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International Socialism, March 1974

Briefing:

Inflation

From International Socialism, No. 67, March 1974, pp. 15–18.
Transcribed & marked up by Einde O’Callaghan for ETOL.

A NUMBER of different factors have contributed to the upsurge in prices throughout the world. We will first look at each separately. But they all flow from the very structure of modem capitalist society.
 

Shortages

THIS is the factor that has been stressed most by government propaganda in the last year. It is said that natural events like crop failures (in Russia, South Asia and elsewhere) and the world ‘energy crisis’ have meant that supplies of essential raw materials and foodstuffs are in short supply, so pushing up their prices. It is further said that no-one can do anything about this.

There have been shortages and some of these have been beyond anyone’s control. But many have resulted, not from natural causes, but from the anarchic organisation of capitalist production itself.

A few examples: in the US in 1971–2 the big oil companies deliberately held back production, so as to force price increases from the government and to drive smaller independent oil marketing companies out of business. [1] When the demand for oil in the US suddenly rose in 1973, supplies inevitably ran down and the US began buying oil from the Arab states for the first time, so producing an increased demand for Arab oil and allowing the producers (including the same oil companies who held back US production in the first place) to push up prices.

Again, in Europe in 1970–72 the big chemical combines decided that their profits were not high enough to justify building much of the new plant that had been planned. So when the rest of industrial output grew at an unsuspected speed last year, there were just not enough chemical products to go round, and their prices shot up.

Even when there have been natural shortages (as in grain), there has also been an important man-made component. In 1970 governments in the US, Canada and Australia were encouraging farmers not to grow as much grain as they could – even paying them not to produce grain in the US – so as to keep up the price internationally. But for this there would have been much larger stocks available to compensate for the harvest failures of 1972.
 

Speculation

BUT much of the increase in prices of foods and raw materials has not resulted from shortages at all. The cause has been speculation. As prices have begun to rise, those with wealth (individuals or companies) have seen that the easiest way to protect it against the effects of inflation has been to buy up future supplies of food and raw materials. They have also hoped by doing so to make considerable profits. The City investment advice specialists of Sausmure, Corey and Harris last month advised their clients: ‘In view of the world shortage of raw materials, we feel there is a case for investing a slice of an investor’s portfolio in these markets ... The right decision can put equities growth in the shade.’ But the very competition between different speculators to buy up supplies pushes prices up even further.

Most of this speculation takes place through the London commodity market, where prices of food and raw materials have shot up by 75 per cent in the last year.

One dealer told the Guardian (13 Feb) that between 30 and 75 per cent of these rises could be attributed to pure speculation.
 

Profits

WHETHER the upsurge in prices has been a result of shortages or of speculation, someone has gained from them. Massive gains have accrued to those who produce and market raw materials. Some of these will benefit the impoverished third world countries where many of these materials are to be found. But most of the third world will lose out What they gain from selling one or two commodities will be cancelled out by the need to import other commodities at greatly increased cost An estimate by the US Overseas Development Council suggests that 30 third world countries with a combined population of 900 million people will have their economic prospects ruined by a joint deficit of three billion dollars.

The really big beneficiaries of rising commodity prices are likely to be those who control production and marketing internationally – the giant western companies like Anglo-American (profits up 35 per cent last year), Rio Tinto Zinc (profits up nearly 100 per cent), and so on.

Even in the case of oil, where the producer countries stand to gain most, the western companies will also get their cut ‘The profit of western companies operating in the Middle East has jumped in the last year from 30 cents to more than one dollar a barrel’ – which accounts for about a seventh of the cost, ignoring whatever extra profits the companies make through marketing refined oil in the west.

A recent study suggested that the US oil industry could expect to gain an extra cash flow of 13,000 million dollars (or four times the catastrophic rise in costs to the third world countries) as a result of rising prices at home and abroad.

