Why are prices always rising? (2023)

Book Review from the November 2023 issue of the Socialist Standard

In The Return of Inflation (just published by Reaktion Books) Paul Mattick (the son, not the father) gives a potted history (there are only 146 pages of text) of inflation. The word dates from the middle of the 19th century. He cites an American book of 1855 complaining that an ‘inflation of the currency makes prices rise’ and comments ‘here it is the quantity of paper currency that is inflated; later the term settled into its present-day meaning of an increase in prices’. True, but the word still retained its first meaning for a further eighty or so years. The change of meaning from describing a cause to describing its effect doesn’t help, especially as a rise in the general price level can result from other reasons such as supply not being able to keep up with demand in a boom or a fall in the value of the money-commodity (when there was one).

He provides a useful section in which he explains how ‘inflation’ (as it has come to be defined) is measured by a rise in a consumer price index based on the prices of a changing basket of goods and services that consumers typically buy and discusses the limitations of this. In fact, today ‘inflation’ means a rise in some index of consumer prices, but this can come about for other reasons than an over-issue of the currency; from an increase in the price of something that enters into the cost of production of all consumer goods, energy for instance.

At the end of chapter 4, after explaining that, due to increasing productivity, you would expect prices to fall and noting that in the 19th century this did tend to happen and that even in the 1920s and 1930s prices fell during the slump stage of the business cycle, Mattick poses the question of why this has not happened since WW2. On the contrary, the general price level has continuously increased. In Britain prices today are more than 50 times higher than what they were in 1939 and are still rising. It is similar in other countries. Certainly something that needs explaining.

The Quantity Theory of Money

This monetary theory, referred to by Mattick simply as the Quantity Theory, keeps cropping up throughout the book. It says that the general price level is determined by the amount of money in circulation, so that if the amount of money is increased this will lead to a rise in prices. It was originally put forward when ‘money’ meant gold (or silver) and paper notes convertible into it at a fixed rate. Its proponents, known in Britain as the Currency School, based their case on what had happened there when, during the Napoleonic Wars, paper notes were not convertible into gold, and so many of them were issued that prices rose.

They argued that the same thing would happen when convertibility was restored, and framed legislation to restrict the amount of bank notes that could be issued without being backed by gold. They were opposed by the Banking School, whose main proponent, Thomas Tooke, produced evidence, as Mattick notes, that showed that this had not happened after convertibility was restored and could not have happened; if too many notes were issued (if their number was inflated) what would happen would be that gold coins would drop out of circulation and be turned into bullion (demonetised into gold bars) leaving the price level unchanged. In other words, it was the amount of prices to be realised that determined the quantity of money (gold and paper notes together) in circulation, the exact opposite of what the Quantity Theory posited. Marx, Mattick adds, accepted Tooke’s findings and rejected the Quantity Theory. He regarded banking legislation based on it as mistaken, such as the 1844 Bank Act which gave a monopoly in the issue of bank notes to the Bank of England and restricted the amount it could issue to not much more than the amount of gold it had in its vaults.

Inconvertible paper money

By the end of the 1930s in most countries gold coins had ceased to circulate and the currency was composed entirely of bank notes issued by a central bank together with lesser denomination token coins. This situation, where the currency was just inconvertible paper notes, was discussed by Marx who accepted that in this circumstance the Quantity Theory could apply: if more such notes were issued than the prices to be realised of goods and services in the economy required, the result would be a depreciation of the underlying value of the notes and a consequent rise in the general price level, i.e £1 would buy less than it did. Mattick mentions this but only in passing, even though it must clearly be of some relevance in any explanation of the continuous rise in the general price level since 1939.

An inconvertible paper currency in itself does not have to lead to a rise in the general price level but does place the onus of getting right the amount to issue on those responsible for issuing the notes. If they get it broadly right there won’t be a persistent rise in prices. But the temptation is always there to use their position to issue money to fund government spending, or to passively make it available to commercial banks in a way that still leads to an excess issue.

Keynesianism fails

Another change in usage that has occurred since the 19th century, but which Mattick does not mention, is a change in the meaning of ‘money’. Since the 1930s it has commonly been extended to include commercial bank loans.

Keynes went along with this and taught that controlling the amount of the currency (which only the state can do) was relatively unimportant and that the monetary authority could safely make available what was needed including by the government. He argued that the way out of a slump was government intervention to encourage spending, as by transferring money from the rich to the rest and by the government itself spending on infrastructure projects (or even digging holes in the ground and filling them up again). This appeared to work for nearly three decades after WW2 in the sense that no big slump occurred even if a rise in the general price level did. However, put to the test when the post-war boom came to an end in the mid 70s, Keynesianism led to ‘stagflation’; prices continued to rise despite slump conditions whereas before the war they would have fallen due to declines in production and trade.

As in his previous writings Mattick is good on why Keynesianism was mistaken:

‘From the Keynesian point of view, government spending is just an expansion of demand, or an additional investment in future production (…) Once we remember that the goal of capitalist production is the earning of a return on investment, however, things look different (…) Capital is not produced but consumed by governments; state spending does not solve the problem of insufficient profitability. It is an expense of the capitalist economy’ (p.110).

Monetarism too

Following the failure of Keynesianism in the 1970s, the monetary authorities heeded instead the theories of ‘Monetarism’ as propounded by Milton Friedman. This was an attempt to revive the Quantity Theory of Money but since in the meantime the definition of ‘money’ had typically expanded to include bank loans it was, rather, more a Quantity Theory of Bank Loans: that bank loans play a key role in determining the price level. (Already in the 1920s this had been dubbed the ‘Bank Deposit Theory of Prices’ by the Classical economist Edwin Cannan). This was clearly a different theory to the classical formulation but its application in the 1980s arguably did bring the rate of rising prices down even if inflation continued, though it certainly didn’t end the slump; in fact unemployment rose to record post-war levels. As Mattick notes, ‘the money supply turned out to be difficult to control, swelling and shrinking in response to the needs of businessmen and bankers’ (p.67).

The objections to the original Quantity Theory of convertible paper currency were seen to apply to Friedman’s quantity theory of bank loans. Bank lending depends on the state of the economy. It goes up in a boom and down in a slump. Neither the state of the economy nor the level of prices is intrinsically controlled by the level of bank lending. It’s effectively the other way around. Governments have tried and are still trying to control bank lending by varying short-term rates of interest (the government can’t control long-term rates); after the crash of 2008 keeping them low in an unsuccessful bid to encourage expansion and, currently, increasing them in the hope that this will reduce the rate at which prices are rising,

Inflation or recession

Mattick’s explanation of the continuous rise in the general price level since 1940 is that ‘inflation ha taken the place of recession’ (p. 123), that ‘all this extra money has provided an alternative to the deflationary depressions of the past’ (p. 120). He is not the only student of Marxian economics to take this position. His argument is that in a slump the price level would normally fall because of reduced overall demand for goods and services (as it did up to the end of the 1930s) but that governments’ monetary policy has prevented this, in his view initially to avoid a workers’ revolt and, later, to keep them happy with jobs, pensions and other payments.

He says the extra cost of providing education, health services, unemployment and sick pay — all needed to maintain a trained and fit profit-producing workforce— will have had something do with the continuous post-war rising prices because governments chose to partly finance this by issuing more money. This is sometimes called ‘printing’ more money but the process is not so simple as that, as Mattick explains in regard to what happens in the US (it’s essentially the same in other countries):

‘The Federal Reserve puts money into the economic system when it purchases treasury bonds (and other securities) in what is called “open market” operations (it withdraws money from the system by selling Treasuries). It pays for them with Federal Reserve notes — “liabilities” in accounting talk, IOUs against Federal securities which can always be sold. It is these notes — government debt — that circulate throughout the economy’ (p. 66).

