\n[governments] … have been unable or unwilling to intervene on a scale sufficient to resolve the basic contradictions of capitalist development, and yet they have been unwilling to face the consequences of potentially very serious crisis. Where imbalances have arisen which threatened to squeeze profits and provoke a crisis, governments have used their control over expenditure to maintain demand. This has created relatively buoyant demand conditions and allowed firms to raise prices, and thereby maintain or even increase the rate of profit …<\/p>\n
As a rule, demand is not been maintained specifically to allow firms to increase their prices, but in response to some other pressures, such as the need to maintain full employment or provide cheap finance for industry. On the other hand, when firms have made use of favourable demand conditions in order to raise their prices, governments have not usually prevented them from doing so …<\/p>\n
So, it is clearly being governed policy to allow higher prices, and to this extent we can say that inflation is deliberate<\/em> policy designed to foster the accumulation of capital by maintaining or even raising the rate of profit (emphasis in original).\n<\/p><\/blockquote>\n John Cornwall (1989: 100) used the term “inflationary bias” to describe the situation where the real income resistance on both sides of the labour market had created the conditions where “no successful incomes policy can be implemented that would allow involuntary unemployment to be reduced to a minimum without the strong demand conditions leading to accelerating rates of inflation”.<\/p>\n He considered this ‘bias’ forced governments to introduce aggregate spending policies “that are restrictive enough to generate high rates of unemployment” (p.100). We will come back to that discussion presently.<\/p>\n [Reference: Cornwall, J. (1989) ‘Inflation as a Cause of Economic Stagnation: A Dual Model’, in Kregel, J.A. (ed.) Inflation and Income Distribution in Capitalist Crisis<\/em>, London, Palgrave, Macmillan, 99-122.]<\/p>\n In a similar vein, Pat Devine argued in 1974 that inflation was a structural construct of Capitalism. He argued that the increased bargaining power of workers (that accompanied the long period of full employment in the Post Second World War period) and the declining productivity in the early 1970s imparted a structural bias towards inflation which manifested in the inflation breakout in the mid-1970s which he says “ended the golden age”.<\/p>\n This argument implicated Keynesian-style approaches to full employment by suggesting that the emphasis on high employment and high rates of growth provided the conditions for these biases to emerge. Then with the collapse of the Bretton Woods system of convertible currencies and fixed exchange rates (which provided deflationary forces to economies that had strongly domestic demand growth) these structural biases came to the fore.<\/p>\n [Reference: Devine, P. (1974) ‘Inflation and Marxist Theory’, Marxism Today<\/em>, March, 70-92.]<\/p>\n Robert Rowthorn (1980) argued that that the mid-1970s crisis – which marked the end of the Keynesian period and the start of the neo-liberal period – was associated with a rising inflation but also an on-going profit squeeze due to declining productivity and increasing external competition for market share. The profit squeeze led to firms reducing their rate of investment (which reduced aggregate demand growth) which combined with harsh contractions in monetary and fiscal policy created the stagflation that bedeviled the world in the second half of the 1970s.<\/p>\n As we have seen, Edward Heath’s resolution to this ‘structural bias” was the policy-motivated attack on the working class bargaining power – both in the form of the persistently high unemployment and specific labour relations legislation. The subsequent redistribution of real income towards profits reduced the inflation spiral as workers were unable to pursue real wages growth and productivity growth outstripped real wages growth. We will return to that issue presently.<\/p>\n Within this context though, inflationary pressures were rising throughout the advanced world in the late 1960s and early 1970s. There were many reasons, including the US spending effort associated with the prosecution of the Vietnam War. We do not need to discuss the plethora of events that were triggering the wage-price dynamics associated with this inflation bias.<\/p>\n Inflation was rising in Britain in the early 1970s. The following graph shows the annual inflation rate (retail price index) from January 1965 to December 1989. The inflation in the mid-1970s that followed the oil price rises dwarfed the experience in the early 1970s.<\/p>\n The inflation that Edward Heath oversaw was initially instigated by the relaxed credit conditions under the Bank of England’s Competition and Credit Control (CCC), which was introduced in 1971 as part of the first wave of ‘Monetarist’-style changes in the Bank’s thinking. It freed up credit (as part of the growing free market mantra) and attempted to control the money supply via quantity targets.