Finance and Industry: Controlling unemployment (1965)

The Finance and Industry column from the March 1965 issue of the Socialist Standard

Controlling unemployment

We have referred many times in these columns to the fact that American academic economists are seriously questioning the adequacy of traditional Keynesian policies to deal with unemployment. One leading American economist wrote in 1963: “Our problems of unemployment have seemingly become chronic.” But it is precisely chronic unemployment which Keynesian policies are supposed to prevent.

In his General Theory of Employment, Interest and Money which appeared in 1936, Keynes set out to show how it was that capitalist economies of the free enterprise variety did not automatically lead to full employment. He said that unemployment and stagnation were caused by a lack of “effective demand.” Keynes went on to suggest a number of ways of dealing with such “demand deficiency” unemployment: stricter control of investment, a redistribution of income in favour of the poor, budget deficits and various other fiscal and monetary measures to encourage effective demand and investment. This is the so-called Keynesian revolution, the application of deliberate fiscal and monetary policies by the government to try to affect the workings of free enterprise capitalism.

From 1958 on, unemployment in America has averaged 6 per cent despite the application of Keynesian policies. It is this that has started economists questioning. Consider the views of Robert Lekachman expressed in a book published last year. Of the advanced countries he writes,

“The original simplicities of keynesian policy prescriptions have been overtaken by the actual complexities and contradictions of applying monetary and fiscal techniques to situations simultaneously subject to inflation and unemployment, or high interest rates and gold outflows, or falling demand and rising prices. The dilemmas of recent American economic policy exemplify this point. President Kennedy’s major response to unsatisfactory rates of unemployment was the 1963 program of tax reduction and tax reform. Now if simple Keynesian fiscal policy were enough, such a program would dependably stimulate aggregate spending, diminish unemployment, and restore the economy to some approximation of full-capacity operation. Yet even Administration spokesmen hive made comparatively cautious claims for the spread and the adequacy of this policy, and few economists indeed believe that by itself tax policy is capable of reducing unemployment to tolerable levels. It is a sign of the times that this tolerable level has itself shown a secular tendency to rise from 2½-3 per cent to 4-5 per cent. For the sad, uncomfortable fact may be that just about the time that some version of the simplest Keynesian revelation has at last won the hearts of businessmen and politicians, the nature of the economic problem has sufficiently changed to require different remedies and different theoretical justifications to support them (Keynes’ General Theory: Report of Three Decades).

It is true that the American economy did show signs of increased activity in 1964 but unemployment was still around five per cent with four per cent as the “tolerable level” as Lekachman suggests.

Capitalism will not break down in depression and stagnation as a result of the inability of the working class to buy back what they produce, as has sometimes been suggested. If this were so, the Keynesians would have some justification for their claim to have found an alternative to socialism. In fact, the capitalist system will continue until the working class organise to end it. In the meantime its growth will be accompanied by a trade cycle involving periods of unemployment and prosperity. So the shoe is on the other foot. It is we Socialists who are in a position to point out that the Keynes theory on its own admission has proved incapable of dealing adequately with the problem of chronic unemployment in America.

African capitalists

The capitalist system is still spreading rapidly throughout the world turning peasants and tribesmen into wage-workers. In Asia, Africa and Latin America new capitalist states are emerging. Some of these, as in Cuba or Ghana, are totalitarian state-capitalist regimes in which the emerging working class is subjected to an industrialising elite. In others like India and Nigeria the emergence of capitalism is not forced and controlled to such an extent.

It is under such regimes that from the motley collection of shopkeepers, traders and contractors a more substantial group of big capitalists is allowed to evolve. A recent supplement to the international edition of the New York Times introduces some of the new capitalists of Africa to American businessmen. In Nigeria there are Sir Mobolaji Bank-Anthony and Chief Shafi Lawal Edu. Sir Mobolaji is, we are told, “either owner, chairman or director of 10 large corporations.” His compatriot is “chairman of the African Alliance Insurance Company, and serves on the boards of several companies.” In Somalia there is fish-processing magnate Abdullahi Omar who:

“… for several years operated his own general store in Hargeisa, and then moved to Mogadiscio, Somalia, in 1960 after independence. He established a wholesale import agency and interested himself in the fishing potential of his country. He recently established Somalia’s first steel and wood furniture factory and is negotiating with American interests for the opening in June of a pickled-skins plant.”

In Uganda there is Jayant Madhvani who is supposed to be the wealthiest man in East Africa. He:

“. . . heads the Madhvani group of companies based on Jinja. These include sugar, tea, coffee, textiles, steel, paper and more than a dozen other companies operating in Uganda, Kenya and Tanzania. In Uganda alone, Madhvani enterprises account for more than 10 per cent of total product.”

At present this group of “non-European” capitalists is only small in number but as capitalist development proceeds more can be expected to appear. The working class in Africa has the choice of being exploited by and subjected to such a group of wealthy magnates or to an industrialising elite of nationalist political leaders. Either way they suffer. Either way the fact is brought out that the important social division in these newly emergent capitalisms is that of class, not race or colour.

Adam Buick

Letter: Full employment, slumps and other questions (1964)

Letter to the Editors from the October 1964 issue of the Socialist Standard

Full employment, slumps and other questions

Dear Sir.

An article published in the Socialist Standard in January of this year posed a question with its title, namely "Are you better off?" Unfortunately, however, the article does not provide any definite conclusion.

The article does however concede that the average increase of the purchasing power of take-home pay is probably about 10 per cent.

"In the meantime, owing to more than proportionate increases of pay deductions from pay (national insurance and income tax), the average increase of the purchasing power of take-home pay is not the 18 per cent of the two indexes would show (wage rate index and retail price index) but something less, probably about 10 per cent Socialist Standard, page 9, January 1964.”

It might also be pointed out that.the present alleged standard of affluence that many of the working class are at present living at is dependent on their wives going to work in order to augment the family budget. But, notwithstanding, this and other factors such as the tremendous growth in hire purchase commitments, it is difficult to deny that the worker of today is better off if fully employed, as the vast majority are at present, than his counterpart was when unemployed in large numbers before the Second World War, particularly in the slump of 1929. In case it should be asked why one should compare the lot of a fully employed worker to that of an unemployed one in the pre-war period the answer is that millions were unemployed then, and relatively few are unemployed now. The article in question gave four columns of figures, one of which gave the number of unemployed of 1938 when it stood at 1,927,000. The column next to this gives unemployment as a percentage of 1938. this year being taken as 100 per cent. If these figures are accurate, then we may conclude that unemployment has not reached 50 per cent of this level since 1938.

On this aspect of the problem the article in your journal is significantly silent. In fact I think it would be true to say that the Socialist Standard has failed to account for this continuing full employment since the end of the war and does not even find the subject worthy of discussion in its columns.

May 1 therefore ask the following questions?

(a) Why in your opinion has the slump which you maintain is an essential feature of capitalism failed to appear in England?

(b) Why has there been no slump of the magnitude of 1929 since the war.

(c) Are the present conditions of full employment, increasing the membership of your organisation and the sales of the Socialist Standard.

(d) Do you think the orthodox economists using ideas of the late Maynard Keynes have found a way of preventing widespread and profound slumps of the pre 1938 variety and if not how do you account for this rather prolonged period of full employment?

I am, yours etc.

T. Lawlor

Reply:

Our correspondent comments on the fact that, compared with pre-war years, the position of the workers has been affected by the decline of unemployment and the increased number of married women who go out to work, as well as by the rise of average wages in relation to prices. This was referred to in the article, where it was pointed out that total wages are about five times what they were in 1938, “mainly because of the decline of unemployment and the fact that far more married women are now out at work".

Whether this last factor can be regarded simply as a gain is another matter. In the nineteenth century the need of married women to work was commonly regarded as a disadvantage by those who studied its consequences.

If however it is a fact that most workers now are rather better off than before the war, this kind of development is not a new thing. Frederick Engels noted in 1885 that since 1844, when he wrote his The Condition of the Working Class in England, the factory workers had become “undoubtedly better off”, and the condition of engineers, carpenters, joiners and bricklayers, organised in the trade unions, “had remarkably improved". (See Preface to 1892 Edition).

In the same Preface and in the 1886 Preface to Capital Engels then went on to state a position which events proved to be wrong. He had concluded, because of the length and severity of the depression, that British Capitalism would never resume its expansion and that “either the country must go to pieces or capitalist production must ”. He thought unemployment was bound to increase year by year and that shortly, “ the unemployed . . . will take their fate into their own hands ”,

Profiting by Engels' mistakes the SPGB reached the conclusion (one indeed that Marx and Engels had themselves seen) that the achievement of Socialism calls for understanding on the part of the workers and cannot be the outcome of discontent and despair without understanding.

