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Chapter Two: Is it incomes policy or wage restraint? |
On 30 April 1965 George Brown told the Conference of Executives of Trade Unions, “This is not just a wages policy but an incomes policy. It is not only just an incomes policy but a prices and incomes policy.”
In other words, he was at pains to argue, the incomes policy will be perfectly fair because it will apply equally to all incomes. In this chapter we shall discuss whether this claim has any truth.
There is a qualitative difference between wages and profits, in that wages are a necessary part of the costs of production while profits are not. Profits are a residue left over after production and sale, while wages are not. And wages are negotiated between two sides, while profits are not. All the talk about putting the same restraints on profits and wages, in fact, covers up the basic contradiction in any policy of planning of profits. This was very well expressed in an editorial in DATA Journal in June 1965:
Wages and salaries are determined by negotiation and bargaining. Any changes in their magnitude are subject to discussion in advance of the changes being made. Profits in contrast are not subject to negotiation. An employer does not have to negotiate with his workers to secure an increase in profits.
Profits, moreover, are the motor of advance under capitalism and they act as the only reliable measure of how well an enterprise is doing. If the profit motive under capitalism is damped down, then economic growth will be damped down too. The Statist, a mouthpiece for business interests, pointed this out very clearly:
It is precisely because profits do play a specific and essential role in a capitalist economy – in providing the finance for expansion, the inducement to invest and the stimulus to efficiency – that their control is such a hazardous, not to say impossible, operation.
So long ... as we maintain the capitalist rules of the game, so long as we continue to discard the idea of a total state planning, we must allow profits a high degree of flexibility. [1]
The same point was made by the management of the Dunlop Rubber Company, when it published Dunlop’s Statement of Intent in support of George Brown:
Profits for Security and Growth. We are in a competitive business. Our success is measured by the profits we make. Augment them, be proud of them and recognise them as the fund which provides our security and the tools for our future success.
And Professor Paish put the argument against a profit freeze under capitalism in a nutshell: “To try and peg profits would mean that every firm would be working on a cost-plus basis and would lose all incentive to keep down costs”. [2]
And if, instead of pegging profits directly, measures were taken to limit profits indirectly by imposing taxation on firms making high profits, the effect would be much the same:
A high rate of profits tax has no effect on the inefficient firm which is only just managing to stay in business, while it increases the difficulty of efficient firms in obtaining the finance they need for expansion, both from internal sources and, very probably, the market. It also reduces the incentive to keep down costs, especially in the form of expenditures such as advertising, which may still be yielding some residual benefit to the firm after the tax, it may be hoped, is reduced or removed. No system could be better designed to slow down growth than one which keeps the inefficient alive, prevents the efficient from expanding, and reduces for everyone the incentive to keep down costs. [3]
Because profits are the locomotive of capitalist growth, it follows that the higher the rate of growth the more profits grow: “Typically over the last decade, whatever the percentage increase in industrial output in any year, the increase in company profits has been nearly three times as great”. [4]
Profits rise most where industry is growing most, where industry is at its largest, where industry is most monopolistic. A statistical analysis by Ken Alexander and John Hughes, for the years 1948-59, shows an increase of nearly 60 percent in profit per unit of output in metal manufactures, chemicals, bricks and glass. In vehicles, “other metal goods”, food, drink, tobacco, and engineering and electrical goods the rise was about 40 percent. These industries typically have a small number of leading firms and a record of extensive collusion in price fixing. On the other hand, in textiles, clothing, timber, paper and printing there was either no rise or actually a fall in profits per unit of output. [5]
It is clear that a policy of levelling profits downwards under capitalism would produce industrial stagnation:
The notion that company profits can be limited to, say, a 4 percent increase in line with the expected increase in national productivity is ludicrous. In any particular year the profits of any one industry, which may be recovering from a slump, will be advancing by, say, 50 percent, while the profits of another, which may be turning down from boom, will be declining by, say, 10 percent. To put an extra tax on profits which have risen through the greater skill of the management would be to tax and discourage efficiency. The Labour Party must accustom itself to the idea that the efficient profit-makers in a mixed economy are the pillars of the trading state. It is private enterprise which runs the export trade, which enables the nation to pay its way in the world and secure a surplus on its balance of payments. Sometimes it is the flamboyant business tycoon, drawing on an immense expense account, who is responsible for the most spectacular success in foreign markets. Wilson has got to make those businessmen feel that they can work with profit under a Labour government. And by “with profit” I do not mean a meagre profit. [6]
Nor is any “long-run” limitation of profits over a number of years possible. As long as a tiny section of the population owns and controls industry and therefore controls investment decisions, any attempt to “control” profits would simply result in the owners and controllers of capital sending their money abroad, to sunnier climes. Any serious suggestion of control would lead to a complete shutting up of investment in Britain.
