lørdag den 23. august 2008

Questions of the Day (part 16)

Inflation and unemployment

IN THE LAST QUARTER of the nineteenth century, during what was known at that time as The Great Depression, and again in the depression between the two world wars, an increasing number of workers — and even some professional economists — were paying attention to the analysis of capitalism made by Karl Marx in his work Capital. Marx showed that unemployment, and its rise to peak levels in periodical phases of trade depression, arise put of the structure of capitalism itself, and are therefore inevitable while capitalism lasts.

This growing interest in Marx was all but extinguished with the publication in 1936 of J. M. Keynes' The General Theory of Employment, Interest and Money. According to the new doctrine it only needs that the government "manage the economy in such a way as to maintain demand" for full employment to be created and trade depressions to be abolished.

Keynes described Marx's Capital as "an obsolete economic textbook, which I know to be not only scientifically erroneous but without interest or application for the modern world" ("A Short View of Russia", J. M. Keynes, 1925. p 14). Keynesian doctrines were accepted by most economists, political parties and the trade unions. Writing in 1957 (Remedies for Inflation) Mr. (now Sir Harold) Wilson stated that the Labour Party and all other "major parties" were Keynesian. As late as 1974, in spite of the evidence that Keynesian techniques had been a failure, the Tory M.P. Mr. Peter Walker called his party "the party of Keynes and Disraeli"; while the Liberal M.P. Mr. John Pardoe said that the Liberal Party is "the party of Keynes and William Beveridge".

Alone in this country the Socialist Party of Great Britain insisted from the outset that Marx was right; that the new doctrines were fallacies; that full employment cannot be maintained; that trade depressions cannot be eliminated, that the remedies proposed were only disguised inflation and would do nothing to serve working-class interests.

The Labour Party adopted the new policy at its Annual Conference in 1944, in a Report on Full Employment and Financial Policy, which declared:

"If bad trade and general unemployment threaten this means that total purchasing power is falling too low. Therefore we should at once increase expenditure .... We should give people more money and not less, to spend."

The Tory Party was committed to a similar view; but such was the confusion created by Keynes' theories that neither Party recognised that this is a policy of the crudest inflation. So at every general election in the post-war years they continued to declare their opposition to inflation. Both parties pledged themselves to maintain "full employment", defined in the Labour Party's 1945 General Election programme as "Jobs for All".

In the history of capitalism, as Marx had explained, periods of good trade and low unemployment alternate with periods of bad trade and high unemployment. One such period of low unemployment occurred in the years immediately following the second world war (helped by work on making good war damage); but Labour and Tory Governments both claimed this to be evidence of their success in "managing the economy". From 1955 onwards, however, unemployment has been on a sharp upward trend, each peak of unemployment rising to a higher level — to 747,000 in 1963, to above a million under the Heath Government in 1972, and to 1,500,000 in 1976 under Labour Government, and to over 1,600,000 in July 1977, This was capitalism operating in its normal way; but it led many who had wrongly believed that Keynesian techniques would abolish unemployment to reach the false opposite conclusion: that it was those techniques that had been the cause of unemployment. The Times,13 February 1976, told its readers that "unemployment ... will decline as fast and as soon as we all forget Keynes".

But if Keynesian policies did nothing for unemployment, their effect on prices was that by 1977 the general level was ten times what it had been in 1938, and was rising fast.

Inflation is caused by governments going on year after year printing and putting into circulation hundreds of millions of pounds of additional paper money.

Wherever and whenever currency has been issued in excess, the price level has risen; and wherever and whenever currency has been restricted, prices have stabilised or fallen. In the period 1920-23, the printing presses of the German central bank were busy day and night pouring out notes, and prices were rocketing upwards. In Britain in the same three year period the Government had decided to halt inflation; the note issue was restricted and prices were falling fast.

Inflation is not the only factor affecting prices. In Britain, in the 90 years before 1914 when there was no inflation (the price level in 1914 being below that of 1820), prices rose moderately in trade booms and fell again in periods of bad trade, a process also explained by Marx.

The reason there was no inflation in Britain in the century before 1914, was that through the operation of the gold standard the note issue was controlled. Beyond a fixed low limit the Bank of England could not issue additional notes without adding an equivalent amount of gold to the reserve in its vaults. Also the notes, by law, were freely convertible into a fixed amount of gold — one pound or a sovereign being fixed at about a quarter of an ounce of gold. Gold coins and Bank of England notes both circulated; but because of legally enforced convertibility a Bank of England note "was as good as gold", and the combined circulation of notes and gold coins was equivalent to the circulation of a total amount of gold.

