The British Strategic Review traces the development of monetarism from becoming a dominant paradigm in British macroeconomics starting in 1975 during Denis Healey's Chancellorship and this continued strengthening through all successive governments up until the present date. The remarkable issue is that both Labour and Conservative governments interspersed by 20 General Elections have both pursued the same fundamental monetary policy. Both failed to question the fact that it has been the main cause of erosion in the competitivity of the British economy. The reason the voting public are less aware of this fact is that the almost all of the rhetoric between Conservative and Labour parties and in government and opposition has seldom, if ever, sought to question monetary policy. All the parliamentary exchanges and election manifestos have been about symptoms as opposed to causes. The "theory" behind the holy tenets of bank rates, monetary injections debt and inflationary targets are considered to be a crystalline transparent and sophisticated logic that is well beyond the comprehension of the common person and most MPs to even attempt to question and so the fundamental structural issue is monetary policy remains safely within its temple. The problem with this statement is that most people think monetary policy is something that coasts along in the background and the important arguments lie in the field of private enterprise and nationalization issues, workers and union rights and say in business policies and the like.
|Clause IV of the Labour party|
The original version of Clause IV, drafted by Sidney Webb of the Fabians in November 1917 and adopted by the party in 1918, read, in part 4:
"To secure for the workers by hand or by brain the full fruits of their industry and the most equitable distribution thereof that may be possible upon the basis of the common ownership of the means of production, distribution, and exchange, and the best obtainable system of popular administration and control of each industry or service.
"The Clause IV moment
In 1995, Tony Blair won a controversial vote to amend what was known as Clause IV of the Labour party constitution, ending the party’s commitment to nationalization. This vote, held at the Methodist Central Hall, Westminster, where the original clause was adopted in 1918, marked a “victory” for Blair and the New Labour project. By winning the vote the Labour leader had a green light to modernize the party, making it more attractive to middle class voters ahead of the 1997 general election. Blair considered this to be a sign that radical politics was alive in a new Labour party by jettisoning its socialist past to get elected.
However, people who attended the preparatory meetings with the unions who had recently gone through some violent repression by the polices under the Thatcher government were simply asked, "Do you want another ten years of Thatcher?" The visceral reaction was predictable under the understanding that just as Clause IV could be voted out so it could be voted in at some later date.
Both sides of the political divide in the United Kingdom have failed to analyse the range of interpretations of Clause IV in a dispassionate manner. As a result, like many essentially theoretical concepts driving the passions and rhetoric of opposing sides, always ends up with the country paying a heavy price as a result of lost opportunities of practical advancement which are not served by fanciful theoretical concepts or heated rhetoric. The nature of argument needs to shift from clever tricks of misleading eloquence to a more in-depth analysis of national gaps and needs and a willingness to seek mutually advantageous solutions.
However, amongst the best analysis concerning some of these points of discussion and argument were laid out in the 1950s by the Labour MP, Anthony Crosland. It is important to register the fact that the most constructive analysis putting Clause IV (see box on the right) into a more realistic perspective was developed by leading Labour party members in the late 1950s. Important shifts in socialist outlook were championed by Hugh Gaitskell the Labour party leader and Anthony Crosland a Labour MP. In 1959 Gaitskell had attempted to change party policy on nationalization (Clause IV). The intellectual justification for his stand was to be found in work by Anthony Crosland in his book, "The Future of Socialism"
published in 1956. Here he argued that there was no need for nationalization because the actual power resided in the management of economic activities and not in the hands of the owners and the state could influence sector activities sufficiently well. This particular observation was to become the central justification for reducing the force and significance of Clause IV. Crosland is reported to have observed that capitalism seemed to have solved the problem of coming up with adequate per capita incomes for the workers.
Crosland's observations can be traced back to meetings of the Congress for Cultural Freedom (CCF), launched in 1950 in Berlin and headed by Melvin Lasky (51). The general drift of Crosland's book's content had been discussed at a Milan CCF conference attended by Hugh Gaitskell, Denis Healey, Rita Hinden and Daniel Bell the author of a book in the same vein entitled, "The End of Ideology
". There are sound arguments for considering Anthony Crosland to have laid much of the intellectual foundation for what was to be picked up, some 20 years later, as new Labour policy.
The problem was that Denis Healey in 1975 introduced monetarism and abandoned any existing safeguards in practice or upholding Crosland’s view that capitalism’s solution to adequate per capita incomes for the workers. In addition, the "new" Labour policies unfortunately continued with monetarism under a newly independent Bank of England so the decline in investment, productivity and real wages continued. Only to hand the baton for corrosive policies to the subsequent coalition and Conservative governments.
