Ted Grant

Would reflation solve our problems?

A reply to Tribune

Written: November 1978
Source: Militant, November 17, 1978 and November 24, 1978
Transcription/Markup: Emil 2001/2006
Proofread: Emil 2001

It is not merely bloody-mindedness which has led the capitalist class to adopt the ferocious policies which are put forward by people like Keith Joseph, Margaret Thatcher and the other leaders of the Tory Party and which are also advocated by the CBI at the present time. The CBI, for example, is calling for a further cut of £3,000 to £5,000 million in state expenditure, a programme that would undoubtedly be attempted by a new Tory government.

Of course, the capitalists and their Tory flunkies in Parliament would not feel the effects on themselves or their families. They have private education, private insurance, private health and hospital care. Faced with the crisis of their system, therefore, they are quite prepared to wreck the former "welfare state".

It is their pressure which has compelled the labour leaders to take the measures of retrenchment they have done.

The reason why the ruling class ekes the position of "class war", of savage cuts in living standards, is that there is no other way if capitalism is to survive. As Marxists explain, it is the working of the social system as a whole which explains all the developments that are taking place at the present time.

The reason for the intransigence of the capitalists in comparison with the position of the 1950s and the 1960s is that in the meantime there has been an enormous fall in the rate of profit. The CBI complains that this year the rate of profit will only be 3%. In the 50s the rate of profit actually reached 35%.

This fall in the rate of profit, of course, is due to the very expansion of industry. The fact that the capitalists have to spend more and more on what Marx called "constant" capital (i.e. machinery, and buildings, etc) means that the ratio of the "constant" to the "variable" capital (i.e. the wages that are paid to the working class) has increased enormously in the course of the last few decades.

The capitalists get no profit from the investment in machinery and buildings. The only profit they can make is from the surplus labour - that is to say, the unpaid labour of the working class. That is what the investigations of Marx into the capitalist system demonstrated. Thus capitalists are cold-blooded and brutal in defence of the sacred god of profit.

And it is these difficulties which explain why the capitalists have taken the stand that they have on the question of cutting state expenditure and further cutting into the share the working class takes of the wealth it produces. They begrudge even the miserable amount of tax that they pay at the present time, and want more and more and bigger and bigger subsidies for the industrialists.

The fact that they cannot stand on their own feet is an indication of how parasitic monopoly capitalism has become during the course of the last five or six decades. They rely on national assistance from the state. They are millionaire parasites and beggars. Why should the labour movement accept this monstrous situation?

Whatever measures are adopted by the state, so long as the monopolies control nine-tenths of productive industry, they will provide no solution to the problems of British capitalist society and even less so for working people.

Neither inflationary deficits in state expenditure, nor cuts in state expenditure and deflation will solve them.

Under these circumstances, the only solution that would solve the needs and the interests of the working people lies in the transformation of society. Marx long ago explained that one social system is replaced by another social system when it can no longer serve to develop the productive forces, that is to say the means of life, the power of man over nature.

Once a social system becomes an impediment to the development of the powers of science, of engineering, of technique as the capitalist system has now begun to do, that marks the beginning of the end for that social system. This is shown by the fact that on a world scale productive capacity of industry can only be utilised at the present time to 85% in the USA in "boom", and in the case of Britain, only 80% of productive capacity is now being utilised.

The wave of strikes threatening to engulf Britain this winter, following on the car workers' disputes, the bakers' strike and many other "small" strikes is an indication of the present mood of the organised workers in Britain. This is through the experience they have gained during the last three years.

They have seen the falsity of the arguments of the right-wing labour leaders that by tightening their belts and by accepting low wages and derisory increases they can fight inflation.

Cuts in standards of living have reached a level to which the working class is no longer willing to submit. The complete bankruptcy of the position of British capitalism, and standing on this basis of the ideas put forward by Callaghan, Healey and the other leaders of the right wing of the Labour Party which have benefited big business by a bonanza of profits at the expense of the workers, has led to the more advanced layers of the working class in the labour and trade union movement looking for a different solution to their problems.

It is in this atmosphere that the Tribune has come forward (in its issue of October 14) to argue for an increase of £1,000 million in public expenditure.

Putting forward what they imagine is a moderate and realistic programme, Tribune claims that an increase in state expenditure on these lines would lead to at least 235,000 new jobs.

This demand is exceptionally moderate when it is considered that the cut in state expenditure in 1975 and 1976 was £8,000 million. The health service, social services, transport, and other state and municipal services have been undermined as a consequence of the cuts.

Against this background, even an increase of £1,000 million would be a mere flea bite in face of the problems which are facing the British state and which are facing the working class.