Central bank notes are a part of the government’s debt but only a very small part of it. Although the initiative to create new money comes from the central bank the whole banking system is involved. This gives rise to the illusion that it is the commercial banks that create new money whereas in fact they are only circulating what the central bank created. Unfortunately, Mattick seems to accept that commercial banks can create new money. He writes, for instance, of what a bank can do when an amount of money is deposited with it:

‘The money can be loaned as a note — another form of IOU — or in the form of a new deposit, in the borrower’s name, in the loaning bank; thus the original money lent to the bank can appear in two or more different deposits, each of which can be used to make payments by banknote. In this way … banks can enlarge the supply of money’ (pp.22-3).

But this can’t be. If $1,000 is deposited in a bank, the bank can lend most of this, say $900, in the form of a bank account which the borrower can draw on. There will be now be two bank deposits, one of $1,000 and the other of $900, totalling $1,900, but one is an asset (the initial deposit) and the other a liability (a loan to the borrower). It should be clear that no more than the initial amount of $1,000 can be spent. If together the amount withdrawn by both deposit holders comes to more than this, the bank wouldn’t be able to honour the excess. Banking is in fact based on the fact that the initial depositor is not going to withdraw more than $100. What banks do is increase spending by lending already existing money that might otherwise lie idle – in essence, commercial banks circulate money but don’t invent it out of nothing.

Despite this error, Mattick provides a good description of how capitalism works:

‘The goal of production in this mode of social organization is not actually “growth” — the enlarged production of consumable goods — but enterprises’ competitive accumulation of control over social resources in the form of money: capital accumulation’ (p.145).

He points out that taxation is not ultimately a burden on the workforce:

‘Wages are also taxed, but if we think of wages as the amount of national income that the class of wage-earners accept in return for their work, it is clear that the amount taken as tax could just as well have been retained by their employers’ (pp 89-90).

Mattick is neither a professional nor an academic economist; which is probably why his book is written in simple English and easy to follow, though the last chapter in which he argues that capitalism has become ‘a sort of Ponzi scheme’ differs in this respect from the rest. All in all, though, with some minor caveats it can be recommended for those seeking to learn more about ‘inflation’.

Adam Buick

Exit a formidable opponent (1987)

From the September 1987 issue of the Socialist Standard

Of all the MPs who did not return after the election to the House of Commons none expose more clearly the present purpose of parliament, the motivation of their party and the unpleasant realities of capitalist politics than the recently ennobled Lord Callaghan.

After their defeat the Labour Party are, once more, in the throes of something called "Bringing The Party Up To Date", which actually means purging themselves of any policies or so-called principles which are suspected of losing them votes. A letter from "Lifelong Tribune Supporter", Walter Cairns, of the University of Dundee, in the Guardian of 22 July put it like this:

Kinnock and Gould . . . enjoy my unqualified support in their endeavours to refashion the party's image into that of a modern and efficient movement for socialism.

Among the contradictions and misconceptions which crowd this letter from an eminent academic lawyer, one thing stands out. Even while they are advocating policies like refashioning the party image, based on the cynical presumptions of a capitalist society, Labour supporters are capable of claiming that they are doing so with the object of establishing socialism.

If the Labour Party — somehow, somewhere. sometime — does stand for socialism it must follow that its membership consists of socialists — of people who understand socialism and are agreed about the urgency of setting it up in place of capitalism. It must also follow that these people think, speak and act like socialists; for example they oppose any discrimination based on sex or race, they deny that production for profit is a constructive social motivation, they understand that a class society must give rise to class conflict, they reject the principle of political leadership. Applying these standards to the record of James Callaghan reveals conclusive evidence about the authentic character of the Labour Party — that it is not a socialist party but one which stands, quite clearly, for capitalism.

Callaghans early life was an impoverished struggle from which, not untypically, he drew the wrong conclusions. For one thing, the extremities of his family's poverty had something to do with his father's death in 1921, while he was still young, as a result of what he went through in the Navy during the First World War but this did not deter Callaghan from joining the Navy himself during the Second World War. He had left school to become a junior clerk in the Inland Revenue and had risen through his union, the Association of Officers of Taxes. In 1945 he was returned to the Commons for one of the Cardiff constituencies — some prudently left-wing stances during the 1930s had attracted the attention and patronage of Hugh Dalton and Harold Laski. He passed the war quietly in Naval Intelligence. Perhaps after all he did learn something from his father’s death.

Callaghan's rise was something of a mystery to political observers. He had not gone to university, he was not charismatic like Bevan, or sophisticated like Crossman or earthy like Bevin. He had no gift for sweeping rhetoric or quicksilver repartee. What he did have, instead, was a dogged resolve to climb the greasy pole of political power and. to help in this, a cunning feel for many ingrained working class prejudices. Peter Walker, who in these matters knows what he is talking about, described Callaghan the Prime Minister:

We have a Prime Minister, who is good on television; who looks like Stanley Baldwin; who lives like Stanley Baldwin; and Stanley Baldwin with the vote of the Labour Party and North Sea Oil is a very formidable opponent. (Financial Times, 16 December. 1967.)

When the first Wilson government was elected in 1964, Callaghan’s eminence in the Labour Party was enough to see him installed as Chancellor of the Exchequer. This was an unusually tricky appointment. Labour's promise of prosperity through a massive surge in productivity in an age restless with the new technology had led to the setting up of the Department of Economic Affairs (DEA). a new ministry with a brief to blast away the Treasury’s cobwebs of financial orthodoxy. Callaghan, when he was Shadow Chancellor, had made no secret of the orthodoxy of the policies he intended to follow. Speaking at a Yorkshire miners’ summer school in 1962. he warned that ". . . substantial changes are necessary in the reorganisation of Britain’s economy and in the methods of wage-fixing", by which he meant formal "planning" of wage rises. In the same speech Callaghan denounced the Macmillan government for their handling of industrial relations and for governing the country by gimmicks. (Guardian, 28 August. 1962). Probably, the miners loved it. They could not have known that Callaghan was an admirer of, and a close collaborator with, Reginald Maudling, who as Tory Chancellor of the Exchequer was an important practitioner of government by gimmick:

There was a mutual liking and confidence between Maudling and myself. During his tenure of office he did not hesitate to talk privately and frankly to me about his concerns. I reciprocated during my period at the Treasury . . . (James Callaghan, Time and Chance, 1987.)

The Wilson government was dogged by the "central problem" of the balance of payments. They hoped to control the economy through the DEA's National Plan and through the joint Declaration of Intent by the government. the employers and the unions that the way to improve the world standing of British capitalism was for everyone to volunteer to be moderate and restrained about their income. It did not take long for the realities of capitalism to wreck that fantasy and for the Labour government to make moderation and restraint compulsory. At the Labour conference in 1966 Callaghan revealed that what they actually meant by "voluntary" was "under threat of compulsion”:

Those who wanted to force the government to use compulsion have had their way. Perhaps they are proud of their victory but they have done no service to the ordinary men and women of this country, nor to the trade union movement.

This speech also spelled it out that when the government talked about moderation in incomes they really meant in working class incomes — in wages. The income of the capitalist class (who are not "ordinary men and women") did not come into the reckoning.

According to Richard Crossman, Callaghan's apparent nonchalance concealed a panic at the continuing economic crises which at times left him virtually paralysed. For one thing he was under severe pressure to devalue the pound an issue on which he had not only nailed his colours to the mast but burned his boats into the bargain. In the Commons in July 1967 he again stated his opposition to devaluation as". . . not the way out of Britain’s difficulties". So when, in November that year, the government which had promised to raise real standards decided to cut them by devaluing the pound Callaghan had no way out. In what was described as a resignation he swapped offices with Roy Jenkins, to become Home Secretary. It was not a bad reward for a minister whose impotence in face of capitalism's crises had been so harshly exposed.

