Some things are missing
The problem with all of these documents is they do not answer the question of how to recover on an economic and politically practical basis combining mechanisms, procedures and policies. Part 1 of this series sought to explain how the hegemonic cycle effects in the sense of the transition from early manufacturing to gains from scale transformed into exports, the accumulation of capital and an increasing financialization of business, the economy and policy has resulted in the United Kingdom becoming uncompetitive. A serious balance of payments crisis is a permanent feature while many praise the contribution of the City of London financial services in preventing the balance of payments from being a good deal worse. It is the transformation of profitability from industry to financial services which is witness to the fact of the degree to which financialization has hollowed out the real economy and gainful employment.
Nicholas Kaldor, in his inaugural lecture as Professor of Economics at Cambridge University in 1966, emphasized the importance of maintaining a significant manufacturing sector as a basis for maintaining economic growth largely based on returns to scale and innovation. He linked this to the maintenance sound wages and employment. He saw the dangers and also the futility of the logic behind the drive to monetarism by the Thatcher government which led to the virtual destruction of UK manufacturing. So we can see here that if Kaldorian economics had prevailed we would not have suffered the hollowing out of UK manufacturing described by Jon Crudddas in his book, "The Dignity of Labour".
One of the most important focal points of John Cruddas' book is in the title and it refers to the decadence in status and social role of working people using the Dagenham plant and local community as a background reference as evidence of this process of decay. This concentration on this evidence is valid but it limits the analysis to a microcosm of what was happening in the United Kingdom as a microcosm of what was happening in the world economy.
International, national, devolved and local perspectives
A sound study of economics and a life pursuing economics is a series of realizations that the system is complex and somewhat like an onion with multiple layers, with layers of decisions and actions impacting each other. In order to come to workable models of how the economy works, in relation to politics, takes a long time to understand. By concentrating at any particular level, the reasons for events and even attitudes, often lack a "local" or even national explanation leading to local frustration, confrontations and very often, wrong conclusions as to solutions. This is because other layers in the system are significant constraints on change at the local level or on the other hand they impose prejudicial change such as that described by Cruddas. There is therefore a need to understand where the power of actionable decision making lies when analyzing a local issue such as the UK in the context of the global economy. This does not make the analysis of the local condition invalid, however, rather it means the local conditions are evidence of the actual impact of macroeconomic and global economic policies.
If one reviews how the macroeconomy was managed up until the 1930s, the centralized interference in interest rates were used to created an imposed mass reduction in effective wage rates when the balance of payments went in the wrong direction. Labour was treated in an arbitrary manner somewhat like an input commodity.
A participatory democracy?
With the coincidence of the arrival of universal suffrage in the UK, and a little later, the Bretton Woods Agreement, the rise of Keynesianism as a theory of how to avoid high unemployment, seemed to herald a new confidence in the UK that government could manage the macroeconomy more effectively. Paradoxically, the period 1945-1965 in the UK had steady growth, low unemployment and disparity of incomes declined while real incomes rose. What is often not understood is that although this is sometimes referred to as the Golden Age of Keynesianism, Keynesian policies were not applied for the whole of this period. This was revealed by Robin Matthews in his 1968 Economic Journal paper entitled, "Why Has Britain Had Full Employment Since the War?". Matthews noted that the country ran a positive balance and policy in fact was quite deflationary. While Keynes seemed to remain the darling of "socialists" the initiation of the National Health Service and a host of other reforms did not take place in a Keynesian policy framework. What was notable was that real incomes rose together with the purchasing power of the currency.
Shortly following this period, in 1971 Nixon came off the gold standard heralding a change in the fortunes of the UK and then the USA. First of all there was the rapid rise in international petroleum prices and the arrival of slumpflation, the combination of inflation with rising unemployment. In this period the existing economic theories of monetarism and Keynesianism and derived policies and policy instruments showed themselves to be inadequate and unable to solve slumpflation. The monetarist take-over in the 1970s was based on assertion and the so-called supply side approach, no more than a marginal tax rate reduction, meant policies in an attempt to reduce inflation with very high interest rates only accentuated the slump.
