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Tony Cliff
& Colin Barker

Incomes policy, legislation and shop stewards

Chapter One: Why incomes policy?

Over the last few years more and more publicity has been given to the question of “incomes policy”. Labour Party and trade union conferences have debated it with great heat, the Tories were converted to “incomes planning” in 1962, the present Labour government is convinced of the necessity for an “incomes policy”, and so on and so on. To understand why this question has become so important over the past few years we have to understand the changing situation facing those who own and control industry, the capitalist class.
 

The changing pattern of investment

Firstly, in present day capitalism the individual investments made by big business have grown enormously, both in size and in the time they take to mature. And at the same time the risks involved in the act of investment have also increased, because the pace of technological change is greater today than ever before. While it is true that the rapid advance of technology offers very high profits nowadays when investments are made in the right place, it is also true that the penalties for investment in the wrong place or at the wrong time are also much greater. Secondly, the threat of obsolescence (machinery, etc becoming out of date) has radically increased during the present technological revolution. Thirdly, the pressure of international competition is greater than ever, and has been made sharper still by the systematic lowering of the barriers to international trade since the early 1950s, notably inside the European Common Market and the European Free Trade Association,

Because of these developments it has become increasingly vital under contemporary capitalism for the typical board of directors to be able to plan ahead over a number of years with some degree of certainty and confidence. And thus planning has become very respectable with big business:

It is indeed characteristic of modern capitalist planning that the impulse to embark on the seemingly speculative enterprise of long-range prediction comes from the industries which find that they are compelled, because of the nature of the technology that they employ, to commit large indivisible blocks of capital to projects that will only pay for themselves after the lapse of several years.

Systematic economic analysis, preferably in collaboration with other industries similarly placed, whose decisions will also influence the outcome, is then the obvious way of reducing the risk. In Britain it was the steel industry which took the initiative in this field. The Iron and Steel Board, the public agency which had been set up in the early 1950s to supervise this industry, found that its attempts to guide the direction of steel investment, and to check whether its volume was adequate, required a close examination of trends over the economy as a whole. The third five-year development programme issued in 1961 was in some ways a pilot project for the full-scale planning operation on which the British government embarked with the establishment of the National Economic Development Council in 1962. [1]

As an illustration of the tendency towards the very long period before investments start to pay their way, the following recent example will suffice. In July 1965 the British Motor Corporation (BMC) took over the giant Pressed Steel Company for £33½ million. At the end of December 1965, partly to avoid being investigated by the Monopolies Commission, BMC sold the Pressed Steel factory at Linwood, near Glasgow, to the Chrysler-Rootes group. For this lone factory Rootes paid £14½ million. What matter here are the terms for payment – Rootes paid £3.6 million down, with a promise to pay another £2 million by the end of 1971. The Board of Trade is staking the other £8 million to £9 million (at an undisclosed but no doubt very favourable mortgage rate). [2]

As for the risk of equipment becoming out of date, we have only to remember the common saying in the United States that any aeroplane that exists is obsolete, and that many an aeroplane or missile is already out of date before it even leaves the drawing board. The same applies, even if not quite so dramatically, to other products. The huge British ICI combine provides a recent example:

At Wilton on Teesside engineers from Kellogg International are putting the finishing touches to ICI’s new 200,000 ton a year giant ethylene cracker. When it comes on stream in the spring it will be the biggest in Britain, and it is already scheduled as likely to close down next year, when the 450,000-ton super-giant being built by Lummus comes into operation. Some £7 million worth of gleaming hardware straight into mothballs waiting for demand to catch up – this is the alarming price of technical progress. [3]

ICI is Britain’s largest manufacturing company, and the threat of obsolescence illustrated in the above example is expressed in the company’s changing depreciation policy:

The period of depreciation for equipment in ICI, which was commonly 20 years plus before the war, was reduced from 1950 onwards, when, according to the chairman, the company was “beginning to think in terms of 15 years for new projects.

