The reintroduction of mass unemployment in the 1970s & 80s

In January 1943 an article in The Times entitled “Planning Full Employment” looked ahead to the possibility of a post-war economy being run in such a way that the mass unemployment of the inter-war period was eliminated. As befits The Times, the article was written from the point of view of the Establishment and candidly discussed the problems of such an approach by outlining the role of unemployment in a capitalist system :

   “Unemployment is not a mere accidental blemish in a private enterprise economy. On the contrary, it is part of the essential mechanism of the system, and has a definite function to fulfill.
   The first function of unemployment (which has always existed in open or disguised forms) is that it maintains the authority of master over man. The master has normally been in a position to say: “If you don’t want the job, there are plenty of others who do.” When the man can say: “If you don’t want to employ me, there are plenty of others who will,” the situation is radically altered.”

But could war-time full employment with an “overriding appeal of patriotism” successfully translate into peace-time full employment? The article sounded a warning:

“In peace-time, with full employment, the worker would have no counterweight against feeling that he is employed merely to make profits for the firm, and that he is under no moral obligation to refrain from using his new-found freedom from fear to snatch every advantage that he can. “

The article has been attributed to Keynesian economist Joan Robinson and its conclusion is consistent with Keynes` own pragmatic wish to save capitalism from itself:

“whatever the past achievements of private enterprise, regulation is now required to ensure further progress. Once it is clear that mass unemployment is the price that must be paid, probably at an increasing rate, for the unregulated economy of the past, further argument becomes unnecessary—even if there were no other reasons why unregulated private enterprise is inadequate to deal with the problems of modern industry.”

To a large extent, the vision of economists like Robinson came true and the period 1948-75 has become known as the “Golden Age of Capitalism”, where the UK and many other countries enjoyed high rates of economic growth combined with low unemployment. Unfortunately, in a capitalist system there is an inherent conflict between the classes, and what is good for the working people is bad for the capitalist. A counter-offensive was mounted which started to bear fruit during the 1970s.

In 1970, the OECD published a discussion on ‘Inflation the Present Problem’. It acknowledged that full employment had caused increases in the wages share of the national product in several industrialised countries and that in a bid to protect profits, firms were increasing prices. The report argued for higher priority to be given to price stability which would entail “giving a lower priority to something else”, that is, abandoning full employment. Swedish economist Walter Korpi wrote “This policy statement, published well before the oil crisis, comes surprisingly close to recommending unemployment as a cure to inflation and the profit squeeze”. The OECD report went so far as to acknowledge the electoral damage that governments could expect for allowing unemployment to rise:
“Peoples reaction to going bankrupt or being thrown out of a job may have been different in the 1930s when it could be thought this was the result of a natural disaster. But today a serious recession would be clearly recognised to be the result of a deliberate policy being followed by the government” (OECD 1970: 37).
“…the fundamental problem is how to get people to exercise the moderation that they would do if they believed that a major recession was possible, without actually having to administer the lesson” (OECD 1970: 35).

The cause of international inflation in the 1970s

At the same time as the increasing wage share observed by the OECD was causing firms to raise prices, a momentous change was taking place in the world`s monetary system (in reality the USA`s monetary system!) which would dramatically increase inflation.

The period 1968-71 saw the gradual abandonment of the post-war monetary environment known as the Bretton Woods system. Previously the US dollar had been convertible to gold at the rate of $35 per ounce, this had ensured a stability demonstrated by the fact that the UN index of commodity prices, in terms of either dollars or gold, stood at the same level in 1970 as in 1950.  
  The debts built up by the US government largely due to the war in Vietnam meant that a demand for repayment in gold at the internationally agreed rate could no longer be met. President Nixon finally announced the default on US obligations to repay in gold on 15th August 1971, all subsequent repayments would be made in dollars which could be created at will by the Federal Reserve. This undermined confidence in the dollar, causing it to fall dramatically. Oil sales are denominated in dollars, so oil-producing countries saw their revenues decrease in real terms. At the same time, the price of wheat, a key commodity whose global price is effectively determined by the United States – by far the largest exporter at that time, had quadrupled outside of the US. A Wall Street Journal editorial in August 1973 explained that:
“What also needs to be recognized is that [the United States] can now buy a barrel of foreign crude oil with less than a bushel of wheat, and a year ago it took almost 2.5 bushels to get that barrel”.
 All the OPEC producers (with the Shah of Iran, a close ally of the US, to the forefront) were determined to restore the real price of oil which had been drastically eroded by  the decline of the US dollar (in which oil prices are always set) and over the 1974-1975 period oil prices quadrupled. This triggered high inflation in the world`s industrialised countries as capitalists sought to retain their profit margins by pushing up prices.

