Boffy's Blog: Michael Roberts and Inflation

Wednesday 16 June 2021

Michael Roberts and Inflation - Part 10 of 16

When Roberts says,

“This is the mirror image of the 1970s, when unemployment rates rose to highs, but so did inflation, and we had what was called ‘stagflation’. Both examples show that the Keynesian cost-push theory is false.”

This is not an accurate depiction of what, in fact, happened. During the 1960's, as Glyn and Sutcliffe and others have shown, Marx's description above could be seen to be developing. As stated previously, the unemployment rate in the 1960's was around 1-2%, compared to the current rate of around 5%. Even at it recent lows, it fell to only around 4%, even on its grossly modified basis, and only compares with the period of the 1970's, when unemployment started to rise rapidly! In the 1960's, wage share rose, squeezing profits. The rise in wage share was not seen just in actual wages, but also in a rise in the social wage, for example, the introduction of all The Great Society welfare measures introduced by Johnson in the US. The US, in particular, covered these additional costs by printing more money tokens. Roberts, in looking at costs in the 1970's, seems to have forgotten the effects of the quadrupling of global oil prices in 1973, at a time when oil formed a much more significant element of costs than it does today. That increase in costs also fed through into pressure on wages, similar to that described by Marx following on from Ricardo.

Moreover, in the 1970's, workers and their organisations still benefited from the previous 25 years of growth and confidence arising from the period of the long wave uptrend. So, for example, in 1972, miners were able to strike and win a sizeable pay rise, of more than 27%, followed again in 1974, in a strike in pursuance of a 35% pay increase that also brought down the Tory government. And, in the period between 1973 and the fall of the Heath government, a sliding scale of wages, for all workers, was introduced, so that wages were increased in line with the rapidly rising prices.

What is true is that, after 1974, the Labour government, basing itself on Keynesian ideas, attempted to halt the inflationary spiral by introducing a prices and incomes policy, which inevitably failed, as the government also attempted to introduce counter-cyclical demand management policies that were paid for by printing additional money tokens, and borrowing. Eventually, that dam was broken when Ford workers won a large pay rise, which led to other workers demanding large rises too. As the Labour government resisted those claims, during the Winter of Discontent, it led to the conditions for its dismissal and the election of Thatcher. In the 1980's, money supply was constricted severely as a result of the policies of Volcker in the US, and a similar shift in policy elsewhere, and firms could no longer pass on higher costs in higher prices. Businesses had to resist demands for higher wages, and as the example of the miners in Britain, and Air Traffic Controllers in the US showed, even with much greater levels of militancy, and prolonged struggles, workers were unable to win higher wages, or even save their jobs, as capital also introduced new technologies that replaced labour.

The other factor that has to be taken into consideration is the effect of increases in the supply of money tokens on economic activity itself. Marx describes the inflationary effect as being from the fact that more money tokens are put into circulation than would have been the case of the money they are to represent, which itself is a function of the value of commodities to be circulated. If, additional liquidity results in increased economic activity, for example, because the state uses the additional liquidity to fund spending, be it for additional infrastructure, or to employ additional teachers, or nurses, then this additional value of commodities being circulated, would itself absorb some of the additional liquidity, if not more. This is the argument of MMT.

Prior to the Industrial Revolution in 1760, Britain's borrowing, and, thereby, money supply increased massively, reaching 250% of GDP, as the state created the conditions and infrastructure required. Marx notes,