<\/p>\n The policy failed and was abandoned in 1974 but the rising inflation sparked off major industrial conflict as the two ‘price setting’ powers, the firms and the unions attempted to protect their real incomes from the rising inflation.<\/p>\n The Monetarists basically interpreted the inflation in traditional terms – that excessive spending was pulling up prices (the so-called ‘demand-pull inflation’ approach that was shared by Keynesians).<\/p>\n The Monetarists added a new focus on the role of the central bank and the money supply in creating the excess spending.<\/p>\n They used the term spawned by Milton Friedman (1970) – “Inflation is always and everywhere monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output” – which during the Keynesian period had been expressed as too much money chasing too few goods”.<\/p>\n [Reference: Friedman, M. (1970) ‘The Counter-Revolution in Monetary Theory’, First Wincott Memorial Lecture<\/em>, University of London, September 16, 1970.]<\/p>\n The argument was simple – if we assume that output is already at its potential level (maximum) and velocity of circulation of the existing money stock (how many times it turns over per period) is constant, then an increasing money supply can only push prices up.<\/p>\n The most important part of the story though is that they argued that the money supply was directly controlled by the central bank and so if the money supply was ‘excessive’ – that is, by the logic of the theory – if there was inflation – then it must be the fault of the central bank.<\/p>\n Please read my blog – Britain and the 1970s oil shocks – the failure of Monetarism<\/a> – to understand why the Monetarist explanation of inflation was deeply flawed.<\/p>\n Understanding the inflation of the early 1970s requires us to reject the Monetarist causality and instead recognise that inflation can arise from supply side (cost) factors even when their is significant unemployment (output well below its potential).<\/p>\n As John Cornwall noted (1983: 17):<\/p>\n \n… inflation is essentially a cost-push phenomena, sustained and driven by wage-wage and wage-price mechanisms. Both of these mechanisms are seen to be the outgrowth of institutional changes that have been evolving for some time. In particular, it is argued that the development of powerful unions and oligopolies operating in a full employment context have altered the nature of the inflationary process greatly since the days before unions, but remarkably so ever since the beginnings of the postwar period.\n<\/p><\/blockquote>\n [Reference: Cornwall, J. (1983) The Conditions for Economic Recovery<\/em>, Oxford, Martin Robertson.]<\/p>\n Cornwall also added a political element to this observation.<\/p>\n He argued that (1983: 17):<\/p>\n \nMany societies will not tolerate continuous, high unemployment and sooner or later the money supply and aggregate demand targets will be adjusted to stabilise unemployment … Strong trade unions generate strong political as well is market power. If unemployment rates cannot be allowed to rise without limit for political reasons, then whatever inflation is still left when the constraint is reached must be validated.\n<\/p><\/blockquote>\n The notion of cost-push inflation<\/strong> (sometimes called ‘sellers inflation’) has a long tradition in the progressive literature (Marx, Kalecki, Lerner, Kaldor, Weintraub) although it is not exclusively a progressive theory.<\/p>\n Milton Friedman also considered that wage demands from trade unions were a major threat to inflation although he ultimately considered central bank monetary policy to be the real problem in that they accommodated these wage demands by increasing the money supply.<\/p>\n Cost-push inflation is an easy concept to understand and is generally explained in the context of ‘product markets’ (where goods and services are sold) where firms have price setting power. In the real world, firms set prices by applying some form of profit mark-up to costs.<\/p>\n While specific arrangements might vary, firms are considered to desire target profit rates which they render operational by the mark-up on unit costs. Unit costs are driven largely by wage costs, productivity movements and raw material prices.<\/p>\n Trade union bargaining power was considered an important component of the capacity of workers to realise nominal wage gains and this power was considered to be pro-cyclical – that is, when the economy is operating at “high pressure” (high levels of capacity utilisation) workers are more able to succeed in gaining money wage gains.<\/p>\n In these models, unemployment is seen as disciplining the capacity of workers to gain wages growth – in line with Karl Marx’s reserve army of unemployed idea.