Jonathan Mitchie on W. E. G. Salter's Productivity and Technical Change.

How on earth do you pick the one book in your academic field which has meant the most to you? The books which have meant the most to me have not been in my field - E. H. Carr's What is History?, Huw Benyon's Working for Ford and Nick Hornby's Fever Pitch.

Certainly the "classics" have meant a lot - Marx's Capital and Keynes's General Theory - but to say why would be to invite a correspondence on whether I had not misinterpreted their true meaning. On the other hand, there are books in my field whose meaning is crystal clear and which have made important contributions - Coutts, Godley and Nordhaus's Industrial Pricing in the United Kingdom or Ha-Joon Chang's Political Economy of Industrial Policy - but these are too specific to be the single piece which has meant the most.

This, at least, was the train of thought from which I alighted at W. E. G. Salter's Productivity and Technical Change. Salter's book, published in 1960, stressed the role of capital investment as a vehicle for technical change, which in turn allows the dynamic growth of productivity and wage levels. Governments which wished to raise industrial productivity should therefore be looking to boost investment.

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This key message is developed not as a result of some simplified model which would fall apart if it was made to bear the weight of actual institutional patterns; on the contrary, Salter's work explicitly sets out the various interrelated forces at work. Economic growth involves investment in the latest equipment to allow output to expand, which in turn will generally lead to increasing productivity and falling costs.

It is thus not necessary to restrain wages in order to expand output; on the contrary, expanding output will generally be accompanied by rising productivity and wage levels. This conflicts with the current orthodoxy, that expanding employment would be inflationary because firms would not be able to pay existing levels of wages, so would need to raise prices.

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Reading Salter's book it is clear that his motivation in writing it was to achieve a better understanding of how economies function, not to demonstrate his own brilliance. He cites the existing literature where relevant, not otherwise. The theoretical discussion sets the scene for sensible empirical work which in turn tests the theory. In short, a model of good economics.

Salter's untimely death in 1963 was followed in 1966 by a second edition with an addendum by Professor W. B. Reddaway who had supervised Salter's work and who was the director of the department of applied economics in Cambridge at the time. Reddaway's testing of Salter's work against the more recent data which had become available was itself a model of how economics can make sense of the world rather than obfuscate.

It is clear that the impetus behind Salter analysing the issue of productivity in the1960s was that in an era of full employment, increasing productivity was the only way to increase output per head. It is depressing to reflect that although that is no longer the case today, when widespread unemployment would allow improved living standards to be achieved by simply increasing output and employment, the order of the day is nevertheless rationalisation and downsizing, boosting productivity and competitiveness.

Far from questioning this, much of the profession carries on their economic theorising on the assumption that the economy is fully employed, by definition (their definition, that is). Others spread the myth that high unemployment is necessary to prevent inflation from accelerating, ignoring the evidence to the contrary.

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Faced with this, it is tempting to advocate that policy makers should ignore academic economists. Yet Salter's book is a useful reminder that there is an economics which accepts that the world is as it is and not how economists might theorise it to be. When faced with the can of food on the desert island, Salter was one economist who would get beyond "imagine we have a can opener".

Jonathan Michie is a fellow of Robinson College, Cambridge.