In the early 1960s this came down to 12 to 15 years, and more recently the average for new plant has come down to about ten years. For certain kinds of investment, where the risks of technical obsolescence are thought to be high, the amortisation period is down to five to seven years (information supplied by Paul Chambers, chairman of ICI). [4]

Also research takes a larger and larger place in production. According to the National Institute Economic Review, in 1959 the American aeronautics industry spent on research a sum equal to 35.7 percent of the value of its net production in 1958. The figure for the electronics industry was 36.5 percent. [5] Because of competition, research is shrouded in secrecy, and each firm is forced to spend huge sums of money on research that may well be obsolete long before it produces any results.

The long term nature of investment and the rapid pace of technological change impel large firms towards attempts at long term control over all aspects of cost – and particularly over labour costs. This is why the employers need greater predictability in their labour relations – wages, hours of work, grading, productivity – so that they can increase the area within which they can plan ahead in the working of their firms.

Another reason why the employers need an incomes policy is to be seen in the increasing unevenness between the conditions in different sections of capitalist industry in one and the same country. While industries with very fast rates of growth can easily afford relatively high wages demanded under full employment, other slower growing industries find it much more difficult to pay. The traditional capitalist solution, of leaving the problem to be solved by simple

laissez faire (the rule of the jungle), would tear the ruling class apart today, in the modern conditions of very high concentration and centralisation of capital. In the present situation the solution that becomes necessary is one that involves state intervention to make sure that wages don’t rise at a rate faster than the more backward industries can afford. [6]
 

International competition

Another factor making it vital for the employers to increase the predictability of their costs, and above all of their labour costs, is the increasing tendency for profit margins to decline. This is the effect of increasing international competition.

In the first decade after the war, when the rehabilitation of Germany, France, Italy and Japan had only just been achieved, it was quite easy for employers to put up prices when wages were increased. After all, the Employers’ Federation that agreed to the wage increase was usually made up of exactly the same people as the trade association that determined prices. With world prices going up generally, until the late 1950s there was very little to prevent the employers from compensating for wage increases by putting up their prices, even in the field of exports. But as international competition increased, profit margins began to get squeezed. Take the case of the British engineering industry, which is responsible for a third of manufacturing employment in Britain, and for over half of all British exports – the following table shows the undoubted tendency for profit margins to decline:

R.R. Neild, too, found a decline in profit margins in relation to value added as a fairly general picture in manufacturing industry during the period. [8]

The problem of international competition is especially acute in the British economy. International competition has forced a squeeze on profit margins, but this squeeze threatens to become even tighter in an economy like the British capitalist economy which has large-scale troubles with its balance of payments. For in trying to solve the balance of payments problems, a succession of British Chancellors of the Exchequer have resorted to a system usually referred to as “stop-go”, which has meant forcing industry to work below capacity for an extended period, every four or five years. This has meant that unit costs in British industry have gone up too.

Indeed British capitalism has suffered under a double burden since the early 1950s: firstly Tory chancellors have operated stop-go policies that alternately released and shut off demand in response to the pressures of the balance of payments situation; and secondly there has been an enormous expenditure on armaments that devoured roughly half the amount available each year for investment. The result has been an economy that looked stable on the surface, but that grew at a rate lower than any other developed economy. From 1950 to 1955 the real national product per man-year in Britain grew by only 1.8 percent, and from 1955 to 1961 by only 1.6 percent. In other countries over the same period the figures were as follows: Germany 6 and 3.5 percent; France 4.3 and 3.5 percent; Italy 5.4 and 4.1 percent; Netherlands 4.4 and 2.6 percent; United States 2.8 and 1.4 percent. [9] And from 1954 to 1962 Britain’s share of exports in world trade fell from 20.1 to 15.2 percent. [10]

At the same time, largely because of relatively full employment, workers’ bargaining power has increased considerably. In many industries the employers have found themselves, without the disciplining sanction of unemployment, in a weaker position vis-à-vis organised labour than ever before. Up to the late 1950s the employers’ main reaction to this situation was to make the best of it, giving way to the workers’ demands wherever the only alternative was an extremely expensive stop in production, and passing on the higher costs in the form of higher prices. For the boom was on, and such a boom as never before.

