Dave Gardner

This article takes, as a starting point, the article by Martin Seale on how the Bank of England (BoE) manages inflation through manipulating interest rates with the byproduct being unemployment. 

Currently, the BoE manages inflation through the setting of an interest rate that keeps the inflation rate stable. The mechanism used is the dampening of economic activity through increasing the cost of credit through increasing the BoE interest rate. A side effect is unemployment and hence a dampening of aggregate demand. The thinking here is that inflation is demand-driven. Prices rise because the demand for goods outruns the supply. Decrease the demand and prices will cease to rise. Conventional inflation management therefore suggests that there is a trade-off between unemployment and inflation which is managed by setting the BoE rate of interest. Workers have to choose between above inflation wage rises and an increase in unemployment on the one hand or a below inflation wage rise and declining living standards on the other, assuming a static economy. Martin suggests that there is an alternative way of managing the economy in the working class interest and this article outlines what this is, drawing on historical experience still within the memory of many socialists alive today. We neglect the lessons of our past at our peril.

In the 1960s and 70s, a time of substantial trade union economic and political power, there was a sustained attempt by the governing élites of the country to involve organised labour in the governing of the state. This probably began with Ernest Bevin’s invitation to the TUC in 1945 to run the British social security system, a proposal that was not taken up. Further features of this attempt included the setting up of the National Economic Development Council (NEDC), a tripartite planning body with union and employer membership, in 1962 under a Tory government and the Bullock Report on Industrial Democracy in 1977. Other landmarks included proposed legislation to manage interunion and employer-union rivalry in the White Paper ‘In Place of Strife’ in 1968 and the Donovan Report, also of 1968, that aimed to regularise collective bargaining and increase employee rights. I shall concentrate on two experiments that were made with a co-ordinated economy in which unions, business and the state would attempt to manage inflation and promote growth while limiting unemployment, as these are particularly relevant to the management of inflation and were an alternative to the current BoE and Treasury orthodoxy. 

The Prices and Incomes Board, set up in 1966 by the Labour government had statutory powers to limit pay increases unless accompanied by rises in productivity. This measure followed the general approach set out by the NEDC’s government representatives. It ran into strong opposition from those trade unions who wanted a voluntaristic approach that allowed them discretion in collective bargaining. Labour lost the general election of 1970 and the incoming Tory administration of Edward Heath abolished the Prices and Incomes Board, although after an initial flirtation with free market economics, it tried to revive the tripartite approach to economic management. The Wilson government of 1974 introduced the Social Contract, a voluntary wage increase limitation scheme which, as a quid pro quointroduced measures desired by the trade unions such as repeal of the 1971 Industrial Relations Act. The Social Contract was introduced at a time of high inflation and low growth caused by the oil shock of 1973 and its ramifications. Many trade unionists saw the social contract as an obstacle to maintaining living standards and it began to be ignored and was abandoned by 1975. It was replaced by a 10% statutory wage cap. It should be noted that the trade union movement itself suffered from inter union rivalry, particularly in the matter of establishing wage differentials previously negotiated through collective bargaining. Flat rate increases in pay as recommended by the government in their interpretation of the social contract, upset some of the craft unions as flat rate increases tended to undermine wage differentials. Other unions, such as the TGWU led by Jack Jones, saw flat rate increases as having the potential to improve the relative position of less well paid workers. The social contract eventually collapsed, in part due to the failure of the organised labour to take a collective view on the relationship between wage increases, inflation and productivity.

For workers the inflation/unemployment/productivity relationship remains a collective action problem which has to be solved through compromises with other interests, particularly with employers and the state. Unlike in the 1970s however, the trade unions are weak and are still a long way from developing a collective view on priorities. The main problem is to get a body as diverse as the working class and the organised working class in particular, to take a common view of their interests and to prioritise medium and long term goals over short term ones and thus negotiate with the state and employers from a position of strength. Since few in the movement have attempted to reflect on the missed opportunities of the 1960s and 1970s (Frances O’Grady ex Secretary General of the TUC being a notable exception), organised labour is not in a good position today to develop a rational position on incomes policy.

What would a bargain in terms of wage restraint in return for working class concessions actually look like? In order to gain working class confidence, the effects would need to be seen relatively quickly if such a policy was ever to take hold. They will want to see action taken even if its results take longer to come through. Therefore substantial (and highly visible) investment in housing and transport would be a priority, as well as price controls on essentials such as food, gas and electricity. Investment in housing and transport could be accompanied by proper funding of vocational education to allow working class people the opportunity to develop skills and adopt a worthwhile occupation. Such investments would have the additional benefit of improving the human and physical productive powers of the country and so encourage inward investment. Without these investments productivity will continue to languish. Anti working-class parties such as Reform and the Tories will maintain that such measures are leading us to a Soviet-style economy. The unions should take a robust view on this. If the working class are united in a sustained attempt to improve their position within a capitalist economy they should do so. All working people want and need better housing, transport and vocational education. There is a way for them to achieve this. For the longer term trade unions should vigorously seek representation on the council of the BoE as a condition for their co-operation on managing the wage/price/unemployment relationship. They should urge an incoming trade union friendly government to get rid of the BoE’s independence, subordinate it to the economic management of the country and ensure the co-ordination of fiscal and monetary policy.

Why do we say that the effects of such a policy need to be immediately visible? Long term structural change in the economy will take time. For example, for houses to be built or refurbished to an acceptable standard, a skilled workforce will be needed. Qualifications, apprenticeships and equipment need to be set up. Trade lecturers in colleges need to be recruited before they can reskill a new generation of construction workers. Before a mass housing policy, which prioritises high qualify housing can be launched, years of preparation are necessary. That is why palpable changes in the short-term are so important: new buses and bus routes; restoration of union rights and encouragement of unionisation; return of water to public ownership; emergency back to work schemes for the workless; price controls on essentials – all of these are doable in the short-term before the long term reforms take effect. This is what the trade unions should be putting pressure on any future government to do.