Our correspondent accepts rather too easily the claim that there has been “continuing full employment since the end of the war". In the column of figures to which he refers in the January Socialist Standard it is shown that since the war unemployment has ranged from 302,000 in January 1956 to 861,000 in January 1963. This latter figure may not be high by pre-war standards but it certainly cannot be described as “full employment”. Allowance ought also to be made for the fact that unemployment will have been increased in the nineteen thirties by the big flow of migration into this country. In post-war years up to about 1960 the net flow was outwards.

Against that background we can answer the specific questions.

(a) For this question it is necessary to take care about the use of words. If by “slump” our correspondent means only a “heavy slump” like that of the thirties, the answer is that such heavy slumps are not an essential feature following each capitalist crisis.

What we had as an essential feature o! capitalism is, to quote the words used by Marx in Capital, Volume I, Chapter XV, Section 8: —

The life of modern industry becomes a series of periods of moderate activity, prosperity, overproduction, crisis and stagnation.

The crises, that is the sharp interruptions of booms, have continued to happen in the post-war years. For example, the index of production in January 1963 was down to 108, after having reached 120 in January 1961. If in post-war years, the ensuing “stagnations" have not been heavy and prolonged this is in line with the experience of crises in the nineteenth century. Most of these crises were not followed by heavy prolonged slumps. The outstanding big ones were in the eighteen forties, the eighteen eighties (the one that threw Engels off-balance) and the nineteen thirties, and in between there were depressions that were not heavy or prolonged.

(b) Among the reasons why heavy depression existed in the nineteen thirties and not in post-war years in this country (experience of some other countries has been markedly different) is the absence of a very important factor which existed then. This is the pre-war feature of crisis-dislocation superimposed on the long-term decline of some very big industries, agriculture, coal and cotton without the counter effect of strongly expanding new industries. In post-war years, along with a much larger Civil Service, large armed forces and armaments industry, there has been expansion of building (helped by war-time destruction and stoppage of building), man-made fibres, electricity and electrical engineering, motor car and aircraft manufacture, television, chemicals and oil, electronics and nuclear power.

(c) If this question means has low unemployment since the end of the war been accompanied by a continuous increase of membership, etc., the answer is no; but we would not expect increase of membership to be determined by low unemployment any more than the heavy unemployment of the thirties had that effect. Other factors also come into it.

(d) This question relates to the supposed ability of governments to prevent widespread and profound slumps by means of the techniques associated with the late Lord Keynes. It will put the matter into perspective to point out that also before 1935 (the year Keyne's major work appeared) there were, between the heavy slump, long periods without heavy slumps.

If it is claimed that Keynesian techniques give Governments effective control over capitalism why did unemployment rise to 861,000 in 1963? As all governments have at their disposal these same techniques, and numerous economists who approve of them, why have many countries had heavy unemployment for prolonged periods since the war. among them U.S.A.. Canada. Germany, Italy, Belgium and Denmark? In Italy unemployment ranged between 1½ and 2 million for 10 years after the war. During this year unemployment has been at the 6 per cent level in Canada and U.S.A.

How have the techniques supposed to have worked? The Keynesians claim that the Government can, when it likes, stimulate capital investment and consumption and at other times damp down over-expansion. When the present motor car boom slackens off as it certainly will, what can the government do, if the world market for cars is temporality saturated, except wait for demand to recover? Theoretically the government could have prevented the industry from expanding so rapidly—and left the market to be filled with the cars of other producers—but the car manufacturers, the trade unions and the Tory and Opposition M.P.'s would all have protested.

Now that the Southern Rhodesian tobacco industry has been hit by falling prices following a bumper crop, how can Keynes help them? The producers are in fact turning to another and older technique, that of restricting production.

Of course it long ago ceased to he true that Keynesian doctrines were held only by the unorthodox minority. They had become the orthodoxy of large numbers of economists and members of governments. Now fashion is changing again and Keynes comes under increasing criticism. It would seem that his theories have not proved, even to his admirers, to be the panacea they were claimed to be.

Editorial Committee.

The Crisis: Capitalism’s Stranglehold on the Labour Government (1975)

From the August 1975 issue of the Socialist Standard

There is of course nothing new in governments breaking pledges and turning policy somersaults, but latterly the occasions have become more frequent and more farcical. At every election since the second world war the Labour and Tory parties have undertaken to deal with inflation: to so little effect that prices have risen continuously for thirty years, with the rate of increase getting faster and faster.

It is not at all surprising that this should have happened because the governments have been running a policy of inflation in the belief that this was a way to prevent unemployment from increasing. A vain hope, because at each of the half-dozen recessions since 1950 unemployment has risen to a new higher peak—over a million in 1972 and now forecasts of a possible 1½ millions by early 1976. Instead of stopping inflation, it has been government policy first to promote it and then to try to suppress its symptoms by means of a “Prices and Incomes Policy”.

It started in 1947 under Attlee’s government and has been re-enacted half a dozen times. A long succession of failures as far as stopping inflation is concerned, but it would be churlish not to acknowledge its one happy achievement—the enrichment in the use of our vocabulary. We have had wage restraints, wage freezes, wage thaws, plateaus, pauses, ceilings, guiding lights, norms, standstills, early warnings, guide-lines, slow-downs, explosions, wage-stops, thresholds, curbs, social contracts, and a lot more.

The latest from Mr Wilson “the £6 limit on wage increases”, which he admits means a lower standard of living, has a novel refinement. For years the centrepiece of the Labour programme was the “national minimum”. The law was to be used to force “bad employers” to become “good employers” by making them put wages up. Now Mr Wilson threatens to use the law to prosecute employers who put wages up too much. They are, he says, “rogue employers”. The recipients, of course, could be workers whose wages are only a small fraction of Wilson’s own income.

Don't they understand capitalism?

Is it really possible for government ministers not to understand how capitalism operates? And to be unaware of the inevitable consequences of their own policies? Indeed it is possible. During the nineteenth century, although capitalism regularly went through the recurring cycle of expansion, boom, crisis and depression outlined by Marx as the economic law of the system, governments, capitalists and many economists were forever expecting booms to be permanent and being amazed as each crisis blew up. There are plenty of similar examples in our own times.

Any serious student of capitalism knows that the capitalist is in business to make a profit and therefore will not invest more to expand production at those times when there is no prospect of selling the product profitably. Yet in the last recession, in 1971-2, Heath and Barber complained bitterly that though for months on end they pleaded and threatened and offered inducements for increased investment, “nobody would listen”. Healey, Chancellor of the Exchequer in the present government, confesses to having been equally ignorant of the facts of economic life. “One thing I have learnt from my experience in the past seven months [as Chancellor]: there is no chance of investment if business expects a general and prolonged recession, however generous the tax incentives” (Report of speech, The Times, 5th October 1974).

Later in the same month he was again airing his ignorance, this time as guest speaker at the Lord Mayor’s banquet for bankers and merchants of the City of London:

I simply cannot understand how it can make economic sense . . . to keep a million active men and women idle when the nation needs the goods they could produce (Times, 18th October 1974).

Since when has capitalism been interested in meeting people’s needs? And, in a depression, who needs additional production of unsaleable cars, motor-cycles, supertankers, steel and so on?

In one respect nineteenth-century British governments were better informed than governments since 1945. They knew how to prevent inflation and decided that it was in the interest of capitalism to prevent it. There was no inflation for the hundred years before 1914. Prices rose and fell by moderate amounts in booms and depressions, but the level was lower in 1914 than in 1814. Now the price level is more than seven times the 1938 level and rising fast, by far the biggest cause being the depreciation of the currency consequent on government policy.

There were always some uninfluential groups advocating inflation to cure the ills of capitalism. One was dealt with in the Socialist Standard in August 1906. Using the Marxist analysis the writer of the article showed that it would cure nothing and would simply raise prices: “the workers, as is usual, being the first to suffer”. Another example is mentioned in The Life and Times of Ernest Bevin, by Alan Bullock (p. 17). Bevin, trade union leader and later a minister in the Attlee government, was present in 1908 at a conference to discuss remedies for unemployment. One proposal was “the issue of paper pounds”. A Liberal politician who was there thought that it was “very sensible” but politically impracticable.

After 1945 it was quite different. Influenced by Keynes (or by crude distortions of Keynes) the Labour and Tory Parties and the TUC adopted the doctrine that the government could “manage” the economy in a way that would prevent crises and depressions occurring again. By “maintaining demand” they believed they could always prevent unemployment. Maintaining demand meant in practice printing more money and putting up prices. Keynes, whether he intended it or not, had made inflation respectable.

