Prices and Profits
By NICHOLAS DAVENPORT
THE massive document which the Government sub- mitted to the National In- comes Commission would appear to have been writ- ten by a novice in the monastic order of our Civil Service. He seems to have derived his know- ledge of the business world outside by reading Gov- ernment White Papers and statistical bluebooks, which, for that matter, is all the experience he will ever get of the workings of the entrepreneur system for which he stands guardian. The purpose of the document was to give a lesson in applied economics to the em- ployers as well as to the trade unionists, although the economics applied had no relevance to any known system of free capitalist enterprise. Prices, it says, must in general be kept stable and profits must be kept broadly in line with an incomes policy, although the wonderful admission is made that 'in a dynamic economy it is inevitable, and indeed, desirable, that some prices should go up while others go down . . .' and that 'profits must vary from firm to firm and from industry to industry.' This sensational discovery is the prelude to the Government's thesis that more prices should have gone down 'than has been the case in the past,' and this requires a more critical attitude towards profit margins and that while it does not expect that changes in the rate of profit should necessarily be kept within the limits of the 3 per cent to 33- per cent annual growth rate for earned incomes, which is based on the long- term trend in productivity, it advises the NIC to focus attention on prices, profit margins and rates of return on capital, suggesting that it might relate total profits to the gross national product (after adjusting for changes in the num- ber of firms or in the total of capital employed) to see if undue profits are in fact being made. The object of this extraordinary and meaningless statistical exercise is, I presume, to turn the NIC into a price-reviewing as well as wage-reviewing body.
If this document had been the stunted brain- child of a schoolboy debating society it would have been understandable, but coming from government departments in the eighteenth year after the death of Keynes it is intensely depress-
ing. Small wonder that it provoked Mr. Enoch Powell into the other extreme of declaring that wages, prices and profits 'always have been deter- mined and always will be determined, until we go Communist, by supply and demand.' If Mr. Powell and the novice who wrote the Treasury document really want to know how prices are fixed they should read the excellent piece of re- search done by Mr. Robert Neild, of the National Institute of Economic and Social Research, on Pricing and Employment in the Trade Cycle, which has just been published by the Cambridge University Press. His findings confirm the theory set out by Mr. W. A. H. Godley, of the Treasury, in an unpublished paper which Mr. Neild quotes as follows: 'Businessmen have in their mind an idea about what the long-term trend of output is and fix their prices on the basis of the costs implied by the trend and keep them there when output fluctuates about the trend. So profit mar- gins rise when output rises faster and fall when output rises less fast or declines.' It is as simple as that! Of course, there are occasions when prices are fixed too high. This is when a great industrial combine has secured a virtual monopoly and can charge what it likes without fear of competition. Something of the sort arose in cables, in wallpaper and in electrical appli- ances supplied to the motor industry. The way .to break monopoly prices is, as Mr. Heath has reminded us, by application to the Restrictive Practices Court and the Monopolies Commis- sion. The Government is taking wider powers to deal with any mergers which create dangerous monopoly conditions and it might consider ex- tending the scope of the Restrictive Practices Court to cover 'information agreements' as well as 'price agreements.' The abolition of r.p.m. is also an assurance that prices will be tempered by competition.
The government document did have the fair- ness to warn the NIC that a long-term view of profits was necessary. 'This is particularly rele- vant,' it said, 'at the present time when company profits are recovering from the down-turn experi- enced in 1961 and 1962. It is still too soon to estimate how much further this recovery will go, but there has been a fall in the relative share both of company profits and of aggregate profit incomes of all kinds compared with aggregate earned incomes over the past ten years.' There has, indeed, been a fall, and if you look back
forty years you will see that it is almost a revolution:
DIVISION OF THE NATIONAL INCOME
Incomes from Employment Rents Profits, Interest, etc.
1920-29 .... 59.7% 6.6% 33.7% 1930-39 .... 62.0% 8.7% 29.2% 1948-51 .... 71.2% 4.1% 24.7% 1952-55 .... 71.6% 4.4% 24.0% 1956-59 .... 73.0% 5.0% 22.0% 1960-62 ....
74.5% 5.5% 19.9%
Keynes used to talk happily of the coming euthanasia of the rentier, but if the trend line of this table is carried forward another ten or twenty years it will be necessary to speak of the euthanasia of the enterpreneur. An analysis of the rates of return on capital employed by the companies whose profits are now under 20 per cent of the national income suggests that this is no fanciful anticipation. Within the last ten years earnings on capital employed have fallen from 221 per cent to approximately 121 per cent. Admittedly 1962 is a bad year foe comparison, thanks to the Lloydian squeeze, but even so it is a disturbing thought for the free-enterprise system that the profitability of capital should have nearly halved in ten years. Although Ameri- can industry has also experienced a decline in profitability in this period, the rate of return on American industrial capital is much higher than on British-much more than can be explained by the greater ,size of the American market.
The Government attempt to turn the NIC into a price-reviewing as well as a wage-reviewing body must, therefore, be dismissed as inept and fatuous. The document showed an abysmal ig- norance of profitability in industry today. Mr. Edward Heath has confessed to a company of overseas bankers assembled at a Guildhall ban- quet that companies will find it harder 'to earn profits as a result of his recent actions over r.p.m. and the loopholes in the Restrictive Prac- tices Act. He even admitted that if profits did not go up, other incomes are not likely to go up either. He might have added that companies which are suspected of earning too low a profit (the majority) should be referred to the NEDC, which should examine their organisation, re- search and investment policy. If Mr. Maudling ever seriously believed that he could get George Woodcock and his friends to agree to a statement advocating wage restraint in return for a phoney NIC review of company profits, he can surely be under no illusion today. The two halves of the nation are still at daggers drawn.
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