The question that immediately arises is why in all the countries of capitalism - America, Sweden, France, Britain - there is a rejection of these Keynesian ideas - that through state expenditure and deficit financing the problems of the market can be solved for capitalism? Why should the Treasury, Callaghan, Healey and the other leaders of the Labour Party - or if it comes to that, the Tories - why should they be in favour of slashing state expenditure if, by measures of state expenditure, it would be possible to solve the problems which face the ruling class and the British people at the present time? The idea that the ruling class does not understand how to run capitalism, that the ruling class does not understand its own interests, is pathetic.

It is the experience of the last twenty-five years which has crushingly demonstrated to the ruling class what the Marxists have always argued, that Keynesianism, i.e. deficit financing over a period, far from solving the problems of capitalism actually aggravates them.

One of the main reasons for the explosion of inflation throughout the world during the course of the last three decades has been precisely deficit financing on the part of capitalist governments. The Keynesian illusion has been completely shattered for all serious capitalist politicians and for all serious capitalist economists.

The Tribunites have correctly attacked the "monetarists", the theories of Friedman and other representatives of capitalism. These are the theories which have been accepted by the Tories as the basis for the policies of the government in the future. Their theories, in fact, are the theories of deflation, of cutting down state expenditure, of holding down wages, and in that way guaranteeing the value of the currency. By that means they hope to end inflation.

As correctly pointed out by the Tribunites and trade union leaders, this would mean mass unemployment, it would mean a collapse of the market, it would mean untold misery and degradation for the working class in Britain. This "cure" is even worse than the disease.

All that is perfectly true, but it does not alter the fact, that from the point of view of capitalism, such a policy is nevertheless the only solution to the problems that they face at the present time. To continue on the road of deficit financing, would inevitably mean an increase in inflation to the level of that in the Latin American countries, and if continued, to even worse.

That is why the ruling class has abandoned completely the illusions of Keynesianism, that it is possible to solve the problems of the capitalist economies by measures of state expenditure.

The Tribunites answer the arguments of the Marxists by accusing them of being monetarists. In reality, all that the Marxists are doing is analysing the way in which the capitalist system works, and recognising that on the basis of capitalism any increase in the number of pieces of paper, or pound notes in circulation, without the backing of goods or gold, would inevitably mean an increase in inflation.

The idea that this elementary proposition of economics, not even Marxist economics, is "monetarism" is ludicrous. Karl Marx wrote, more than 150 years ago: "If the quantity of money issued be double what it ought to be, then as a matter of fact, a pound would be money made not of a quarter of an ounce, but on an eighth of an ounce of gold. The effect would be the same as an alteration taking place in the function of gold as the standard of prices. Those values that were previously expressed by the price of a pound of would now be expressed by the price of two pounds."

Leaving aside the reference to gold, which it is not necessary to explain in this article, it is clear that if the number of notes, taking the economy as a whole, which would cover the amount of goods that are produced would be 1 million, and the state, in currency and treasury notes increased this (for arguments sake) to 2 million, it would mean doubling of prices.

In that sense, the arguments of Mrs Thatcher and the arguments of Keith Joseph - the arguments of the right-wing leaders of the Labour Party - are perfectly correct: deficit financing and the use of the printing press inevitably leads to inflation.

Of course, they do not see the other side of the contradiction; the consequences of deflationary policies. As far as the working class is concerned, neither inflation nor deflation can solve the problems that face them. It is only the choice of hanging or burning.

The real problem as far as the Tribunites are concerned, is that they do not understand the capitalist system as a system of production. Capitalism works by the fact that the surplus, or unpaid labour of the working class, is the profit of the capitalist class.

This creates a dilemma for the capitalists in the sense that they themselves consume in luxury and wasteful expenditure only a small part of the profit that they make.

Most of the profit or the surplus extracted from the labour of the working class is reinvested in industry, commerce, tourism, investments abroad, or other forms of capital expenditure.

One of the most telling points made in the Tribune article, a point which has been repeatedly emphasised by Militant, is the fact that the big monopolies in Britain, the big corporations, pay almost no tax whatsoever. This is because of the exemptions, the very lavish exemptions, given by the government allegedly to stimulate investment. In addition, corporation tax, like all the other taxes intended to hit the rich and to hit the monopolies, has in practice a thousand and one loop-holes through which the monopolies have succeeded in reducing tax to negligible proportions in the last two or three tax years.

