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International Socialism, April/Maly 1969

Dave Purdy

Prospects for British Capitalism

From International Socialism (1st series), No.36, April/May 1969, pp.29-32.
Transcribed & marked up by Einde O’Callaghan for ETOL.

The road to socialism is paved with bad predictions. Cautious realism and millenarian optimism tend to succeed each other in the socialist movement in a way which is itself almost predictable, in as much as this political prognostication cycle seems to be inversely related to currently held intuitions about the economic prospects for Western capitalism. Thus amongst the Marxist Left in Britain after the disappointment of expectations that capitalism would lapse into a 1930s-type depression following the Second World War, the 1950s were characterised by a mood of resignation before the ‘objective forces’ of economic expansion and stability. In the early 1960s the cycle of revolutionary euphoria passed its nadir with the evident weakening of the British economy’s international position, and began to turn more sharply upwards after the advent of a Labour Government bent on appeasing the international bankers by executing tough remedial measures at home. The revolutionary’s annus mirabilis of 1968 together with the deepening of Britain’s domestic crisis have provided a further impetus to the intuitive sense of the explosiveness of ‘the coming period’.

Now there is no particular virtue in perversely going against the trend and arguing that the immediate future will bring a reversion to the relatively rapid growth rates and stability experienced in the past. There are many good reasons why this will not happen, which will be examined below. There is no virtue either in opting for agnosticism about British capitalism’s future economic prospects on the grounds that the present international economic conjuncture contains too many imponderables. True, such possible eventualities as a relapse into protectionism by the major capitalist rivals, a real breakdown of the international monetary system, or an East-West détente and the opening up of the state capitalist economies to Western trade (and capital?), complicate the analysis and increase the hazards of forecasting. But this merely highlights the need for a framework of analysis which does not have to be completely recast to take account of these contingencies. The need is to identify the main forces and constraints impinging on the British economy and then to see how far their operation is modified by the inclusion of ‘imponderables’. Marxists, after all, do not claim to be any better at the art of ‘guesstimating’ than the bourgeois practitioners in the universities, research institutes and government departments. At the same time one must beware of falling too easily into line with the prevailing phase of the optimism-pessimism cycle. Quite apart from the mechanistic view of class consciousness involved in linking the prospects for revolutionary socialism directly to aggregate economic indices such as the likely rate of growth of world trade or the toughness with which the incomes policy is applied, the signs are that the British economy, whilst beset by all the familiar ailments of its old age, has far from reached its death throes.

Before embarking on a discussion of the prospects facing British capitalism at the present time it is useful to review its recent history. International Socialism has frequently noted the tendency for the characteristic anarchy of the capitalist system to become international in form as both cause and effect of the growth of state intervention in individual national economies. [1] Nowhere is the compulsive discipline of the international market more strikingly illustrated than in the British case. To equilibrate Britain’s relationship with her foreign competitors as expressed in the state of the balance of payments, has been the overriding aim of successive governments. In the last analysis all the other putative problems – a long term growth rate too slow by international standards, an inadequate rate of investment, lagging productivity, an excessive expansion of money wages and prices and declining international competitiveness – have been translated into this one. It is true that the deficit on combined current and long term capital account was greatly exacerbated by heavy military spending overseas and a large net outflow of private capital. (Together these items accounted for £517 million of the record £747 million deficit incurred in 1964, whilst the foreign currency drain from the former alone exceeded the deficit in 1959, 1960, 1963 and 1965.) Nevertheless the visible trade gap significantly widened in the 1960’s. [2] Capitalist priorities demanded the fulfilment of a rearguard support role for US imperialism’s advance guard (a role marginally diminished by the 1965 defence cuts but pledged to be restored by the Tories), and the maintenance of a basic freedom of mobility for private capital despite minor restrictions. It was, therefore, the UK’s visible deficit and in particular her allegedly poor export performance as evidenced in her declining share of world trade, [3] that commanded attention.

Tory governments had rectified successive deficits by the simple leech strategy of bleeding-off purchasing power so as to cut back imports. The tendency for the peak and average level of unemployment to rise during each successive stop-go cycle (see table 1) shows this strategy to have been a way of storing up trouble for the future by narrowing the range of options available to later governments committed to operating a capitalist economy in an increasingly ruthless competitive world environment. Whereas the Tories were able to deflate the economy without at the same time attempting to supplement this market-induced check on the growth of wage costs by operating an incomes policy, Labour has found itself deflating and freezing. Even the previous choice which the Government used to flaunt before the unions of abiding by the incomes norm or suffering the unemployment attendant on deflation has now disappeared. This is a measure of the tightness with which the international market straitjacket grips British capitalism. Having once accepted the maxim of modern capitalism ‘Export! Export! That is the IMF and all its prophets’, Labour has had to follow the logic through from the old rule of merely keeping the rise in wages within the limits set by the overall rate of growth of productivity, to the present aim (as it happens so far unsuccessful) of bringing about a cut in real wages.