The rise in food prices may have been the result of factors operating internationally. But it has meant that those who produce food in this country have seen their returns shoot upwards, as the prices they receive have increased much more quickly than their costs. Estimates suggest that last year farming profits increased by about 40 per cent. Popular mythology holds that farmers are small, almost impoverished businessmen. The reality is rather different. A specialist cereal grower would today have an income of about £12,000 a year. There are small farmers and they have been squeezed. Not by the consumer, however, but by the big cereal farmer (who benefits as they pay more for animal feed), the banks (who have seen interest rates on loans to small farmers shoot up) and landowners (who have gained as the rising profitability of agriculture has made prices soar for farming land). However, the average farmer today is not a small businessman, but a medium-sized capitalist, with land worth hundreds of thousands of pounds and rising profits.

Finally, industrial companies have taken advantage of the conditions of the last year to raise their profits by pushing up prices of finished goods, over and above any increase in material costs. So average company profits rose last year by about a third, following an increase the year before of about 17 per cent. In money terms profits must have increased by more than £2000 million in the last 12 months (equivalent to £2 a head a week for every employed person).
 

Government Spending

THIS contributes to pushing up prices in two ways.

Firstly, tax rises cut real incomes, and compel workers to push for wage increases to compensate for the loss. The trend in Britain in the last 20 years has been for taxation to be increasingly at the expense of wage and salary earners, rather than big business. [2]

Taxation as a proportion of the total national product grew from about 30 per cent ten years ago to about 35 per cent today.

Secondly, the government often feels it dare not increase taxation any more, because of the opposition this will lead to within the working class. Instead, it finances its expenditure by creating more money than there are goods. So over the last year, the money supply has increased about 30 per cent More money chasing fewer goods means higher prices.

Traditionally it has been the right wing who have attacked public expenditure. But in fact, there is little for the left to defend in the pattern of government spending in Britain today. A glance at the 1972 figures reveals the reality:

• The military budget aim: to defend capitalism against external foes – total spending £3000 million.
   
• Trade and industry budget aim: to provide finance and assistance to private sector of economy – total spending £1,615 million (up 25 per cent in 12 months, and including £82 million for shipbuilding, £76 million for Concorde, £48 million for RB211, £300 million for export credits, £325 million for other investment grants).
   
• Nationalised industry investment aim: to build up sections of the economy for the benefit of private capital where private capital does not find it profitable enough to invest itself-total spending £1660 million.
• Law and order aim: to defend private wealth against those who would appropriate it unlawfully – total spending £764 million.
   
• Motorways aim: to provide private industrial concerns with easy transport to markets – total spending £300 million.
   
• National Debt Interest: total spending £2,350 million.

By contrast:

• Social Security Supplementary Benefits – total spending £641 million.
   
• Family allowances – total spending £343 million.

Even when elements of public expenditure that seem generally socially useful, like education, are examined, it is found that their major component is determined by the needs of industry. Most educational expenditure goes on those over 16 years old. The Robbins Report of 1964, which provided the impetus to the expansion of higher educational expansion, discussed the rate of return for capitalism of its ‘investment’ in this sphere of education. [3]

What is true, however, is that cuts in public expenditure are invariably at the expense of those items which benefit the mass of the population.
 

Devaluation

THE pound has fallen in value compared with other currencies by about six per cent over the last 12 months. The Economist calculates that imports have been responsible for price rises of 5.6 per cent in the last year. About half this figure must be due to the declining pound.

One of the key factors in forcing the pound down has been the rising balance of payments deficit, even before the oil crisis. But last year’s surge in the balance of payments did not go to help workers consume more-wage controls ensured that the five per cent expansion in the British income accrued solely to the owners of industry as the massive increase in profits. Last year company profits rose by more than £2000 million, the balance of payments deficit by about £1400 million.
 

Wages

THESE used to get the main blame for inflation. But in the last year real wages have fallen both in Britain (by about 2.5 per cent) and in the US (by about 1.5 per cent), despite record price increases in both cases. Inflation in this country last year would still have been about 7.4 per cent (according to the Economist’s figures) even if money wages had remained static.