<\/p>\n Workers have various motivations depending on the theory but most accept that real wages growth (increasing the capacity of the nominal or money wage to command real goods and services) is a primary aim of most wage bargaining.<\/p>\n So income distribution in capitalism can be characterised as a ‘battle of the mark-ups’ – workers try to get more real output for themselves by pushing for higher money wages and firms then resisting the squeeze on their profits by passing on the rising cost – that is, increasing prices with the mark-up constant.<\/p>\n At that point there is no inflation – just a once-off rise in prices and no change to the distribution of national income in real terms.<\/p>\n However, if economic conditions are bouyant and the threat of unemployment is low, workers may resist the attempt by capital to keep their real wage constant (or falling) and hence they may respond to the increasing prices by making further nominal wage demands.<\/p>\n If their bargaining power is strong (which from the firm’s perspective is usually in terms of how much damage the workers can inflict via industrial action on output and hence profits) then they are likely to be successful.<\/p>\n At that point there is still no inflation. But if firms are not willing to absorb the squeeze on their real output claims then they will raise prices again and the beginnings of a wage-price<\/strong> spiral begins. If this process continues then cost-push inflation is observed.<\/p>\n Alternatively, the pressure might come from firms trying to expand their real income by increasing the mark-up at the expense of workers. The workers then engage in real wage resistance drives higher nominal wage demands in retaliation. In this case, we might refer to the unfolding inflationary process as a price-wage spiral.<\/p>\n Further, wage pressures might come from a particular group of workers gaining a large wage increase, which alters the relativities with other workers. To restore these relativities, which in no small way reflect social status, these workers will push for higher nominal wages. A wage-wage spiral<\/strong>, might then precipitate a wage-price spiral.<\/p>\n These insights led to the development of the so-called Conflict theory of inflation<\/strong>.<\/p>\n A series of articles in Marxism Today in 1974 advanced the notion of inflation being the result of a distributional conflict between workers and capital. One such article by Pat Devine (1974) ‘Inflation and Marxist Theory’, Marxism Today<\/em>, March, 70-92 adequately summarised the approach.<\/p>\n The conflict theory derives directly from cost-push theories referred to above. Conflict theory recognises that the money supply is not controlled by the central bank, as in the Monetarist conception, but is, rather reflects the demand for credit by private firms and consumers through the commercial banking system.<\/p>\n The market power of firms and unions allows them to influences prices and wage outcomes without much correspondence to the state of the economy in search of their respective desired real output (income) shares.<\/p>\n In each period, the economy produces a given real output which is shared between the groups with distributional claims. If the desired real shares of the workers and capital is consistent with the available real output produced then there is no incompatibility and there will be no inflationary pressures.<\/p>\n But when the sum of the distributional claims (expressed in nominal terms – money wage demands and mark-ups) are greater than the real output available then inflation can occurs via the wage-price or price-wage mechanisms noted above.<\/p>\n The upshot is that it is the conflict over available real output, which is endemic to the class conflict withn capitalism, that promotes inflation.<\/p>\n Various dimensions can then be studied – the extent to which different wage contracts overlap and are adjusted, the rate of growth of productivity (which provides ‘room’ for the wage demands to be accommodated without squeezing the profit margin), the state of capacity utilisation (which disciplines the capacity of the firms to pass on increasing costs), the rate of unemployment (which disciplines the capacity of workers to push for nominal wages growth).<\/p>\n As noted above, the role of the state is also important. Conflict theories of inflation note that for this distributional conflict to become a full-blown inflation the central bank has to ultimately ‘accommodate’ the conflict. What does that mean?<\/p>\n If the central bank pushes up interest rates and makes credit more expensive, firms will be less able to pay the higher money wages (the conceptualisation is that firms access credit to fund their working capital needs in advance of realisation via sales). Production becomes more difficult and workers (in weaker bargaining positions) are laid off.