Much of Cruddas' analysis concentrates on this unfortunate period when economic policies during the following years were constantly informing us that the theory must be wrong as the growth in income disparity took hold to remain with us until the present day. So by tinkering with policies as options of a fundamentally flawed economic theory was never going to solve the problems facing plants like Dagenham. Although the process of introducing the cascade of ravages of monetarism on labour are associated with the Thatcher government, the flirtation with monetarism started under Denis Healey when he was Chancellor in the Wilson government.
The start of a counter-revolution still in progress
It is notable that Nicholas Kaldor, an opponent of monetarism, resigned from advising the government in 1976 and in 1977 commented that Labour had succumbed to the "monetarist hawks". As a result, subsequently, policies both of the Conservatives and Labour did not support export led growth based on manufacture but rather went along with globalization, monies flowing into offshore plants and employment prospects declining and with ownership having no interest other than government grants, all was doomed to failure. Productivity agreements were a basis for survival, but the across-the-board attack by the Conservatives on unions initiated a process which caused the general image of the unions to decline. This is paradoxical given the questionable behaviour of the government in condoning brutal action against the miners, for example.
The main bulwark against the counter-revolution has been the mainstream British media, largely funded by the benefactors of the Conservative party has made sure that the coverage of Labour and the Unions has been "under control". Blair and Brown's antics were more related to keeping the media on side than with delivering effective policies. Indeed, this is why the policies, based on the same flawed economic theories only contributed to the process of increasing income disparity and debt.
Because the Labour party always wish to keep the media at bay they continue to make statements, especially in the macroeconomic sphere, that simply uphold the status quo of banks managing their own affairs through the City of London lobbies and the Bank of England where we have seen significant asset inflation and reduction in real wages, falls in supply side investment and declining productivity.
Corporate accountancy regulations place labour as a cost as opposed to a beneficiary of supply side production resulting in rises in corporate taxation hurting labour; and yet the Labour party has recently supported a recent proposal by the Conservative government to raise corporate taxation.
The issue of the status of labour
Since Cruddas has little to say on the policy front it is worth dwelling on an isolated statement he made concerning the dignity of labour in the context of the loss of a sense of vocation in the pursuit of a skilled profession. Clearly the globalization agenda has hollowed out opportunities and destroyed the professional employment or many skilled people both by automation and exporting jobs to offshore plants. But the balance is currently changing with 40% of the British workforce earning the same as the average income of the population of Croatia and the Chinese hourly rates rising and making the expansion of onshore production more feasible.
In the period covering Cruddas' political experience the world had come off the gold standard and we were operating on a fiat currency system. During this period, something was going on in the background manipulating the context within which Cruddas analyzed events. The diagram on the left shows the situation of the balance of payments of the United Kingdom. With or without Ford at Dagenham, the situation was pretty bad. This was caused by a combination of events which accelerated the trends and events that Cruddas describes. For the United Kingdom the main driver was a very unfortunate decision by the Thatcher government to embrace monetarism and so-called supply side economics.
In the early 1970s conflict between Israel and Arab countries led to a period of some 20 years of rapid rises in the international price of petroleum causing a massive upward trend in cost-push inflation which caused rising unemployment. This combination came to be known as slumpflation or stagflation. Keynesian policy instruments offered absolutely no solutions to slumpflation. Keynesianism is based on a method of how to increase employment levels through government expenditure on "public works". The theory was that unemployment is the result of a fall in demand which was equated with the amount of money circulating in the economy. The corollary to this was that by injecting money into the economy "demand" can end up causing inflation. It is here that monetary policy comes in to apply high interest rates and reduce monetary injections and on the fiscal side governments might raise taxes to impose reductions in disposable incomes and "demand".
Supply side economics is not supply side economics
Robert Mundell a Canadian economist and Arthur Laffer came up with some ideas that became what is known as supply side economics. This had almost nothing to do with the supply side but was a marginal tax reduction scheme for higher band tax payers following a theory that if the better off have higher disposable incomes, net of tax, then investment will rise as will productivity and real wages as unit prices fall so as to drive down inflation. This model has a certain theoretical logic but this is the problem with much economic theory, like Keynesianism and monetarism there are two missing elements. One is that the theory and the policy contain no motivational governor to sustain progress or traction and the other is that Keynesianism, monetarism and supply side contain absolutely no technological or innovation content which should provide a mechanism or policy instrument of some kind to provide incentive to maintain the force of a motivational governor. We are referring here to a gap or lack of identification of any policy motivation to keep matters moving so as to gain traction and end up where policy decision makers have destined as the objective.
