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WHAT IS A FREEZE?
The fact that any Government should adopt a statutory freeze on wages and prices is hardly an occasion for surprise or wonder. As stated in October, Britain has had some form of wages or prices control in every other year since the end of World War II. With the exception of Germany and Japan, major industrialised 'Western' countries have used wages and prices control at various intervals since the wars Indeed France has literally never been without some form of price control while the Netherlands has operated with an agreed national wage bargain since the war. When recently trade union pressure cancelled this agreement, the only result was worse inflation and fresh union determination to come to a new agreement.
What is the function of freezes and incomes policies? "Ever since the wage-price explosion of the winter of 1969/70, it has been clear that any tolerably successful economic strategy would have to have three main elements: a temporary and statutory wage price freeze; a firm control over the money supply and what may be called in shorthand a 'realistic' policy towards the exchange rate. These are not panaceas; and they cannot by themselves resolve the major economic tensions of modern society, in particular those produced by trade union monopoly power. But they are the main devices so far evolved for keeping the system running without an explosion." (S.Brittan, FT, 9.11.72)
"There has by now been a good deal of experience in both this and other countries with freezes, ceilings and voluntary and statutory restraint. The evidence suggests that the initial emergency period of a stand-still is surprisingly successful; the secondary stage of follow-up has some diminishing degree of success, provided that it is statutory, while the long-term policy from which so much is hoped never seems to materialises" (Brittan, FT, 7.11.72)
"The Federal Reserve Bank of Richmond in the US put it very well in its October journal by saying that wage price policies should be 'temporary and episodic' and that 'the Phase II machinery should be maintained just long enough to eliminate inflationary expectations and to improve the wage price performance of the economy." (Brittan, FT, 9.11.72)
"There are however two things that a freeze can achieve with skill and good luck. It can reduce to less alarming proportions people's ideas of how fast prices are likely to rise. This will lead, in any given state of the labour market, to a lower rate of money wage increases than would otherwise be expected. Secondly, a freeze can provide a breathing space in which the increase in the money supply can be slowed down to a less inflationary pace without halting expansion and causing a slump in employment. Some of the politicians who talk about controlling the money supply give the impression that it is a form of magic and that, if only the Chancellor would order the Governor of the Bank of England to manipulate pieces of paper, inflation would be painlessly squeezed out of the system. If it were that painless, some major country would have adopted this policy long ago and allowed its currency to appreciate against the rest of the world. A rigid limit on the money supply is in effect telling the trade unions that the authorities will refuse to finance the results of wage deals too far in excess of the rise of productivity, but that unions are perfectly free to settle for more money for fewer jobs if they so wish. No democratic government has in fact been prepared to allow unemployment to go that far ... The role of a freeze is to allow the money supply to be reduced in such a way that it will lower the rate of inflation without causing a destruction of jobs." (Brittan, FT, 7.11.72)
Today in Britain, the reason for a freeze or indeed any form of incomes policy, is that through the economic struggle the working class is able to take so great a portion of the value it produces that the amount of surplus value the employer appropriates is insufficient to carry on production. (Previous freezes here have been because "resources had to be switched into exports and import-saving to eliminate the payments deficit of the 1960s; and because the devaluation and the supporting measures were delayed so long, the switch of resources had to be concentrated in a very short period, and an exceptionally high surplus earned, to pay off debt and restore confidence." Brittan, FT, 16.11.72)
The only alternative to a freeze which has been put forward by anyone in the present public discussion around the breakdown of the tripartite talks is Enoch Powell's solution: "the monetarist viewpoint implies one of two things: either standing aside and letting prices run away out of control, or regulating the money supply in such a way that employment is bound to suffer. It would involve throwing out of the window all talk of 5% or any other rate of growth and of any conscious policy towards unemployment whatsoever." (Brittan, FT, l.11.72)
A freeze/incomes policy is nothing more or less than the conscious attempt to regulate money wage increases. It becomes possible then to regulate prices because the labour content involved in prices has first been regulated.
"The Scanlon-Jones view that it is more important to control prices than to control wages is the opposite of the truth. The object of an incomes policy is to prevent trade unions pushing money wages through the ceiling. If it can succeed in doing this, commercially determined prices will largely look after themselves. Almost every official and economist concerned with this issue, irrespective of his politics, is primarily concerned to limit money wages; and the price control aspects are put in primarily as bargaining counters and public relations gestures. This preoccupation with wages is not due to malevolence but to the facts of the case. One can argue until the cows come home about whether British (or world) inflation is due to an excessive growth of the money supply or trade union wage push. But whatever the precise relationship between these two factors - and they are obviously both at work - the one thing that the current inflation is not due to is a push from the side of profit margins. If the lack of control of prices had anything to do with the recent inflation, it would be difficult to explain why there has been such a sharply falling trend in the share of profits in the national product. Trading profits, net of stock appreciation; averaged 10-12% of final output in the decade up to 1964 and were down to 7% in l970. Of course there has been some recovery since then, due to the well-known fact that the share of profits rises in the upward phase of the business cycle - one has yet to see the unions complain when it falls in the recession stage. The true long-term fall is in fact much more severe than the published figures which relate to gross profits. The net rate of return on capital, if proper allowance is made for inflation, has been declining so sharply that some would-be Marxist economists (Glyn and Sutcliffe, see October Communist, NS - 'CBI-TUC talks' earlier in this series - PB) have been warning that capitalism will collapse unless the capitalists fight back. Whatever else these trends suggest, it is not a profit-push inflation. There have been several more direct studies of the relation between wages and prices in the UK. These have nearly all pointed in the same directions. As the latest and best documented study by Godley and Nordhaus ... shows, prices in the non-food manufacturing sector can be best predicted by looking at current costs, namely labour, materials, fuel, services and indirect taxes corrected for cyclical distortion and assuming a constant mark- up. A clear implication is that if wages rise less quickly so will prices. Of course there are many objections which can be raised against this theory. But its divergence from reality is the very opposite of what anyone listening to Jones and Scanlon might suppose. For prices in the first few years have risen less than costs calculated in this way as profit margins have been under pressure. Price control has less than zero to contribute to fighting cost inflation." (Brittan, FT, l.11.72)