Marx and others on inflation

A number of economists in the past have understood that if an inconvertible paper currency is issued in excess amounts it will correspondingly put up prices. Marx’s special contribution was to anchor it to his theory of value. In given circumstances a certain amount of currency will be required. If the currency consisted solely of gold coin it would represent a certain total weight of gold and therefore a certain total mass of value. If the gold is replaced by inconvertible paper money (not convertible into a fixed weight of gold) and is then issued in amounts exceeding the gold it represents, it will simply put up prices. This is the present situation. Currency in Britain in 1938 was under £500 millions. It is now over £6,000 millions. It went up £825 millions in the year to July 1975.

Those who reject this explanation of inflation can apply a test. Let them show when such excess issue took place without raising prices; or when such excess issue was halted and prices did not fall.

In December 1919, after a very fast rise in prices, a ceiling was placed on the note issue and within a year prices were falling fast and wages with them. Lord Rothschild (Times, 30th June 1975) recalls that German inflation was halted in 1923 by applying the recommendations of a Committee (two members of which were the banker Brand and the economist Keynes) which included the Reichsbank being “forbidden to print more notes”.

Some modern “monetarists” have confused the issue by trying to relate price movements to the total of currency plus some or all of bank deposits. Why should the act of lending by depositors to banks affect the price level? Historically there is no justification for the theory. The enormous growth of bank deposits in the last decades of the 19th century was accompanied by a fall of the price level, not a rise.

Harold Wilson used to be quite confident about how he would prevent inflation. In 1957 some of his articles in The Guardian were published as a pamphlet, Remedies for Inflation. In Section III “What Labour Would Do” he wrote:

Ever since the Coalition Government’s White Paper (Employment Policy, 1944) all major parties have been committed, on Keynesian lines, to using the Budget as a means of avoiding undue inflation or deflation. In inflationary times, therefore, all are agreed in theory on the need for public saving through a large Budget surplus, though we have felt that a number of Conservative Budgets have sacrificed financial stability to a desire for fiscal popularity.

In practice Wilson’s government in 1974-5, instead of running a Budget surplus, has shown the biggest deficit in British peace-time history. Wilson says that the Government’s latest measures have been forced on it by the threatened drastic fall of the pound under pressure from foreign holders of sterling, just like Labour Premier Ramsay MacDonald in 1931.

There is no sign that the bulk of the Labour ministers and the TUC have given up their delusion that unemployment can be prevented or reduced by a further round of “reflation” (their name for inflation). But at the moment Wilson, after years of promoting inflation because he thought it would prevent unemployment, is now declaring that inflation causes unemployment.

Some of his critics in the Labour Party and trade unions (including apparently Mr Scanlon, leaders of the engineers), think they have Marx’s backing for their view that the way to deal with crises is to raise wages further. They are quite wrong. Of course Marx favoured the attitude of workers getting as high wages as they can at any time, but he did not hold that crises could be averted by raising wages. He dealt with the higher wages argument in Capital (Vol II, p. 475) and showed how absurd it is. Depressions end when the capitalists see prospects of profit improving. Putting wages up further would reduce profit margins not increase them.

No Cure for Capitalism

Because Socialists view the thirty-year Labour-Tory experiment with Keynesian fallacies as a complete fiasco for the working class it must not be concluded that we are enamoured with the prospect of returning to capitalism without inflation. With or without inflation capitalism will go on producing unemployment, crises and depressions. With Labour government, or any other government, “managed” or left to market forces, with or without more nationalisation, capitalism has nothing to offer to the working class. The only course for the workers is to replace capitalism with Socialism.

Edgar Hardcastle

Editorial: Lord Keynes – Economist of Capitalism in Decline (1946)

Editorial from the June 1946 issue of the Socialist Standard

In the sickness of its declining years capitalism is being nursed by the Labour Party. Lord Keynes, who died on April 21st, was the doctor who prescribed the treatment. His theories, on which rest the belief in the possibility of “full employment” under capitalism, have come to the widely accepted not because of intrinsic merit or originality, but because capitalists and the Labour politicians alike have dire need of a panacea that will, they hope, make capitalism work or at least persuade workers that it will. Faced with mounting unemployment and the political discontent that it causes, many Tory and Liberal politicians had lost confidence in their ability to save capitalism. Lord Keynes promised them another lease of life. The Labour Party, new to power, never had much confidence in its own ability, and the “economic blizzard” of 1931 that wrecked the  Labour Government destroyed even what it had; so Keynes was their hope, too.

He believed that investment and price trends could be made subject to governmental control and thereby booms and slumps could be ironed out and approximately full employment secured. His views found expression in the National Government’s “White Paper on Unemployment Policy” (1944), in which the Government accepted “as one of their primary aims and responsibilities the maintenance of a high and stable level of employment after the war”. The Labour Government has endorsed this White Paper. Keynes directly influenced the Liberal and Labour programmes.

“It was mainly through his personal influence”, says the Times (April 22nd), “that the Liberal Party adopted as their platform in the election of 1929 the proposal to conquer unemployment by a policy of public works and monetary expansion”. The section of the Labour Party that opposed the MacDonald-Snowden economy cuts in 1931 quoted Keynes in support of their view. The Labour Party’s report on “Full Employment and Financial Policy” (1944) largely rests on Keynes’s theories. It declares that “the best cure for bad trade is to increase purchasing power and to speed up development”. It looks to loans, “compulsory if necessary”, from the Banks to “help the Chancellor to find the purchasing power required for full employment . . .” “If bad trade and general unemployment threaten, this means that total purchasing power is falling too low . . . We should give the people more money, and not less, to spend.”

Socialists have no hesitation is saying that if the Labour Government attempts anything of the kind – it may, of course, get cold feet and scurry to the safety of “orthodox” financial policies, as did Snowden and MacDonald-it will not succeed in avoiding unemployment and crises. Capitalism depends for its relatively smooth functioning on the capitalists’ confidence in their prospect of selling their goods at a profit. By the time that bad trade threatens the capitalists will already be apprehensive and the proposed government policy would sap their confidence still more. It is one thing to propose to increase the workers’ purchasing power but the capitalists (including the Government itself in State industries) are at all times forced by competition to seek to reduce the purchasing power of the working  class in relation to the mass of goods produced for the market. This they do, if not directly, by wage cuts, then indirectly by installing labour-displacing machinery to increase output and lower costs of production.

Always the workers can buy only part of the commodities they produce (but which belong to the owners of the means of production), the part represented by their wages. Keynes and the Labour Party ignored these basic facts of private ownership and the wages system and looked to financial schemes to relieve the disequilibrium when, periodically, it had produced a crisis of bad trade and unemployment. Events will show that unemployment cannot be abolished under capitalism, even though its growth may for a time be masked by war, war preparations and totalitarian controls.

The extent and nature of the dependence of capitalists and the Labour Party on Keynes’s theories was shown by the estimates of his work published by the Herald and the Times on April 22nd. The Herald,  under the heading “The Great Lord Keynes”, by a Labour MP, Mr. Evan Durbin, said that Keynes “more than anyone else .  . . bridged the gap between Liberalism and Socialism”. The Times developed the same idea at length:-

“The Keynesian approach offered a bridge between the academic economists on the side and ‘the brave army of heretics’—Mandeville, Malthus, Marx, Gesell and Hobson (to name only a few)—on the other. This may yet prove to have been Lord Keynes’s most valuable achievement”.

Marx is here put in curious company, but the Times‘ inclusion of him had a reason. The Times thinks that Keynes had found the way to cure unemployment and thus save capitalism from the challenge of Socialists. It quotes him as defending his policy of full employment through State control of investment “both as the only practicable means of avoiding the destruction of existing economic forms in their entirety and as the condition for the successful functioning of individual initiative”.

The Times went on to claim that Keynes had shown how to bring about reconciliation between the orthodox political parties and the “growing army of deeply discontented reformers and revolutionaries”. The claim is certainly true of the Labour Party, but woe betide that Party when Keynes’s full employment policy fails them and the bridge he built collapses. Let it therefore be clearly understood that neither Keynes nor anyone else has reconciled the Socialist demand for the abolition of capitalism with the despairing attempt to make the system tolerable by trying to cure unemployment within its framework.

