In the previous instalment of this series of blogs I am writing, which will form the input to my next book on globalisation and the capacities of the nation-state, which I am working on with Italian journalist Thomas Fazi, I covered the role of trade unions in a capitalist system where class conflict is a major dynamic. One of the characteristics of the post-modern Left is the denial of the role trade unions play in inflationary episodes. However, once we accept that the unions are creatures of capitalism and embody of the conflictual nature of income distribution within that mode of production, then it is clear that as a countervailing force against capital, unions can precipitate economic crisis if they are ‘too successful’. Too successful in this context refers to the use of their power to control the supply of labour which negative impacts on the rate of profit earned by capital and leads to a decline in investment and a rise in unemployment. Trade unions are a problem for capital. Today, we consider the way in which this ‘problem’ manifested in the inflation in Britain in the early to mid-1970s and the failure by the British Labour Party to fully understand the causation involved. By the mid-1970s, the British Labour government had surrendered to the growing dominance of the Monetarist school of thought, which diverted its gaze from the true nature of the economic crisis. They unnecessarily called in the IMF as a result of this blindness.Bill Mitchell – billy blog
Distributional conflict and inflation – Britain in the early 1970s
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia
5 comments:
Nonsense !
70's inflation was caused by events in the Mid-East spiking the price of oil. In the early 70's it was OPEC, finally subdued by the secret 1976 Doha agreement wherein the Sauds agreed to moderate the price of oil in return for the U.S. propping up the unpopular Saudi regime.
Then another spike in '79 after the Saudi price war destabilized Iran and led to the so-called Iranian crisis, shutting off Iranian oil. Eventually the Sauds ramped up their production to compensate for the loss of the Iranian supply and prices stabilized again.
Both oil spikes were short lived.
Wage increases cannot be inflationary unless they exceed productivity increases -- which almost never happens!
The 70's inflation would have happened no matter what. This is born out by the fact that 70's inflation was about the same in all the Western countries, not just the UK or the US. The real policy choice was between maintaining full employment and enduring some minor pain in the form of inflation, or doing what actually happened and crashing the economy -- and still having inflation nonetheless !
Bill needs to go back to the drawing board.
Almost never happens? Really?
Dan Bill replies here:
http://bilbo.economicoutlook.net/blog/?p=33307#comment-44327
"1. My blog in question was entitled “Distributional conflict and inflation – Britain in the early 1970s” and the empirical analysis was about Britain in that period, although the dynamics I discuss were applicable everywhere.
2. One who is familiar with the historical facts will readily know that inflation in Britain and other nations (such as the US) was already rising significantly in the late 1960s.
Check the graph out that is presented in the blog. In the UK, inflation rose from 1.5 per cent per annum in the November 1967 to 5.2 per cent a year later. By August 1971 it was peaking at 10.3 per cent.
It then moderated a little before accelerating again after the oil shock in October 1973.
Similarly, the US inflation rate average 2.78 per cent through 1967 and then rose to 4.27 per cent in 1968, 5.46 per cent in 1969, 5.84 per cent in 1970, and was up to 7.4 per cent in the month before the OPEC oil price shock was introduced.
However, you want to spin the story, the crude oil price was flat (at around $US20 per barrel) until the acceleration began in the October 1973 and it then jumped to $US49 per barrel by March 1974.
It is simply incorrect and a denial of the historical facts to blame OPEC for the inflation prior to late 1973.
3. I have written many paragraphs in articles, book chapters, blogs, Op Ed pieces and in several of my books analysing the impact of the OPEC oil price shock. To write a comment attacking my blog as if I had ignored that event is disengenous and suggest the commentator has read none of my work over many years on that topic.
But moreover and importantly, the blog in question provides a detailed account of how inflation begins and sustains itself through a adjustment response mechanism.
It is important to understand that a single event cannot lead to inflation. An inflationary process is an outcome of a series of events and responses, especially when it is coming from the supply-side (a raw material price shock).
The OPEC oil price rise in October 1973 was a trigger but alone could not have caused the rapid escalation in prices around the world. To think otherwise is to misunderstand the dynamic interactions that arise in the distributional mechanism of a capitalist, monetary system.
If capital and labour had have agreed (tacitly or otherwise) to swallow the imported oil price shock – and that would mean they would have to have accepted the real income loss that the rising oil prices generated – then there would have been no inflation.
A once-off price rise is not inflation.
So imagine that capital accepted it would wear the real income loss totally and absorbed the cost rise in their margins. No inflation would occur.
Imagine that capital would not accept the real income loss and pushed up prices to maintain their margin. A once-off price level increase would have occurred.
Now, whether that becomes an inflationary spiral depends on the response of the workers. If they accepted the real wage cut – then that is the end of it. They are worse off and the economy digests the real income loss. OPEC exporters gain, workers lose.
However, if they resist the real wage cut and they push for higher nominal wages to compensation for the higher prices then the wage-price spiral is starting.
If firms, in turn, resist the margin squeeze and pass on the nominal wage increases as higher prices – then we have an inflationary process.
It is simple ignorance to think that a single event – a raw material price rise, or a successful wage demand or a successful profit margin push – will generate inflation."
Well, increasing the price of certain key inputs can trigger a positive feedback loop that translates to the whole supply chain and takes a while, so wouldn't be a one-tim event, or not as simple as that. Aggregates always lie and don't tell the whole story.
And talking about that, we should actually disaggregate inflation to see who is consuming what and triggering rises in prices. If you think income inequality is bad, resource allocation/consumption inequality is even worse.
And until that is 'fixed' there won't be any changes, as inflation will be always used as a weapon against the population to cut wages, impose austerity policies and 'races to the bottom'. If we start watching at the share of inflation increases (what is being consumed more, and by whom) in each period things may get more interesting. Like right now, the only inflation is being triggered by wealthy people, and the fear to that inflation is used as an excuse to not do anything for labour, or even worse, do something against labour.
Replying to a comment which seems to have been removed:
No inflation was not a serious problem in the 60's -- unless you consider 5% inflation to be a "serious problem." Remember, Milt Friedman thought 4% inflation was optimal.
I lived through the 60's and remember how everyone was wringing their hands because the price of chicken went up 5 cents. But in hindsight, the 60's were a good time economically, when any high school graduate could make a decent living, and when any college graduate was assured a professional job, the price of chicken notwithstanding. Inflation is one of those things everyone likes to complain about but, within reason, is not important.
"One who is familiar with the historical facts ...." Ad hominem attack.
Was labor a factor in the mild-mannered inflation prior to the 70's oil shock? Yes, during the post-WWII period until the first oil shock, what little inflation there was did correlate (weakly) to U.S. employment. After the oil shock, that correlation broke down and has not been observed since.
"the crude oil price was flat (at around $US20 per barrel) until the acceleration began in the October 1973." Actually,there was a blip in oil prices that correlated to the 69/70 blip in inflation, though as I said before I do believe employment was the main influence at that time.
Can other things besides oil cause inflation? Sure. It's just that from the 70's onward, oil has been the main driver, not surprising considering that we have a petro economy.
"It is simple ignorance to think that..." Another ad hominem attack. Stick to the facts, please!
Did labor unions induce a never ending cycle of inflation? That theory is at odds with the fact that 70's inflation dissipated quickly once oil prices moderated.
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