The purpose of this article is to survey the nature and causes of the severe distresses now afflicting the British economy, and to consider the changes we should be making. These distresses are most evident in our unemployment, now approaching three million and in reality a good deal more because so many are involved in training schemes or not registered. This represents a huge waste of resources and a great deal of personal suffering. There has also been a check, which cannot as yet be measured, to the steady growth of the national income which went on in the period when we enjoyed full employment. During this period, unemployment rarely rose above half a million, mostly people changing their jobs or well below the standard of employability. The change from full employment is the result of a deliberate change in policy. To understand this change it is necessary to understand the place of money in our economic life.
If everyone who gets an income from the sale of goods and services spends this amount and no more, the total offered for output will equal the total price of it. Those who have sold the goods and services are thus enabled to pay wages, dividends etc, and they all pay taxes which are paid out again, mostly to local and national government employees. Thus spending our incomes provides the funds to keep the incomes flowing. But both individuals and governments can spend less than they receive, or use past savings or borrowings to spend more. Thus there may be deficiencies in demand leading to unemployment, or excesses leading to rising prices and inflation. Demand management, based mainly on the influence of J.M. Keynes, was intended to offset these swings, the government varying the balance between its own income and expenditure according to what was needed to keep employment fairly steady. It was this policy which avoided the booms and slumps of the past and gave us something like full employment and moderately steady growth from the end of World War Two for nearly thirty years.
The change in policy, initiated to some extent in the last years of the Labour Government, but pursued with such vigour by the present administration as to produce a worse slump than the Great Depression of the Thirties, involves an attempt to halt the inflation which has been associated with full employment. The price mechanism which is the lubricant for our whole system is put under severe strain if prices are all rising, because they do so at different rates. Those whose incomes or assets rise first benefit at the expense of the latecomers. It has always been agreed that it is one of the primary duties of government to avoid inflation by controlling the amount of money available. But after full employment became the primary object of policy, it was found that prices rose by about 2 to 3 per cent every year, and most economists agreed that this was because full employment increased the bargaining power of labour. This rate of inflation, fairly constant until about 1967, then began to increase, and prices roughly doubled in the next seven years and rose even faster after that. This is an alarming rate and the history of other inflations shows that such rates tend to get faster until everyone loses confidence in money. But though all agreed that something needed to be done, there was, and remains, an acute difference of opinion about how the wage and price increases could be checked and controlled.
The monetarists point out that it has been accepted for at least two hundred years that if the general price level is to be kept steady, the supply of money must be controlled. The trade unions would not be able to get inflationary wage increases if more money was not available. If the supply were restricted, employers would not be able to afford higher wages and the workers demanding more would price themselves out of jobs. This policy would in effect mean giving up full employment as the primary objective and replacing it by stable prices, with employment as a conditioned outcome. The argument continues by saying that although at first it would mean unemployment, once the workers knew that the Government was determined they would only expect to get wage increases within the monetary guide-lines.
The opponents of this point of view agreed that a monetary policy severe enough would check inflation in the end, but said that no one knew what the cost would be in lost output and social stability. They thought that a direct appeal to employers and workers, to show the necessary moderation, would be more likely to succeed and would cause much less damage. This was incomes policy, which required the Government to lay down the target for acceptable wage and price increase. It would also be necessary to have some form of appeal, to give the policy flexibility, and some sort of sanction against those who broke the guide-lines. In short, this policy rejected the use of unemployment as an instrument of policy, and trusted that the community (who would benefit both from price stability and from full employment) would be reasonable.
For about fifteen years after full employment was accepted, no government was so worried about inflation that it did more than appeal to industry for moderation. Unemployment was kept below half a million, growth was fairly steady, and price increases averaging 2½ to 3 per cent were not taken very seriously. The Conservatives won three elections running. By 1962, however, there was enough anxiety about price increases to lead to the first experiment with incomes policy, and from then until 1979 there was a succession of experiments on these lines. They varied in detail, but all laid down some ‘norm’ for wage and salaries increases. There was usually some control of prices and some appeals mechanism. The sanctions part proved much more difficult. These experiments sought the collaboration of the TUC, and the Labour governments of 1964-70 and 1974-79, in the so-called social contracts, changed the laws about trade unions and conditions of employment to increase union power, in return for undertakings not to use it unduly.
All these experiments, though they had a re-straining effect when introduced, turned out to be only temporary palliatives, because the unions could not carry their members with them for any length of time, and no government was prepared to enforce a compulsory policy for long. The Heath government faced a miners’ strike and a three-day week, but lost the election which followed. The Callaghan government had a policy which brought inflation down, but when it negotiated a new and stricter agreement with the TUC in 1979, this was rejected by Congress and the wave of strikes was no doubt a factor in the loss by Labour of the 1979 Election.
The most discouraging feature of this period was that the rate of inflation rose more or less steadily from 1964 onwards. Each new experiment started with a higher rate to be controlled, and with the unions setting their claims more extravagantly. The monetarists were able to claim that incomes policy only aggravated the malady; and it would have been folly for Mrs Thatcher to try to negotiate anything with the TUC when they had just brought down her Labour predecessors. The principles advocated in the joint Statement of Labour and the TUC setting out the 1979 agreement were an admirable digest of what any government from 1947 to 1979 would have endorsed. But the Statement was not worth the paper it was written on.