The Government’s strategy since devaluation can best be described as one of hole-filling. Judging by the gap between the actual devaluation in November 1967 and the January cuts in government spending followed by the March budget it would appear that the Government initially believed that the immediate rise in prices coupled with a tight wages policy would suffice to make a hole in domestic demand, mainly consumption demand, capable of containing the upsurge in exports expected to arise from the general expansion of world incomes and trade and from the extra competitive edge assured by devaluation. In the event this belief proved illusory and the hole had to be dug by a series of deflationary measures designed to reduce demand by some £1,000 million a year (about 3 per cent of GDP). The March package alone was supposed to cut consumption by 2 per cent, £500 million. The incomes policy was an essential adjunct of this strategy both to prevent the erosion of the competitive advantage of devaluation and to ensure that with retail prices rising 3 per cent more than they would otherwise have done owing to higher prices (thus yielding a rise of 5½ per cent on the retail price index) the resultant fall in workers’ real incomes would hold back consumption. Just as in the earlier maturation phase of capitalism, accumulation to keep up with the individual capitalist Joneses held primacy over the consumption requirements of those whose labour made accumulation possible, so in the mature capitalist economy ‘holes’ must be made in consumption to keep up with the international capitalist Joneses.

The official target of this strategy was an exact balance in the balance of payments on current and long term capital account over 1968 as a whole, followed by a surplus of £500 million in 1969 to be sustained at more or less that rate for an indefinite number of years thereafter so as to pay off some of the accumulated overseas debt (which may be anywhere between £2,000 million and £3,000 million) and to build up the narrow base of foreign exchange reserves. It was recognised that to achieve this transfer of resources towards exports and import substitution would involve a temporary sacrifice of growth in output as the impact of devaluation would take some time to make itself felt. Once, however, an export-led rather than consumption- led boom was under way it was hoped that exports and total real output would chase each other upwards in a ‘virtuous circle’. [4]

There are two main features of the outcome of this strategy to date. The first is its extreme precariousness. On the one hand any relaxation in the pursuit of the strategy such as a slight softening in the meanness of the incomes policy at best postpones the achievement of the targets and at worst precipitates a loss of confidence in sterling and the familiar outflow of short term funds, which in turn requires the imposition of the strategy in an even more stringent form. Thus the limited concessions granted to the railwaymen in July and the engineers in October have helped to keep average weekly wage rates advancing at roughly the same rate as retail prices (5.9 per cent in the twelve months following devaluation) whilst average weekly earnings rose by 7.5 per cent over the same period. [5] This has sustained consumption spending above the target laid down in the March budget thus limiting the size of the required hole and forcing the Government to dig harder in the future. On the other hand, even granted the across-the-board cut in living standards implied by the hole-filling strategy, panic in the international money markets such as the flight into gold during the first ten weeks of 1968 or the speculation against the franc in November, in which the ever-vulnerable pound gets caught up, can also drive the economy off course and force a tightening of the strategy, such as that contained in the November package of indirect tax increases.

Both of these two sources of precariousness – Labour’s anxiety to avoid a clear-cut collision with the organised working class and the shakiness of the international monetary system – will continue in the foreseeable future. The chief danger for the working class lies not so much in the prospect of even further economic sacrifices which are inherent in this precariousness, as in its political and ideological consequences. In the extreme case it is quite possible that, say, a devaluation of the franc could result in a second sterling devaluation (as advocated by The Economist during the November crisis) and a 1931-type coalition (as advocated by The Times) to command national support for the necessary sacrifices. Short of this the ruling class urgently needs to enlist widespread support for measures to curb the unions. The very circumstances which make this necessary also contribute to its realisation by creating a kind of siege mentality conducive to the acceptance of a national-cum-racial rather than class definition of social reality. So far, however, one of the reasons why the Government has shrunk from applying the incomes policy with full rigour has been its fear not only of provoking a strike that would seriously impede the export drive [6] but also of reviving and encouraging the factors making for a class identification amongst various section of the working class. [7] In this light Barbara Castle’s latest proposals for a Taft-Hartley type cooling-off period before unofficial strikes and for compulsory ballots of union members before official strikes, appear as weapons in. the general ideological battle rather than as instruments of economic improvement. US experience with the Taft-Hartley Act which permits the President to issue an injunction prohibiting a threatened or actual strike for a period of eighty days [8] suggests that the measures currently proposed would, if implemented, have little tangible effect on the number of days lost through strikes or on the militancy of union claims. The discretionary nature of the measures together with the official emphasis on the fact that the NOP shows a majority of trade unionists in favour of them, indicate that the anti-union ground is being prepared for any possible major Government-employer versus union confrontation that could arise given the precariousness of the Government’s overall economic strategy. Moreover a stand-up fight with a key union which was pursued to the bitter end would in the long run improve the confidence of the speculators and foreign bankers in the Government’s ability to deliver the goods. All this does not imply that the ruling class is spoiling for a fight in the near future. It simply means that the limit of the purely economic measures that can be taken to make devaluation work has almost been reached. Short of disturbing gentlemanly trading conventions, by, for instance, resorting to import controls, the Government can only impose more of the same, and more of the same can only be imposed if it is given a more overtly political and ideological colouring.