Applying Marx (1983)

From the March 1983 issue of the Socialist Standard

We are now in the heaviest trade depression since World War II, with little expectation that recovery will take place in the near future. This has caused dismay and confusion among the economists, dividing them into half a dozen groups each with its own remedy and denouncing their rivals. Not only did they not foresee the depression but nearly all of them denied that it could happen. They had accepted the belief that it is possible for a government to prevent unemployment if it wishes to do so.

First in the field was the Labour Party. In its Election Programme. 1918. Labour and the New Social Order, it stated: "It is now known that the Government . . . can arrange the public works and the orders of National Departments and Local Authorities in such a way as to maintain the aggregate demand for labour in the whole kingdom”. (While they were the Government, 1929-1931, unemployment rose by 1½ million.)

By 1944. under the influence of J.M. Keynes, the three parties. Tory, Labour and Liberal (and the TUC), had all accepted the commitment to maintain "full employment”. It was set out in a document Employment Policy issued by the three parties represented in the war-time national government. Confidence in the policy was confirmed by the Committee on the Working of the Monetary System in a Report in 1958. In Paragraph 484 they said: "When discussing with witnesses the impact of restrictive monetary measures we have been constantly reminded that, as compared with earlier decades, restrictive developments have a much less frightening aspect now that Governments are always committed to full employment policies”.

Commenting on this. Professor F.W. Paish wrote: “This belief springs directly from the expectation that no government will in future allow any really substantial amount of unemployment to appear, even temporarily”. (The Banker, October 1959.) Actually, at the time the Committee published their report, unemployment was already on an upward trend after the very low levels of the ten years after the war. Unemployment rose again while the Labour Party was in office from 1964-1970, though they declared they would not let this happen, and it more than doubled under the Labour government of 1974-1979.

Towards the end of that government's office Prime Minister Callaghan and Chancellor of the Exchequer Denis Healey began to question the validity of the Keynesian “full employment” doctrine. Later, for the first time since the war. a government — under Thatcher — formally repudiated it. But they still claimed to be able to deal with unemployment, firstly by curbing inflation and secondly by reducing taxation: “The State takes too much of the nation's income; its share will be steadily reduced. When it spends and borrows too much, taxes, interest rates, prices and unemployment rise”. (The Conservative Manifesto — 1979.) After four years of office unemployment has risen from 1,300,000 to over 3 million.

The one economist who comes well out of this confusion is Marx. He showed that, in competition with each other to gain a larger market share, capitalists are always seeking to reduce prices by means of labour-displacing machinery and that inevitably depressions occur from time to time: "Capitalist production moves through certain periodical cycles. It moves through a state of quiescence, growing animation, prosperity, overtrade, crisis and stagnation". He never accepted that unemployment and depression could be avoided by some change of government monetary, taxation or investment policy. Nor did he accept the validity of the argument that unemployment would fall and depression be avoided by putting up wages. (The policy which the Independent Labour Party sought to popularise in the 1920s.) Marx showed that not only do wages rise in every boom, but at that time the working class “actually get a larger share of the annual product intended for consumption”. (Capital Vol. Ill. Kerr Edition, p. 474.) Far from remedying the situation this is, said Marx, "always . . . a harbinger of the social crisis".

Marx showed the limitations of the trade union struggle for higher wages. The aim of the capitalist in carrying on business is "the augmentation of his capital”. Wages can therefore go on rising only as long as the rise “does not interfere with the progress of accumulation". (Capital Vol. 1, p. 678 in the Kerr edition). Beyond this, accumulation slackens, "because the stimulus of gain is blunted", in other words, the employer does not for long employ workers out of whom he cannot make profit. Marx saw as inevitable a fall of the workers’ standard of living in depressions when, owing to heavy unemployment, the supply of workers overshoots the demand. Though he did suggest that “it might in such circumstances be necessary to test the real state of demand and supply by a strike, for example, or other method". (Value Price and Profit).

After Marx's death, Frederick Engels put forward the idea that Marx's cycle no longer applied, and had given way to "permanent and chronic depression”, but events soon showed that he was wrong and he returned to Marx's “cycle” theory. In the depressions of the 1880s and between the wars, a considerable number of workers and even some economists became convinced that Marx was right about unemployment and depressions. Then Marxist theory was pushed into the background by Keynes. John Strachey, who had claimed to be a Marxist, told how reading Keynes’ book General Theory of Employment, Interest and Money made him change his views. (He became a Minister in the Attlee Labour government). Richard Crossman. Minister of Housing in the 1964 Labour government, said that Keynes demonstrated that capitalism is not "an inherently unworkable system” and, by so doing, undermined “the old economic case for socialism". (The Times, 24 February 1956)

Even before Keynes dominated the scene most economists rejected Marx's labour theory of value, including the few who looked favourably on other parts of Marx's writings. It is interesting to notice the irrelevance of some of the more common objections to the labour theory, clearly the result of not troubling to understand it.

Marx explained carefully that he was dealing with commodities, articles regularly produced for sale and capable of reproduction. Because Marx showed that commodities have a value and a price the critics assumed, without any justification, that Marx must also be saying that everything which has a price had to be a commodity and have value. They have instanced the enormous prices paid for old master paintings, forgetting that these are incapable of reproduction and are therefore not commodities.

Marx answered the critics:

Objects that in themselves are not commodities. such as conscience, honour etc. are capable of being offered for sale by their holders and of thus acquiring, through their price, the form of commodities. Hence the object may have a price without having value. (Capital Vol. I p. 115. Kerr edition).

The late Harold Laski. who wrote quite sympathetically about Marx, gave an astonishing interpretation to the labour theory, in his book Communism (Home University Library 1927, p.95):

Thus we can measure the amount of labour-power in each man's effort, and so determine scientifically how he ought to be paid.

Laski borrowed this from A.D. Lindsay's book Karl Marx’s Capital (page 61). Lindsay wrote “The Labour Theory of Value is misleading. It is primarily interested in what a man ought to get in reward for his labour”. Both Lindsay and Laski were quite wrong. No such idea entered Marx's head and it is impossible even to guess what can have given Laski and Lindsay this strange notion.

Much has been made by critics of the allegation that in Volume I of Capital Marx put forward the theory that commodities exchange at value and then changed his mind and concluded in Volume III that some commodities permanently sell above their value and others below their value. The critics failed to notice Marx’s explanation in Volume I that he was first dealing with value and would later deal with its price form and that they were not identical. There was, for example, the footnote on page 244 of Volume I (Kerr edition):

The calculations in the text are intended merely as illustrations, and in them, therefore. it is assumed that prices are equal to value. In Book Three we shall learn that even in the case of average prices no such simple assumption can be made.

As for the critics' assumption that the alleged change of mind took place later, Louis Boudin pointed out that "most of the third volume, and particularly those portions of it which are supposed to modify the first Volume, were actually written down by Marx in its present form before the publication of the first Volume". (Theoretical System of Karl Marx, page 133.)

Cartoon by George Meddemmen.

Mention has already been made of the way in which the emergence of Keynes as the leading economist pushed into the background what Marx had written about unemployment and depression. The reason for this was obvious: if, as was almost universally believed, “full employment” was guaranteed for all time, theories about unemployment and depressions ceased to be of interest.

The almost total disregard of what Marx had to say about inflation is less easy to explain. That it should have been disregarded in this country in the period of nearly 100 years before 1914 when the gold standard operated is understandable, because there was no inflation. Why then has there been no interest in Marx’s explanation in the nearly forty years of continuous inflation since World War II? One reason is that, while much has been written about other aspects of Marx's writing, his economics have stayed out of favour even among many people who profess to be Marxists. A second reason is that many of the latter appear to be unaware that Marx had something to say about inflation. A third reason has been that when Keynesian doctrines began to fall into disrepute because of the failure of the “full employment" policy, attention went to the monetarists led by Professor Milton Friedman, who added to the confusion with his absurd remark that Marx, too, was a monetarist.

It is beyond dispute that the policies of Labour and Tory governments have led to the present price level being at least ten times what it was in 1945. (Prices have risen by over 50 per cent under the Thatcher government). It is also beyond dispute that all the governments up to 1979 have claimed to be following Keynesian policies; yet the Keynesian document, the 1944 Employment Policy endorsed by the Tory, Labour and Liberal parties in the national government, proclaimed the intention of seeking to maintain a “more or less stable price level". It is also true that while Keynes himself advocated short term use of inflation to reduce real wages in certain circumstances, his long-term aim was “allowing wages to rise slowly while keeping prices stable" (General Theory page 271). It is at least arguable that if Keynes had lived to see what was being done in his name he would have disowned it.