No. Profit is the lifeblood of capitalism. If you are allergic to profit then you just can’t run a capitalist economy. Therefore as long as the Labour leaders are committed to such an economy they cannot and dare not harm or gag profits. A Fabian writer, J.R. Sargent, was really quite consistent when he argued that a Labour government should allow a more unequal distribution of income, in the interests of capital accumulation and a faster rate of growth. As he pointed out, if wages rose seriously compared with profits, the effect would be quite disastrous:
As the share of wages continued to rise, and profit margins were further eroded, the lifeblood of capitalism would begin to run dry. Capital would try to flee abroad, and would presumably be checked by applying exchange control with the necessary severity. This done, businesses would gradually begin to close down, as there would be insufficient profit to induce them to replace their worn out assets. [7]
Profits consist of the residue that is left from the selling price of a commodity after the costs of production have been deducted. So, to control profits, there must also be control of prices. In fact, however, to control prices is an extremely complicated, indeed an impossible task. First of all, price formation is a very intricate process:
Price leadership, marginal selling, optimum product and price “mixes”, branding, scale economies, the concept of “the contribution”, and pioneer profit ideas are just a few among literally dozens of subtleties which can make price figuring among the most complicated arithmetic business gets involved in.
What, ask the critics, will the review body make of complex price structures like organic chemicals and pharmaceuticals? Here they would find that at one end of the scale there are “bread and butter” products that on paper make no profit at all (though because they are sold in big volume they make a useful contribution to research and other overheads) while at the other end are innovation products attracting pioneer profits of perhaps 100 percent or more on the apparent unit cost.
How, too, will the “wise men” find their way through the complexities of differential pricing? One example here is where a manufacturer sells, at vastly different prices, precisely the same product under his own brand label and as, say, a retailing chain’s “house” brand. Another common example arises when manufacturers “load” the British prices to the maximum extent that the competition permits so that they can afford to operate at highly marginal prices in export markets. [8]
With prices so numerous and so complicated, how can a central body determine the “right” profit per unit of output? This was precisely the problem the National Incomes Commission (NIC) met when it tried to discover how big profits were in the industries it was investigating. The NIC asked the employers if they would provide figures for turnover and profits, keeping the identity of the firms anonymous. The electrical contractors (NFEA) replied that they were very sorry, but they couldn’t provide a sample of turnover and profits from their members and there was nothing else they could do to assist the commission beyond the written evidence already submitted. [9] The other employers the NIC tried to investigate made much the same reply.
It’s true, of course, that in some cases the government might persuade a firm or an industry to hold down the prices of a particular product for a certain period, but these firms and industries can compensate themselves by altering the prices of other products. Since the typical firm today makes a multitude of different products, this is really very easy. One example will do. During the bakers’ strike in November 1965 the employers, the Federation of Wholesale and Multiple Bakers, were holding down the price of bread for three months, by agreement with the Prices and Incomes Board. But, as the bakers’ union complained to George Brown, while bread prices were held steady for a time, the prices of rolls, cobs and confectionery were being put up by as much as 50 percent in some places, and without reference of any sort to the Prices and Incomes Board. [10]
The Department of Economic Affairs has estimated that something like 3 million price changes are made each year, so it is hardly possible for the Prices and Incomes Board to keep track of them all. As for the government’s proposed “early warning system”, this may help to delay price increases but, as the Confederation of British Industry suggested, it is unlikely to contribute very much to price stability. And the OECD Report of August 1964, discussing the problem of applying an incomes policy to non-wage incomes, came to the not very surprising conclusion that price controls were useful only as an emergency measure for short periods.
One way of selling the idea of an incomes policy to the labour movement is by pretending that dividends and profits are the same things, or that at least dividends make up a decisive portion of profits. Sir Stafford Cripps’s wage freeze of 1948-49 was justified by using the “dividend freeze” trick. And it’s not uncommon today for apologists for the incomes policy within the labour movement to demand control of dividends as a fair bargain for the control of wages.
Wages are the payment that workers get for the sale of their labour power, but dividends are not the payment that capitalists get for their ownership of capital. The dividend is only part of the payment to the shareholder. If a worker gets a wage rise of 5s a week instead of 8s a week, the extra 3s are never collected up for him to draw at a later date. The wages that a worker loses he never sees again. But with a shareholder it’s very different. If he gets a dividend of 5s out of a profit of 8s, the other 3s are probably transferred to investment and will come back to him as a capital gain a few years later. The dividend that the shareholder loses he does see again, in another form.
It is a central feature of the contemporary tax scene that the capitalist nowadays prefers capital gains to dividend income. Dividend freeze wouldn’t suppress capital gains, but instead would make them even bigger: “It is well known (indeed it is constantly broadcast by the financial press) that it ‘pays’ a surtax-payer to select securities which have a low dividend yield but a high degree of expected capital appreciation”. [11]
What’s more, in the case of successful companies, not only may the value of the shares (capital appreciation) be greater than the rise in dividends, but also it may be greater than the rise in profits as a whole, as represented in growth of company reserves from the continuous “ploughing back” of undistributed profits.