The second main aspect of the outcome of the hole-filling strategy is its dependence on long term trends outside the government’s control. As has already been pointed out little progress has so far been made towards the avowed targets. Far from an exact balance in 1968 the current account deficit in the first nine months alone was £407 million and in view of the deterioration in the visible trade deficit between October and November (from £17 million to £68 million) it seems doubtful whether the current account was in balance during the fourth quarter either. An estimated net outflow of private long term capital of £20 million would bring the 1968 basic deficit up to around the £490 million incurred in 1967. Since there was an improvement of around £70 million in the long term capital account and of over £100 million in the invisible surplus (because of the effects of devaluation), the visible trade gap must have actually widened during 1968 despite a sharp increase in exports (running in November at 34 per cent above the average for the third quarter of 1967; 24 per cent up in volume). It is true that the surge in imports during 1968 will probably be halted in 1969 as the accumulated doses of deflation begin to eat into spending and the import deposits scheme takes effect, but equally it is doubtful whether exports can maintain the spectacular advance achieved in 1968. The crucial factor here is the likely growth in world trade. Despite the severe jolts received from the monetary crisis and despite the continuing constraint imposed by the growing shortage of funds with which they are financed, total imports and exports of the industrial countries both grew by 12 per cent compared with 5½-6 per cent in 1967. Since these countries account for three-quarters of world trade the growth rate of world trade will not have been very different. Progress is unlikely to be so rapid in 1969. The Economist (28th December) without arguments forecasts 5 per cent. Certainly this would be more in line with long term historical norms, it being understood that the long term dates back before 1950, the year when most academic studies of growth seem to regard the really important history of Western Capitalism as beginning. Whether, however, this drop from the 9 per cent or so averaged over 1955-64 will continue after 1969 is more problematical.

Since one of the most important determinants of world trade prospects is the rate of growth of world output, and particularly world manufacturing output [9], and since the evidence suggests a slowing down in the growth rates of the major capitalist (and state capitalist incidentally) countries, especially the previous fast growers – Germany, France, Italy and Japan – as compared with the 1950’s and early 1960’s (see table 2), the margin of manoeuvre for the UK’s export drive is that much narrower, and the prospect of spinning out of the alleged ‘vicious circle’ and into the ‘virtuous circle’ that much more remote. It is worth noting in this respect that the growth rates achieved in all the major capitalist countries since the Second World War, except the US, have been well above those achieved since 1870. The view that post-war achievements represent a new norm of performance to which all economies may aspire [10] rests largely on the comforting belief that that assimilation of Keynesian anti-cyclical remedies into government economic thinking has permanently raised the inducement to private investment by providing businessmen with the assurance that demand for their products will always be forthcoming. The corollary of this view is that a poor growth performance, such as the UK’s, can be attributed to poor economic management. Now apart from special factors making for acceleration above historical standards in certain countries, but not in others, notably the enormous migration of labour out of disguised unemployment in agriculture into the modern industrial sector, the fact is that there exists no single case of the uncompromising use of Keynesian measures in genuinely peaceful conditions. It is a strange kind of normality which makes every expansionary impulse depend on war or preperations for war – pre-World War Two rearmament, World War Two itself and the recovery phase that followed it, the development of the Cold War and the arms race, the Korean War and the development of the world-wide containment and ‘aid’ policies of the US and her allies. The exceptional character of post-war Western economic growth and the decreasing effectiveness of arms spending as a stabilising-expansionary force [11], suggests that the world environment in the longer term future is unlikely to be favourable to Britain’s export efforts. To the extent that Britain’s exports are not, as in the 1950’s and early 1960’s, buoyed up on a fast swelling tide of world trade, the strategic targets can be achieved by making deeper inroads into the market shares of her main competitors, which in turn strengthens the pressure for tightness on the wages front in order to secure a favourable differential rate of inflation. Moreover even if the bite of the world trade constraint is not so hard, it is a near certainty that if Britain were to succeed in attaining an initial surplus of £500 million [12] some other countries would be forced by the deterioration in their own external balances to take defensive measures; and this in turn would tend to frustrate the maintenance of Britain’s surplus position. Such is the logic of international competition.