Why then have prices been rising continuously for over forty years? Marx’s answer would have been that it became a possibility with the abandonment of the gold standard in 1931, and became an actuality through the increase of the currency (notes and coin) in circulation with the public, from under £500 million in 1938 to nearly £11,000 million. The gold standard background is important. While the gold standard operated the pound sterling was. by law, a fixed weight of gold (about a quarter of an ounce). The effect was that the notes could never deviate, except marginally, from the value of the legally fixed equivalent weight of gold. As it was said at that time, "a Bank of England note is as good as gold", and it was everywhere accepted as such. Now the notes are “inconvertible" and their purchasing power steadily declines through excess issue.

Marx defined it as follows:

If the quantity of paper money issued were double what it ought to he, then, as a matter of fact. £1 would be the money-name not of a quarter of an ounce of gold but of one-eighth of an ounce of gold. The effect would be the same as if an alteration had taken place in the function of gold as a standard of prices. Those values that were previously expressed by the price of £1 would now be expressed by the price of £2. (Capital. Vol. I page 144 in the Kerr edition)

Several points have to be noted. What Marx meant by "what it ought to be" was the total quantity of gold that would circulate with a wholly gold coin currency. It was an application of his labour theory of value, gold having value like all other commodities. He was not saying (as did some quantity theorists) that any increase of inconvertible paper currency causes prices to rise. The rise occurs only to the extent that the quantity of notes is in excess of “what it ought to be". If, for example, production and population increase, the "necessary" amount of gold in circulation would increase. Other factors also affect this, including the tendency for the “necessary" amount of currency to decline with the development of transport and the banking system.

Marx also pointed out that there are other, "non-currency" factors, which affect prices, including changes in the value of commodities and the rise of prices in a boom and fall in a depression. (Also, while the gold standard operated, a fall in the value of gold would raise prices and a rise in the value of gold would reduce prices.) Marx made another valuable contribution to the whole issue of inflation and deflation. In accordance with his labour theory of value wages too are prices, the price of labour-power. So inflation which raises prices also raises wages. And deflation, which lowers prices, also lowers wages. Both situations are however affected by whatever ability the workers have to gain wage increases beyond the rise of other prices, or to prevent wages falling as much as other prices.

Some people have been misled by Milton Friedman's talk of controlling “money supply" into believing that he and Marx were thinking on similar lines. This is not so. Marx was talking about "currency", notes and coins, while Friedman’s doctrine is concerned with bank deposits, based on an old fallacy that the price level is related to the rise and fall of bank deposits. Keynes held the same view. In his Monetary Reform (1923 p. 128) he wrote: "The internal price level is mainly determined by the amount of credit created by the banks, chiefly the Big Five . . . The amount of credit, so created, is in its turn roughly measured by the volume of the banks’ deposits"

One last word about Keynes. Now that the Keynesians are in disarray perhaps some of them will look again at Keynes’ statement that Marx’s Capital was “an obsolete economic textbook which I know to be scientifically erroneous and without interest or application for the modern world".

Do they still find that convincing?

Edgar Hardcastle

Keynes and the World Depression (1962)

From the December 1962 issue of the Socialist Standard

There is widespread talk in the industrialised countries that the future is uncertain if not positively threatening. Profits have been falling in the past two years not only in Britain, but fairly generally. Many big industries have over-expanded so that there is surplus oil, surplus shipping, surplus coal and surplus manufacturing capacity. City editors watch the portents and anxiously wait for signs of profit margins rising again. The employers were hoping that increasing unemployment would help them out by keeping wages down, but more unemployment is double-edged, for at the same time it causes shop sales to stagnate or decline.

Business men and governments in each country think to find a way out by increasing exports but, of course, all the other countries are trying to do the same.

In Britain the Government finds a new cause for concern. Even when total production and sales increase as they have in recent months this has been achieved without employing more workers. The Guardian (2/11/62) offers the explanation that industry has been in the habit of holding on to workers, though they were not all required, because it expected trade to improve fairly soon and the workers would be needed again, but industry has “now abandoned hope of an early change in the trend of trade and is parting with  'hoarded’ labour.”

At the same time world prices of food and raw materials have been falling and this means that the countries dependent on selling these products are less able and willing to buy the exports of the industrialised countries.

It has been common in post-war years for the followers of the late Lord Keynes to take comfort in the belief that various Keynesian devices, including low interest rates to encourage investment, could always deal with capitalism’s economic problems. Now many of them are not so confident. Capitalists do not in practice expand their factories and plant merely because interest rates are low, they need also to be assured that they will be able to sell the products at a profit. As the Monthly Economic Letter of the First National Bank of New York put n recently (September, 1962)—“we found during the Great Depression, that ’you can’t push a string'—no matter how abundant credit may be, business men will be reluctant to borrow unless they can see productive use for the money with a reward of profit in sight.”

Some economists, observing that in the post-war years Government action on, interest rates, purchase tax and so on has not eliminated the ups and downs of trade and production, have taken the line that governments cannot control the small movements but can still control the big ones: it seems that they may now have another opportunity of testing it out. But Keynes is not so widely accepted as he was. Some of those who used to think that he supplied the answer to all the ills of stagnant trade and heavy unemployment are now to be found arguing that the only solution for Britain is to get into the Common Market. The one is as irrelevant as the other to the real contradictions of capitalism.

Edgar Hardcastle

Growing pains of capitalism (1996)

From the June 1996 issue of the Socialist Standard

How far the present Tory — or a future Labour — government is
 willing, or able, to spend money is a question which is at the heart
of every other issue — from education to the NHS. No government,
regardless of which economic guru it paid lip service to, has ever
 intervened to make the capitalist economy run smoothly. As even a
cursory look at its own history reveals, the idea that the Labour 
Party will succeed where every other party in the history of
 capitalism has failed is an insult to the intelligence of the working 
class on whose votes the fate of the Labour Party's
 bid for power depends.

Once upon a time governments believed that they could intervene in the economy to ensure its smooth operation without economic crises, slumps and unemployment. The seminal 1944 White Paper on Employment, issued under the National government of Churchill and Attlee, affirmed that governments should intervene to maintain adequate levels of employment and growth in the post-war period. It was inspired by the doctrines of John Maynard Keynes, the economist who claimed that capitalism could operate without the existence of slumps given correct government intervention and appropriate state expenditure. The Keynesian doctrine led the labour Party to famously state that “if bad trade and general unemployment threatens, this means that total purchasing power has fallen too low. Therefore we should at once increase expenditure, both on consumption and on development, i.e. on both consumer goods and capital goods. We should give people more money and not less, to spend” (Full Employment and Financial Policy). The view that full employment and economic growth were the overriding considerations of government was repeated in the Radcliffe Report of 1959 and publicly by ministers. Today, in the wake of the return of seemingly permanent mass unemployment and severe economic crises, no major political party in Britain (or elsewhere for that matter) still holds to what was termed the‘‘past-war consensus” on government spending, growth and employment.

It was Jim Callaghan, when Prime Minister in the late 1970s, who told the Labour Party conference that the option of governments spending their way out of an economic crisis ‘‘no longer existed” after years of Keynesian intervention failed to stop the reappearance of slump. This was a view enthusiastically endorsed by Mrs Thatcher and her successor, whose aim has been to reduce government expenditure as a way of assisting the economy, instead of selectively increasing it as a stimulus to trade. The current government aim is to reduce government spending to under 40 percent of GNP, a target which they do not look like achieving in the near future or anything like it. In actual fact, despite protestation to the contrary over the last twenty years or so, government spending has been rising as rapidly as ever.

That this is so is not because of any systematic attempt to boost spending to avert unemployment and economic disaster on Keynesian lines, but is precisely because these factors (unemployment, etc.) have been in operation due to the normal workings of the capitalist economy, and the governments of the world have all but given up trying to do anything about them. No government or major party pledges itself to a swift return to what used to be called "full employment" and none is likely to because they realise, implicitly if not explicitly, that the capitalist trade cycle is beyond their control. Furthermore, government expenditure has been rising fast without any conscious reformist action by governments to avert the problems. All governments now do is attempt to clean up the mess left by innumerable market failures and this alone costs them an increasing amount.

Spend, spend, spend

Economics correspondent David Smith has claimed that “public spending, once lifted, is virtually impossible to lower” (Sunday Times, 24 March) and this seems to be confirmed by recent history of the ongoing costs of the inefficient capitalist system and the failures of the market economy keep building up. During the last Labour government, for instance, real government spending rose by 9.4 percent, which was matched by a 9.4 percent rise during the first Thatcher parliament, excluding proceeds from privatisations which are a one-off bonus. Thatcher’s second term, aided by signs of economic recovery, saw the increase in expenditure slow to 7 percent. Between the 1987 General Election and 1992 the increase slowed further to 5.9 percent, but since then with the return of slump government spending has risen by a colossal 11.3 percent in real terms, the biggest rise since the onset of economic crisis under Ted Heath in the early 1970s. The 1992 Conservative Election Manifesto claimed “Our policy is . . . to reduce the share of national income taken by the public sector”, but this has not happened.