Take the cases of Woolworths and Marks & Spencer. In February 1955 the market price of all the shares in Woolworths amounted to some £280 million, while share capital and accumulated reserves together came to only £39 million. Marks & Spencer’s shares were worth £128 million, while their share capital and reserves came to only £20 million. [12]
A firm of London stockbrokers carried out a survey in 1959 which showed that the total value of six ordinary shares valued at £1,000 in 1913 had risen by 1 September 1959 to £73,840. [13]
Again, if £1 million had been invested on 1 January each year since 1919 in a representative group of “blue chip” industrial equity shares and the gross income had been reinvested at the end of every year, the total value of the fund on 1 January 1960 would have been £646,330,000. [14] Yet again, “It has been stated that £100 invested in 1951 in each of the following companies would have grown by May 1961 to these pleasing amounts: Jaguar, £3,098; GUS, £2,777; Legal and General, £1,744. [15]
“Never has so much money been made from property as in the decade 1949-59,” wrote Frederick Ellis, City editor of the Daily Express. He estimated that nine men had made a total net capital gain of £40,000,000 since the war. The Board of Inland Revenue statistics show that in 1957-58 there were only 2,600 people with incomes, before tax, exceeding £20,000 a year. [16]
Recently the Economist carried a study of the British tax system in the course of which it fully confirmed the above analysis:
Briefly, the rich do not only have more money – they also make it multiply faster. Thus cash and fixed interest securities represent 45 percent of the wealth of individuals with less than £10,000, and equity shares only 5 percent. By contrast, equities represent 56 percent of the wealth of those with over £250,000, and cash and bonds only 22 percent. As a result, the average capital appreciation of the assets held by the wealthiest group, on this average composition, has been 114 percent between 1950 and 1964, while the assets of the £3,000-£10,000 group have appreciated by only 48 percent. [17]
It should be added of course that these figures refer only to the quite well off sections of the population anyway. Only 12.1 percent of the population have wealth invested of more than £3,000. The remaining 87.9 percent of the population undoubtedly saw their few pounds in the Post Office Savings Bank grow by even less than 48 percent.
Nicholas Kaldor calculated that if dividends had risen parallel with industrial production over the last few years – at a rate of somewhat under 3 percent a year – then there would have been an average annual increase in dividend payments of the order of £25 million to £40 million, while at the same time there would have been an average increase in the market value of ordinary shares of £500 million to £800 million a year. [18] This should make it clear that, even if wage rises were kept in step with the rise of dividends, they would be very much out of step with the rise in the value of shares in the market.
James Callaghan’s capital gains tax won’t alter the picture in any real sense. Even when capital gains tax is in full operation, it will – when taken together with stamp duty and death duties, the other two “wealth taxes” – “still amount to a property levy of under 1 percent a year”. [19] For, quite simply, Callaghan’s tax is not a tax on capital. A millionaire who improves his capital position after April 1965 is not liable to tax on his gains. He only has to pay the tax if he realises his extra wealth by selling his shares. But of course, precisely because he is a millionaire, he can very well afford not to sell, for he can live very nicely on his large income:
It is not just that the wealthy are financially more sophisticated – they are also genuinely better placed to take risks, and need to keep a smaller proportion of their money unprofitably as a liquid reserve. The awkward fact is that any tendency towards a more even distribution of wealth in Britain is being counteracted all the time by these differences in its composition. [20]
The British rate of capital gains tax (30 percent) is only marginally above the rate that has existed in the United States over the last 30 years (25 percent) – and not one US millionaire has ended his life on the dole so far because of this! Indeed, one of the main effects of the Labour government’s tax has been to push the value of shares up still higher because shareholders (to avoid the tax) are less willing to sell. Consider the example of the owner of six ordinary shares valued each at £1,000 in 1913 that we mentioned above. The value of his shares would have risen to £73,480 on 1 September 1959. If he had had to pay Callaghan’s capital gains tax his wealth would have risen to “only” £51,988, which is not too bad really!
Nor is capital appreciation the only item on the profits side which the supporters of incomes policy quietly forget. There are also many “fringe benefits” like expense accounts, trust funds, golden handshakes, tax fiddles, etc., etc.