Inflation was of course deplored, publicly, but as long as profit margins were maintained it was not felt as a real problem. But, as we have shown, international competition put a squeeze on profit margins, and with a semi-stagnant economy workers’ bargaining power become more and more of a problem for the bosses. So at the end of the 1950s, and increasingly in the 1960s, state and industry together have sought to find ways to achieve the ultimate aim of any ruling class – a working class that knows “its place” and keeps it, that demands no more than the iron rations offered by its rulers, and that is prepared to pay the costs of its rulers’ mistakes.

The coming together of state and business in economic planning and its twin brother, incomes planning, has been made that much easier by the fact that the state has already become a central factor in the economy of the capitalist countries:

Central and local government together employed 3 million people who earned 15 percent of all wages. The public sector as a whole was responsible for over 40 percent of all fixed investment and for as much as 50 percent of the building work done in the country. [11]

In 1962 total public expenditure, including interest paid on the national debt, was equivalent to 44 percent of GNP. The ratio had varied but never fallen below 40 percent in the previous decade. [12]
 

The German, Japanese, French and Italian “miracles”

The factors we have already mentioned made the British capitalists and their government anxious for an incomes policy, but they were further convinced when they made comparisons between their own performance and the “miracles” of other capitalist countries, in Japan and in Western Europe. Remember how enviously Harold Wilson spoke during the 1964 general election campaign when he compared the British rate of growth with that of West Germany, France, Italy and Japan! Looking at these foreign economies, the secret of success for the employers was plain to see – wages there lagged behind profits more than they did in Britain.

In Germany during the early 1950s the fruits of rising productivity were channelled into business profits rather than into wages. The same happened in France in the late 1950s (after de Gaulle came to power) – real wages were held down for a number of years while profits soared. In fact real wages in France fell by 1 percent between 1958 and 1961, while production advanced rapidly. This of course gave the French capitalists a considerable competitive advantage in the international market – French exports benefited, as of course did profits. Similarly in Italy in the 1950s wages lagged far behind rising productivity, so that profits galloped far ahead. [13]

The logic of the Japanese economic miracle was much the same – there was a violent rise in profits compared with wages. Since the war, as a result, Japanese industrial production has risen at such a fantastic rate that by 1961 it was at least four times that in the mid-1930s. The average annual rate of growth of the Japanese gross national product has been estimated at 7 percent for the years 1953-59, and at 10 percent for the period 1955-60 [14]:

These conditions in the labour market lie at the root of Japanese progress. There has been an abundance of labour to meet the rapidly rising demand from the factories without provoking a steep increase in wages ... In these circumstances it is not surprising that, while industrial productivity rose by 55 percent between 1955 and 1960, real wages rose by only 25 percent. Here is one of the main reasons for the massive industrial investment during recent years – gross investment has lately amounted to over 30 percent of the gross national expenditure – without which Japan’s rapid progress would have been impossible. [15]

One very important cause of the lag of wages behind profits in these countries was the existence of a large reserve army of unemployed workers. West Germany was blessed with some 10 million refugees (from the part of former East Germany which is now in Poland, from the Sudeten zone of Czechoslovakia, and – some 2½ million people – from East Germany). Italy got millions of new workers from the poverty-stricken south. In France rapid technological changes in agriculture freed millions to go to the towns, and the same happened on an even larger scale in Japan.

Also, in all these countries trade union organisation is much weaker than it is in Britain. Nor is this due only to the obvious pressure in the labour market of the reserve army of unemployed workers. In France only 2 million workers are organised into unions, and these unions are divided into three separate federations (Communist-controlled, Socialist-controlled and Catholic-controlled). In Italy there are also three federations of trade unions, while in Japan the history of the trade union movement since the war has been one of splits and divisions. Low union membership and a divided trade union movement obviously make workers’ bargaining power much less of a threat to the employers, and wages suffer at the expense of profits.