This increase in state expenditure in recent decades has caused a massive burden to be placed on the surplus value extracted by the capitalists from the workers, which ,as we have explained on many previous occasions, is in the last analysis the sole source of state finance, whether through taxation or borrowing. As everyone should by now know, the tax burden has continued to rise under the Conservative and government indebtedness is heavy, the Public Sector Borrowing Requirement being £32 billion at present even though the slump “officially” ended three years ago (this in turn is one of the factors behind the still historically high real rates of interest being charged in the financial system).

The only conceivable way this huge burden of government expenditure is going to be cut back, easing the pressure on surplus value, is for there to be an unusually strong period of economic growth. This what all the parties — especially Labour — are banking on after the next general election. But is it a realistic prospect?

Road to nowhere

It seems that even many of the capitalists and their representatives doubt this. A recent report from the Directorate-General of Economic and Social Affairs of the European Commission is a good example. It suggests that even on an optimistic basis, a growth rate of 3.3 percent annually across the European Union is needed if there is to be “a serious contribution” to reducing unemployment and reliance on state benefits, the biggest factor in state expenditure rises. But over the past five years the growth rate has been only 1.6 percent. The average annual growth rate since 1973 has actually been little more than 2 percent, rising in booms and falling in slumps, with a general downward trend since the previous period.

The plans of the European Union for “an optimal growth path” were last met at times during the period 1950-73 after which there was a break in growth and labour productivity, rises in real interest rates and soaring unemployment as the crisis began to bite. And yet the report accounts for this by suggesting that “in secular terms the 1950-60 period was an exceptionally favourable period of reconstruction and catching up in Europe and was thus not likely to last forever . . . " That the EU growth and employment plans were last met during, and in the aftermath of, an “exceptional period” characterised by post-war reconstruction really says all there needs to be said on the matter.

The European Union still intends, however, to implement measures at the bloc level to attract employment and stimulate growth. These include reforms in the hours of working (notoriously difficult to implement and likely to be successfully resisted for their own good reasons by the capitalist class), minor changes in tax laws relating to the labour supply, and what the Commission calls “the widening of wage-cost distribution”, encouraging workers to take lower-paid jobs, if necessary subsidising them do so. This latter proposal would, as the report admits, “have a high budget cost” and could not be guaranteed to solve the problem. Interestingly, the report also adds that any measures taken should also act “to safeguard the existing human capital of the unemployed in order to prevent social exclusion and to maintain social cohesion”.

Afraid of the consequences should they not, it is quite clear that the EU, its member states and capitalist political parties are incapable of restoring the levels of growth characterised by the post-war reconstruction. The situation in Britain is typical. Labour and the Conservatives are vacuous political entities now even by reformist standards. In the face of mass unemployment, burgeoning debt, rising taxation, expenditure and burdens on profit, they have nowhere to run. They have no solutions other than to pray that the miracle of economic growth may somehow descend from the heavens to save them. All the indications, even from their own economists, is that it is a pious hope indeed barring capitalism’s own particular solution, the barbarism of world war and “reconstruction”.

Dave Perrin

50 Years Ago: Lord Keynes: Economist of Capitalism in Decline (1996)

The 50 Years Ago column from the June 1996 issue of the Socialist Standard

In the sickness of its declining years capitalism is being nursed by the Labour Party. Lord Keynes, who died on April 21st, was the doctor who prescribed the treatment. His theories, on which rest the belief in the possibility of “full employment" under capitalism, have come to be widely accepted not because of intrinsic merit or originality, but because capitalists and Labour politicians alike have dire need of a panacea that will, they hope, make capitalism work or at least persuade the workers that it will. Faced with mounting unemployment and the political discontent that it causes, many Tory and Liberal politicians had lost confidence in their ability to save capitalism. Lord Keynes promised them another lease of life. The Labour Party new to power, never had much confidence in its own ability, and the "economic blizzard” of 1931 that wrecked the Labour Government destroyed even what it had; so Lord Keynes was their hope, too.

He believed that investment and price trends could be made subject to governmental control and thereby booms and slumps could be ironed out and approximately full employment secured . . . Socialists have no hesitation in saying that if the Labour Government attempts anything of the kind—it may, of course, get cold feet and scurry to the safety of “orthodox" financial policies, as did Snowden and MacDonald—it will not succeed in avoiding unemployment and crises.

(From the editorial in Socialist
 Standard, June 1946)

The Politicians and the Cost of Living (1955)

From the June 1955 issue of the Socialist Standard

In all the elections of the ’twenties and ’thirties the chief issue was unemployment: who caused it and how to cure it. Since the war pride of place has been given to the cost of living: who sent it up and who will bring it down again. The attitudes of the Governments and the Opposition parties towards unemployment in the first period have been paralleled by their attitudes towards rising prices in the second. Each party claims that it will keep prices (or unemployment) down because it alone knows how. Each party when in power pretends to be surprised and displeased to find prices (or unemployment) rising, and trots out a glib excuse: it is due to strikes, high wages, or low productivity, or to world factors beyond the control of the Government in this country.

At no time has there been agreement between what the parties promised at elections and what they produced in office. Conservatives, Labour and Liberals, were all subscribers to the policy laid down in the document “Employment Policy" issued by the Coalition Government in 1944. Among other things it committed them to the policy of keeping prices down, and at successive elections they all promised to pursue the policy of avoiding a rising cost of living.

In or out of office they have put forward a number of schemes for achieving this, credit restrictions, higher Bank interest, rates, budget surpluses, increased national savings, bulk buying, price controls, limitation of dividends, restraint in wage demands, action against monopolies and price rings, food subsidies, etc., etc., without the upward movement of prices since 1938 being arrested.

Indeed prices have in fact risen since 1914 with only one downward movement—that which marked the deflation of the ’20’s. The cost of living in October, 1951, when the Labour Government left office, was about 40 per cent. above 1945, now it is 60 per cent.

We are faced then with the remarkable happening that those who keep on telling us that they can and will keep prices down if we put them into power go on asking for votes on no better ground than their total failure to do so when they were in power.

Yet one thing is certain. The Government’s financial advisers and at least some members of Tory and Labour Cabinets have known all along how to keep prices down or reduce them again to a former level. They know how to reducer the cost of living—which most electors want—but they dare not do it because they fear it would be accompanied by something most electors do not want—an increase of unemployment.

So by tacit agreement the party leaders fiercely fight a mock battle over the cost of living but avoid even a mention of the remedy known to them.

That is why no party has suggested that the method which did produce a fall in prices when it was adopted in 1920, namely currency control and limitation, should be tried now. Prices rose from 1914 owing to the expansion of the note issue and so long as that continued went on rising despite everything the Government did. Then by minute of 15 December, 1919, Austen Chamberlain announced that the Government would act on the recommendation of the Cunliffe Committee and would limit the fiduciary note issue for 1920 to £321 million, the maximum then reached in 1919, and that in subsequent years the permitted maximum would be the actual maximum of the preceding year. After a few months the effects of this policy of currency limitations became apparent and the trend of prices was reversed, affecting wholesale prices in the middle of 1920 and retail prices before the end of the year.

Later on the 1919 decision was abandoned and the note issue has been steadily increased, particularly since 1939. It now stands at £1,775 million, £50 million of which was added this year in April and May, £25 million on each occasion, and the Labour and Tory leaders who were responsible still affect to be surprised that the cost of living and prices generally have mounted accordingly.

If the Tory and Labour leaders now really believe their professed determination to lower prices why their reluctance even to suggest the renewed application of the policy which proved so effective when it was applied 35 years ago?

It is because both parties are convinced that such a policy is incompatible with "full employment,” that in fact full employment can only be kept going by a “little gentle dose of inflation.” As an unsigned article in the Financial Times phrased it:—

"Among considering people there can be few illusions over what the election is really about. It is a matter of voting for the party that is likely to do the least harm to the precarious economy in which we live. In short, for the party that will inflate the least.”—(Financial Times, 9/5/55.)

