Against an incomes policy

Nicholas Ridley

The argument about whether we should have a prices and incomes policy, or not, seems to take place without reference either to the outside world, or to the inside world. In the outside world nobody has an incomes policy (except for the communist countries where you take what you are given or else get sent to a salt mine. But perhaps that is an incomes policy?). Holland and the United States have both tried to have one, but finding it a failure, have both abandoned it.

So far as the inside world goes, we have had three attempts—the Labour Government's in 1967-69, the Tory Government's in 1972-74, and now the Labour Government's in 1975-76. The first two ended in dismal failure, and the third one will also fail.

The last prediction needs substantiating. The £6 a week limit was brought in on 1 August, 1975, and has been heralded as a great success. It sought to keep money wage rises down to no more than £6 a week. Its 'success' is said to have been responsible for the undoubted downturn in the rate of inflation.

In fact the downturn in wage rises started long before the August 1975 measures. Between October 1974 and October •1975 average gross weekly earnings of full-time male workers rose by 21.6 per cent. In the same period, the index of retail prices rose by 25.9 per cent, indicating a fall of about 4 per cent in real wages. So wages were actually falling well before the £6 a week limit. Probably the effect of the £6 a week limit has been for some wages to be higher than they would otherwise have been. This is particularly true in the public sector, where £6 extra was treated as an entitlement by trade union and government alike. Without it, they might, on average, have settled for a little less. The policy only survived the recent slump because its limit was higher than the average increase likely to be available. With Mr Healey threatening to reduce the limit for the next round, and the economy beginning to move forward again, disaster seems to be inevitably ahead.

Indeed, it is worth asking, out of idle curiosity, why Mr Heath's policy failed while (we are told) Mr Healey's is succeeding? Was it because the unions like Mr Healey so much more than they liked Mr Heath ? Or because the left can speak to the left ? Or was it perhaps because of the 'Social Contract'. (By the way, what has happened to the Social Contract ?) It seems incredible that such political considerations could have allowed Mr Healey to lower the real value of wages by 4 per cent, while in the previous year Mr Heath came unstuck although real wages rose by about 1 per cent.

No, this sort of facile explanation is all very well for 'Conservative Weekly News', or 'Notes for Labour Speakers', but the glaring truth which cannot be ignored is that in 1973-74 Mr Heath imposed his incomes policy in a situation of rising inflation, while now Mr Healey is imposing his in a situation of rising unemployment. The severe contraction of the money supply which took place in late 1973 and 1974 is doing its grim work. It has caused 1.3 million people to be unemployed, but it has also reduced wages by 4 per cent and brought inflation down to an annual rate of about 16 per cent.

The same is true if one looks at the control of prices. The oppressive Price Code was originally alleged by the Price Commission to have lopped £1,000 million off prices by mid-I974. It is now said not even to be biting. Not only does the Price Commission say that prices are now generally below their control levels, but so does the Confederation of British Industry.

Nobody believes that it is the Price Code which is now controlling prices, but market forces. Indeed the only reason given officially for the retention of the Price Code is that it may stop prices rising if the economy takes off again at some point in the future. This again shows that it is possible to operate a statutory prices and incomes policy only when inflation is waning, when of tourse it is not necessary.

So the Price Code is not now controlling prices, and the incomes policy is not controlling wages. We all know that if either comes into serious conflict with its statutory ceiling during some future turn, that it is the statutory ceilings that would give way. Even Mr Healey has become a monetarist. Monetary policy is working with deadly effectiveness. The rational argument appears to be triumphing. The economy is even looking healthier than it did two years ago.

Yet the argument for controls goes on. It goes on despite the facts, despite the experience of other countries, despite the obvious logical case against controls. It goes on despite the obvious havoc that control policies do to profits, to pay differentials, to labour mobility. The argument ignores the lost dimension of economic freedom, both for capital and for labour, that is involved. It seems as difficult to destroy as the onetime belief that the earth was flat.

I would understand it if the socialists were the main and sole advocates of price and wage controls. It is a logical policy for them to believe in. They want to plan everything, and it follows that they must seek to control prices and wages in order to make events conform to their plan. (Curiously enough however there is a large element in the Labour Party, and in the trade unions, which opposes controls.) But there are a number of Tories who, contrary to what their gut beliefs should tell them, continue to advocate control of prices and wages. Perhaps some of them are subconscious believers in the Corporate State— advocates of a sort of sublimated fascism. But most of them are such reasonable and openminded people that a deeper explanation must be sought.

Their thought derives from the monopoly nature of some of our trade unions, almost entirely public sector ones at that. Classical economic doctrine tells us that monopolies must be controlled by the state—hence wage controls are necessary. It is politically impossible to control wages unless you control prices, so we must at least go through the motions of controlling prices too. If we do not do this the nation will be continually blackmailed by the likes of the NUM, and we shall get the £100-a-week miner, so the argument runs.

Perhaps I have chosen an unfortunate example in referring to the NUM because it was the NUM who broke first Mr Heath's voluntary 'N-I' policy in 1971, and then his statutory policy in 1974. But the fact is that it was one of the very monopolistic unions, whose wages 'such Tories want to control, that proved to be uncontrollable by the law. Romantics still dream about what would have happened if Mr Heath had won the February 1974 election, and how the weight of public opinion would have forced the miners back down the pits. But we all know that it would have been inescapably necessary, in the end, to settle with them on their terms.

Thus statutory wage policies cannot curb monopoly public sector unions. Nor of course are statutory powers necessary when we are dealing with the public sector. The state has adequate power anyway—either because it is the direct employer, or because it holds the purse strings as it does in the case of the nationalised industries.

Of course the state must seek to exercise control over its own employees' wages. Of course it must do this in accordance with some rational plan. Of course it must be prepared to stand firm on occasion and face a strike. Thus it must have 'a policy for public sector incomes'. I do not know of anyone who would deny that, and surely that is the best defence there can be for those who sleep uneasily because of Mr Gormley and Mr MacGahey?

There seems however to be no reason to extend such a policy for public sector incomes into the workings of the private sector of the economy. Could Tories now bury the hatchet, and agree upon a policy of socialist controls for the socialist sector of the economy, and capitalist disciplines for the capitalist sector?