It has become such a scandal that even serious papers of the capitalists like the Sunday Times have taken it up, pointing out that it is through tax loop-holes and through the numerous subsidies that the corporations pay no tax whatsoever. That is why the formula adopted by the Tribunites Stuart Holland and Paul Ormerod of tax relief "only on the basis of proven need" is a naive formula. If by "proven need" they mean the need of the individual then that should be stated; just as national assistance is given to individuals on the basis of need only, so in the same way we have always argued that when industries are nationalised compensation should be paid on the basis of need only.

The Tribunite formula is so ambiguous that is not clear that this is intended. On the contrary, what is obviously meant is that the "lame ducks" of capitalism, capitalist firms in trouble, instead of being nationalised, should actually be subsidised as they have been under both Tory and Labour governments in the last two or three decades.

The tax of 52% which has been suggested on profits would be a step forward in comparison with the present situation, but does not get to the roots of the problem. The further point that by a price freeze over the next twelve to eighteen months, that £3,000 million would be saved and would constitute an argument against wage increases, as the Tribune article says, doesn't hold water.

The figure of £3,000 million is given on the basis that the firms are putting up their prices 8% to 8.5% to make up for inflation. It is suggested this will take place during the course of the next year or so. The argument that, therefore, by lowering prices the market would be increased and thus the capitalists would get back their money in that way is false.

The capitalists don't produce goods for the sake of selling them, the capitalists produce goods in order to make profits, and if 8% was to be cut off the prices that they charge, that would mean a cut in profits. If they sell more goods on the basis of this cut in prices, that would mean a further reduction in the profits that they would expect to make.

Already, the CBI has threatened that if there were a price freeze, they would cease to invest, not that their investments have amounted to very much in any event! Undoubtedly, however, under such conditions the Labour government would be faced with the sabotage of capital that was threatened by the CBI before the elections.

Wilson himself in his memoirs wrote of the Labour government of 1964-70 of the sabotage of capital with which the government was faced. A threatened sabotage of investment unless the Labour government would capitulate to the demands of the monopolies. And from a ruling class point of view, there is no other way in which they could act.

All the material of the Tribunites has a fundamental lack in not seeing that society is divided fundamentally into two absolutely antagonistic classes with hostile interests and hostile needs, that is the way capitalist society is constituted.

The situation now is that the profit of the capitalists can only be gained out of cutting the share of the working class in the wealth that they produce. That explains why the capitalists are not interested in lower prices as such, and are not interested in higher prices as such. They are interested in the maximisation of profits alone.

All the attempts to avoid the real class antagonisms in society involve the Tribunites in one convulsive contradiction after another. In essence, they are suggesting that the monopolies should be soaked. Militant has always called for drastic action against the monopolies, but to try to limit prices by edict would be like trying to stop a bulldozer with a feather duster.

While they control the means of production, all the means of life, all the means of producing the machinery, the food and the necessary goods, the ruling class have a thousand and one ways of avoiding actions on the part of Labour governments.

The Keynesianism of priming the pump has been so discredited that even the leading Keynesian economists and the Keynesian Tribune are not at the present time suggesting deficit financing but trying to find some way of putting taxes on the ruling class and on the rich in order to use the money for the benefit of the working people.

"They estimate," says Tribune, drawing on the arguments of Stuart Holland and Paul Ormerod, "that by taxing companies that can afford to pay at the present nominal rate of 52% an extra £3,000 million could be raised from the corporate sector."

In reality, all such measures can be circumvented by the monopolies so long as they have the power and the control to decide.

In the past, the Tribunites and also the so-called Communist Party, have always put forward the idea that by means of devaluation it would be possible to circumvent all the difficulties British capitalism finds on world markets in selling its goods. But the experience of devaluations of the last decade or so crushingly refutes this particular idea.

The recent fall in the value of the pound of about 40% during the course of the last two years, should have had as an effect an enormous increase in sales of British goods on the markets of the world, at least for a temporary period until inevitably the rise in prices cancelled out the advantages. Instead, there was a marginal increase of less than 0.5% in the share of British capitalism in the markets of the world. Why was this?

It is because the 100 British monopolies that control 80% of the market of the goods which are sold abroad used this as a means of enriching themselves. In Heath s famous phrase, "at a stroke", they raised prices 40% in order to enrich themselves to the tune of thousands of millions of pounds.

All the fall in the pound succeeded in doing was to weaken the position of British capitalism.

The price of the manufactured goods that Britain imports went up enormously, thus adding to inflation. The price of food and raw materials also increased to this extent. The ruling class in Britain at that particular time were fortunate in the sense that prices did not go up to the same extent as the devaluation because of the general fall in the prices of food and commodities on the world market.

Incidentally, that is one of the reasons why inflation has been kept down in the course of the last two years. It is a fairy tale that it is because wages have been kept down. The main reason has been the fall in the price of goods imported from abroad, manufactured goods, food and raw materials.