Callaghan's time as Home Secretary was notable for his pushing through in seven days the Commonwealth Immigration Act of 1968 — a panicky reaction to the prejudices maliciously excited by the likes of Duncan Sandys and Enoch Powell over the Asian immigration from Kenya and Uganda. His justification for this measure — that unless the public were confident that immigration was effectively controlled there would be continuing riots and tension (Time and Chance) may have secured a few racist votes for the Labour Party but it contradicted their claim to stand for the free, humane co-operative world of socialism and it was in any case a wretchedly specious argument for trying to appease the appetite of a dangerous prejudice.

Labour’s return to power in 1974 allowed Callaghan to become Foreign Secretary and when Wilson resigned in 1976 he moved predictably into Number Ten, a politician unusually experienced in the three great offices of state below that of Prime Minister. In theory, then, he should have been an historic success. In practice it was very different. His government soon decided that the agreement for voluntary pay restraint negotiated with the unions by Wilson and Michael Foot should be extended. They set a limit of five per cent and threatened sanctions against any company which settled pay claims above that figure. Healey, the Chancellor, was wielding a savage axe on public expenditure. aiming for cuts totalling £3,000 million over the next two years. Callaghan informed the 1976 Labour conference that Keynesian policies, which had once given theoretical sustenance to Labour manifesto writers, were now dead:

We used to think that you could 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 . . .

This was greeted as a typical piece of Callaghan common sense; it took no account of the effect which the cuts were to have in, for one, the National Health Service:

Standards of care in the health service have drastically worsened through the lack of money, more work and shortage of nurses, the Royal College of Nurses said yesterday.

(Guardian, 31 October 1987.)

For a while Callaghan seemed to be getting away with those policies but resentment against the government deepened and the Labour Party lost a series of by-elections, most notably in mining and industrial seats like Ashfield and Workington. As their majority dwindled away Callaghan, rather than surrender power, came to an arrangement with the Liberals in which whatever was left of Labour policies were compromised for the sake of Liberal support in parliament.

In the summer of 1978 the unions began to indicate that they had had enough of pay restraint. Many trade unionists were employed in socially vital work for wages below what they could get on Social Security. After a week in the sewage works or the sewers, in ambulances or hospital kitchens they were compelled to scrabble for Family Income Supplement. In the previous winter Callaghan's government had used troops to break the firemen's strike but no detachment of Green Goddesses could have withstood the flood of disruption of the winter of discontent. Callaghan, the Prime Minister who had come up through the trade union movement. was in favour of trying to dragoon the strikers in a State of Emergency but settled for merely urging workers to betray their class interests by crossing picket lines: ''Everyone," he said in the Commons, "has the right to work and everyone has the right to cross a picket line. It is not a sacred object and I hope they will do so". (Guardian 24 January, 1979).

Labour optimism of 1964 was no more than a sour memory when, in March 1979, Callaghan's government were defeated on a motion of confidence and so were forced into an election. The DEA, the National Plan, the technological revolution, the planned growth of productivity and of incomes, were all consigned to the already crowded history of broken promises. In her diaries Barbara Castle described the end of Labour's dream as "stagnant output, high unemployment and falling living standards." This last was, of course, a reference to the condition of the working class for the capitalists were doing rather well. Healey had warned the rich that he would squeeze them until the pips squeaked but as Labour left office the income of the richest one per cent exceeded that of the poorest 20 per cent. In several senses the way had been paved for the age of Thatcher, which the Labour Party now regard as so calamitous. If there were any of what might be called justice in these matters. Callaghan should have shrunk, shame-faced, into obscurity. Instead he subsided into an honoured place on the back benches, with more time to spend on his adored Sussex farm. And when he announced his resignation from parliament he was quickly given a title as reward for all he tried to do, and did, for the interests of the British capitalist class.

His memoirs (Time and Chance) is a curiously passionless book, except when Callaghan launches into extravagant praise for some fellow political trickster. Criticism is, at worst, muted. Perhaps, after all, he does experience some twinges of doubt; perhaps what happened during those dismal years is too much to recall with any strength. He failed to keep a promise to do the impossible, to control an uncontrollable social system which operates on laws based on the interests of a small minority of parasites. In these fruitless endeavours he was indeed a formidable opponent — of the working class where he originated, the class who are the real producers in society. There is a useful lesson in his story. The significance of politicians is not their strength but their impotence and what this tells us about our class power to change society.

Ivan

Sting in the Tail: The Daily Grind (1989)

The Sting in the Tail column from the April 1989 issue of the Socialist Standard

The Daily Grind

A survey carried out by an insurance company has shown that more than half of male office workers spend much of their time at work making personal telephone calls, reading newspapers and magazines, and slipping away to attend to their personal business. More than a third dream of changing their job while 40 per cent long for love affairs with younger colleagues.

Bloody typical, isn't it? No wonder this country can't compete with the Japanese . . but wait a bit, the insurance company IS Japanese and the male workers work in Tokyo !

But aren't Japanese supposed to be much more loyal to their employers and dedicated to their work than us ?

These findings only confirm that wage slavery has much the same effect on workers the world over and never provides the satisfaction and fulfilment that work could and should be.

House Hunting

Towards the end of last year an item in a newspaper mentioned that Donald Trump, a New York property magnate, has an apartment in Manhattan which cost 17 million dollars.

Astonishing as it may seem this is not the top end of the market for the really rich. Two years ago a Fifth Avenue apartment worth 30 million dollars owned by Adnan Khashoggi, the Iranian arms dealer, had been seized by the New York court as security in a law suit brought against him by Lonrho.

This "apartment" was created out of sixteen smaller ones and takes up two entire floors in one of New York's most fashionable areas. Anybody who is worried that Khashoggi will not have a roof over his head will be relieved to know that he has other homes in Marbella, Paris, Cannes, the Canary Islands, Madrid, Rome, Beirut, Riyadh, Jedda and Monte Carlo.

Rumours that he is looking for a home in either Brixton, Handsworth or Toxteth have not been confirmed.

Militant Tactics

How often have we come across examples of left-wing organisations recruiting people on the basis of some single issue or other. The Socialist Workers Party do it all the time. They get people to join over such issues as "Troops Out", "The Right To Work", etc., etc., but never on the issue of the abolition of the wages system.

The latest example is Militant's drive to recruit opponents of the Poll Tax into the Labour Party in Glasgow. Militant organisers have been telling the local press that they have recently signed up many new members for the Labour Party ("30 after one meeting") who joined purely on the grounds of their opposition to the Poll Tax.

Militant's aim is to use these recruits as voting fodder to help de-select sitting Labour councillors and, ever hopeful, replace them with Militant supporters.

Recent history makes it extremely unlikely that they will succeed in even this trivial objective but their action highlights once again the unprincipled and non-socialist outlook of the would-be "Vanguard".

An Apology for Thatcher?

Sir Douglas Hague, chairman of the Economic and Social Research Council from 1983 to 1987, was recently reported as saying:

. . . most of Britain’s social scientists seem to me not completely in touch with the real world.

He said Britain's economists should apologise to Margaret Thatcher for their misguided policies. Now there's an idea!

During the farce of Mao's Cultural Revolution in China one of the strange spectacles was university professors parading through Peking with placards proclaiming "I am a complete dumpling. I was a capitalist deviationist. Long live the Glorious Cultural Revolution."

Something similar seems to be demanded by Sir Douglas of the 364 economists in April 1981 who had the effrontery to criticise the Government's economic policy.According to Sir Douglas

Never in history can a profession have been so manifestly proved to be so wrong in its predictions, yet no collective apology has come.

London Tourist Board could exploit Sir Douglas's apology idea. Lines of discredited economists parading past 10 Downing Street in Dunce's caps and carrying placards proclaiming " I was a Keynesian dupe. Privatisation for pavements."

This could provide Mrs. Thatcher with her "photo opportunity" as contrite academics kneel to kiss her arse.

What troubles Sir Douglas of course is that the Government funds these ungrateful buggers and they are not coming up with what the Government wants to hear. According to Sir Douglas:

. . . too much attention was being devoted to the study of the problems of the deprived and disadvantaged.