<\/p>\n The rising unemployment, in turn, eventually discourages the workers from pursuing their on-going demand for wage increases and ultimately the inflationary process is choked off.<\/p>\n However, if the central bank doesn’t tighten monetary policy and the fiscal authorities do not increase taxes or cut public spending then the incompatible distributional claims will play out and inflation becomes inevitable.<\/p>\n With the inflation rate rising in Britain, productivity growth stagnant as a result of the decisions by capital to invest abroad and neglect investment opportunities in Britain itself, and the Tory government intent on forcing workers to reduce real incomes rather than trying to stimulate investment, it was no surprise that the inherent destructive tendencies of capitalism would come to the fore in the early 1970s.<\/p>\n As Rowthorn observed (1980: 143):<\/p>\n \n… during the 1950s and 1960s … British governments gave a rather low priority to domestic economic development, and devoted both resources and energies to the creation of the world role for British capitalism. This involved rebuilding the City of London as a world financial Centre, facilitating overseas investment by big industrial firms and supporting a huge military establishment. It absorbed resources which could have been used productively at home, and was accompanied by a laissez-faire fairy economic policy of non-intervention in the private sector. As a result, British industry failed to keep up with its rivals and economic development was relatively slow. Clearly, such a process of relative decline must eventually lead to severe problems and, indeed in the late 1960s Britain entered a prolonged period of crisis.\n<\/p><\/blockquote>\n Despite the popular narratives from the Right, Rowthorn also notes that “British workers … were not very militant in this period and put up with a rather modest increase in their living standards” (p.144).<\/p>\n So the neglect of continuing to build the productive potential of the British economy – “a suicidal strategy” according to Rowthorn (p.144) – “was made possible by the quiescence of British workers” (p.144).<\/p>\n The militancy of the unions in the early 1970s, therefore, has to be seen in this historical context and the behaviour of capital in the preceding two decades.<\/p>\n Data available from the British Office of National Statistics for – Labour disputes<\/a> – indeed, shows the growing industrial relations tension in Britain in the early 1970s, followed by Thatcher’s showdown with the unions and the subsequent muting of union power in the 1990s and beyond.<\/p>\n The following graph shows the total work days lost per month from industrial disputes in all sectors (thousands) in Britain from January 1935 to January 2016. The early 1970s saw a rapid rise in the days lost from industrial disputes as the Heath government introduced the Industrial Relations Act 1971<\/p>\n A closer examination of the period January 1965 to December 1990 is provided in the next graph.<\/p>\n We have discussed Edward Heath’s battle with the trade unions in the early 1970s. While Heath had largely rejected the ideas of Milton Friedman with respect to macroeconomic policy, the desire to quell the power of the trade unions remained a traditional Tory battlefield.<\/p>\n Please read my blog – The Heath government was not Monetarist – that was left to the Labour Party<\/a> – for more discussion on this point.<\/p>\n The Industrial Relations Act 1971<\/a> was a provocative act by the Heath government to precipitate a showdown with the unions. The Tories clearly believed that the British public were ripe for a prolonged anti-union crusade, which would shift the bargaining power firmly in favour of the Tories’ natural allies, Capital.<\/p>\n The outcome was less favourable for the Tories and led to their political demise in the February 1974 general election and a subsequent repeal of many of the clearly anti-worker aspects embedded in the harsh Industrial Relations Act 1971. While the unions were victorious during this period and managed to resist the real wage impingement attempted by capital and the Tory government, their ‘day in the sun’ was soon to end.<\/p>\n The oil crisis in late 1973 would see to that.<\/p>\n There were two major oil price shocks in the 1970s, which produced dramatic shifts in economic environment that the government around the world had to manage. In a sense, these shocks were without precedent.<\/p>\n The first occurred in October 1973, which caused a surge in the British inflation rate and inflation rates around the world, particularly in oil-dependent economies.<\/p>\n The causation was clear.<\/p>\n While wage-price or price-wage spirals can emerge through shifts in the real income aspirations of either workers or capital, which then sets off resistance from the other party, raw material price shocks can also trigger of a cost-push inflation.<\/p>\n They can be imported or domestically-sourced.