The measures of the Labour government in cutting state expenditure and holding down the wages of the workers also undoubtedly had as a consequence the cutting down of the market, and under conditions where the market is limited it is not possible for the monopolies to increase their prices at an enormous rate. The fall in inflation, therefore, has been due not at all to the cut in state expenditure and the cut in the standard of living of the workers (i.e. the real wages of the workers). It has been due to the fact that it was not possible to raise prices any further. Although, of course, it was perfectly true that by cutting state expenditure and thus cutting deficit expenditure, one of the main causes of inflation was thereby ameliorated.

The real issue at stake is that despite an increased bonanza of profits due to the holding down of wages, which was accepted by the workers and by the union leaders as a temporary expedient in order to end inflation despite profits of over £6,400 million which was reached by manufacturing industry in the last year, there has not been any great increase in investment. This, moreover, is despite the subsidies and the tax concessions which amount to about £4,000 million a year.

It is an absolute condemnation of the capitalist system in Britain and an argument that the stewardship of big business should be ended, that they have completely failed in their role. Real investment in manufacturing industry, that is to say the production of real wealth, is not much higher in Britain in 1978 than it was in 1970. This, in turn, in real terms is not much higher than it was in 1950.

That means that on the basis of capitalism Britain is falling further and further behind her rivals abroad. As Giscard d'Estaing boasted, France has already outstripped Britain as a manufacturing nation. China has outstripped Britain, India has more industry than Britain, and by 1980, if the present process continues, Britain will even fall behind Italy.

Of course, Militant is in favour of increased state expenditure to mop up unemployment. Not a miserable £1,000 million, but a whole programme of useful public works, of a mass building programme of housing, roads, schools, hospitals, on the basis of a plan to mop up unemployment completely. That is why we campaign for a 35-hour week. This measure would instantly cut unemployment by half - by 500,000 to 750,000 according to different estimates.

The arguments of Tribune for a puny £1,000 million increase in state expenditure is like a man standing in front of an avalanche and moving a few rocks from the path imagining that this will solve the problems that face the economy and the working people of Britain.

Marxists cannot support either deflationary or inflationary policies, but only socialist policies!

But Tribune's front-page article is a perfect example of the refusal of the Tribunites to grasp the real issues and face up to the problems in a "realistic" way.

There is no complete solution to the problems facing working people other than the nationalisation, with minimum compensation on the basis of need, of the 200 monopolies, the banks and insurance companies, and the establishment of a plan of production under workers' control and management. It is not this or that aspect of the social system that has gone wrong: it is the problem of the workings of the entire social system of capitalism.

The problem with right-wing labour, with the capitalists themselves if it comes to that, and the Tribunite wing of the Labour Party, is that they do not work on the basis of theory and of the laws of the social system.

They don't work on the basis of the past, the present and the future. They work purely empirically, that is on the basis of the immediate facts that face them, and are utterly incapable of working out the effects which the measures they suggest, even if they were implemented, would have. We saw for instance the effect of the measures of Allende in Chile, which resulted in an explosion of inflation in Chile. This was the result of trying to solve the problems of the working people a little at a time.

If production was used to its full capacity, it would mean an increase in production of a fifth. The needs of the working people could be satisfied. Instead of that, we now have the miserable production of steel this year of 17 million tons. Last year also, the production of steel was only a little above 17 million tons (17.4 million tons). Yet in 1970 British capitalism produce 27 million tons of steel.

And steel is an index of industrial capacity. Most of the goods which are produced involve the use of steel.

The original aims of the capitalists was to increase the production of steel to forty million tons in the eighties. That has been drastically scaled down and abandoned, and we now have the miserable situation where per head of the population not much more steel has been produced than in 1929, the year before the great slump of the pre-war period.

The working class will not allow the forcible cutting down of its standard of living in a vain endeavour to maintain the capitalist system.

The needs of the working class demand at the least that there should be a 35-hour week without reduction in pay in order to eliminate unemployment and, as a minimum, a £70 minimum wage not only for those that are working, but for the entire population, the sick, the unemployed, and the old-age pensioners.

Every family should have as minimum a wage coming in of £70 week.

The productive forces of society at the present time are sufficiently developed for this to be entirely possible. If it is not being utilised at the present time, it is because of the contradictions of the capitalist system.

Therefore the labour movement must fight for a transformation of the capitalist system on the lines that have been suggested. If capitalism cannot afford a minimum decent standard for the mass of the population, then it is time to say that the working people cannot afford capitalism, and to strive for an entirely different system, for a socialist system of society - a democratic socialist system of society.