It might be thought that at least the politicians and their economic advisers have been right to practice this deception on the voters for it has been through their foresight and skill that we have been spared heavy unemployment. But before anyone starts complimenting them on their cleverness in thinking beforehand that the way to avoid heavy unemployment was to pursue a policy of inflation and consequent rising costs of living he should turn to the 1944 statement on “Employment Policy,” which shows that they did not foresee this at all but then believed the opposite. They were all committed to maintaining “full employment,” but the 1944 policy statement held that it could only be achieved if prices and wages did not go on rising but remained “reasonably stable.” The idea was that if prices were kept down the workers could be persuaded to accept “wage restraint.”

Between the wars, when prices were falling, workers’ struggles to raise or even to maintain money wages were impeded by the heavy unemployment.

After the war, when the Labour Government came into office, they intended to operate the policy of the 1944 statement and have both prices and wages stable. In the “Labour Party Speakers’ Handbook,” 1949-50 (p. 207) it was claimed that during the first two years of Labour Government from 1945 to 1947, “prices were kept fairly stable”; though critics maintained with undeniable evidence that it was the cost of living index that was kept down, not the cost of living. After 1947, when even the Labour Government could not, in face of its own figures, deny that the cost of living was rising the “wage restraint” policy was restated and emphasised by the late Sir Stafford Cripps. It was only partially successful and money wages went on rising, though all the time lagging behind the soaring cost of living. The situation was unlike that between the wars but it was a distinction without a real difference. Then the employers' ally against the workers’ efforts to raise their standard of living was unemployment, now the usefulness of every increase of wages and insurance benefits was subject to ceaseless erosion by higher prices, which whittled away the purchasing power of every pound.

And this has been the chosen policy of all post-war Governments. A milestone in the inflationary trend was the devaluation of the pound by the Labour Government in 1949. They knew this must raise the cost of living though they continued to make their stock speeches about their resolve to keep it from rising.

Also all the Governments since the war have made great efforts to persuade the workers to go without purchases they would normally have made and to save the money instead. Since the Governments knew that their currency and devaluation policies would raise the cost of living this savings drive was but a further deception, the losers being those who put their money into National Savings.

True, if they invested £50 they have received interest and eventually have the £50 back, but at that later date it buys very much much less than could have been bought with the original £50. The big investor who went for company ordinary shares suffered no such loss as the prices of their shares went up along with other prices.

We may be sure that future Tory and Labour Governments, so long as they go on fearing that heavy unemployment would put them out of office, will continue their policy of gentle inflation and their two-faced policy of promising to reduce the cost of living without any intention of doing so by the means they know would be effective.

What happened between the wars and what has happened since are just two faces of the capitalist system of society. Of course a disturbance of the precarious balance of world production and markets of the size and pattern of that which occurred in 1931 will find the currency inflation remedy helpless to stop a collapse.

In 1931, as now, the S.P.G.B. pointed out that the one way not to have unemployment and price fluctuations to be have a system of society in which commodities, among them the workers power to labour, are not bought and sold—the system of society known as Socialism.

Edgar Hardcastle

Cooking the Books: Keynes rides again (2008)

The Cooking the Books column from the December 2008 issue of the Socialist Standard

It is not just the ideas of Marx that the current crisis is getting people to look at again. It’s also those of Keynes. In fact it now seems to be official government policy. In October the Chancellor Alistair Darling declared that “much of what Keynes wrote still makes sense” (Sunday Telegraph, 19 October). Then last month Gordon Brown himself, in America for a summit of the G20, “invoked the memory of John Maynard Keynes”, according to the Financial Times (15/16 November), proposing a typically Keynesian approach to the current crisis, right down to exactly the same terminology:

“Gordon Brown yesterday heralded an anti-recession strategy founded on tax cuts for low earners and further cuts in interest rates, in the hope that Britain will spend its way out of the downturn. Mr Brown . . . suggested that the government would use tax credits to help poor families since they were more likely to spend any money handed out. People on low income had ‘a higher propensity to spend if their credits are higher’, Mr. Brown said.”

Keynes was an inter-war years economist who was at one time credited with having saved capitalism. He argued that capitalism did not automatically tend towards full employment and that government intervention to increase spending was needed to ensure this. He was himself a Liberal, but his ideas were embraced by all three main parties in Britain. He was particularly liked in Labour Party circles as his theories seems to justify their reformist attempt to redistribute income from the rich to the poor with their “higher propensity to spend”.

As it happened, post-war Britain did have more or less full employment for twenty or so years after the war, but this was more due to the expansion of world markets than to Keynesian “demand management” policies. When, in the mid-1970s, world market conditions changed, Keynes’s policies were shown not to work. Instead of stimulating a revival of industrial production they added a new problem – rising prices through currency inflation, which in turn led to periodic devaluations of the pound. In all previous slumps prices had fallen, but the implementation of Keynesian policies in the 1970s meant that they continued to rise. A new word was invented to describe the result: “stagflation”.

In Britain the funeral oration on Keynesianism (Keynes himself had died in 1946) was delivered by the then Labour Party Prime Minister, James Callaghan, at the 1976 Labour Party Conference:

“We used to think that you could just spend your way out of a recession and increase employment by cutting taxes and boosting government spending. I tell you, in all candour, that that option no longer exists and that in so far as it ever did exist, it only worked on each occasion since the war by injecting bigger doses of inflation into the economy, followed by higher levels of unemployment” (Times, 29 September 1976).

Or, as Keynes’s biographer Lord Skidelsky put it, “Then Keynesian policies suddenly became obsolete and the theory that backed it was condemned to history’s dustbin” (Times, 23 October).

It is a sign of the desperation of Brown and his government that they have been forced to rummage through the dustbin of history for a policy to deal with the current financial crisis and coming depression. Spending your way out of a crisis was tried by the last Labour government and, as Callaghan was forced to admit, it didn’t work. There’s no reason to believe it will this time either.

Cooking the Books: Global turbulence (2007)

The Cooking the Books column from the January 2007 issue of the Socialist Standard

Around 1973 the post-war boom came to an end. Various explanations were advanced. At the time one of the more popular was that profits had been squeezed because the working class had been able to take advantage of full employment to push up wages, as put forward by Andrew Glyn and Bob Sutcliffe in British Capitalism, Workers and the Profit Squeeze.

It was also the view, at the other end of the political spectrum, of Mrs Thatcher, who determined to destroy this supposed power of the unions. Which her government did after 1979. But this didn’t bring about a return to pre-1973 boom times. Which shows, argues Robert Brenner in The Economics of Global Turbulence, that it wasn’t increased wages that caused the fall in the rate of profit that precipitated what he calls “the long downturn” that is still with us.

So what did? His explanation is that the unplanned and competitive nature of capitalism led to world overproduction and overcapacity in manufacturing industry. The expansion of American manufacturing industry led the post-war boom but, in time, the same productive methods it employed were applied by its competitors in Germany and Japan, so increasing – over-increasing in fact (in relation to paying demand, not real need of course) – world manufacturing capacity.

“Normally” this would be rectified by a world slump in which the high-cost, inefficient producers would be eliminated but this didn’t happen, argues Brenner, or at least not sufficiently, because of government intervention and because some of the inefficient producers were prepared to carry on with reduced profits. And it still hasn’t happened as, although world paying demand (world trade) has expanded, world manufacturing capacity has expanded more, with the arrival, first, of Korea and Taiwan and, now, of China. As a result since 1973 the world economy as a whole has only been limping along.

The motor of capitalism has always been industry, which transforms material things into other material things. It is the renewal and expansion of such industries, and the repercussions this has on the rest of the economy, that has resulted in the accumulation of productive capital that is the essence of capitalism. But in Western countries today, with their stagnant or declining manufacturing sectors, this no longer appears to be the case. Judging by the commentaries on the financial pages, this role of motor would seem to have been taken over by “consumption”.

Capitalism has of course always satisfied paying consumer demand but this has been generated as a by-product of the accumulation of capital. Keynesianism was an attempt to go beyond this and artificially stimulate consumer demand through government spending.

Brenner argues that governments are still trying to stimulate and manipulate demand, by deliberately engineering an illusory increase in wealth by lowering short-term interest rates. This has the effect of increasing the price of stocks and shares and houses; people feel richer and, once a stock exchange or housing bubble develops, can get more money to spend through cashing in their capital gains. Brenner calls this “asset-price Keynesianism” and argues that in the end it is just as impossible to sustain as classical Keynesianism. Not only does it lead to “stop-go” as the artificially inflated demand draws in imports and creates balance of payments problems, but it also leads to stock exchange and/or housing booms and busts.

He says that the current apparent expansion in the US will sooner or later come to an end (as it now seems to be) “but, whether the reversal takes place with a whimper or a bang, economic slowdown and new turbulence still seem much more likely than a leap into a new long upturn”. So capitalism will just stagger on from mini-boom to mini-slump and back as it has done since 1973.