Why was the rate of inflation in the United Kingdom higher than many other industrialised countries?

Thanks to the work of the Glasgow University Media Group (GUMG) we have a record of the mainstream media coverage on the UK economy and industrial relations in the 1970s. In their 1982 book Really Bad News, GUMG examined the widespread claim, both then and now, that wages were the cause of the high rate of price inflation seen in the 1970s:

“The argument that wages had caused price increases was a dubious one. It hinged on the view that wages were shooting ahead and somehow dragging prices along behind them. In fact in the whole period 1970-75 real wages had remained about the same and for the first six months of 1975 had actually fallen. In any case prices do not have to rise simply because wages do. If sufficient investment is undertaken, then productivity can increase and manufacturers can afford to increase wages and in some cases may even lower the cost of the product. Workers in countries such as Germany and France, where there are higher levels of investment, receive higher wages, yet the rate of inflation there is lower than in Britain.”

“The key problem underlying Britain’s economic decline is the failure of industrial investment. On rare occasions this has been acknowledged even on the television news. In January 1975 the industrial editor of ITN [Independent Television News] made the following reference: “Since the war, Britain’s overriding problem, almost universally agreed, has been a failure to invest adequately.” (ITN 22:00 21.1.75)
 “…..the decline of investment was widespread across the whole of the manufacturing sector. Between 1960 and 1972 Britain re-invested 16-18% of its gross national product each year. By comparison Japan was investing 30-35%, almost twice the rate”

Contrary to the more partisan position taken by the Conservative party in public at the time, the minutes of the Shadow Cabinet meeting chaired by Margaret Thatcher on 11.4.75 acknowledged the underperformance of the UK economy:

“It was suggested that Britain`s economic competitiveness and the efficiency of our industrial and education systems had been declining for decades, but it was felt that it would be difficult to blame one political party for this. There had been a gradual shift to the Left since the war in most European countries yet these had experienced remarkable economic success.”
(Extract from the 57th meeting of the Leaders Consultative Committee (the Shadow Cabinet) chaired by Margaret Thatcher on 11.4.75)

The ideas of monetarist economists were gaining prominence during this period, and though this school of thought did not have the interests of the working class at its heart, monetarists were adamant that wages were not the cause of inflation. Despite this the GUMG noted that a very different message was coming from the mainstream media:

“Yet the news consistently pursued the theme that wages were the cause of inflation. Our study of the first four months of 1975 showed that on the news, statements saying that wages were the main cause outnumbered by eight to one those which rejected this view. The argument that wages were the problem was linked by news journalists to political policies such as the need for wage restraint. For example, the industrial correspondent of the BBC commented in January 1975: “With wages now as the main boost in inflation, just getting inflation down to a reasonable level seems to imply tougher wage restraint” (BBC1 21:00 20.1.75).
In this period there were 17 occasions when views were given on the news that the policies of wage restraint and lower wages were not the best way to solve the economic crisis. There were 287 occasions when the view was featured that these were exactly what was needed.”

In contrast to the union-bashing from journalists and politicians, monetarist economist Milton Friedman did not blame the unions for pushing up inflation. Friedman wrote to the Economist during his one-week visit to the United Kingdom in September 1974 saying that he had “been dismayed, even in my few days in London, at the widespread support of ‘union bashing’ as a way to attack inflation”. Reflecting on his visit a few months later, Friedman was particularly struck by the continuing popularity of the “wage-push” explanation of inflation, he wrote “In Britain, the explanation that everybody gives for inflation is that inflation is caused by trade unions, the greedy grasping laborers who force up the wages that cause inflation”.