Apparently his idea of "being in touch with the real world" is to ignore the unemployed, the homeless and the exploited.

What a Shower

When one of the speakers at the recent Young Conservative conference angrily denounced the "headbangers" who was he referring to?

The IRA or the Loony Left? No, this was just one of the "wets" referring to those of his fellow YC's known as the "libertarians". And no wonder.

Here's what one of them had to say during one of the debates "Socialism is a filthy, disgusting perversion. We are the pure." The "pure" what he didn't say, but there are several things we can think of.

The hang 'em flog 'em bunch spend a lot of their time trying to outdo one another in being "right wing". Indeed their main objective seems to consist of being as reactionary (they call it "revolutionary") and obnoxious as they possibly can be.

They support every authoritarian regime as long as it is "right wing", they flaunt "Hang Nelson Mandela" T-shirts, and when striking miners and their families were suffering then they had callous, jeering songs to sing.

Perhaps no one can accuse these "libertarians" of being "wet" but as sympathetic, considerate human beings they are a complete wash-out.

Economic policy: nothing new (1989)

From the May 1989 issue of the Socialist Standard

Like other post-war Labour and Tory Prime Ministers Mrs. Thatcher is conscious of the long decline of British capitalism as a manufacturing power and anxious to reverse it. The extent of the decline is shown by the place of British exports of manufactured goods in the world total. In 1883 Britain's share was 37 per cent. By 1938 it was down to 21 per cent. Apart from a brief recovery to 29 per cent in 1948 when Japan and Germany were out of the market. it has gone on falling. In 1984 it was 8 per cent and Britain is now, on balance, an importer of manufactures.

While the 1987 Tory Election Manifesto told of "our manufacturers . . . traveling the globe with a new confidence" it would appear that Thatcher has no real hope of a recovery of manufacturing industry, and relies instead on the expanding so-called service sector (tourism banking, finance insurance and technical know-how) which, the Manifesto said, "generates a vast surplus of foreign earnings".

Denationalisation Measures

The same 1987 Manifesto made much of the governments efforts to attack monopolies and encourage competition.

On competition, the argument is that it increases efficiency, reduces cost and prices and thereby enables British industry to capture a larger share of world trade at the expense of other countries. It is the reverse of one of Keynes' arguments. Keynes held that competition for foreign markets was one of the main economic causes of war and advocated that government expenditure be increased so as to (as he believed) expand total demand in the home market and therefore make it unnecessary for British manufacturers to seek markets abroad. In fact, of course, increasing or decreasing government expenditure makes no difference to total demand in a country.

The traditional Tory policy for dealing with private monopolies was to nationalise them in the interest of the rest of the capitalist class. Engels in Socialism: Utopian and Scientific shared the view that governments would be forced to adopt that policy. It was a Tory government in 1884 which passed the Act giving them power to take over the railways, intending to use it as a threat to deter the companies from exploiting their transport monopoly. Among later nationalisations supported by Tory governments were the telegraphs, the telephones cross-channel cables the BBC London Passenger Transport Board, Central Electricity Board and British Overseas Airways Corporation. And as late as 1943 Prime Minister Winston Churchill, who had supported nationalisation all his political life, spoke in favour of extending it, saying in a broadcast:

  There is a broadening field for State ownership and enterprise especially in relation to monopoly. (Times, 6 April 1943.)

In the first post-war Tory government, elected in 1951, policy began to change. It declared a halt to further nationalisation, denationalised steel, and greatly strengthened the law to deal with monopolies, in this following the example of American governments since'the beginning of the century.

One of the factors leading to denationalisation by the Thatcher government has been the losses that have been incurred since 1945. While some have made profits most have made losses, and the overall loss has been enormous. D.R. Myddleton, Professor of Finance and Accounting, estimated in 1976 that the total loss on the nationalised industries as a whole since 1945, had been £25,000 million (Financial Times, 19 February 1975). And Professor Walter Eltis, covering the years 1961 to 1977, had this to say:

  The financial surpluses of the public corporations have at no point been sufficient to cover the interest costs on their accumulating debt in addition to wages and salaries (Lloyds Bank Review, January 1979.)

The losses have continued since 1977.

Continuing inflation

By the mid-seventies fast rising unemployment convinced the Labour government that the Keynesian belief that increased government expenditure increases employment is a fallacy. Prime Minister Callaghan said at the 1976 Labour Party Conference at Blackpool:

  We used to think you could spend your way out of a recession and increase employment by cutting taxes and boosting government spending. I tell you in all candour that this option no longer exists (Daily Mail, 29 September 1976.)

At the same time the Tories under Thatcher were likewise rejecting the Keynesian “full employment" doctrine and adopting “monetarism". The present line-up is that the anti-Thatcher Tories, including the Heath faction, have remained Keynesian, as have the Liberals and SDP. and the Labour Party has gone back to Keynes.

Like the Labour Government 1974-79. the Thatcher government has already more than doubled the price level during its ten years in office. Governments in the nineteenth century and many economists (including Marx) knew quite well that the relevant factor in price stability is the amount of money (notes and coin) in circulation. If issued in excess of what is needed to carry out economic transactions then prices go up. If reduced below this level, as in 1920-25, prices go down. If kept in balance, as under the Gold Standard, prices are stabilised. Since 1938 the amount issued has been continually in excess and the present total is more than 30 times what it was in 1938.

When, in 1978, Labour Prime Minister Callaghan said that “the government was not going to print the money to finance inflation", and in 1979 Thatcher said "we will not print money", it may have seemed that they were both endorsing nineteenth century currency theory and practice. It was not so. When they talk of "money supply" they do not mean notes and coin but, predominantly, bank deposits. The government's advisers and most modern economists deny that the amount of notes and coin in circulation governs the price level, and the Bank of England in 1978 and 1979 (and in all the years since then) never ceased printing more notes and putting them into circulation.

Why the Labour and Tory governments have chosen to go in for half a century of inflation does not permit of a simple answer. There are three possibilities. The first is that they have done it out of pure ignorance. An example is the fatuous statement by Professor Milton Friedman to Thatcher that Karl Marx was a monetarist like Thatcher and himself.

The second is that the Treasury quietly points out to each Chancellor that continuous inflation has the great merit that it reduces the real cost of the interest payments on the national debt which have to be met out of the Budget.

The third is the one to which Keynes drew attention. Inflation is good for borrowers because, while interest rates rise when there is inflation, they rise less than the rise of prices. The biggest borrowers are the business community and farmers, both of whom have a lot of political pull and could influence government policy in favour of inflation.

Mid-Victorian values

The Thatcher government takes pride in the success it claims to have had in promoting home-ownership, proft-sharing and the "spirit of enterprise" which makes capitalists and workers willing to stand on their own feet instead of relying on state protection and assistance. What they don't admit is that this is as old as capitalism.

Better-paid workers, partly from choice and partly because rented accommodation was not available, have always aimed at owning their own houses. The first of the early type of building societies was set up in Birmingham in 1775 and there was something of a boom in Yorkshire in the early nineteenth century. In 1890 there were 2,800 such societies. The first reported profit-sharing scheme was in 1829. Their record is one of increase in every boom and decline in every depression.

In 1831 the Society for Diffusion of Useful Knowledge published a piece of pure Thatcherite doctrine in a booklet on the results of machinery entitled The Working Man’s Companion: An Address to the Working Men of the United Kingdom. It advised the workers not to join a union or resist machinery but to prepare in advance to meet possible unemployment. Work hard, keep away from the ale-house and the gin shop and gambling and save part of your wages. When he loses his job the worker then "strikes into some new line of labour, or he resolves to see what his capital and labour together will do as a workman on his own account”:

When there is a glut of labour, go at once out of the market: become yourselves capitalists.

