You grew up in Wales and studied at the London School of Economics in the 1960s. What sparked your first interest in economics and public policy, and did you ever imagine it leading to 10 Downing Street?
Well, I grew up in Wales on the outskirts of a moderately large town of about 150,000 people called Swansea. I went to study at the LSE because I was absolutely convinced that the only political position to take was left-wing. The LSE had a reputation for being left-wing, which was very attractive to me.
I had not studied economics at school, so I had no knowledge of economics when I arrived. I initially registered for a course in accounting, and after two weeks I changed my mind. I thought it was a very tedious subject and switched to economic theory. But I remained very left-wing, and I had never thought, ever, that I would be involved in politics in 10 Downing Street, let alone working for a Conservative Prime Minister. In fact, at the time I thought the very worst newspaper in London was the „Daily Telegraph“. Now I think it is a very good newspaper.
How did that change?
There were two main reasons. I joined the staff of the London School of Economics when I was 23. It was a very distinguished faculty of about 40 to 50 people with quite a number of international names. The more I studied how markets work, the more I realised that I disagreed with the direction of the Labour government.
I voted for the Labour government in 1964 and again in 1966. The government believed we could introduce a planning regime like the French and in 1966 it produced a „National Plan“, capital N, capital P. I gradually realised this was hopeless. They were spending too much money, inflation was rising, there was a lot of dissatisfaction in the trade unions and a lot of antagonism between government and trade unions. Quite a lot of British firms and sectors were nationalised, and the nationalised industries were not making money. I thought I could not go on supporting this.
Towards the end of the decade, Ted Heath, who became Prime Minister, argued that markets work better than state regulation and planning. And I said to myself: that is really where I am. That was the first reason for changing.
The second reason was social policy. In social policy I was quite conservative. I was very sceptical about the reforms we were making, for example introducing abortion and making divorce much easier. What struck me was that we did not have sufficient evidence to know how this would work out.
On abortion some people argued that once you introduce it, the standards required to have it would slip, and you would have more abortions. On divorce I believed it was important that there was the option to divorce, but every marriage runs into some sort of problem at some time. If it is very easy to jump off the bus, then more people will jump off the bus, which is exactly what has happened.
So, there were those two reasons: first, the realisation that a market economy was superior to extensive state ownership and state planning. Second, social reform where there was not enough empirical evidence to say, „we know this will work and will not lead to a wave of support and growth for the particular problem“.
You are often described as one of the key architects behind the Thatcher government’s privatisation and deregulation agenda. How do you look back on that period – what do you consider your proudest achievement, and is there anything you would approach differently today?
I would say I was not the chief architect; I was one of the architects of Thatcher’s privatisation policy. At that time, in the early 1970s, a lot of British industry was effectively state-owned or state-controlled: the steel industry, shipbuilding, coal, the telephone business, gas, water, airlines. It was comprehensive.
The problem was that nearly all of them were basically loss-making. They were certainly not covering their cost of capital. They were politicised. Decisions such as where to locate a new factory or a new generating station were subject to a lot of political lobbying because the firms were state-owned. You felt decisions were made not on economic grounds but on political grounds.
The car industry, for example, was effectively nationalised. The Conservatives were in government from 1970 to 1974, then Labour came in and took more industries under its control. We were looking for a way of breaking out of this and doing something that people felt. We were looking at the idea of privatisation, which was basically a new concept at the time.
What was amazing was the way it caught on. It caught on like a sort of whirlwind. Almost every country in the world, apart from die-hard socialist or communist countries, adopted it. It was amazing.
We found that every industry we privatised had too many people working in it. In the steel industry, for instance, you could reduce manpower and have the same or even more output. But you did not do this as a state-owned business because the trade unions would have been up against you. If my memory serves me correctly, they were roughly a third overmanned. In other words, you could run the company with two thirds of the people. So, whenever you privatised, productivity improved dramatically.
The second point was regulation. There were areas where, when you privatised, you had to introduce a regulatory regime because competition was very limited. In telecoms competition at that time, going back to 1980, was very limited. There is tremendous competition now, but when we first did it, you needed a regulatory regime. By the time I was in Downing Street you needed regulators for gas, electricity and water.
First of all, we privatised companies like British Steel and British Airways. Later, when I was in Number 10, we privatised gas, electricity and water. For each of those there was a monopoly element, so we had to create a regulator alongside the entity. They were overmanned as well, and we dealt with that too.