Friedman`s prescription for inflation was “tight money” which involved some combination of a cut in government spending and an increase of interest rates, both of which lead to an increase in unemployment.

The Labour Party and Monetarism

In the Labour Party`s October 1974 election manifesto the commitment was to “restore and sustain full employment”, and in a speech in September, Chancellor Denis Healey described the policy of controlling inflation through unemployment as “sin”. Yet in November, Healey acknowledged that his budget of that month was one which would increase unemployment, the Chancellor said that he hoped the increase would be modest. The day after the budget, Peter Jay, economic editor of The Times, wrote about the first Chancellor courageous enough to qualify the post-war commitment to full employment. Jay was one of the foremost proponents of monetarism in the UK and was also the son-in-law of the next Labour Prime Minister Jim Callaghan.

At the Labour Party conference in 1976, Prime Minister Callaghan`s speech contained the following, which seemed to mark the abandonment of Keynesian stimulus spending for the new economic religion of Monetarism:
We used to think that you could spend your way out of a recession and increase employment by cutting taxes and boosting government spending. I tell you in all candour that that option no longer exists, and in so far as it ever did exist, it only worked on each occasion since the war by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step.

These words could have come straight from the mouth of Milton Friedman, except for the fact that Callaghan was careful to exclude the “natural rate of unemployment” from his speech. Indeed, his words implied that the new approach would bring lower unemployment. But the implementation of Friedman`s monetarist proposals for the UK economy had already been considered by the Conservative Party`s powerful Economic Reconstruction Group which included, amongst others, every shadow minister whose portfolio had any significant economic aspect. It concluded after its second meeting in July 1975 that:

“The Group tended to the view that there would be several serious problems involved in this course of action. A very high level of unemployment would probably be required for four or five years. In the private sector capital expenditure, confidence and growth would be damaged. The need to sustain the policy throughout the life of a parliament would raise obvious political difficulties.”

  Ultimately the leader of the Economic Reconstruction Group, Geoffrey Howe, would become Thatcher`s first Chancellor and these “serious problems” would be inflicted on the economy of the United Kingdom at the first opportunity. The panic of the political and business elites at that time was revealed in 2011 by Sir Adam Ridley (Economic Adviser to the Conservative Party Shadow Cabinet from 1974 to 1979), who in Autumn 1975 had attended “an extraordinary meeting, held by the CBI to discuss the end of capitalism. We gathered in a small hotel in Sussex” for what he described as a “very private discussion”.
Ridley and fellow economist Alan Budd (more on him later) had previously spent time in the Treasury in 1970 and 1971 studying the decline in industrial profitability. The chronically-low profitability of British industry resulting from chronic underinvestment was exarcerbated by the sharp rise in oil prices in 73-74. Instead of increasing profits by substantially increasing productivity through investment, producers raised their prices in an attempt to preserve their profit margin. This resulted in pay claims that sought to preserve the purchasing power of workers.

The Labour governments` Chancellor from 74-79, Denis Healey, has claimed that he never believed in the concept of a “natural rate of unemployment” (this was also something that Margaret Thatcher also was later to claim when she was put on the spot in an interview in 1985), yet under his Chancellorship unemployment increased from a level already near its post-war peak, to almost 1.5 million. Politicians using unemployment or pursuing policies which will inevitably raise or sustain unemployment at high levels will tend to complain about wage levels, just as Healey did. Perhaps the boldest form of the attempt to correlate wages and unemployment is the invitation to poverty contained within the phrase “workers need to price themselves into jobs”. The implication that there is a wage level which will allow full employment is completely undermined by Friedman`s elaboration of his “natural rate” as being the rate of unemployment at which inflation is held steady – but it is only held steady because of the effect of unemployment on wages.

It was a measure of the cynicism behind the Conservative election campaign of 1979 that the party produced a notorious poster with the words “Labour isn`t working” purporting to show a long, snaking dole queue (in reality a small number of Conservative activists recruited for the photograph). Such an opportunity would not have existed without the real joblessness created by the policies of the Labour governments over the previous five years.