Thatcher may well have imbibed her philosophy from that mid-Victorian bestseller, Samuel Smiles. Among his popular works were Thrift, Workers Earnings, Strikes and Savings, and Self-Help; with Illustrations of Character and Conduct. This last-named sold a quarter of a million copies.

Ups and downs of production

Governments like to be able to show that while they have been in power production has increased at record rates. The 1987 Tory Election Programme had this: “Britain today is in the seventh year of steady economic growth". It sounds impressive until it is remembered that in the first two years of Tory government production fell sharply. At January 1989 the total increase of industrial production since 1979 was less than the increase that took place in the previous ten years 1969-1979. When the next depression comes along it will fall again.

Thatcher however is confident that this time the boom really is here to stay. She has spelled out all the things required to guarantee no more depressions: Free trade, no inflation, low taxation and less government expenditure, weak trade unions and low wages, competitive industry, little nationalisation and of course a Tory government.

Early in the 1870s these guarantees were there. Free trade: highly competitive British industry; no inflation; low taxation (Income tax was 1¼ per cent against the present 25 per cent): government expenditure was only about 8 per cent of National Income against the present 40 per cent: real wages were far below present levels: the unions were small and weak and trade union law more restrictive: not much nationalisation and last but not least, a Tory Prime Minister, Disraeli.

So what happened in 1875? Here is the answer from a government publication, Industrial Relations Handbook, (the 1957 edition published by a Tory Minister of Labour) "A period of trade depression followed the year 1875 and lasted for almost twenty years".

Edgar Hardcastle

Greasy Pole: On the Scaffold (1996)

The Greasy Pole column from the May 1996 issue of the Socialist Standard

A general election is rather like an execution; as it approaches it concentrates wonderfully the minds of those who fear their end is nigh. Survival becomes the all-absorbing, all-dominant preoccupation of their thoughts. How can they most effectively plead their case for a last minute reprieve? How can they persuade the people who will pass judgment on them to commute the penalty to a life sentence as the Member for one of the more obstinately safe constituencies? If this can be arranged the grateful Member will uncomplainingly suffer years of attendance at constituency committee meetings, fund-raising drives, summer fayres and even surgeries when they have to devote their Saturdays to listening to voters’ complaints about housing or crime or medical services or whatever.

All of this is in the cause of winning— or at least holding on to—votes. To do this it will probably be necessary to be involved in all kinds of otherwise repellent activities. Shopping centres will have to be invaded to that unsuspecting customers, whose only concern is to spend some of their income on something which a recent TV ad has convinced them is indispensable to their continued existence as exploited workers, can be startled into revealing their opinions on issues like the common currency or heavier sentences for criminals or whether MPs should be allowed to make so much on the side. Pretty girls will be cuddled, defenceless babies will be kissed, so that the photographers accompanying this spontaneous demonstration can get some newsworthy pictures.

Questions of policy

Occasionally there will be a pressing, unavoidable need to deal with questions about policy, about where one party stands compared to the others. The replies to some of these questions will have been supplied, in readily-digestible form, in a candidate’s handbook or other material from headquarters. It is as well to get these right because it won't do to acquire a reputation as a maverick before you have even got to Westminster. Of course, the important thing is to stress that there are vast, unbridgeable political chasms between your party and the rest. If you have done your homework diligently you will have committed to memory some examples of how inefficient or unprincipled the other parties are, what impotent flops they have as leaders. It will even be possible to indicate that their honesty is in doubt and to wonder about the sanity of anyone who could possibly vote for them. (This has to be done with some delicacy; it is never wise to imply that the voters are mad, even if they do consistently support a social system which operates like a madhouse.)

If this is to be done successfully it is vital to avoid any diversions into political history or any proper comparisons of the respective parties’ policies. For example, the Conservatives came to power in 1979 saying they were committed to a policy of monetarism. The voters were encouraged to believe that a Thatcher government would allow free reign to market forces, which would involve a retrenchment of nationalisation and state influence or regulation in industrial and commercial matters. The assumption was that if the market was allowed to operate freely in all fields there would be a demand for only the best of the goods and services on offer and the rest would wither away and die. "Everything," as one of Thatcher’s people put it, "should be freed, so that people can do exactly what they want to do."

Continuity

Of course since then a few million people have found they are not free to do exactly what they want to do. People who survive on state benefit when they are unemployed, people whose homes have been taken over by the building society, people who see their children being schooled by desperately over-stressed teachers in crumbling buildings don’t feel that this is happening to them by their own free choice. But for the moment the point is that the ideas put forward by the Tories at the 1979 election were not new or exclusive to them. In truth, it was the outgoing Labour government which began the process and, particularly in view of how the Labour Party has developed since then, it is a matter of speculation about how far they would have carried it on had they been in power.

It was described by Robert Blake, the historian of the Conservative Party, in an interview in August 1989:

  "One should never forget that Callaghan and Healey between them were changing economic and social policy quite markedly. In suited both sides subsequently to play this down. Margaret Thatcher doesn't want to be beholden to them, and they, of course, do not want it implied that they were doing these things earlier. There's more continuity than one might appreciate between Callaghan’s administration after the IMF and all that happened in 1976, and Margaret Thatcher's administration than either side wishes to admit’’(Thatcher’s England. John Ranelagh).

Choices

The fact is that the parties who compete for power over capitalism change each other, in the sense that they are ready to absorb and adapt policies which they all see as successful. That was the history of the Conservative Party after l945,when Wooltoon and Butler went some way to refashion their appeal to the working class. It has been the history of the Labour Party since 1979, with their drive for change becoming more determined and blatant as they perceive themselves getting closer to power. That is why we now have the New Labour Party, openly competing for what Blair calls the middle ground, with ideas on the economy, trade unions, crime and market forces which are all but indistinguishable from the Tories.

At the election the minds of the candidates will be concentrated in persuading us that they represent a choice when all they offer is minor deflections to the mainstream of running capitalism. But it doesn’t have to be like this; we don’t have to be that class who volunteers for our own execution.

Ivan

Cooking the Books: System change not policy change (2020)

The Cooking the Books column from the May 2020 issue of the Socialist Standard

‘Get used to more state intervention, it looks like it’s here to stay’ read the headline of an article in the Times (25 March) by its Deputy Business Editor, Graham Ruddick.

A swing back towards state intervention was beginning to become evident even before the coronavirus crisis led to the massive state intervention in the economy that it has (even more than the Labour Party used to advocate under Corbyn). Before this, failed Tory politician Sir Iain Duncan Smith had told the BBC that ‘you need a dose of Keynesianism to restore monetarism’ (Guardian, 16 February). Ruddick quoted Patrick Minford, who he described as ‘one of the Iron Lady’s favourite economists’ as telling the Financial Times that ‘fiscal policy was now needed to boost the economy because monetary policy has run out of road.’ The final nail in the coffin of Thatcher’s economic policy was hammered in by Boris Johnson when he declared in a video message, no doubt deliberately to distance himself from her opposite view, ‘that there really is such a thing as society’ (Guardian, 29 March).

‘Laissez-faire’ originated as a demand by capitalist entrepreneurs in eighteenth-century France that the state, then controlled by a landed aristocracy, should leave them alone to pursue their profit-seeking economic activity. Adam Smith took this up and it became the demand of factory-owners in Britain too, backed up by a whole school of ‘political economists’. Their theory, that the best economic system was one where the state let capitalist enterprises get on with making profits in response to spontaneous markets forces, came to be known as ‘economic liberalism’.

Economic liberalism was the dominant economic policy, backed by academic theory, pursued in openly capitalist states up until the Crash of 1929 and the slump that followed. After the end of WW2, during which the state played a leading role in organising economic activity, state intervention was continued, justified by Keynes’s new theory that it was needed to manage the capitalist economy so as to arrange for steady economic growth uninterrupted by slumps such as that of the 1930s. This appeared to work but when the real test came, with the end of the post-war boom in the 1970s, it failed; increased state spending did not stimulate an economic recovery but merely resulted in stagflation (stagnation plus inflation).