With or without supply side economics the overwhelming policy toolkit applied by the Thatcher regime was monetary. So to deal with the inflation under slumpflation, interest rates were raised to very high levels even although the inflation was not caused by excessive demand but rather by cost-push inflation. The only solution to this type of inflation was technological linked to substitution of the high cost inputs. The nature of human interests is such that providing a tax break through so-called supply side policy faced the risk that the higher disposable incomes would not be invested in supply side production but rather to invest in assets or invested abroad (offshore); this is what happened on balance. As a result corporate owners and executives became richer and work forces poorer. Income disparity rose sharply. During this period real incomes of wage earners declined and many lower middle income mortgagees were impacted by the extortionate interest rates which converted safe mortgages into sub prime mortgages and loss of homes. Close to a million individuals and family members lost their homes.
Academic signifies not applied - remember that
It is the case that over 350 academic economists wrote to the Times newspaper criticising these policies at the time but they did not come up with alternative policies. Anyone who listened to the leading macroeconomists over the period 1975 through 1985 could sense a lack of practical grounding and empirical evidence justifying what passed for no more than assertions. No theory or derived policies were convincing then. They remain without merit now. Notice that we are talking about an environment in which all of the policy instruments were not fit for purpose and it is this period that Cruddas describes in his book.
In the absence of an integrated theory, plan
Getting away from economic theory and macroeconomic policies it is notable that a degree of planning and tripartite collaborations between unions, industry representation and government, in fact worked to some degree; Jon Cruddas mentions this. However, these types of collaboration needed to be set up on an ad hoc basis because their logic is not part of the economic theory or derived policies of Keynesianism or monetarism. Economic sector or industrial policy in this country has therefore, always been an amateurish add-on to macroeconomic policy for lack of an integrated macroeconomic model. Not having the mainstream monetarist or Keynesian theoretical pedigree and stamp of approval, these add-ons become associated with the agendas of specific political parties and become political footballs to be abandoned by subsequent governments.
Is the "value" of labour really a topic of economic analysis?
Given the poor state of economic theory which has been constructed on a trail of contributions going back centuries it is perplexing as to why Jon Cruddas got into a discussion concerning Labour Theory of Value (LTV). There is a strange practice of the "left" or "socialists" dwelling on Marx and the various economic interpretations of the place of labour in the national production function and value categories as if to add some intellectual substance to the subject of interest, labour. The labour theory of value seems to be no more than a distraction from the fundamental crisis we face. This is better left to academic dissertations. The plight of labour and communities is a matter of such vital concern to the nation. It needs to be addressed in the context of constitutional principles supporting a better distribution of incomes linked to sustainable principles of fair treatment and establishing minimum real incomes. There is a need for a constitutional economics. But these are just words that sound promising. We have not developed this important aspect of this subject further in this article because APEurope Pool economists have advised us that the forthcoming "British Strategic Review" (Q3, 2021) entitled, "Monetarism & the real economy" covers this, and many more fundamental issues, in considerable detail. The most important aspect of this edition is that it lays out the evidence as to why monetarism and Bank of England orientation and management has been so destructive. One reason, and a matter of concern, is that much of the published and peer reviewed logic as the sum total of the intellectual effort of monetarists is severely flawed for demonstrable reasons. Central to this statement is that their decision analysis is based on a mathematical logic summarised in the Quantity Theory of Money (QTM) formula which completely overlooks several significant "black holes" or important relationships that drawn money away from the productive investment and as a result have caused the hollowing out of the real economy at an accelerated rate during the last 12 years.
Clearly any levels of hope in the "Britannia Unchained" document, published in 2012 have been dashed by the cumulative failure of monetarism and the spectacular failure of quantitative easing (QE) as the foundation for "austerity" in the intervening 9 years (2012-2021) that brought the country to a low point just before Covid-19 appeared.