After my time the railways were a very difficult case. The question was: how do you privatise the track and the companies using the track? Do you privatise them together, by region, or have ownership of the track separate? So, you needed a regulator for the railways when they were privatised.
Do you sometimes think there was too much privatisation? And looking at the present, do you think there needs to be more or less?
For individual companies, nobody really objected apart from political objections to privatisation in principle. The objections came when you had a monopoly situation and the industry was not broken up enough, for example in gas. In electricity privatisation we broke generation from supply and so on. The question is: did we get that right?
By and large, for individual companies, I think we did. For gas and electricity, we have privatised gas too much as a monopoly. We should have had more competition when we did it.
Water is the most difficult case. I am not sure today, if water were still public, whether we would privatise it in quite the way we did. With water you cannot really have competition within a given area, you must have a monopoly. We said the competition would be in the capital markets. So, if you are running a water company and I am running a water company, we have to go to investors for money. If we run our companies differently, we will earn different rates of return on capital. Then there is competition there, but there was no direct competition. I am not sure regarding today. I think with water we would have to rethink the way we did it.
Let us move to a more recent development: Brexit. It is a huge part of what is happening in the UK right now. Overall, what do you think about the decision to do Brexit?
First, I never thought the case for Brexit was an economic case. People argued that we were reducing the size of our market and so on. I felt it was always a political case.
When the European movement started after the Second World War, its roots were, I would say, in the Catholic faith. Many of the founders – De Gasperi in Italy, Adenauer in Germany, and a French figure whose name I cannot recall – were quite devout Catholics. The weekend before they signed the founding document, they all went to a monastery on the Rhine to pray about what they were doing. I found what they were trying to do very attractive and I agreed with it.
Then Europe became more secular. Religion declined, churchgoing declined. The European ideal became the European Economic Community, the EEC. Europe then said: we have to develop a European culture. So, we have a European anthem, a European symbol, a European identity. But Europe never really developed a demos.
What do you mean?
„Demos“ – D-E-M-O-S. If you look it up in a dictionary, the demos is the political community you create. In post-war Germany, for instance, you had a demos. You knew what it was to be Germans together. But I do not think members of the EU have a European demos. You have a European flag, a European anthem and a European symbol, but there is no European demos. There are the French, the Germans, the Italians, the Dutch and so on, and you have not merged into one demos.
My concern was that we were joining something which was really an economic unit. It was a protectionist project, going back to the German Chancellor of the 1870s – the man who started the welfare state in Germany, whose name escapes me now. The EEC started with strong protection. One of its major objectives at the beginning was to say: Europe must be a rival to the United States of America. As there is the United States of America, we would have the United States of Europe. I was always opposed to that. I was very pro-American because I believed in free trade and free capital movements. For me America was a beacon of free enterprise and initiative.
So, I felt that becoming part of Europe meant entering a protected market, with more regulation and more government influence over corporate governance along the German model. I felt that was the wrong direction. I was, I suppose, a sort of latent Thatcherite before Thatcher.
So, there was a difference in the political mindset compared to the European Union.
Exactly. Initially, it was a cultural and political statement, and I would say its basis was Catholic social thought. I did not know much about Catholic social thought at the time, but it goes back to „Rerum Novarum“ in 1891. If you read „Rerum Novarum“, you will find the basis of the European project within it.
I am sure there are statements by people like Adenauer and by the first president of what later became the European Union. It began, I think, with the European Coal and Steel Community. If you look at that, you get a feeling for the direction of travel: more government, more social factors influencing economic factors. At that stage I wanted to separate the two, because I thought it would lead in the end to a more socialist state.
And if you’re now looking back on it all, do you think it was the right move to separate?
Yes, I do, although it is a complicated answer. I actually voted to join the European Economic Community in 1972 because I thought it was a larger market and there were economies of scale.
Later I voted to leave the European Union because I thought it had become overregulated – not state-owned, but overregulated – and too much of a protected economic unit.
Now Britain has had high inflation and high debt in recent years, as you have also highlighted in Parliament. What do you think are the most urgent steps?
I have just written a book on inflation that came out about six weeks ago, called „Inflation“. We had a debate in Parliament on this, which is in „Hansard“. I still think inflation is a problem.
