MONEY A showdown on wages?
NICHOLAS DAVENPORT
As Mr Mark Brady, in a letter to the SPECTATOR, complained, the term 'Fried- manites' sounds like a species of monster from Dr Who and in deference to his reasonable rebuke I will drop the name. But the monsters did pursue me on holiday and I must reply to the charge of inconsistency. I have no time or space to re-argue the case Professor Kaldor put so clearly in his lecture, re-printed in Lloyds Bank Review, that money supply does not play the causal role and determine the level and rate of growth of money incomes or expenditures. But if a sharp cut in money supply is added to a sharp cut in demand from extra taxation it does make things worse by precipitating bankruptcies, some of which may be un- necessary. Mr Jenkins clapped on £1,300 million of extra taxation and that was enough to cause the mild recession and the rise in unemployment. As I said: 'The body economic is sick enough : there is no need to make it sicker by prescribing dangerous quack medicines.' Yet the Bank of England contracted the DCE (domestic credit ex- pansion) by £625 million in 1969-70 instead of allowing an increase of £400 million! Here is a test case for the followers of Professor Friedman. Wages are now rising at the rate of about 12 per cent per annum and under Labour the economy has been grow- ing at the rate of 24 per cent per an- num—rising to 34 per cent this year, Mr Jenkins hoped. (What a hope!) Do they imagine that they can stop this alarming wage-cost inflation by cutting the money supply? If money supply plays the causal role it should be as easy as shelling peas: but just ask Mr Vic Feather. He will point out that wages have been mounting year after year regardless of whether the government is deflating the economy or cutting the money supply. The trade unions have been able to exact an increase both in money and real incomes, because their bargaining power over the employers has been a compelling one while a Labour government pursued anti-employer policies. Here is the record of the gains made during the Wilson regime:
Oct, lune %
1964 1970 change Weekly wage rate 105.8 142.9 35 Weekly wage earnings 109.1 161.3 47.8 Retail prices 104.2 135.0 29.7 Index 1963 = 100. Figures of the National Institute of Economic and Social Research.
It will be seen that workers were able to increase their standard of living during the Labour government by 18 per cent despite worse Treasury 'stops' than Selwyn Lloyd's, despite the devaluation intended to reduce their real wages, despite even Barbara Castle. This should teach the money supply fanatics a lesson—that managing an economy is not just a question of handing out the right num- ber of 'chips'. Rather is it a question of managing a lot of very awkward and sometimes bloody-minded men.
It must have dawned on the present government that you cannot run a mixed economy without a consensus. There has got to be a tacit understanding between the managements and the trade unions, between the governing set and the governed, that the private sector will be allowed to make sufficient profit to enable it to compete abroad—the private sector being responsible for the export trade—and that the public sector will not make this impossible by carry- ing on a perpetual wage-cost inflation. It was never certain that the Wilson government really wanted to run a mixed economy. Its left wing, true to its socialist principles, longed to see the public sector take over more and more of the private sector and its right wing only approved of profits if they were 'honestly' and 'fairly' earned, implying that most entrepreneurs were profiteers and crooks. Mr Harold Lever was virtually the only Minister who ever said a kind word for profit-making private enterprise. We may well ask—Is the consensus breaking down?
The engineering industry claims that it is. In a well documented report published last week by the Engineering Employers' Federa- tion it is suggested that the workers are now pushing their demands far beyond the realm of reason. While average wage earnings are now being advanced for the whole economy at the rate of 10 per cent to 12 per cent those in the engineering industry are rising at the rate of I I per cent to 14 per cent. Yet the im- provement in productivity averages only about 34 per cent per annum. A rise of some 84 per cent in unit costs in British engineer- ing is fat higher thank that in other industrial countries with whom we are in competition. The consequent fall in profit margins—down to 6.6 per cent on home sales and only 2.2 per cent on export sales—means that most companies cannot maintain their investment, that is finance the modernisation of their plant. Indeed, some are contemplating a cut in investment, which is the road to death. If the British engineering industry, which accounts for nearly a third of our exports and over a fifth of the GNP, is to lose its viability, it will be a very serious matter for the nation. No doubt the report errs on the alarmist side. No doubt some managements are still employing their labour wastefully and could improve their productivity if they had the brains or the guts but this is not a report which can be ignored. It points a danger of which the Government must be aware. The least it can do is to ease the pressures on the banks so that the cash needs of efficient engineering companies suffering from this wage-cost inflation can be met.
If we really mean to work a mixed economy how can the necessary consensus be restored or activated? Not by government exhortation. This has been tried so many times before without having the slightest effect. Having read Mr Carr's latest ex- hortatory appeal I looked up my files and history books and found that exactly the same words had been used by Harold Wilson, Selwyn Lloyd, Peter Thorneycroft and Stafford Cripps. Every time you tell the unions that they have been taking more out of the till than they have earned they will merely smile and feel that they have been smart. The feuding of the split society goes on. It is useless, also, to pretend that it will all come right if the government applies fiscal
and Friedmanite measures firmly enough to create a mild recession. This is the remedy proposed by left-wing economists who dismiss a runaway inflation in Britain as a 'nursery bogey'. I notice that the young economics editor of the Times, who has suddenly become very cynical—as a result. I believe, of a visit to Oh! Calcutta'—is tak- ing this complacent line. We already have a mild recession and yet the sharpest wage-cost inflation ever seen is in full swing. According to the more elderly economics editor of the Economist it has gathered such momentum that only 'shock treatment' will do.
The Government seems to be anticipating a showdown in one of the nationalised in- dustries or public services. The miners have put in a claim for 334 per cent, the railwaymen for 25 per cent, local govern- ment manual workers for 20 per cent to 30 per cent, the teachers for 44) per cent, hospital ancillary workers for 20 per cent to 30 per cent, municipal busmen for 25 per cent or more, electricity supply workers for something 'substantial', not to mention the farm workers for 37 per cent. One can only hope that when the showdown comes both sides will use their commonsense. A runaway wage inflation is a social revolu- tion—backdoor though it may be—and it is always very foolish to allow any sort of revolution to make a start.
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