<\/p>\n An imported resource price rise immediately leads to a loss of real income for the nation in question. The 1974 oil price hike stirred up an already tense industrial relations environment in Britain as they did in other nations.<\/p>\n The question was how who would bear the real income losses for the nation as a result of the sharp rise in oil prices?<\/p>\n Something had to give. The loss had to be borne by the claimants on real income and the proportion in which the losses would be ‘shared’ then became an outcome of a renewed distributional struggle.<\/p>\n In general terms, if the workers resisted the lower real wages or if bosses did not accept that some squeeze on their profit margin was inevitable, then a wage-price\/price-wage spiral would ensure.<\/p>\n And it did – in Britain in 1974. Workers, buoyed by their victories in 1972 and again in early 1974, resisted the real wage cuts.<\/p>\n British capital then retaliated with price hikes and while the Heath government oversaw the first acceleration in the inflation rate, it was the newly-elected Wilson Labour government that oversaw the rise in inflation, which peaked at 26.9 per cent in August 1975.<\/p>\n The government can employ a number of strategies when faced with this type of dynamic. It can maintain the existing nominal demand growth to protect employment but, in doing so, run the risk of reinforcing the spiral.<\/p>\n Alternatively, it can use a combination of strategies to discipline the inflation process including the tightening of fiscal and monetary policy to create unemployment; the development of consensual incomes policies and\/or the imposition of wage-price guidelines (without consensus).<\/p>\n The Wilson government was riven with conflict on how to handle the matter and, unfortunately, adopted a Monetarist perspective and attempted to scorch the economy with austerity.<\/p>\n We are now at the point we can appreciate the importance of James Callaghan’s famous 1976 Black Speech to the Labour Party Conference<\/a> and his decision to call on the IMF for help in changing the perspective of the Left on fiscal policy.<\/p>\n We will deal with that turning point in the next blog of this series.<\/p>\n This is a further part of a series I am writing as background to my next book on globalisation and the capacities of the nation-state. More instalments will come as the research process unfolds.<\/p>\n The series so far:<\/p>\n 1. Friday lay day – The Stability Pact didn’t mean much anyway, did it?<\/a><\/p>\n 2. European Left face a Dystopia of their own making<\/a><\/p>\n 3. The Eurozone Groupthink and Denial continues …<\/a><\/p>\n 4. Mitterrand’s turn to austerity was an ideological choice not an inevitability<\/a><\/p>\n 5. The origins of the ‘leftist’ failure to oppose austerity<\/a><\/p>\n 6. The European Project is dead<\/a><\/p>\n 7. The Italian left should hang their heads in shame<\/a><\/p>\n 8. On the trail of inflation and the fears of the same …<\/a>.<\/p>\n 9. Globalisation and currency arrangements<\/a><\/p>\n 10. The co-option of government by transnational organisations<\/a><\/p>\n 11. The Modigliani controversy – the break with Keynesian thinking<\/a><\/p>\n 12. The capacity of the state and the open economy – Part 1<\/a><\/p>\n 13. Is exchange rate depreciation inflationary?<\/a><\/p>\n 14. Balance of payments constraints<\/a><\/p>\n 15. Ultimately, real resource availability constrains prosperity<\/a><\/p>\n 16. The impossibility theorem that beguiles the Left<\/a>.<\/p>\n 17. The British Monetarist infestation<\/a>.<\/p>\n 18. The Monetarism Trap snares the second Wilson Labour Government<\/a>.<\/p>\n 19. The Heath government was not Monetarist – that was left to the Labour Party<\/a>.<\/p>\n 20. Britain and the 1970s oil shocks – the failure of Monetarism<\/a>.<\/p>\n 21. The right-wing counter attack – 1971<\/a>.<\/p>\n 22. British trade unions in the early 1970s<\/a>.<\/p>\n 23. Distributional conflict and inflation – Britain in the early 1970s<\/a>.<\/p>\n The blogs in these series should be considered working notes rather than self-contained topics. Ultimately, they will be edited into the final manuscript of my next book due later in 2016.<\/p>\n We have now published the first version of our MMT textbook – Modern Monetary Theory and Practice: an Introductory Text<\/a> (March 10, 2016).<\/p>\n The long-awaited book is authored by myself, Randy Wray and Martin Watts.<\/p>\n It is available for purchase at:<\/p>\n 1. Amazon.com<\/a> (60 US dollars)<\/p>\n 2. Amazon.co.uk<\/a> (\u00a342.00)<\/p>\n![\"UK_Annual_Inflation_1965_1999\"](\"https:\/\/billmitchell.org\/blog\/wp-content\/uploads\/2016\/04\/UK_Annual_Inflation_1965_1999.jpg\")
<\/a><\/p>\nRising industrial troubles in Britain – early 1970s<\/h2>\n
<\/a><\/p>\n<\/a><\/p>\nThe OPEC oil crisis 1973 – shifts the ground further against the workers<\/h2>\n
Conclusion<\/h2>\n
The series so far<\/h2>\n
FINALLY – Introductory Modern Monetary Theory (MMT) Textbook<\/h2>\n