Proof that wages have not been the main cause of price rises in Britain in the last year is given by a comparison of wage and price rises with those of other countries. Britain, which comes bottom in terms of wage rises, comes top in food price rises and third from top in all price rises.

Each of the factors mentioned above has played some part in the upsurge of inflation But the ultimate cause for price rises does not lie with any single one of them. Shortages, speculation, profiteering, and increased government expenditure, all flow from more basic features of the modern capitalist economy. It is these that have to be examined for a real explanation of the present inflation.

Capitalist crisis

THE history of capitalism until 1940 was a history of cyclical crises, of rapid followed by massive slumps, in which industry ground to a halt and millions of workers were thrown out of their jobs. Inflation was a symptom which arose at one point in the cycle.

The cause of the crises lay in the fact that the expansion of production in a capitalist economy is not regulated by the needs and resources of society as a whole, but rather by the competition between rival owners of the means of production.

During the boom, each firm was under irresistible pressure to expand the scope of its operations as rapidly as possible. If it opened up new factories, bought new machinery, took on more workers and turned out more goods, it could easily sell them and realise a considerable profit

Each time it did so, it provided increased markets for other firms, causing their production to leap ahead also. Profits generally would grow, the economy would boom and production would expand at breakneck speed.

But this frenzy to expand production inevitably ran into an obstacle.

In an unplanned system driven forward by the blind competition of rival firms, there was no method of ensuring that production did not outstrip the resources needed to sustain it. [4]

As the different capitals strenuously outbid one another in their attempt to get the labour and materials they needed to fulfill profitable orders, both money wages and raw materials prices began to shoot upwards. [5] Interest rates also rose, as industrial capitalists competed to borrow funds off financial institutions.

A point was inevitably reached at which the upsurge in wages, raw material costs and interest rates threatened to cut into the profits of industrial firms, however high these might still be.

Once this happened, capitalists saw no point in laying out massive amounts on constructing new plants.

Productive investment ground to a halt and whole sections of industry found themselves without a market for their products over night Firms that made machines and constructed factories suddenly found that the demand for their output had dropped massively. They were forced to close down factories and lay off workers. Each firm tried to undersell its competitors by price cutting and to preserve its profits by wage cutting.

There was a domino effect throughout the system. Unemployment and wage cuts in one section of industry meant that the market for the goods produced elsewhere automatically fell.

Eventually, whole sections of industry would be shut down, many firms going bankrupt in the process. The slump would replace the boom.

The slump did not last for ever, any more than the boom did. The firms which survived the slump (usually the largest) could buy up the plant of those that went bankrupt on the cheap. Unemployment caused massive drops in wages, and eventually a point was again reached at which the surviving firms felt that conditions were once again ripe for profit making. They would begin to expand production in competition with one another, pushing the whole economy back into a frenzied boom, which like the one before it would open the way up for the next slump.

The slump-boom pattern seemed incurable in pre-war capitalism. Indeed, Marx had pointed to a tendency for the booms to get shorter and shallower, the slumps deeper and longer. For, superimposed on the short term boom-slump pattern was a long term tendency for the rate of profit (for boom and slump combined) to decline. The aim of capitalism is the making of profits. But the capitalist drive to accumulate means that total investment grows much more quickly than the labour force, the source of surplus value and profit. The result, Marx argued, was that in the long term the surplus accruing to each unit of investment (the rate of profit) must tend to decline, so that in the boom rising wages would cut more quickly into profit, and in the slump it would take longer before businessmen felt things were going well enough to resume investment.

Nothing within the orbit of the capitalist system seemed able to stop the recurrence of ever more serious crises. For the very essence of capitalism is the never-ending competition of rival owners of the means of production. A single capitalist could not avoid expanding flat-out during the boom, whatever the consequences to the system as a whole. To have attempted to do so would have meant losing markets and going out of business.

When it came to the slump, no single firm could survive if its market collapsed and its rivals cut their prices. Cutting wages and increasing unemployment might seem absurd, hi that they meant that the crisis spread to still further sections of industry. But there was no choice if profit, the motive force of the system, was to be protected.
 