The period during which Anthony Crosland drew his conclusions was one during which the UK economy was undergoing an unprecedented rate of growth, real wages were rising, income disparity falling and there was a healthy balance of payments therefore it appeared to be logical for him to marginalize the more extreme interpretation of Clause IV. However, Crosland was not to know what a disastrous and frankly illogical turn the policy agenda would take in 1975 under his colleague Denis Healey. Crosland died in 1977.
Of relevance to the BSR's analysis and propositions is the fact that Crosland’s faith in capitalism’s ability to pay a decent wage, for increasing numbers of wage-earners is no longer true, indeed, this ability has been eroded over a period of some 50 years since Healey's disastrous decisions. The reason is the rise in political influence of assets holders and traders over policy. As a result, the actual decision-making power no longer lies in the hands of those who manage the economy but rather in the hands of owners of a specific group of companies who benefit directly from increasing financialization under monetary policy and monetarism.
|Crosland's logic undermined by monetarism|
The rise in real wages 1945-1965 justified Crosland's opinion on Clause IV whereas the rise in monetarism post-1975 undermined the logic of this position. The attraction to Clause IV rises as a positive association with declining real wages and rises in income disparity. Therefore the issue of Clause IV reappears as a direct consequence of the failure of monetarism to support rises in real wages.
The Real Incomes Approach policy framework proposed aims to regain a political control over the management of the economy in terms of establishing objectives on the basis of public choice and the management of companies and their work forces managing unit performance in a mutually satisfactory manner.
In a veritable policy analysis vacuum that has stretched from the turn of the previous century to date it is notable that the most earnest visible attempts at shifting both theory and practice to accompany the evolving trends in technology, democracy, gaps and needs have come from those who sought to understand better the role of industry in the life and wellbeing of the British population.
Most are aware of the enormous contributions to this process by William Beveridge on the welfare state, including the plans for the National Health Service. Beveridge initiated this work advising the Liberals many years before to establish National Insurance. Beyond the magical period of 1945-1965 when we witnessed unprecedented growth, rising real incomes and declining incomes disparity, other intellectual contributions did not translate into practical benefits for the people of this country. Conservatives seldom engaged in the Labour discussions preferring to ignore of misrepresent what was said or to criticize from the side lines contributing little, other than to complain repetitively applying displacement arguments that frankly were not important while always pressing the theme that Labour’s hidden agenda was to make people’s means of production a state asset. Following the very engaging considerations, Labour, led by Crosland and later by Nicholas Kaldor's contributions to the explanation of the importance of industry and manufacturing' covering 1950 and beyond 1976 and as an individual through to 1980. There was, what some considered to be, an economic intellectual revolution led by the Thatcher government to reassert the significance of monetarism but, in retrospect, the outcome, this really did not represent either a revolution or a sustainable solution to Britain’s needs, as the Review’s analysis confirms.
The trigger leading to monetarism
Before 1973 the Phillips Curve1 PC showed the relationship between unemployment levels and wage inflation2. As unemployment declines, without changes in technological change and productivity, inflation rises. The rise in inflation is a direct result of bargaining to attract labour not being compensated by higher productivity. With normal monetary injections under monetary policy financial costs rise exacerbating cost-push inflation arising from petroleum costs leading to profit declines and unemployment rising again. As can be seen the trajectory of the PC curve ends up as AC where A is a coordinate typical of slumpflation
Like Jean-Baptists Say's and Nicholas Kaldor's technology approach, McNeill has based the Real Incomes Approach and policy on technological change and rising productivity. The diagram below show the impact of different levels of productivity increase on the inflation axis shape of the Phillips Curve. It remains in place by the inflation axis shrinks with higher productivity. Real wages can be sustained or increased values as a function of technological change.
Under 50 years of monetarism, investment in supply side production and services have decreased and productivity declines and offshore investment in "low income" locations has resulted in industrial and manufacturing activities in the UK being hollowed out
William Phillips was a New Zealand economist who published the statistical results of the relationship between the rate of unemployment and the rate of change in wages over the period 1861-1957. ("The Relation between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1861-1957"
, Economica, 1958) 2
There is a mistaken interpretation of Phillips wage inflation which seems to indicate that wage-earners demand higher wages in terms of a bargaining position, there being no spare labour. However it is important to also track the inflation in goods and services which determine the cost of living and therefore cause demands for higher wages. A future article will disentangle this issue.
In 1973 the Arab countries in OPEC decided to raise the international price of petroleum to "punish" those countries who supported Israel in the Middle East conflicts arising from the expansionary occupation of Palestine by Israel.
