Not so very long ago, I argued that it was possible to characterise modern monetary and fiscal policy in the UK as a function of three key events: exit from the European Exchange Rate Mechanism in September 1992, the election of ‘New Labour’ in May 1997 and the global financial crisis of 2007–2009. The first led to the adoption of a domestic inflation target in October 1992, the second to the operational independence of the Bank of England and the establishment of the Monetary Policy Committee and the third to the acceptance of the need for macro-prudential policies, extraordinary monetary interventions to augment a simple interest rate rule and formal budgetary oversight by a fiscal council. The latter was provided by the Office for Budget Responsibility, which was established in 2010.

This note provides a nontechnical summary of a research paper (Bullard and DiCecio [2021, Classical policy benchmarks for economies with substantial inequality, Federal Reserve Bank of St. Louis, unpublished manuscript]) that I presented as the NIESR 2021 Dow Lecture on 9 February 2021. In the paper, we construct a simple benchmark macroeconomic model with substantial heterogeneity among households, enough to generate empirically plausible Gini coefficients for the distributions of consumption, income and financial wealth. The model includes aggregate shocks as well as both permanent and temporary idiosyncratic uncertainties. Four policymakers—implementing monetary, fiscal, labour market and education policies—act in concert to achieve a first-best allocation of resources. We argue that the roles of these policymaker types are ‘classic’ and match up well with observed policymaker roles in OECD countries. We regard this simple economy as a benchmark for the study of other aspects of the interaction between policy and inequality.

Over 50 years ago, New Society first identified a new ‘Oxford School’ considered central to British post-war reconstruction. Based around Nuffield College, it contained five key figures: Hugh Clegg, Allan Flanders, Alan Fox, Bill McCarthy and Arthur Marsh. Other identified contributors were Ben Roberts, John Hughes and legal theorist Otto Kahn-Freund. A second generation included the likes of George Bain, Willy Brown, Richard Hyman, Rod Martin and Roger Undy. Intriguingly, as early as the late 1940s its key theorist Flanders described their social democratic approach to build industrial pluralism as the ‘third way’—obviously a phrase given greater prominence in the 1990s by Tony Blair and Tony Giddens.

It is an enormous privilege for me to present the Deane–Stone lecture. As a young academic at the University of Southampton, I read so much of the work that came out of the National Institute of Economic and Social Research (NIESR) and was always impressed. Also, as an undergraduate and as a master’s student at the London School of Economics, Sir Richard Stone and Professor Phyllis Deane featured prominently on my reading list. In my opinion, they were pioneers of economic measurement and, today, economists benefit hugely from their legacy.

This paper uses economic history to probe the relationship between state capacity and economic growth during the Great and Little Divergences (c.1500–c.1850). It identifies flaws in the dominant measure of state capacity, fiscal capacity, and advocates instead analysing state expenditures. It investigates five key activities on which states historically spent resources: waging war; providing law and administration; building infrastructure; pursuing industrial policy; and fostering a national culture. The lesson of history, it concludes, is not to build a capacious state. Rather, we need a state that uses its capacity to help (or at least not hinder) market activity.

Good evening. It is a pleasure and an honour to be here at NIESR to give the annual Dow lecture. We are very lucky in the UK to have high-quality independent institutions such as NIESR focusing on the policy landscape, and in my time on the MPC I have always valued their commentary and research.