Marx showed that if that total amount of gold is replaced by inconvertible paper money, and if the amount of that paper money is then issued in excess, prices are pushed up accordingly.

"If the quantity of paper money issued is, for instance, double what it ought to be, then in actual fact one pound has become the money name of about one-eighth of an ounce of gold instead of about one quarter of an ounce .... The values previously expressed by the price £1 94 will now be expressed by the price £2" (Capital, VoL 1.
Allen & Unwin Edition, p. 108).

Governments since 1938 have followed the policy of continually increasing the amount of currency in circulation, from under £500 million in 1938 to over £7,000 million in 1977, an increase far beyond any increase that would have been necessary because of the expansion of total production and trade. In 1976 and 1977 when the Government claimed that its "wages and incomes policy" would curb inflation the flood of additional paper money went on without interruption.

The man, more than any other, who was responsible for abandoning the nineteenth-century policy of controlling the amount of paper money was J. M. Keynes, who declared that it was no longer necessary "to watch and to control the creation of currency".

So for 40 years the major British political parties and the trade unions have been misled by the Keynesian policy of inflation into believing that capitalism could be rid of unemployment and trade depressions. It failed as it was bound to do with the market conditions and 'free' labour conditions of the western world.

Marx showed, and subsequent events have confirmed his analysis of capitalism's economic laws, that, arising from capitalism's inescapable anarchy of production, its progression is the cycle of moderate expansion of production and sales, then boom, then crisis, then depression. But just as there is no Keynesian device which will secure conditions of permanent boom, so there is no such thing as a permanent depression or "collapse of capitalism". (In the middle of "The Great Depression" Frederick Engels, three years after the death of Marx, did temporarily hold that Marx's cycle had ceased to operate and put forward a theory of "Permanent Depression"; but events soon showed this to be wrong and he returned to Marx's view — Preface to Capital 1886.)

In a depression, with bankruptcies which remove competitors, stocks of unsold goods disposed of, wages restrained by unemployment, and raw material prices and interest rates forced down, sooner or later conditions return restoring prospects of making a profit and capitalism expands again: but only to repeat the cycle. There is, however, one kind of 'collapse' that can occur, a collapse of the currency if the excess issue is expanded to the point where the currency as Marx put it "falls into general disrepute", and nobody wants to hold or receive paper money.

Although he only half understood the problem, such a situation was foretold by Herman Cahn in his Collapse of Capitalism published in 1919. What he foretold as inevitable, like an "Act of Nature", was that "within a few years" (or within a year if the war continued), there would be collapse and "social chaos"; out of which, though the workers were not prepared for it, Socialism would arise.

A currency collapse was at that time on the way in the great German inflation (by contrast the British Government had decided in that year to halt it). By December 1923 inflation in Germany had reached fantastic proportions and unemployment had risen to 30 per cent of workers registered as unemployed, an unknown number not registered, and 42 per cent on short time. There was indeed "social chaos" while a new currency was issued and conditions got back to normal. But chaos does not produce Socialism. In Germany it helped to prepare the way for the rise to power of the Nazi Party under Hitler.

The situation in Britain in 1977 is that, although Keynesian inflation has lost many of its adherents, the Keynesians have not given up the struggle. Under the name of 'reflation' it is still being pushed by the T.U.C., by some professional economists, by Labour Party leaders and by some of the Tories and Liberals. (Most of the 'Left-wing' organisations are all for it.) If the inflationists have their way they could produce a currency collapse here. The dilemma of all parties is that if they abandon the Keynesian belief that unemployment and depression can be eliminated under capitalism, what can they do except face the alternative — fearful for them — of getting rid of capitalism?

Some politicians and economists are now urging a return to the nineteenth century gold standard in order to get rid of inflation.

It only needs to add that getting rid of inflation is not the answer. Capitalism without inflation, as in the nineteenth century, no more solves working class problems than does capitalism with inflation, as in the years since the end of the second world war.

Further Reading

Marx versus Keynes SPGB education document
The Marxian Theory of Inflation SPGB education document
the Edgar Hardcastle Internet Archive

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