Incidentally, I do not think tariffs by themselves will lead to inflation. Tariffs lead to a relative price change rather than an absolute price change. They lead to an increase in the price level, but not to ongoing inflation. The central bank would have to monetise the process – increase the money supply at a faster rate than it is doing – for tariffs to lead to inflation. But you would have a one-off increase in the price level.
I say there are three things governments should do to beat inflation.
First, the central bank should be absolutely independent of the government and of the Ministry of Finance. In England the Bank of England is too close to the Treasury, and I have a chapter on that.
Second, I argue in favour of a Swiss-style debt brake. I used to argue for the German version before the changes that have been made but I argue today for the Swiss debt brake.
Third, if you are trying to control inflation, you need the public with you. In the 19th century governments did not need to say „we want to control inflation“; it was automatically assumed that inflation was a bad thing. Gladstone, a famous Prime Minister and Chancellor of the Exchequer, never passed an act in Parliament against inflation.
Today, our culture has changed. It has become much more permissive and our society much more divided. It is more difficult to control inflation if it takes off. In today’s culture of post-modernism, I argue that religion actually plays a role in thinking about this problem and that every society needs a social canopy. The expression comes from a book by the sociologist Peter Berger, an Austrian who went to America and became a Christian.
So, I argue we need that social canopy. There are three elements: the independence of the central bank, the debt brake and political measures that ensure social harmony, a social fabric, a social umbrella, something that strengthens traditional values. And we have to be aware of the dangers of debt, because debt can run away with people. They get themselves into debt and do not realise what they are doing.
I chaired a commission for the Shadow Chancellor of the Exchequer on debt among low-income families and why they have it. It is a very interesting subject.
Turning to another issue: you have been critical of financial regulation in the EU after the financial crisis. Do you think London as a financial hub is now better positioned outside the EU?
I think the EU overregulated the banking sector. After the great financial crisis, the central banks and regulators went into overdrive. Nobody could really object at the time – I was at Goldman Sachs then – because the public was so angry with the banks. If you spoke out against regulation, people would think you just wanted to be „fat cat bankers“.
London, because we were part of the EU, was forced to accept EU standards. We could have been more flexible. It would have required courage, but it would have been possible.
Today I think London is much better positioned outside the EU. We still must be cautious. I am not suggesting we should underwrite any kind of risk. We need regulation which matches the riskiness of the market.
There is one area of risk at present, which is the whole private-credit market. Frankly, the regulators do not know how much risk is at stake in that market. That is a problem. But overall, that is how I would answer your question.
A final question on a more personal note: if I want to build a career in economics and maybe later go into politics, what advice would you give me?
My advice would be that you have to do what you like doing. You have to do something you genuinely enjoy. I did not like accounting, I liked economics. So, when I graduated, I wanted to do more economics. I was offered a job at the LSE. I was very young, 22, and it was a great faculty to join. I had not really done any research, which on reflection was not ideal, but I discovered that I also liked teaching.
So, I think if you feel that doing research and teaching is good, or if you feel that going to an investment bank is good, or to an asset manager, or to a trading company of some kind, then you should do what you feel you would really like to do. I think you will find that you are guided in a certain direction.
I never planned my life out, never ever. But I did pray about it. Back to the Catholic social tradition, although I am not a Catholic but an Anglican, I do think having a sense of vocation matters. We are all created differently. Trying to figure out what your vocation is, is important.
Someone, who later became a friend of mine, was an industrial psychologist. He worked in America for the Rand Corporation and did a lot of research. He came to two conclusions. First, every individual has certain gifts. Second, every individual has a motivational pattern, what drives you. You get up in the morning and you are excited about what you are going to do. The gifts you have are the gifts you have, but the motivational pattern is what energises you.
He would ask: „Tell me, when you were very young, what did you like doing?“ One thing I liked doing was going down to a local river near where we lived. In this river there were banks of clay. Among the clay there was a blue stratum of clay. I would scratch the blue clay out, take it home, mould it into shapes and bake it. All my life I have liked creating things. I liked creating a policy unit. At a business school I liked being dean and creating something. With a think tank I liked creating the think tank.
When I created it, I am not so keen on running it. I will willingly hand it over to somebody else to run. That is a challenge. I like the challenge of something new like that. And Number 10 was perfect because every day there were new things. And I had responsibility for the whole of domestic policymaking. It was not just economic; it was health, education, the environment, police, prisons, and so on.