As regards golden handshakes, a few examples will suffice:
Some of the cases which received mention in the press in 1959 and 1960 included the following: Lord Portal £30,000 and Mr G. Cunliffe £58,000 (British Aluminium takeover, Economist, 14 March 1959, p.1001); Mr L. Nidditch £40,000 (Ely Brewery and Jasper takeover, Times, 30 June 1960); Mr Perkins £30,000 (Perkins and Co, New Statesman, 7 February 1959); Mr Baron £29,237 (Carreras, New Statesman, 7 February 1959); Sir Frank Spriggs £75,000 (Hawker Siddeley, New Statesman, 14 March 1959); and Lt Col W.H. Kingsmill £60,000 plus annual pension of about £4,000 (Taylor Walker, Times, 22 June 1959). [21]
Colonel R.W.W. Taylor, former managing director of Lang Pneumatic, received £40,000. [22] R. Craig Wood, former managing director of the appliance division of Associated Electrical Industries, received £30,000. [23] Philip G. Walker, former managing director of Reed Paper makers, received the huge sum of £124,000 in a golden handshake. [24] And Eric Morland, who served for only 26 months as managing director of Associated Fire Alarms, got a golden handshake of £20,000, or some £25 for every day of his “service”! [25] The reader should not forget that no tax at all is paid on golden handshakes ...
As for expense accounts, it was estimated in 1955 that expenditure on spirits and imported wines on business accounts reached the sum of £33 million. A survey of London nightclubs and late-night restaurants showed that most of the bills for entertainment were paid by firms and not by individuals. As the Economist put it, “Only Exchequer largesse paid directly via the tax-free expense account keeps the nightclub industry ticking at all”. [26] And Professor Titmuss tells us:
Lord Kindersley ... chairman of Rolls Royce, said that “most of their cars were bought by companies”. Among employees and directors in the top 1 percent of incomes it appears to be a general practice to provide either cars for their own use or chauffeur-driven cars or car services from a company pool or rental system. [27]
To golden handshakes and expense accounts should be added endowment policies, education trusts and scholarships, non-contributory pensions, etc – most of which are allowable as legitimate business expenses and none of which find their way into the statistics on income distribution.
So even if George Brown’s policy guaranteed that dividends didn’t rise faster than wages, there would be no guarantee at all that profits as a whole would not rise much faster than wages. Also, even if the rate of growth of wages and profits were equal (which it couldn’t be in fact), this would still not mean fairness, for the points from which the worker and the capitalist start are quite different. Three percent added to a weekly wage of £10 is nothing like 3 percent added to a profit of £1,000,000. Above all, the assumption that wages and other incomes should grow at the same rate means that the shares of different sections of society in the national cake are to remain the same. What a very conservative policy anyway!
But in fact, when incomes policy is referred to in discussions in the press, in parliament, etc, what is meant almost always is wages:
There is no doubt that to most managements with whom I have discussed it, an incomes policy (they rarely mention the prices side) means an attempt to discipline the unions, especially at shopfloor level. It means an attempt to come to grips with constantly rising labour costs. And to some it suggests that the government have taken a hand to try to remove restrictive practices.
Hardly an employer regards it as a means of introducing greater social justice into a chaotic wages and salary structure. Yet that is precisely how it is regarded by those trade unionists who support the concept. [28]
1. M. Spicer, Implementing an Incomes Policy 3 – And What About Profits?, Statist, 8 January 1965.
2. F.W. Paish, Limits, p.20.
3. F.W. Paish, Limits, pp.20-21.
4. Fabian Group, A Plan for Incomes, April 1965, p.3.
5. K. Alexander and J. Hughes, A Socialist Wages Plan (London, 1959), pp.60-61.
6. N. Davenport, The Split Society, Spectator, 29 November 1963.
7. J.R. Sargent, Out of Stagnation (1963), p.33.
8. C. George, Snags for Industry in a Prices Review, Statist, 1 January 1965.
9. Cmnd. 2098 (Public Records Office, 1963), p.54.
10. Guardian, 22 November 1965.
11. R.M. Titmuss, Income Distribution and Social Change (London, 1963), p.108.
12. R.M. Titmuss, Income, p.110.
13. R.M. Titmuss, Income, p.110.
14. Times, 14 March 1960, quoted in R.M. Titmuss, Income, pp.110-111.
15. Observer, 17 September 1961.
16. R.M. Titmuss, Income, p.112.
17. The Indefensible Status Quo, Economist, 15 January 1966, p.218.
18. Quoted by R.M. Titmuss, Income, pp.111-112.
19. Economist, 15 January 1966, p.217.
20. Economist, 15 January 1966, p.218.
21. R.M. Titmuss, Income, p.136.
22. Financial Times, 10 March 1964.
23. Financial Times, 7 April 1964.
24. Financial Times, 30 June 1964.
25. Times, 1 September 1965.
26. Economist, 11 April 1959, p105, quoted in R.M. Titmuss, Income, p.180.
27. R.M. Titmuss, Income, p.178.
28. G. Goodman, From Consent to Compulsion?, Statist, 7 May 1965.
Last updated on 20.1.2004