Capitalist enterprises demanded, rather, that the state reduce taxes on them so that they could keep more of their reduced profits. States cut back their spending and a new theory was thought up to justify this. Called ‘monetarism’, it argued that, as long as the government controlled the (somewhat vaguely defined) ‘money supply’, left to themselves market forces would bring about steady, inflation-free economic growth. Its opponents saw this as a return to pre-Keynesian economic policy, which to a certain extent it was, and dubbed it ‘neo-liberalism’. It, too, appeared to work for a while but then came the crash of 2008 and the slump that followed.

Because its supporters were open and often strident advocates of capitalism, some of its opponents came to see opposition to ‘neo-liberalism’ as opposition to capitalism. They imagined that in calling for a return to more state intervention they were being ‘anti-capitalist’ when in fact they were merely calling for a change of government policy under capitalism.

Will a move away from the policy of ‘neo-liberalism’ improve things? In a word, no. Increased state intervention didn’t work last time and won’t work this time either. What is needed is not policy change, but system change.

Friedman, Keynes and Marx (1978)

From the December 1978 issue of the Socialist Standard

The capitalist system operates according to definite economic laws which governments can neither change nor overcome; to the extent that they try to they generally make matters worse or create some new problem.

This view is quite at variance with the prevailing economic and political orthodoxy, which holds that government intervention in the workings of capitalism can ensure crisis-free growth and continuous full employment (Keynes) and that government action can eliminate poverty, bad housing, poor schools, inadequate health services, pollution and so on (reformism).

Fortunately not all teachers of economics are content to repeat parrot-fashion the theories of Keynes. Some have been prepared to examine the real world and so have not been able to avoid noticing the manifest failure of government intervention to do what the Keynesians and reformists said it would. This has led to a reaction, with a growing number of economists now arguing that the trouble stems from too much government intervention and calling for a return to what their mentor, the American Professor Milton Friedman, calls “competitive free enterprise capitalism”. Even Margaret Thatcher and Sir Keith Joseph have been toying with this suggestion.

They are wrong, of course. Pure private enterprise capitalism would be no better than the mixture of private and state capitalism we know today. But these economists can claim to have a better understanding of how capitalism works than the Keynesians and reformists, since they at least recognise that it operates according to economic laws which governments can’t change. As one advocate of laissez-faire capitalism, Nathaniel Branden has put it:

  All government intervention in the economy is based on the belief that economic laws need not operate, that principles of cause and effect can be suspended, that everything in existence is "flexible” and “malleable”, except a bureaucrat’s whim, which is omnipotent; reality, logic, and economics must not be allowed to get in the way (in Ayn Rand Capitalism: The Unknown Ideal, p. 79).

We couldn’t express it better ourselves! After all, it was Marx who spoke of “the natural laws of capitalist production” as being “tendencies working with iron necessity towards inevitable results” (1867 Preface to Capital).

Milton Friedman is the new star in the firmament of capitalist economics—he was awarded the Nobel Prize for Economics in 1976, effectively for having demolished the theories of Keynes—but there is nothing especially original about his work. All he had done is to observe how capitalism works and so has noticed that it doesn’t work in accordance with Keynes’ theories.

Take the question of inflation, for instance. Although Keynes at one time stated that over-issuing an inconvertible paper currency would inevitably lead to a rise in the general price level he later came to attach little importance to monetary policy, seeing its role as merely to ensure that enough money was available to finance the government spending which the tax and investment policies he advocated would involve. He thus provided an ideal theoretical justification for governments to finance their activities by recourse to the printing press. Which is what they have been doing in all countries since the war, with the inevitable result that prices generally have been constantly rising.

Friedman has merely done a bit of historical research to show the relationship between unwarranted increases in the money supply and rises in the general price level, enabling him to conclude that rising prices was bound to be the result of Keynesian policies and will continue to be as long as they are applied. In doing this “monetarists” (so called because they disagree with Keynes’ view that “money doesn’t matter”) like Friedman have rediscovered what Marx (and other economists of his time) had stated over a hundred years ago as being the inevitable result of over-issuing an inconvertible paper currency.

Keynes was also something of an “underconsumptionist” in that he thought that capitalism needed government spending to keep it going. His followers have favoured inflation, or more exactly government spending financed by inflating the currency, as a means of trying to reduce and avoid unemployment. But that inflation can reduce unemployment has proved an illusion, as the artificial inflationary boom gives way to the sort of "stagflation” or "slumpflation” we now have, where widespread unemployment and a high rate of price rises exist side by side.

Observing this phenomenon, Friedman has applied a bit of logic and come to the conclusion that the business cycle of boom-slump-boom-slump is independent of inflation, that inflation is not a way of ensuring a permanent boom but merely results in prices rising in all stages of the cycle, during the slump as well as during the boom. Thus the choice is not, as we are always being told by government ministers, Labour and Tory, between inflation and unemployment. The level of unemployment is governed by factors other than inflation, which is essentially a monetary phenomenon independent of the real economic forces which cause unemployment to exist and to rise and fall. This "discovery” of Friedman’s has long been known to socialists though no one thought of proposing us for a Nobel Prize! Even Friedman’s general conclusion on Keynesianism—that the monetary mismanagement it involves has probably aggravated rather than stabilised the capitalist business cycle — was anticipated by Marx, who recognised that monetary bungling could aggravate a crisis originally caused by other factors.

In his book Capitalism and Freedom (1962) where he expresses in simple language his philosophy of “competitive free enterprise capitalism”, Friedman shows how reformist policies aimed at trying to abolish poverty, equalize incomes, eliminate bad housing, have failed just as miserably as Keynesianism:

  Which if any of the great ‘reforms’ of past decades have achieved its objectives? Have the good intentions of the proponents of these reforms been realized? (. . .) An income tax initially enacted at low rates and later seized upon as a means to redistribute income in favour of the lower classes has become a facade, covering loopholes and special provisions that render rates that are highly graduated on paper largely ineffective (. . .)
  A housing program intended to improve the housing conditions of the poor, to reduce juvenile delinquency, and to contribute to the removal of urban slums, has worsened the housing conditions of the poor, contributed to juvenile delinquency, and spread urban blight (. . .)
   Social security measures were enacted to make receipt of assistance a matter of right, to eliminate the need for direct relief and assistance. Millions now receive social security benefits. Yet the relief rolls grow and the sums spent on direct assistance mount.

After mentioning some exceptions of where he thinks government intervention has led to some improvement (such as building roads, providing basic schooling, public health measures) Friedman concludes:

  If a balance be struck, there can be little doubt that the record is dismal. The greater part of the new ventures undertaken by government in the past few decades have failed to achieve their objectives.

Up to this point Friedman is saying much the same as we have done: that social reforms don’t work. But Friedman is not a socialist and does not draw the conclusion we do: that this proves that capitalism is a system which does not work and cannot be made to work in the interest of the wage and salary earning majority. He thinks that if there were less government intervention then capitalism would work to everybody’s benefit!

This conclusion is of course mistaken and arises from recognising as inexorable only one of capitalism’s economic laws: the law of profits, which decrees “no profits, no production”. People like Friedman can easily see that anything that interferes with profits, generally or in a particular industry, will inevitably lead to a drop in production, so making maters worse. But there is another economic law of capitalism which the advocates of private enterprise capitalism ignore: the law of wages, which decrees that the consumption of the class of wage and salary earners is determined by what is necessary to keep them in a fit state of work and to enable them to raise and maintain a family, and that everything they produce over and above this is appropriated as profits by those who own and control the means of production and distribution. Capitalism is thus based on the exploitation and restricted consumption of the working class and, whatever the degree of government intervention, can never work in their interests.