Arms economy

IN THE 30 years after 1940 the system no longer experienced the general crises which were taken for granted previously.

Some apologists for the system have attempted to explain this change in terms of the increase in planning at the national level. But that hardly explains why the different units of capital that operate internationally – the different ‘nationally planned’ economies – were able to avoid simultaneous hell bent expansion during booms, followed by simultaneous contractions of investment and slumps. For there exists no supranational authority capable of forcing the different national capitals to accept a single international plan.

However, there has been one significant change in capitalism since 1940 which can explain the long, more or less uninterrupted boom: a larger proportion of the surplus value in the hands of the ruling class has been used for preparations for war than ever before in the history of the system (except for the years 1914-18). In the US in the 1950s, as much was spent on arms as on industrial investment; in Britain today, more goes on arms than on manufacturing investment by private firms.

This meant that a sizeable proportion of the surplus available for investment was no longer subject to the fluctuating fortunes of boom and slump.

Industry grew much more evenly, and therefore in the long term much more rapidly than in the past And it did so without outstripping the labour supply (so avoiding much of the trend for the rate of profit to decline).

However, the arms economy could not eliminate the crisis prone nature of capitalism indefinitely, because there was a clash between the cost of arms production and the needs of economic competition.

In the first years after the war, this did. not matter. The US was massively more powerful in economic terms than any of the other western states.

But over time, those economies not burdened with arms spending were able to grow much more rapidly than the US. The US arms economy provided them with a market for their goods, while they themselves devoted all their resources to expanding production, not arms. The US economy grew at three or four per cent a year throughout the 1950s and 1960s; the Japanese economy at between 10 and 15 per cent; the European economies at five to six per cent.

One result was that a growing section of the international economy was constituted by states with low arms spending. Another was that the US was under pressure to cut the proportion of its own national product devoted to arms.

All told, the proportion of the western world’s resources devoted to arms fell from 7.5 per cent in 1955 to four per cent in 1965 and has continued falling since.

This has meant that the stabilising effect of the arms economy has also been declining – a fact that has been graphically brought home in the last 18 months, first with a simultaneous boom in all the western countries, greater than any since the early 1950s, and now with the threat of a world recession.
 

The present inflation

THE PRESENT inflation is similar in many ways to the upsurge in prices, wages and interest rates which occurred at the height of the classical boom.

The sudden growth in world-wide production in 1972-3 followed a period of stagnation for a number of economies. In Britain, for instance, the years 1971–2 saw a wave of ‘rationalisation’ throughout industry as firms tried to preserve their profits during a period of stagnant markets. The sudden and unexpected vigour of the world boom caught these industries off guard. There was just not the productive capacity to meet the rising demand. Prices began to shoot skywards, helped by speculation, and the oil crisis is pushing them further – it is expected to add about 3 per cent to prices this year, according to the OECD.

The point has now been reached where despite record industrial profits, each national ruling class fears a sudden collapse of profit rates and investment.

The response of private industrialists has been to cut back on investment – often trying to protect their funds against inflation by buying up commodities and forcing up prices further. In Japan, for example ‘industry orders for new machines in December plunged 36.7 per cent from the preceding month.’

Individual capitalist states are quite as bewildered by this turn of events as were their forebears when faced with the classic symptoms of crisis. Each individual state can seek to protect its own ruling class, by cutting back ‘non-essential’ public expenditure (i.e. welfare), forcing down local wages, and by letting the value of its currencies decline. With these measures it can hope to maintain its profits, maintain investment and increase its exports by undercutting its competitors, even if the total world market does not grow. But if all states behave the same, the only result can be to cut the total world market and make the recession worse than it would be otherwise, without stopping the upsurge of prices.
 

A System Out of Control

THE SLUMP part of the classic boom-slump cycle had one redeeming feature from the capitalist point of view – its price cuts meant that inflation came to an end. But no such cure to inflation can be expected now.