One of the startling revelations in the British Strategic review is that rather than take action to substitute petroleum or dissuade OPEC from restricting production to raise prices, the IMF developed the concept of recycling petrodollars back through financial intermediaries such as banks and later hedge funds and through lobbies into political party coffers so that the high price of petroleum was allowed to rise seven-fold within just 10 years. Most are unaware of the fact that Johan Witteveen the Managing Director of th IMF was a Moslem of the Sufi sect and although Nixon and Ford wanted him to criticise OPEC he skillfully transforming the state if affairs to be one of interest to politicians. His actions resulted in the slumpflation crisis enduring for more than 20 years into the mid-1990s.
In 1975, The British economist, Hector McNeill realized that conventional macroeconomic policy instruments could not solve the slumpflation crisis without inflicting prejudice on the majority. He therefore "went back to basics" to trace both the impact of this crisis on unemployment and inflation to identify the transmission mechanisms creating this crisis. He showed that the existing "Phillips curve" (see diagram A in box on the right) which showed a specific relationship between unemployment levels and inflation was distorted by the impact of petroleum prices giving rise to cost-push inflation and not demand-pull inflation. All of the monetarism policy instruments assume inflation to be caused by "demand-pull" inflation and for this reason couldn't work in a cost-push situation.
In pursuing this analysis McNeill also realized that inflation has no connection to money volumes since unit prices are set by companies according to their specific profiles of costs, market conditions and price elasticity of consumption. In 1975, and before, Nicholas Kaldor, the Professor of Economics at Cambridge University had counseled against monetarism and had emphasized the need to maintain an industrial policy to as to reap the benefits of rises in technological productivity. Nicholas Kaldor (1908–1986), along with Kenneth Arrow (1921–2017) and Robert Solow in the States, had emphasized the role of technological productivity to real economic growth. Nicholas Kaldor was an important adviser to the Labour government and he withdrew his support in 1976 as a result of Healey's policy decisions which he considered to be dangerous. Kaldor's predictions turned out to be right.
It is important to register the fact that this technological model of the economy was first explained in some detail by the French economist Jean-Baptiste Say (1767–1832) and who actually has a very clear explanation of the relationship between real incomes and national economic growth. Say saw entrepreneurs as people to change how things are done by improving resource use and raising productivity so as to create a situation where more efficient production could facilitate lower unit output prices and sustained nominal wages so as to create a sustained growth in real wages. This is the essence of the Real Incomes Approach developed by McNeill and which sees the original of increases in consumption and national growth arising from advancing productivity in production methods so as to create rising real incomes and therefore consumption. The direction of travel of productivity and real wages under RIP is shown in Diagram B (see box on right) Notice that this is the inverse of monetarism, Keynesian and Supply Side Economics, all of which apply an aggregate demand model (ADM) where economic growth is considered to arise from monetary injections alone. Clearly, without technological change monetary injections cannot raise real wage purchasing power. Indeed the Diagram C (see box on right) shows the direction productivity has moved under 50 years of monetarism.The return of Clause IV to the national agenda
Therefore, rather than dispel the relevance of Clause IV as a result of Capitalist paying adequate wages, the prejudice inflicted by 50 years of monetarism which has drained real wage levels, the relevance of Clause IV has returned. The frustration of trade unions and workers of all types, many of whom are not union members all point to a desire, expressed in Clause IV of "..securing the most equitable distribution of income in compensation for their physical and intellectual contributions"
. The contentious part relates to the concept of "...the common ownership of the means of production, distribution, and exchange.
About 2 years ago the Labour NEC was to review the content of the New Labour version of Clause IV and Corbyn's own preference was reported to be more in the direction of the original. Of course this drew the usual idiotic UK corporate media reaction. Since this reformulation did not go forwards, it is at least worth revisiting Clause IV in the light of what constitutes "the means of production" and how companies can be restructured or new ones formed. The options today are greater and therefore the topic of Cause IV should not be considered to be a taboo by anyone who has any appreciation of the current dire status of the economy. Wage earners, the majority, certainly need better options than are provided by the current system. After 50 years we have come to a point where alternative forms of organization of companies and ways in which wage-earners can secure more compesatory incomes is of vital importance. The topic of nationalization of some industries has also returned to the natuional agenda because of the waste and failures associated with private ownership. Much of this momentum on Clause IV is the result of the distastrous impacts of monetarism which have reversed the Crosland's notion that the system can produce adequate wages for wage-earners; the preponderence of the evidence establishes that it cannot. The next article in this series will review some of the options. They can in fact make Britain more competitive and help raise real wages and temper the out of control rises in the cost of living.