There is another fundamental difference between Friedman and socialists. Although recognising the failure of social reforms he is himself a sort of reformist in that he is proposing changes in capitalism as it exists today in order to achieve his ideal of a "competitive free enterprise capitalism”. The concern of socialists, on the other hand, in the field of economics is to understand capitalism, to “lay bare the economic law of motion of modern society” as Marx put it, and not at all to prescribe economic policies for governments to follow.

The rise of Friedmanite economics, for all its faults and shortcomings, does however represent a return towards the more realistic view of the way capitalism works. Before Keynes, this view was held by a number of capitalist economists, and the demonstration that planning and social reforms don’t and can’t work may be unpalatable for economic “experts” and reformist politicians.

Adam Buick

Neo-Liberalism: Old Religion Repackaged (2019)

From the December 2019 issue of the Socialist Standard

It’s not neo-liberalism that’s to blame – it’s capitalism

In Marx’s day the doctrine that the government should not interfere in the operation of the capitalist economy was known as ‘Manchesterism’ after the city in the north of England where capitalist industry was then most developed and whose capitalists wanted to be free to pursue profits as they thought fit.

Its advocates preached ‘free trade’ (the abolition of tariffs on imported goods and bounties on exported goods) and letting market forces operate freely. They even opposed laws against adulteration and to limit the hours of work of those they employed. Also known as ‘economic liberalism’, it had roots in the eighteenth century in French manufacturers and merchants who told the royal bureaucracy to leave them alone and let them get on with their business (‘laissez faire’) and in Adam Smith’s curious theory that behind market forces was some ‘invisible hand’ ensuring that these operated for the common good.

However, a practical problem soon arose over industries and services which all capitalist businesses had to make use of, such as transport (roads, canals, railways) and communications (post, telegraph). Capitalists did not want these to be in the hands of any one group of their number who would thereby be in a position to hold the rest of them to ransom and charge monopoly prices. This was why in Britain, as early as 1844, a Railways Act contained a clause providing, if need be, for state ownership, so-called ‘nationalisation.’ In Europe railways had been in the hands of the state almost from the beginning because of their strategic importance for transporting troops in times of war. In the event Britain settled for price regulation by the government, which was also a violation of laissez faire.

Economic liberalism never caught on in its entirety outside Britain as ‘free trade’ was seen, not without justification, by rival capitalists in other countries as a means of giving British capitalists a competitive advantage. They demanded that their governments ‘protect’ them from such competition through tariffs on imported British goods. Beyond that, however, they embraced the doctrine that governments should not interfere with their pursuit of profits.

Enter Keynes

Between the two world wars of the last century even Britain abandoned free trade and the gold standard. An era of government-created fiat money opened up, in which governments had to pursue an interventionist policy to manage their currency. With the financial crash of 1929 and the big slump in production that followed, governments also came under pressure to intervene in the capitalist economy to try to get it expanding again. ‘Public works’ programmes were initiated, such as Roosevelt’s New Deal in the USA and Hitler’s rearmament in Germany. In his 1936 General Theory of Employment, Interest and Income the British economist John Maynard Keynes provided a theoretical justification for such ad-hoc schemes. He argued that left to itself – laissez faire – capitalism would not necessarily recover from a slump of its own accord, as economists had preached till then, but that government intervention, in the form of a tax policy to stimulate demand was required. In the event of a boom, this could be prevented from ending in a slump, as booms had previously always done, by the government pursing the opposite policy of using taxes to discourage consumption. Thanks to government intervention, steady capitalist expansion could be engineered.

Naturally this theory, especially stimulating demand in a slump by redistributing purchasing power from the rich to the non-rich, was acclaimed by reformists as a justification for the reforms they already favoured. Those that had still regarded themselves as in the Marxist tradition abandoned Marx for Keynes.

Keynesianism was not consciously pursued as a government policy till the beginning of the Second World War. When that war was not followed by a slump, as the end of the First World War had been, but by a 25-year period of capitalist expansion with only minor ‘recessions,’ many open supporters of capitalism hailed Keynes for having saved capitalism.

But this was an illusion. Put to the test when the post-war boom came to an end in the 1970s, Keynesian policies resulted in what was called ‘stagflation’ – a rise in the general price level while the economy remained stagnant. The post-war boom had been caused by other factors such as reconstruction and the spontaneous expansion of internal and world markets.

Exit Keynes

The end of the post-war boom led to what was called a ‘fiscal crisis of the capitalist state’. Governments depend for what they spend on levying taxes, which ultimately fall on capitalist profits, and on borrowing money from those who have it. With less profit being made, there was less to tax and less to borrow. Government had no alternative but to cut their spending rather than increasing it as Keynes had advocated they should do to get out of a slump. Another economic theory was required to replace Keynesianism and justify this.

The new theory, popularised by the American economist Milton Friedman, called itself ‘monetarism’ as it advocated a tight monetary policy, i.e. cutting government spending, and letting market forces revive the capitalist economy by restoring profitability of its own accord as asset prices and real wages fell. This was not really a new theory but a revival of pre-Keynesian economic liberalism.

There is some justification, then, for calling this replacement policy ‘neo-liberalism.’ What is not justified is seeing its application as a free choice on the part the part of governments. It was something imposed on them by the workings of the capitalist economy, given the situation it was in. Governments had no choice but to apply it. In other words, capitalism was the cause, with neo-liberalism merely the political and ideological justification.

What the capitalist conditions imposed was that governments should cut their spending or, rather, cut taxing profits with the result that they had less to spend. With less to spend, ‘austerity’ was the order of the day in all countries irrespective of the political colour of their government. It was not just Reagan and Thatcher in the USA and Britain but also Mitterrand in France. Public services were cut back. ‘Welfare’ and ‘benefits’ were slashed, especially for those who for one reason or another were not able to find a job. Since the economists preached that there was a so-called ‘natural rate of unemployment,’ which could be as high as 6 percent, millions of already poor people had their standard of living reduced even further. Other reforms enacted during the post-war boom were whittled away or rolled back.

To reduce their borrowing, governments sold off state assets to private capitalist firms, who were granted the right to make profits from them in return for themselves raising the capital to finance them.

As a policy of trying to ensure steady sustained capitalist development, neo-liberalism has been just as much a failure as Keynesianism was, as spectacularly shown by the Crash of 2008 and the Great Recession that followed. What this showed is that, no matter what policy governments adopt, capitalism goes relentlessly on its way, repeatedly going through the boom/slump cycle that it has done since the 1820s. The fact is that governments do not – cannot – control the way the capitalist economy works. It is the other way round. It is the operation of capitalism that constrains what governments do; all they can do is little more than react to what capitalism throws at them. There is a sense in which they do have a choice. They could choose to try to defy what capitalism’s economic forces dictate but, if they do, they will make matters worse. As Marx pointed out with regard to banking legislation, while governments cannot make things better, they can make things worse:

  ‘Ignorant and confused banking laws, such as those of 1844-5, may intensify the monetary crisis. But no bank legislation can abolish crises themselves’ (Capital, Volume 3, Chapter 30, Penguin Books edition, p. 621).

This warning is apt because left-wing populists are calling for neo-liberalism to be replaced by government intervention to spend money to end austerity and get capitalism expanding again – a revival of Keynes’s discredited idea that could be called ‘neo-Keynesianism.’ As Marxists know, both from the past experience of such attempts and from a knowledge of how capitalism works, this is doomed to fail and would make things worse.

It is not neo-liberalism that is the problem, but capitalism. It is not a change of policy that is required, but a change of socio-economic system.

Adam Buick

The Financial Times and Inflation (1976)

From the October 1976 issue of the Socialist Standard

For years the Financial Times has been offering a variety of different explanations of inflation. In an editorial “How Costs Get Pushed Up” (6th Sept.) it had another go.

It examined a number of theories, including that presented by the “monetarists” and Sir Keith Joseph, and discussed them. The point it made about the monetarists was that their explanation must be wrong because “wages and prices in this country began to accelerate after the unprecedented fiscal and monetary squeeze of 1968-70”.