Looking overseas at these various foreign “miracles”, the message for the British capitalists is very clear – if restrained wages can cause these “miracles”, then why shouldn’t the British capitalists try to get themselves the same blessing?
 

Incomes policy as a substitute for the army of the unemployed

In the “good old days” before the war the capitalists disciplined their workers, as Karl Marx noted, with the aid of a reserve army of unemployed. But since the beginning of the Second World War conditions of full, or nearly full, employment have existed in Britain, thus removing the threat of unemployment as a way of disciplining the workers. All the same, the idea of using deflation to create unemployment – so as to cut wage increases – has reappeared again and again among the ruling circles. Perhaps the most notorious example was that of Sir Stafford Cripps (Chancellor of the Exchequer in the first post-war Labour government) who stated in the Economic Survey of 1948 that the object of his policy was to increase the numbers of the unemployed by 50 percent in the course of the year by deliberately putting a damper on the building industry. At the end of 1947 there were 300,000 workers unemployed, and Cripps said that in order to get more mobility of labour their number would have to go up to 450,000 by the end of 1948. [16]

The same idea, that the economy needs a pool of unemployed workers, has been a recurrent theme in the Economist over the years. But, above all, the chief advocate of the idea has been Professor F.W. Paish, the main economic adviser to the Tory government over a number of years. Professor Paish’s theories have received wide publicity, and have been rather uncritically accepted by many, including some socialists. Some discussion of them therefore seems worthwhile.

Paish’s theory stresses the importance of running the economy with a certain margin of unused capacity. This he sees as a condition for growth without rising prices:

It does not seem possible to put the necessary margin of unused capacity at less than 5 percent, which roughly corresponds to 2 percent of unemployment, and it may well have been higher, though not very much higher. We may probably put it somewhat within the range of 5 to 7 percent, corresponding to between 2 and 2½ percent of unemployment. [17]

Paish went so far as to calculate the exact changes in wages that would be associated with small changes in the unemployment rate. [18]

Unfortunately for Professor Paish, his calculations have been disproved by the facts of life. A level of unemployment somewhat above the level Paish considered necessary to contain wage rises was in fact sustained for a whole year – from the fourth quarter of 1962 till the third quarter of 1963 – but wages still rose. And other countries had similar experiences. In some countries wages and prices rose quite rapidly when unemployment exceeded 5 percent and was often near the 10 percent mark. Thus in Italy, while the rate of unemployment outside agriculture was 13.4 percent (15.3 percent in the years 1950 and 1954), wage rates rose by 25 percent (1948-54). In Belgium the unemployment rates were between 11.3 percent and 7.6 percent in 1949-54, while wage rates rose by 30 percent (1948-54). As against Italy and Belgium, British unemployment from 1948 to 1954 was between 1.4 percent and 1.2 percent, and wage rates rose by 35 percent. The figures for Italy and Belgium show that not even an unemployment rate of 10 percent is sufficient to subdue the workers enough to stop the wage-price spiral. [19]
 

The wage-price spiral

Inflation – the wage-price spiral – is in fact the product of the class struggle under the conditions of modern capitalism, where there are only small or even no reserves of unemployed workers. On the one hand stands the capitalist class, organised in monopoly associations, and on the other hand there stands a mature and organised labour movement. Added to these two is a third agent of inflation, the capitalist state, which on the one hand has a permanent arms economy which tends to “overheat” the economy, while on the other it is very afraid of the political consequences of mass unemployment in an advanced country with a strong labour movement.