(1) Continued arms spending, even if using a smaller proportion of world production than previously, provides a floor below which the recession will not sink. Those sections of industry dependent on government arms orders will be protected against the trend to factory closures, unemployment and so on. That means that even at the depth of a recession, conditions will not approach those of the 1930s when whole industries ground to a halt and unemployment rose as high as 30 per cent.

Moreover, arms spending itself is increasingly inflationary. Inflation of two or three per cent a year was always a by-product of the high government spending and full employment of the arms economy. But in the past technological advances in arms production counteracted inflationary pressures by providing civilian industry with new techniques that enabled it to cut its costs. As arms production itself has become more and more specialised, there has been a decline in this technological ‘spin-off’. The result was an increasing trend to inflation even before the boom of the last 18 months.

(2) For the firms dominating the major industries of modem capitalism, price competition has declined. With a single firm monopolising a whole industry in a particular country and a handful of firms collaborating together to carve up the world market, pressures on them to cut prices, even during a recession are easily resisted. The response of such companies to a fall in their markets is not, by and large, to cut prices. It is to increase prices so as to maintain their profits while selling fewer goods and running their plant at less than full capacity.

Although it has been the boom of the last 18 months that has got inflation really roaring, the rapid increase in prices did not begin with the boom. In Britain it was in the period of stagnation that preceded the boom, when unemployment was approaching the one million mark and redundancies were an everyday occurrence, that inflation first hit the 10 per cent mark.

The giant companies are able to operate in this way because they are too big to be truly disciplined by market forces. Governments just do not dare let the ultimate discipline of the market – enforced closure through bankruptcy-take effect. The collapse of any one of the giants would have a catastrophic impact on the rest of the system. So instead of the threat of bankruptcy leading to massive price cutting by the giants, it tends to produce massive injections of government aid – and further inflationary pressures as government spending rises.

What, in effect, has happened is that the units of the system have grown too large for the old market mechanisms automatically to counter inflation any more. The system has lost the flexibility that used to allow it to solve its own problems in the long term. Prices rise in the boom – and they continue to rise during the recession.

(3) If prices are not automatically cut by the modern recession, nor are wages. Employers who feel able to increase their prices during a recession are likely to increase wages under pressure from their workers – even though unemployment may be high outside the factory. This is particularly the case with strategically placed groups of skilled workers within the giant firms, whose actions can bring a whole section of industry to a halt fairly quickly.

(4) But if prices continue to rise during a recession, then even the purely speculative pressures for them to rise further can outlast the boom. Normally the drop off in the demand for raw materials in a recession would be expected to reduce raw material prices. But with inflation continuing at 15 to 20 per cent a year, raw materials and foodstuffs may still seem a better bet for investors than industry-so creating a growing, purely speculative demand for commodities that keeps their price up.

Individual capitalist governments are helpless in the face of rising prices. Thirty years of continual economic growth have meant that national economies are more intertwined with one another than ever before. There is little that a single government can do to insulate its domestic economy from inflationary pressures which the multi-national firms, the international banking systems and the international commodity market transmit from country to country.

Palliatives of one sort or another can be tried – the occasional food subsidy, attempts at statutory control of profit margins – but these have little overall impact. Massive deflation may be resorted to out of desperation, but this can be counter productive, merely adding massive unemployment to massive inflation. The only certain way of easing the effects of inflation on the ruling class is by shifting them on to the back of the working class – which is why wage restraint and ‘austerity’ is all the rage internationally. For socialists there must be a rejection of all such attempts to somehow control an uncontrollable system. We have to insist that the solution to inflation lies with the destruction of the system itself.

Notes

1. According to reports of investigations by the US Federal Trade Commission and a Senate sub-committee.

2. Incidentally, this refutes the myth that wage rises have caused the share of profits in the national income to fall. Before tax profits as a percentage of wages and salaries did fall, from 41.6 per cent in 1949–52 to 37.2 per cent in 1965–8; but after tax they rose, from 25 per cent to 30.2 per cent.

3. Robbins Report on the Expansion of Higher Education, 1961.

4. See Capital, III, p. 244.

5. Marx: Capital, III, p. 246.

 
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