Consevative Party 1979 General Election Poster, the small text reads “BRITAIN`S BETTER OFF WITH THE CONSERVATIVES”

In a draft speech sent to Thatcher on 25th January 1979 Keith Joseph echoed Friedman`s view that the unions had no role in creating inflation when he wrote that “the inevitable response of trade unions to an inflation which they did not originally create is making the cure of inflation more difficult” (emphasis in original). The “problem” for Joseph was that trade unions were able to obtain wage increases to compensate for price increases. The “solution” would be to engineer the weakening of the unions to a point where prices could be raised without fear that workers would be able to secure full cost of living increases. Profit margins could then be raised without depending on productivity increases, which require investment.

The Thatcher Government, monetarism, and inflation

The shock that hit the UK economy during the first government of Margaret Thatcher was put into historical perspective by F. William Engdahl in his book “Gods of Money”:

“In early May 1979 Margaret Thatcher won election in Britain by campaigning on a platform of “squeezing inflation out of the economy.” Thatcher, and her inner circle of Adam Smith [Institute] ‘free market’ ideologues, promoted a fraud, insisting that government deficit spending, and not the 140 percent increase in the price of oil since the fall of Iran’s Shah, was the chief cause of Britain’s 18% rate of price inflation.”

“In June 1979, only one month after Thatcher took office, Thatcher’s Chancellor of the Exchequer, Sir Geoffrey Howe, raised Base Rates for the banks a staggering five percentage points-from 12% up to 17%–within a matter of twelve weeks. This amounted to an unprecedented 42% increase in the cost of borrowing for both industry and homeowners. Never in modern history had a major industrialized nation undergone such a shock in such a brief period, outside the context of a wartime economic emergency.”

The government`s rhetorical commitment to fighting inflation was undermined by the fact that Chancellor Geoffrey Howe put the main rate of Value Added Tax up from 8 to 15 per cent in his first budget in 1979. This is the most direct way a government can put up prices!

  In the US, the new Chairman of the Federal Reserve, Paul Volcker, also raised interest rates, starting in October 1979. In contrast to the the Thatcher government`s fraudulent claims that government spending was the cause of inflation, the famously blunt Volcker made clear the aim of this policy in testimony to Congress, where he said that:
“The standard of living of the average American has to decline”
The New York Times – October 18, 1979 reported this and went on to explain that US workers were not to receive wage increases to compensate for the increased prices they were paying due to imported inflation caused by oil price rises:
In that logic, Mr. Volcker was following not only similar remarks of his own of recent weeks, but also the identical line of argument that the [Carter] Administration has put forward for many months.  Administration economists regard as their top anti-inflation priority preventing the recent surge in energy and housing prices from spilling over into wages.

In his 1992 documentary “The League of Gentlemen”, Adam Curtis includes a clip of Margaret Thatcher giving a speech to the Press Association on 11th Jun 1980 in which she said:

“Let me just have a word about monetarism and monetary control first. You all know full well that if you produce too much of something its value will fall; that’s elementary. It isn’t a new fangled theory; it is as essential as the law of gravity and you can’t avoid it.”

Speech at Press Association Annual Lunch – Margaret Thatcher – Jun 11,1980
http://www.margaretthatcher.org/document/104377

Economist Richard Douthwaite, in his book “The Growth Illusion” points out that Mrs Thatcher had been preaching the gospel of monetarism since she gave a speech about it to the Conservative Party conference in 1968, suggesting that the money supply should be controlled to moderate inflation.

Thatcher was less forthcoming on a central idea of monetarist doctrine, namely that an economy has a “natural rate of unemployment” which is supposedly the amount of unemployment necessary to stop inflation from spiralling upwards.