Because of the superficial resemblance between monetarist theory and the explanation given by Marx it might be thought that the argument of the Financial Times against the monetarists would also prove Marx to have been wrong; but in fact the argument has no bearing on Marx’s explanation.

In brief Marx held that, in addition to the moderate rise and fall of the general price level in booms and depressions that takes place when there is no inflation (as in the 19th century) an excess issue of an inconvertible paper currency will send up prices. So why did the alleged “unprecedented monetary
squeeze” of 1968-70 not curb inflation?

The answer is that as regards the note issue no such squeeze took place. Using annual average figures of the notes and coin in circulation the increase between 1967 and 1970 was £401 million. This was not less but more than the £359 million expansion in the previous three years and has been followed by expansion of £1016 million in 1970-73 and £1782 million in 1973-76.

What the monetarists and the Financial Times have been looking at is not the currency, which is the key factor, but what the government calls “money supply” which is predominantly the total amount of bank deposits. Bank deposits have nothing to do with Marx’s valid explanation of inflation. There is no reason why they should be supposed to govern the price level, and the enormous increase of bank deposits in the last quarter of the 19th century was accompanied by a fall in prices.

The latest state of the Financial Times’s failure to understand inflation is its conclusion that the only way to curb it is “to reduce taxes on wages”.

Edgar Hardcastle

Rifts in the Tory Party (1981)

Cartoon by George Meddemmen.

From the August 1981 issue of the Socialist Standard

Prior to the Cabinet meeting on 17 June the press, TV and radio worked up a lot of sound and fury about the impending great battle between the hard-line “drys”—Thatcher’s supporters—and the soft-line “wets” seeking to force changes of policy. The media spokesmen had many explanations of what the battle was about and what the outcome would be. And when it was over they offered a wide choice of verdicts, ranging from the official one that there wasn’t any battle, to reports that the rebels had been out manoeuvred. They were all agreed that the chief leader of revolt was Peter Walker, Minister of Agriculture, who only a week later publicly voiced his criticisms. “Without sending Mrs Thatcher an advance copy of his speech. Mr. Peter Walker, one of the leading ‘wets’ in the Cabinet, yesterday argued forcefully against the Government's rigid stand on monetarism when he addressed the British-American Chamber of Commerce in New York”. (The Times 23 June).

One interpretation is that Walker. who had backed Ted Heath against Thatcher when she was elected Tory Leader, has the ambition to take her place. In any event he never did agree with her “monetarist” policy. When, in the late seventies, the majority of Tories threw overboard the Keynesian nonsense as a cure-all for capitalism and adopted in its place the “monetarist” nonsense. Walker (like Heath and some others) remained an unrepentant follower of Keynes: it was he who described his party as the party of Keynes and Disraeli. (He shares his continued devotion to Keynesian doctrine with the various wings of the Labour Party, the Liberals and the TUC).

What brought about the conversion to “monetarism” was the course taken by unemployment. In 1944 the Tories, the Labour Party and the Liberals, all represented in the war-time coalition government, issued an agreed document based on the belief that Keynes was the answer to capitalism's problems and in particular that such policies would guarantee “full employment”.

For a decade unemployment did remain very low, both under the Labour Government (1945-1951) and under the following Tory Government. (From 1945 to 1957 it averaged under 400,000). So it was possible for Harold Wilson to claim in 1957 that “all major parties” (Tory, Labour and Liberal) were still committed Keynesians. But since then unemployment has risen to continually higher peaks: to a million under Heath’s government (1970-1974), to over 1,600,000 under Labour (1974-1979) and now to over 2½ million. The Thatcher wing of the Tory leadership concluded that the old agreed policy was wrong and they fought, and won, the May 1979 General Election on the new “monetarist” policy.

In practice the Keynesians believe that, by increasing government expenditure, unemployment can always be kept at a low level. The new, Thatcher, policy reversed this and aimed to reduce government expenditure, government borrowing and the level of taxation, and by so doing curb inflation and reduce unemployment.

Although the Tories do not mention it, their policy is in essence the one recommended by Harold Wilson in 1957 and which he said would be adopted by a Labour government to deal with inflation.

  In inflationary times . . . all are agreed in theory on the need for public saving through a large Budget surplus . . . 

and

  we should not hesitate to use monetary controls ruthlessly if necessary, as one in an armoury of weapons.

But after more than two years in office the Thatcher government has done none of the things it promised. Instead of going down government expenditure, government borrowing and the level of taxation have all gone up, one reason being the enormous cost of paying benefit to an added 1¼ million unemployed. The Tory leaders are now fearful that unemployment will go on rising and cause them to lose the next election, and the Walker rebels no doubt see the possibility that the Tories will, before then, go back to Keynes, and perhaps unseat Thatcher as party leader.

The truth is that capitalism’s periodic swings into depression and heavy unemployment take place no matter what policy the government follows. Apart from rigging the unemployment figures or subsidising employers to keep unemployed workers on the pay roll, there is almost nothing governments can do about it except wait for the depression to pass. But professional politicians, whether they believe it or not, have to pretend to the electors that their government can and will provide full employment: which means that they have to ignore the evidence.

A case in point is the claim by Foot, Healey and Bonn that Labour Government means low unemployment, indeed “jobs for all”. Here are the facts. Since June 1929 there have been four periods of Labour government, totalling nearly twenty years. In every one of those four periods unemployment has been higher when Labour left office than when it went in. In the first period (1929-1931) it went up by 1,600,000, and in the last period (1974-1979) it more than doubled, from 636,000 to nearly 1,300,000.

In the past the Tories have been luckier, with their electoral victories coming at a time when depression was passing, but they are now faced with the prospect that recovery from the present depression will not take place in time for the next election, in or before May 1984.

Another big electoral issued involved in the Thatcher adoption of monetarism is that of inflation. Unlike unemployment, about which governments can do nothing, inflation—the rise of prices caused by an excess issue of inconvertible paper money—is entirely under government control. This was shown, for example, by the Lloyd George government when, in, December 1919, it decided on a policy of deflation. By reducing the notes in circulation it not only halted the price rise but brought about a drastic fall in prices.

In May 1979 the Thatcher Government declared its intention of curbing inflation and eventually stopping it entirely by means of “monetarism”. It is worth recalling that when in 1944 the three parties adopted Keynes, they too promised “a more or less stable price level”. The reality has been that prices are now more than ten times what they were in 1945, and Thatcher’s new policy has proved just as useless to curb inflation. In her two years of office prices have gone up by 36 per cent and are still rising.

It must be emphasised that the use by the “monetarists” of the term “controlling the money supply” does not mean that they accept Marx’s explanation of inflation or are repeating the deflation policy of the 1919 government. They explicitly repudiate the theory that an excess issue of paper money raises prices, and since May 1979 the Thatcher government has increased the excess of notes in circulation by a further £1300 million. And it is a delusion that the presence or absence of inflation makes any difference to capitalism’s periodic depressions and high unemployment.

Two other issues that were alleged to have been fought over in the Tory Cabinet were the foreign exchange rate of the pound, and the grant of further large sums to the nationalised Coal Industry and British Rail. Some commentators presented these issues in terms of the supposed preference of the whole body of business men for a low pound exchange rate, and their hostility to nationalisation. This superficial view overlooks that each company is concerned with its own profits and survival, and capitalist interests accordingly are divided. Companies heavily involved with exports or which receive profits from investments abroad gain by a low pound exchange rate, while importing companies gain by a high rate. Thus companies engaged in supplying plant and machinery to the coal industry or for railway electrification, were delighted with the government decision to make further grants to the Coal Board and British Rail.

Like all Cabinets, whether Tory or Labour, occupied as they are with handling the problems capitalism continually throws up, the Thatcher Cabinet will go on being divided by the infighting of ambitious politicians promoting their careers.

Edgar Hardcastle