Many advocates of incomes policy, of which I had been one since 1947, were forced to agree that the monetarist policy of the new government should be given a chance. In the event, however, all our misgivings about the difficulty of applying this policy, and about the probable high cost in wasted resources, have been fully justified. Three million unemployed and an inflation rate still above 10 per cent a year speak for themselves. Until recently, wage restraint has been mainly in the private sector, since the Government cannot go bankrupt. Thus the squeeze has fallen very differently on different groups of workers, and it seems certain that they will try to restore the previous relationships as soon as there is any recovery. Only the most extreme monetarists now predict much further reduction in inflation rates, and they rest their hopes on the belief that workers will expect the Government to stand firm and will therefore be willing to reduce their claims to help the unemployed, who could hope to get jobs if inflation fell. It seems more likely that most workers will expect the Government to lose the next election and that this will be the end of monetarism.
The error of the monetarists was to believe that because incomes policy was a failure, their own remedy would succeed. This well-known fallacy should be a danger signal to incomes-policy men, since it would be equally erroneous to reverse it. Can any policy succeed? Are we capable of changing our institutions in order to adapt to our new circumstances?
The market economy, corrected to avoid booms and slumps, should have been capable of absorbing all our resources if prices had been free to move. Monetarism has failed because the trade unions are now so powerful that the price of labour can only move one way: the unemployed cannot find jobs by reducing their price, for if they did, their output would be blacked. It is ironic that this power – of threatening like terrorists to ruin the economy and themselves if their demands are resisted – has been fostered by an incomes policy intended as a rational substitute for the threat of using unemployment to force workers to take lower wage increases.
All the negotiations with the unions made them feel that they were being asked to sacrifice something valuable, and the two periods of social contract gave them increased powers which, by the terms of the contract, they were supposed not to use. Even the present government, which has pinned its hopes on the operation of market forces, has only trifled with the privileges conferred on the unions through ‘contracts’ soon to be repudiated.
The institution of trade-unionism, placed in a unique position of privilege by the community, has thus made the labour market so unresponsive to change that it is working very badly. We could perhaps live with some inflation if this were the price to be paid for reasonably full employment: no doubt the present trend towards indexation is a move to such an adaptation, though we are still torn by the struggle for stable prices. But there is a more alarming aspect of the exercise of union power – one which has damaged us already and which threatens greater dangers for the future. This is the union attitude towards innovation, towards the introduction of cheaper and better ways of satisfying our material wants.
The unions grew up in an adversarial attitude, proper to a war or a lawsuit, or to what economists call a zero sum game, where the object is to win what your opponent will lose. In spite of the efforts over the last thirty-five years to persuade them that increases in output benefit everybody, they have retained this adversarial attitude and put great difficulties in the way of employers who want to use labour-saving methods or machines. Readers of this journal will probably remember the review (LRB, Vol. 3, No 1) by Peter Jenkins of Stop Press by Eric Jacobs, which deals with the dispute which stopped publication of the Times for so long. This is perhaps an extreme example of a practice with which all employers are familiar, but the fact that we tolerated it at all speaks volumes for the pass to which we have come. Over-manning is endemic, and Britain’s record for economic growth is one of the worst among advanced countries. The trade unions, in pursuit of their reluctance to see any reduction in the time taken to do anything, now want us to return to protection, to force us to buy our own output instead of what others can make more cheaply. Species which have to be protected to survive need a protector – who will protect us?
We have been living in a fairly beneficent climate since we embarked on full employment, and the only severe change to which the Western world has had to adapt itself is the rapid rise in crude oil prices since 1973. Britain itself has been largely sheltered from this because of the exploitation of North Sea oil. But oil is going to get scarcer and scarcer, and we will have to make a lot of changes to more expensive energy. The population of the world is expanding fast, and is already near the figure which will press heavily on land and other natural resources. The first effects of this have been seen in the shortage of cheap food and minerals, and in the competition of some of the less developed countries, who are now sending us things which we used to export to them. And we are constantly warned that the microchip revolution will displace a great many workers, who will have to find other jobs. There would be no difficulty about this if we were prepared to change, and changes nowadays can be carried out much more humanely than during the Industrial Revolution. But we are likely to need to adapt more rapidly than in past years, at a time when we have grown less willing to do so. It would be ridiculous to think that the British people are incapable of overcoming this creeping paralysis, which seems to afflict both of the main parties. Conservatives are committed to unemployment – almost as negative in its way as the continual threats of disruption to which labour is committed. Meanwhile the last Labour Conference has foresworn any sort of incomes policy, which really means plumping for accelerating inflation. Surely we can do better than this? In 1937 and 1938, when we were afflicted by a worse threat and a worse paralysis, we were on the eve of a triumphant revival.
What we need to achieve can be simply stated: to devise a permanent incomes policy with teeth in it, and to bring trade-union practices under something like the Monopolies and Restrictive Practices Commission. It is very unlikely that a dictatorship, either right or left, could survive in Britain, so that any government with this programme would have to have enough popular support to be sure it could be carried through. There would have to be a dialogue – either through Parliament or through the National Economic Development Council, which was designed but not used for such a purpose. But it would have to be a forum in which real bargains could be made, between bargainers who could deliver what they had promised and who we were prepared to fight when promises were not kept. This might lead to a good deal of disruption, and to a national emergency if action were taken in order to enforce a surrender: and there could be no hope of success unless the community were brought to realise where we are drifting and to support a government that would stop the drift.