Steering the Economy

Those who seek political support for capitalism have two differing solutions for its present economic troubles. Supporters of Margaret Thatcher believe that the solution lies in a reduction in government spending combined with “wage restraint” which, in effect, means a reduction in real wages. Even among Conservatives, support for this policy is not whole-hearted. It has been described as the “right wing” view. This policy is bitterly opposed by the “left”, composed mainly of Labour Party supporters, and by some Liberals and Social Democrats. These exponents of capitalism are united in believing that government spending should now be increased “to stimulate the economy”and reduce unemployment. It should here be noted that the last Labour government, faced themselves with the problems of administering capitalism, carried out a policy of cuts in public expenditure.

So, which way to turn? Left or Right? The purpose of this article is to show that along neither path lies a solution to working-class problems. In attempting to explain the dilemma clearly and in the space of a short article, some simplification will be made in what is obviously a very complex set of interacting factors.

Those politicians who claim to represent the working class assert that government spending should be increased to build council houses, improve health services, maintain educational standards, repair roads and sewers and, above all, to provide employment. Such activities do not themselves realise a profit, otherwise the government would not be called upon to provide the finance. The purpose of such “social” expenditure is not normally to provide employment but rather to provide the conditions in which workers can be employed in other, profitable, enterprises.

The three sources of government finance are: taxation, loans and currency inflation. Taxation takes many forms, direct and indirect: company tax, income tax, value added tax, excise duty and the like. On the other hand, the government may borrow money, again from many sources: finance houses, banks, insurance companies, the general public, and soon. Finally, when this country abandoned the gold standard in 1931 the way was clear for governments to meet part of their expenses by authorising the Bank of England to increase the supply of inconvertible currency—in other words, by printing an excess of paper money.

We come now to examine the repercussions of these three forms of government spending. Increased taxation reduces profits in a number of ways. Company tax reduces it at the source. Personal income tax on unearned income reduces the dividends received by shareholders. Personal income tax on earned income is also a drain on profits; broadly speaking, wage workers have to be paid enough to allow them to work efficiently and rear children to replace themselves. Their wages must therefore provide for the payment of income tax—as well as various forms of indirect taxes. This is not to say that a general change in taxation does not temporarily affect the standard of living of wage workers. But, in the long term, resistance to any downward pressure on living standards brings wages back to what is socially necessary for efficient production.

To the extent that profits arc reduced by increased taxation, one result has been an increase in investment abroad, in the search for higher profit margins. Another effect is a loss of competitiveness on overseas markets. Reduced profits result, in these and other ways, in reduced production. As an alternative to increased taxation, governments may increase their borrowing. Not only is this merely postponing the repayment of loans (and interest) by other means but also it has the effect of increasing interest rates. The government competes on the money market against the needs of private enterprise, with a consequent increase in interest rates and curtailment of expansion—and in many cases a reduction of production. The third source of government finance, currency inflation, also has the effect of increasing interest rates. The excess issue of paper currency by the Bank of England results in a reduction in its purchasing power. Those who lend money expect to receive an increased return to take account of the effects of inflation. Building Societies find that they have to increase their interest rates to investors, which they will try to pass on to present and prospective borrowers— further impoverishing those workers with mortgages.

Currency inflation reduces real wages by the resultant increase in prices. In 1975, according to the government’s Retail Price Index, prices rose by 25 per cent. This led to demands for wage increases which in many cases could only be achieved by strike action. The present government’s policy of “wage restraint” means a reduction in real wages as prices continue to rise. The major reason at present for the reduction in production and massive unemployment is a worldwide trade depression; but an increase in government spending, although it may provide a limited increase in employment in some areas of the economy, causes a reduction in production in others. This is why all previous attempts by governments to “spend their way out of a recession” have always failed.

To complete the explanation it should be noted that the increase in unemployment due to reduced production means an increase in the total of unemployment benefit. This in turn involves increased government spending—unless the rate of benefit can be cut in the same proportion as the increase in unemployment, and there are obvious limits to this. Moreover, increased unemployment means that the total purchasing power of the working class is reduced. This reduction in purchasing power causes a further reduction in production in those areas of the economy related to working class spending. In such areas there will be a consequent increase in unemployment.

As compared with a policy of increased government spending, the repercussions of a reduction are more direct and immediate. For example, economies in education result in fewer jobs for teachers. Government curbs on local authority spending not only result in a direct reduction in manpower but also in enforced savings in money spent on materials. The slowing down of local authority housing programmes is an example of this. Examine any attempt to reduce central or local government expenditure and it will be seen that a reduction in employment follows. It should also be pointed out that, even where such expenditure is not reduced in money terms, there may in fact be a reduction in real terms due to inflation.

Whether government spending is increased or reduced, there is no way out of the maze of contradictions inherent in the capitalist economy—whether this be private enterprise capitalism or state capitalism (as in Russia) or a mixture of both. The gains made by the working class (those who have to work for wages or salaries) during periods of economic prosperity for the employing class, are rapidly eroded during periods of trade depression. The key to an understanding of the limitations of the present economy can be found in the fact that, in the main, unless capital can be invested at a profit, production ceases. This is a fundamental law of the capitalist system. It is no matter that raw materials and labour, the sole requirements for wealth production, are available in abundance without the prospect of profit, production ceases.

In a socialist society this restriction would be removed. Wealth would be produced solely to satisfy human needs—and in the modern world we have the potential to produce wealth in abundance. There would be no trade depressions because there would be no trade—just distribution. There would be no money because money is only required for trading. There would be no “unemployment” as the working class experiences it—work and “leisure” would be undistinguishable. In fact most of the terms in this article would become obsolete. The “left” and “right” would only be remembered as wings of the same predatory bird: capitalism.

John Moore