In May 1980 in a House of Lords Debate, Lord Kaldor, the former economic adviser to several Labour governments described the inconsistencies he had spotted in statements made by the Chancellor and those made by a fellow Peer:

“Lord Trenchard….indignantly denied that the Government had any intention of impairing the workers’ ability to resist a cut in real wages. Yet……when the monthly figures of retail prices revealed that inflation is now running at 21.8 per cent, the Chancellor of the Exchequer, in an interview on the radio which I happened to listen to…..gave the workers’ insistence on seeking full compensation for price increases in wage increases as the reason for the magnitude and the persistence of inflation. He said that the rise in the price of oil made it necessary that real wages be reduced— that is, that the standard of living of the working class be reduced”

On 27th November the same year Kaldor reminded the House of Lords that:

“[he had] suggested several times last year that the centrepiece of the Government’s economic strategy, the control of the money supply, however genuinely believed in by some people, is really only a facade or a smokescreen. The important consequence of the strategy was to alter the balance of bargaining power, to weaken the trade unions through the intensification of unemployment and through the loss of jobs, through factory closures and bankruptcies, and thereby to succeed in bringing wage settlements well below the rate of inflation; that is to say, to reduce real wages.”

Earlier that same month at the conference of the Confederation of British Industry (CBI), the devastating impact that high interest rates and the strengthening pound had already had on manufacturers caused the Director General of the CBI, Sir Terence Beckett, to call for a confrontation with the government:

“You had better face the brittle fact that the Conservative Party is a rather narrow alliance. How many of them in Parliament have actually run a business? This matters. They don’t all understand you. You think they do, but they don’t, not all of them. They are even suspicious of you – many of you – what is worse they don’t take you seriously. I would not advocate what I am going to say were the cause not noble – we have got to take the gloves off and have a bare-knuckle fight because we have got to have an effective and prosperous industry.”

The Iron Lady`s rusty memory

The smokescreen of monetarism described by Kaldor finally dispersed in a 1985 TV interview Thatcher gave to journalist & economist Peter Jay (“A Week in Politics”, Channel 4, February 1985) where she was asked the following question:

“monetarist economists believe in something called the natural rate of unemployment which is supposed to be the rate at which inflation stops or ceases to accelerate. Now do you think that we Prime Minister with all-time record unemployment figures this week have yet reached that natural rate even though inflation is still proceeding sufficiently to halve the value of money every 15 years?”

Thatcher replies with breathtaking audacity:

“It’s not a doctrine to which I’ve ever subscribed; It’s one which I think actually came in with Milton Friedman; I used to read about it; it’s a theory to which I have never subscribed.”

It was one thing for Thatcher to abandon monetarism, it was quite another for her to deny she had ever subscribed to it! But the mainstream media have been complicit in this rewriting of history, and the myth that the “lady was not for turning” endures to this day. To expose the U-turn would be to expose her outrageous lie that she had never been a “subscriber” to monetarism. Despite the hard time that Peter Jay seemed to have given Thatcher, Jay had long been a fully paid-up member of the establishment, and his leniency on Thatcher is evident when one considers the fact that he was one of the leading proponents of monetarism in the UK. In her 1995 book “The Path to Power” Thatcher stated that she would have liked to have appointed Jay to her Cabinet because of his “understanding of monetary economics”.
The full transcript of the interview (available on the Thatcher Foundation website) shows Jay spared her blushes by not making reference to her past support for monetarism.

Key players offer candid views

In view of this it`s not difficult to understand why Professor Sir Alan Budd, while being interviewed by Adam Curtis (again in the same documentary) in June 1991 about his time as Special Adviser at the Treasury in the period 1979-81, expresses his concerns that he was being used:
 
    Curtis` narration: For some economists who were involved in this story, there is a further question: were their theories used to disguise political policies that would have otherwise been very difficult to implement in Britain?

    Budd: The nightmare I sometimes have, about this whole experience, runs as follows. I was involved in making a number of proposals which were partly at least adopted by the government and put in play by the government. Now, my worry is as follows – that there may have been people making the actual policy decisions, or people behind them or people behind them, who never believed for a moment that this was the correct way to bring down inflation.

    They did, however, see that it would be a very, very good way to raise unemployment, and raising unemployment was an extremely desirable way of reducing the strength of the working classes — if you like, that what was engineered there in Marxist terms was a crisis of capitalism which re-created a reserve army of labour and has allowed the capitalists to make high profits ever since.