Really the argument about who is responsible for the wage-price spiral is a meaningless one, although many professional economists have argued for years about whether the blame should be placed on rising wages that push up prices, or on rising prices that force the workers to try to increase their wages to keep up with the rising cost of living. But the fact of central importance is that workers and capitalists both try to increase their share of the national cake. The way the national cake actually gets carved up between them depends on the relative strength of the contending classes. Up to a point, of course, the wage-price spiral is satisfactory to the capitalists as a way of dealing with working class pressure for higher real wages and a bigger share in the national cake. The rising prices do cheat the workers of the extra purchasing power that they would otherwise have won. But of course the wage-price spiral also leads to a squeeze on profit margins when international competition becomes sharper, and it leads too to stagnation and relative decline in the whole national economy. Inflation has been doing what the reserve army of the unemployed did for capitalism in the past – keeping down the size of the workers’ slice from the national cake – however badly this has turned out for the capitalists in terms of stagnation. Today the capitalists and their government hope that incomes policy will produce the same effect without the bad side effects of stagnation and decline. Thus practically all the Western capitalist countries have embarked on national economic planning and on an incomes policy – France, Italy, Sweden, Norway, the Netherlands, Belgium and Austria. De Gaulle’s France is entering this year on its fifth five-year plan, while Italy has just started along the same road. All these countries have tried to some extent to implement a national incomes policy. [20]

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Notes

1. A. Shonfield, Modern Capitalism (London, 1965), pp.95-96.

2. Guardian, 31 December 1965.

3. Sunday Times Business News, 16 January 1966.

4. A. Shonfield, Modern, p.42.

5. Quoted in S. Mallet, Continental Capitalism and the Common Market, New Left Review, March-April 1963.

6. C. Vittorio Foa, Incomes Policy: A Crucial Problem for the Unions, International Socialist Journal, June 1964.

7. W.A.H. Godley, Pricing Behaviour in the Engineering Industry, Economic Review, May 1964.

8. R.R. Neild, Pricing and Employment in the Trade Cycle (Cambridge, 1963), p.42. Similarly, it was found that the net return on capital (before tax) of the “big six” car producers changed between the years 1954 and 1963 as follows (A. Silberston, The Motor Industry 1955-64, Bulletin, Oxford University Institute of Economics and Statistics, November 1965):

9. National Institute of Economic and Social Research, Economic Review, no.16.

10. N. Davenport, The Split Society, Spectator, 8 November 1963.

11. A. Shonfield, Modern, p.106.

12. A. Shonfield, Modern, p.106.

13. See P. Baffi, Monetary Stability and Economic Development in Italy, 1946-60, Quarterly Review, Banca Nazionale del Lavoro, March 1961.

14. G.C. Allen, The Causes of Japan’s Economic Growth, Three Banks Review, September 1962.

15. G.C. Allen, Causes.

16. A. Shonfield, British Economic Policy Since the War (London, 1959), pp.167-168.

17. F.W. Paish, Studies in an Inflationary Economy (London, 1962), p.310.

18. F.W. Paish, The Limits of Incomes Policies, Hobart Paper 29 (1964), pp.24-25.

19. It is worth noting, by the way, that one of the people expressing views very similar to those of Professor Paish was George Woodcock: “George Woodcock, replying to Nigel Lawson on the TV programme Gallery, gave an answer equally remarkable for its fuzziness of words and its clarity of intent when he was asked what his reactions would be to 600,000 or 700,000 unemployed. Here it is: ‘Oh well, one would regret it but if this, in the circumstances, that is in the short run, is the only way we can really get ourselves on an even keel, we have to face it’” (Spectator, 28 May 1965).

20. The long term investment planning to which capitalism has been tied since the Second World War is a phenomenon intimately associated with the other changes we have pointed out in this chapter – the speed of technological change, the cutting of trade barriers, the existence of more or less full employment. All these developments are rooted in the fact that for a long period now – in fact since the beginning of World War Two – crises of production in capitalism have been more or less eliminated. This in turn is rooted in the war economy and its successor, the permanent arms economy. For further elaboration, see T. Cliff, Perspectives of the Permanent War Economy, in A Socialist Review (London, 1965), pp.34-40; M. Kidron, Rejoinder to Left Reformism, International Socialism 7 (Winter 1961-62); and H. Magdoff, Problems of United States Capitalism, Socialist Register 1965, pp.62-79.

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Last updated on 19.4.2003