The overall prospects for British capitalism is thus one of a more or less indefinitely prolonged domestic toughness towards wages and consumption to make room for the new capital investment and exports made necessary by the priorities of capital and Britain’s generally weak international position. While there is a distinct possibility that this latter-day form of abstinence will rejuvenate the aging body, the likelihood is that it will simply go on getting older.

Notes

l. M. Kidron, Western Capitalism Since the War, Weidenfeld and Nicolson, 1968. chapter 1.

2. The three-year moving average of exports minus imports from 1955-57 to 1963-65 was (in £million): −96, +19, −38, −163, −223, −217, −109, −237, −296. Economic Trends, June 1966.

3. From 21 per cent in 1953, to 19.3 per cent in 1955, to 15.9 per cent in 1960, to 14.9 per cent in 1963.

4. This hope was based on the observation that over 1954-64 countries with high growth rates of output such as Japan, Italy and West Germany also had high growth rates of exports, exports and output mutually supporting each other through the chain of rapid productivity, growth and adaptability of industrial structure, low prices and favourable commodity composition and expanding and sustained demand. Since these countries’ export gains were in part at the expense of the slow growers it is hard to see how all countries could achieve their rates of advance. Moreover simple extrapolation from the past as a guide to future potential is illicit if the past under consideration was exceptional as we argue below. The notion of the ‘virtuous circle’ as an explanation of the good performance of particular elements of the circle is itself suspect since it leaves unexplained how the circle comes to be established in the first place. (Cf. M. Kidron, op. cit., chapter 2)

5. Due mainly, so far as one can tell, to sustained overtime working in certain sectors such as the car industry where the impact of devaluation has been immediate and substantial, and to the exceptional increase in productivity (output per man hour) in manufacturing industry which rose by 6.9 per cent in the first nine months of 1968 compared with the corresponding period in 1967, and which will have especially benefited piece workers.

6. Compare, for instance the 15 per cent pay rise, four times the official ceiling, conceded to the 1,500 tally clerks in the London docks, with the freezing of the 7 per cent or 17s a week claim of 350,000 agricultural workers officially classed as ‘lower paid’.

7. For all the lack of enthusiasm on the shop floor about the threatened engineering strike, had it come off it would undoubtedly have been solid. Towards the less well-organised building workers the Government was more intransigent.

8. In March 1968 60,000 employees in the US copper industry had been on strike for eight months closing down 90 per cent of copper production and costing the country large sums in foreign exchange at a time when the Vietnam War was at a critical stage and there was a balance of payments problem. The President did not use the injunction.

9. It seems that there are other mediating influences involved in this relationship as well as the direct link between higher output and incomes and the demand for imports. Thus in a rapidly expanding world economy protectionist trade restrictions will tend to be eliminated whereas stagnant conditions lead to the kind of nationalistic anti-trade measures adopted during the 1930’s. It is indicative that UK governments have consistently eschewed import controls as a weapon for improving the balance of payments and that resort was made to the 1964-65 import surcharge and the 1968-69 prior deposits scheme only as temporary expedients. At the present time, therefore, remedial rivalry between the weak members of the international economy, the UK and France, has taken the form of direct competitive deflation rather than competitive trade restrictions. The hold of trade liberalism, however, could easily be broken by further upheavals in the international monetary system.

10. For a typical exposition of this view see A. Maddison, Economic Growth in the West, London, Allen and Unwin, 1964.

11. One measure of the inducement to private investment is the marginal investment/output ratio (the increase in investment over some period divided by the increase in output over the same or a slightly later period). The higher this ratio the less the addition to total output from extra investment which, given that wages maintain a constant share of total output, implies a falling rate of profit. The table below shows the ratio to have risen and to be expected to rise in Europe and in view of the non-fulfilment of the OECD’s growth rate projection for the UK, the projected fall in the ratio in the UK is extremely unlikely to occur.

12. Especially if this coincided with a reduction in the US balance of payments deficit, as desired by Johnson and presumably also Nixon.

 
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