In a short reply I cannot deal with all the criticisms of my article.
Barratt Brown and Harrison aver that devaluation and reduction of the arms bill could do nothing to solve our long run problem of inflation. Have we got a long run inflation problem? In recent years unit costs of our major competitors have been rising as fast or faster than here, now that unemployment has virtually gone in Europe and Japan. The exception is the United States, but even there capacity is now strained and unemployment is getting lower. The same rise in unit costs should soon be happening there. Suppose our rate of growth rose by 2 per cent because resources were transferred from arms to investment. This would raise productivity without raising the demand for labour. It is likely (in the present state of knowledge there is some uncertainty about this) that wages would not rise much faster than they are doing now. The result of this would be that the rate of growth of our prices would be cut by nearly 2 per cent—certainly enough to avoid future devaluation. Even if it did not avoid the need for devaluation, so what? A 10 per cent devaluation every five years would not be catastrophic, provided we had done something about the sterling balances; offered for example to guarantee them in dollars or marks, allowed their holders to repatriate them at a rate of say £250m per year, and instituted capital control. The sterling balances are, after all, equal to only about a third of our overseas assets (see Bank of England Quarterly). The objection to repeated devaluation made by John Hughes and Ken Alexander (NLR 36) (that it would cause a wage price spiral which would wipe it out) exaggerates the impact of, say, a 10 per cent devaluation on the home price level—not more than 1–1½ per cent initially and perhaps a little feed back through wages. Most of the studies made of wage-price spirals have ignored the role of profits in stimulating wage rises. In an economy without imports this does not matter much, as profit rises tend to be associated with price rises; but in an economy with imports it may happen that prices rise a bit and yet profits as a share of the national income do not rise, thus moderating the pressure for wage increases. I agree that it is difficult to answer the whole question definitely, but my critics do not ever say why we should not have repeated devaluation. They seem to think that the incorrectness of such a policy is so clear that it needs no argument. I find it quite unclear.