Tobin tax – what a joke (2001)

From the December 2001 issue of the Socialist Standard

The call for a Tobin tax – a tax on financial transactions – is not “anti-capitalist”, as some in the “anti-globalisation movement” seem to think

It is all very well being against something but if this is to be anything more than permanently protesting against some never-ending problem you’ve got to be for something too. Most of those who organise the “anti-capitalist” and “anti-globalisation” protest demonstrations don’t seem to have thought it through this far, and those that have show themselves not to be against capitalism. What they are against is what some of them call “neo-liberalism” – by which they mean the return of laissez-faire economic policies. What they are for is to go back to a more regulated capitalism. They merely want states to intervene to try to control capitalism, to make it more human, to suppress what they see as its worst excesses.

A case in point is the French-based organisation, with branches in many other countries, ATTAC whose vice-president is Susan George, author of such readable and informative books as How The Other Half Dies and A Fate Worse Than Debt. Their hobby horse is a call for the so-called “Tobin Tax”, as is reflected in their full name: “Association for a Tax on financial Transactions and for Aid to Citizens”.

James Tobin was (actually, he’s still alive) an American Keynesian economist who, after the 1944 Bretton Woods agreement on exchange rates collapsed in 1971 when America floated the dollar, proposed a tax on currency transactions as a way of reducing speculation. Here’s how he has recently described his proposal:

“This tax aimed to limit exchange rate fluctuations. The idea is simple: on each operation a minimum levy is made equivalent to, say, 0.5 percent of the transaction. Enough to put off speculators. For many investors place their money for very short periods in currencies. If this money is suddenly withdrawn from the market, countries have to raise their interest rates considerably so that their currencies remain attractive. But high interest rates are often catastrophic for the internal economy, as the crises which hit Mexico, South East Asia and Russia in the 1990s show. The Tobin tax would give back some margin for manoeuvre to the central banks of small countries to fight against the tyranny of financial markets” (interview with Der Spiegel, reproduced in Le Monde, 11 September 2001).

Tobin got the idea from Keynes who had suggested a national tax on internal financial speculation as one of his reforms to get out of the Great Depression of the 1930s. The idea was to encourage money-capital to be invested productively instead of being used for unproductive speculation. Tobin was given a Nobel Prize for Economics in 1981 (not that this is worth much in academic terms; it’s little more than a monetary prize), but no government took up his proposal. In fact, for it to work, all governments would have to take it up. That was why he suggested it should be paid to the World Bank or the IMF.

The Bretton Woods agreement had laid down fixed rates of exchange between currencies, in particular with the dollar which in turn was tied to a fixed amount of gold ($35 an ounce). Devaluations and revaluations were allowed; in fact that is what a “devaluation” was: a formal downward change in a currency’s fixed rate of exchange with other currencies. This system collapsed at the beginning of the 1970s when the Nixon administration announced that the US was no longer prepared to exchange gold at $35 an ounce. So began the present period of floating exchange rates.

Today, the rate of exchange of a state’s currency is determined by market forces: the demand for it in relation to the desire to sell it, which in turn depends essentially on a state’s balance of trade. The more it exports the higher will be the demand from foreigners to buy it (to pay for the exports) while the higher its imports the more will be the supply for sale as importers sell it for foreign currencies (to pay for the imports). This is not to say that states don’t try to maintain a more or less stable rate of exchange. They do, but their only weapons now are short-term interest rates or getting their central bank (and/or some other central bank or banks) to buy and sell their own currency. But these are not always that effective as was demonstrated by Britain’s ignominious exit from the European Exchange Rate Mechanism in 1992 under pressure from speculators led by George Soros.

The collapse of Bretton Woods coincided with the last years of the long post-war boom, and was in fact a sign that it was coming to an end. When the boom did end, or rather, fizzled out corporations found themselves with large “cash mountains” made up of money they would normally have re-invested but which they didn’t because it was no longer profitable to do so. This money thus became available for currency and other forms of financial speculation.

Essentially, speculation is the use of money-capital, not to invest in the production of new wealth and new surplus value, but unproductively to try and swindle other capitalists’ out of their past profits. It’s a zero-sum game in which the total amount of profits remains the same but merely gets redistributed differently amongst capitalists depending on their speculative skills.

The statistics show that most international monetary transactions are now of this nature. Production of course continues and has even been increasing slowly if in fits and starts, so some international transactions are linked to productive activity – transfer of capital to be invested in productive activity in some other country, payments for exports or imports, etc. But these are only a fraction of the total, estimated at less than 10 percent.

Just like Keynes in the 1930s on a national scale, some members of ATTAC today look at this internationally and conclude naively that, if somehow you could discourage speculation, the money tied up in it would then be reinvested in production instead, so reducing unemployment. But this is to get things the wrong way round; there is so much money available for speculation because there are not enough profitable investment outlets. Even if speculation was made less profitable by, for instance, the imposition of a Tobin Tax this would not increase productive investment. To do that you would have to increase the rate of profit or expand markets, but that’s not something that can be done by any tax.

The horse wouldn’t drink

What would happen would be the same as happened in Japan over interest rates. The government there thought that what has been discouraging investment was not low profit prospects but too high interest rates. So they reduced short-term interest rates to zero – but nothing happened. They learned the hard way that you can take a horse to water but you can’t make it drink. Japanese capitalists hadn’t been not investing because of high interest rates but because of low profit prospects. Similarly, capitalists have been speculating rather than investing productively, not because the gains to be had from speculation are too high but because the gains to be had from productive investment are too low.

Actually, ATTAC are not agreed on why they want to impose an international tax on currency transactions. Some want to do this to encourage productive investment and so employment (on the mistaken arguments above). Others want to use the revenue to help the so-called Third World; which, of course, assumes that speculation should continue as the cow to be milked for this purpose. Susan George has explained the arguments here:

“One of the aspects of this tax is to slow down speculation, i.e. making money with money without passing via an exchange of commodities. It could build up a mass of money to help essentially the citizens of the South since it is there that the needs are. At the moment, there is a debate within ATTAC about whether we want a high tax to stop speculation or, on the contrary, a less high one to restrain speculation while building up this financial aid to the citizen. Personally, I prefer the second option” (Le Soir, 24 September).

It is for this reason that you find different rates being mentioned in ATTAC literature from 0.01 percent to 0.1 percent to the 0.5 percent that Tobin himself suggested (but he wanted to stop speculation and was not particularly concerned how the money raised was used).

George’s preference for a low rate, to raise money to spend in the Third World, is in accordance with ATTAC’s main declared aim, but it involves calling people on to the streets not to denounce capitalist exploitation, but to demand a minimal tax on the financial transactions in which capitalists try to swindle each other out of the proceeds of their past exploitation of the working class. It really is one of the most pathetic reform proposals for which people have ever been called upon to demonstrate for. Of course, people are right to protest against the deal capitalism is meting out to the poor in the capitalistically-underdeveloped parts of the world, but the Tobin tax is not going to help them in the least, even if the political will and technical means to implement it could be found.

Tobin was – and still is – an unrepentant Keynesian. Despite the fact that the main result of implementing Keynesian policies was a 30-40 year period of permanent inflation, Susan George and ATTAC are essentially “global Keynesians”, people who want to apply on a global scale Keynes’s ideas on how to make capitalism work better. George in fact has openly called for the adoption of Keynesian policies. As she put it in the Le Soir interview we have already quoted:

“Our leaders must be more serious and move towards Keynesian solutions, as was the case after the Second World War. We need a Marshall Plan for the environment, for reducing inequalities in the world and particularly in the South”.

And

“We don’t expect le grand soir [a derogatory French term meaning “the Revolution”], but a more democratic type of economy. The market will have its place, but not all the place”.

What ATTAC, and their equivalents in this country, the campaigning non-governmental organisations (NGOs) such as Oxfam, the World Development Movement, Christian Aid, etc (not that some of them are all that “non-governmental”, given the grants they get from the state), want is to retain the world market economy but to try to control it for the benefit of humanity, to humanise it. Their hearts may be in the right place but this is to display an incredible lack of vision as well as an appalling ignorance of the way capitalism works, and has to work.

Capitalism operates according to the rules of “no profit, no production” and “can’t pay, can’t have” and, as the world market system, is what is responsible for the desperate plight of most of the world’s population. Before anything lasting and constructive can be done about this, capitalism has to go. The productive resources of the Earth have to become the common heritage of all humanity, so that production can be directed to meeting people’s needs – all people’s needs – instead of to making profits.

Adam Buick