by me.

In 1974, Balogh, by now a Lord, was made a Minister of State at the Department of Energy and so given the opportunity to tackle the problem directly. His solution was to argue for a special, ring-fenced, petroleum revenue tax (PRT) and the creation of the British National Oil Corporation (BNOC). This latter development was an essential accompaniment to PRT as, without it, the State would have had no direct information on costs. When Wilson resigned in March 1976, Balogh moved to become Deputy Chair of BNOC with the effect that he was able to continue to oversee the direct implementation of the policies he favoured.

Overall, there is no doubt at all that these three interventions—the use of the monopsony power available to British Gas, the introduction of PRT and the creation of BNOC—secured multiple billions of pounds for the UK and they must go down as the area in which Balogh's unique blend of applied theory, intuition, passion, energy, courage, patriotism and practical policy­making ability were best fused.

Nonetheless, Balogh had his weaknesses. There were inconsistencies in his views, he was far too intemperate, much too intolerant of people less clever than him, and he made mistakes. With such trenchant views, this was inevi­table. Balogh himself thought that he had been especially wrong in his fear that the USA would revert to unemployment after the Second World War. He also underestimated the speed at which Western Europe would recover. More generally, he prophesied doom far more frequently than proved to be the case. But are prophesies that are confounded by the facts a mistake or a success? A prophesy can be a warning of what to avoid as much as a prediction of the future.

Balogh was also, I believe, always aware of contradictions within himself. What mobilised him above all else was the belief that the world could be made a better place (especially if he had anything to do with it). It was not necessary for people to be ignorant or stupid, nor was it required that the world should be run by knaves and fools, yet his melancholic nature com­bined with his awareness of the grip of history made him constantly doubt whether a better world could be brought about.

He was also accused by his enemies as well as by some of his friends of being wrong about markets. If this is taken to mean that he did not under­stand markets, then it is mistaken. When I worked for him in government, I was constantly surprised by the variety of his insights into markets. This was, of course, no more than the Baloghian case-by-case method. For example, he stressed the prevalence and the danger of oligopoly, yet he also noticed the long tail of tiny firms in the machine tool industry and supported measures to rationalise them.

Moreover, once a Baloghian perspective is adopted, it becomes obvious that the joint existence of the IRC and a Monopolies Commission were comple­mentary rather than competitive instruments of economic policy. There were two differing objectives: securing the benefits of economies of scale for lower costs, and securing the passing on of these lower costs to consumers. One needed the IRC, the other the Monopolies Commission.

He was equally aware that in the banking sector the situation was, yet again, different. Here, there was a strong oligopoly with no tail of small poten­tial competitors. As a result, Balogh advocated more competition, but from the public sector in the shape of the Girobank. While in relation to the organ­isation of research and even more so in the structure of universities, he was passionately in favour of all possible forms of decentralisation of power and was opposed to monopoly of any kind, regarding it as a fundamental threat to new ideas.

If, on the other hand, criticism of Balogh's view of markets is taken to mean that he was too optimistic about how much could be planned and controlled in a non-wartime economy then the criticism is much more warranted. He never really allowed for the complexity that would be involved. No doubt he felt that since he could see what needed to be done, so also could others. Yet, as Paul Streeten has correctly noted, here too there was a contradiction. Balogh denounced administrators in general (and, as we have seen, the British Civil Service in particular) with the same passion that he advocated administrative controls. By the same token, he was too optimistic about the progress that he thought the Soviet Union would continue to make.

One of his best-known works, “The Apotheosis of the Diletantte” (Balogh 1959), is particularly open to this criticism. Indeed, some of those most firmly within mainstream economics might even regard the very title as ironic. Balogh, they could say, was himself a dilettante, always skirmishing on the edges of economics, never offering a new perspective. If this is a claim that Balogh did not know his economics, it is fundamentally wrong. His strength was that he could always see straight through the mathematical flummery to the falsity of the assumptions on which it was based. I vividly recall him accosting me in the early 1970s saying, well before Lucas's work on rational expectations had become at all well known, ‘Wot is all zis stuff about rational expectations? It is just perfect information by another name'.

However, while Balogh undoubtedly knew his economics, it remains the case that “The Apotheosis” produced a highly ironic outcome. Partly as a result of his criticism of the amateur nature of the Civil Service, there was an increase in their professional intake and, most particularly, the founding in 1964 of the Government Economic Service, most members of which come from the main­stream in economics with its ever greater reliance on mathematical models. In short, the exact opposite of what Balogh would have wished.

5