    Now again, I would not say I believe that story, but when I really worry about all this, I worry whether that indeed was really what was going on.

Unlike Budd, Sir Douglas Wass, the head of the Treasury during the first Thatcher government had never been converted to monetarism, yet in a retirement interview in The Times on 31st March 1983 he said:
“What has emerged in shop-floor behaviour through fear and anxiety is much greater than I think could have been done by more co-operative methods. That is a surprise to me.”

On the other hand, in May 1983, Mrs Thatcher`s favourite economist, Friedrich Hayek, had already expressed his concern in Encounter magazine that unemployment had not been raised to what he regarded as a high enough level:
“The Prime Minister was prevented from doing it quickly enough. It is politically feasible to survive even 20 per cent unemployment for six months; it is not politically feasible to survive 10 per cent unemployment for three years. So you have to move fast. Mrs Thatcher knows that, but she was balked by the distribution of political forces. She may also herself be suffering slightly from the delusion that a reduction in inflation is an achievement in itself. It’s only a step in the right direction, which does not become effective until you have really stopped inflation. You first have to get inflation down to zero; then there is a good prospect of a new upturn. The boom may even come very quickly.”

Mrs Thatcher was unable to make Hayek`s fantasy about zero inflation come true. Indeed, the period of falling inflation in the UK just happened to coincide with the steep decline in the price of oil which, by the Spring of 1986, was below $10 per barrel. Once the oil price ceased its fall, inflation in the UK started to climb, during what became known as the “Lawson boom”. By the time Margaret Thatcher left office in November 1990, the annual RPIX inflation (Retail price Index excluding mortgage interest payments) was the same, at 9.2%, as it had been in May 1979 when she entered office – the failure of her inflation-fighting policy could therefore be measured to an accuracy of one decimal place!

Conclusion

In 1974 the Times Economics Editor, Peter Jay reckoned that to eliminate inflation would require unemployment in the “low millions” for a decade or more. He concluded that this was politically unfeasible. “Governments depending on consent,” he wrote, “cannot suspend the full employment commitment”.
  This has been proved wrong on several levels. We have seen that there never was a genuine commitment to full employment, and even when such a commitment appeared in the Labour party`s 1974 manifesto it was abandoned almost immediately. The assumption that high unemployment can eliminate inflation is absurd, and springs from Jay`s dogmatic adherence to monetarism. Unemployment as measured by International Labour Organisation (ILO) remained above 2m from 1981-95, and even when measured on the much-manipulated claimant count, was above 2m for all but two of these years. Inflation did not disappear.
http://news.bbc.co.uk/1/hi/uk_politics/6729739.stm
A more cynical interpretation would be that Jay was deliberately offering false reassurance about what was possible/impossible in a democracy. Our politicians are capable of much greater feats of successful manipulation than he wanted to give them credit for.
  The recent release of documents from 1981 has exposed some of the deceit of that time. The Financial Times revealed that Chancellor Geoffrey Howe proposed massaging unemployment figures to keep the figure below 3m as jobless levels grew to almost three times that of the Winter of Discontent two years earlier.
In a series of exchanges with Margaret Thatcher the Chancellor proposed 2.9m as the unemployment forecast for 1982-3, while admitting the Treasury’s actual figures suggested it would be 3.1m – 3.2m.

“Obviously we should prefer to avoid publishing…a figure of over 3m,” he said, adding that 2.9m was the lowest figure they could publish and still remain “credible”.

He exercised similar creativity with the inflation forecast, proposing 10 per cent, even though that was “at the bottom end” of the Treasury’s internal forecasts.

A response from Mrs Thatcher’s advisers noted approvingly that Mr Howe had accepted the need to balance credibility with political expediency but urged that he go further still, particularly as earnings and inflation figures would be seized on by public sector unions pushing for higher settlements.
  A hand-written note from the prime minister said she shared those “worries” and proposed publishing even lower figures than those Mr Howe suggested.

 

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