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International Socialism, Summer 1966


Paul Derrick

Incomes Policy and Class Power


From International Socialism (1st series), No.25, Summer 1966, pp.20-22.
Thanks to Ted Crawford & the late Will Fancy.
Transcribed & marked up by Einde O’Callaghan for ETOL.


Two IS Editorial members have recently published a searching critique of the Government’s incomes policy, Incomes Policy, Legislation and Shop Stewards. Paul Derrick disagrees with this study and the position of IS on incomes policy, and presents his views below. A comment by Colin Barker follows. Other comments on Derrick’s piece ot the book he is criticising are welcome.

In 1945 it was widely believed Keynes was right in saying it was possible to maintain full employment in a capitalist society without inflation. Since then Britain and many other countries have been successful in maintaining something like full employment; but the price has been continuing inflation. We cannot afford to sacrifice full employment and the production that goes with it. But equally we cannot afford inflation as we have to export about a sixth of what we produce. It is possible, therefore, that we shall be compelled to change the capitalist basis of our economy.

This could happen by restrictive measures like those of the 1965 budget producing mass unemployment and a revolutionary situation. It could happen by a government which calls itself socialist finding itself compelled to adopt socialist policies in order to survive. That it will happen is really self evident: the capitalist system is breaking down because it is incapable of maintaining full employment without inflation. The break may come in Britain before other countries because we are so dependent on exports of manufactures to maintain essential supplies of food and raw materials and because the use of sterling in international trade puts us in a peculiarly vulnerable position.

Every few days Since the Cripps White Paper on incomes policy eighteen years ago trade unionists have been urged by Ministers to exercise restraint in wage claims. We have been told that higher wages mean higher costs and prices and so less competitive exports, that we are not paying our way as a nation, that we must produce more and consume less.

The unions, in 1950 repudiated restraint in wage claims, despite price controls and a 30 per cent profits tax, until there was ‘statutory control of profits.’ Since then the TUC has insisted unions could not co-operate in an incomes policy unless it applied to all incomes. Thirteen years of Tory rule ended with a balance of payments deficit of £769 millions; and the new Labour Government promised that its incomes policy would apply to all incomes.

The deficit was reduced to £354 millions in 1965; but incomes continued to increase faster than output which was little higher at the end of that year than at the beginning. The Labour Government elected in March 1966 proposes to tackle the problem first by bringing in ‘early warning’ legislation to delay wage increases and second by curbs on demand, as through the 1965 budget, to make it harder for employers to pay wage increases.

But as these measures are likely to affect output as much as incomes they will not be very effective in preventing incomes increasing faster than output. If the restrictions are pushed so far as to produce widespread unemployment we are abandoning hope of achieving full employment without inflation – and the hope of achieving a planned growth of real incomes of the kind envisaged in the National Plan.

What then are we to do? One of the best analyses of the problems which the Government’s incomes policy is meant to solve is provided by Tony Cliff and Colin Barker’s Incomes Policy, Legislation and Shop Stewards (advertised elsewhere in this issue). It is a good resumé of the issues involved, but its final chapter, The Way Ahead stresses the need for the working class to fight to protect its interests, without stating where it is all supposed to lead. The working class undoubtedly has very great power today; but although there is much in this pamphlet about class power and class struggle it is not really made dear how the working class should use its power and what it should fight for.

The pamphlet is scornful of the reformist tradition, of the failure of the Labour Party to achieve socialism by Parliamentary democracy. It is true that the Labour Party seems to have forgotten about socialism. There was hardly any mention of the word by Labour Party speakers in the recent election; and when State intervention in industry is necessary for one reason or another – as in the aircraft industry – the 1964 Labour Government leaned over backwards to find some way of dealing with the problem other than by nationalisation. But this does not mean that economic pressures cannot be used to force a Labour Government in a socialist direction; and if legislation is ruled out as ‘reformist’ the object of the exercise becomes obscure.

Should socialists encourage every kind of strike not simply to further the interests of the working class but to create a General Strike in which the workers will occupy the factories? Could not the workers use their very real power to achieve socialism more quickly?

Would it not be more sensible for the working class to use its economic power to make political demands, demands for revolutionary changes in the very basis of the economic system? Of course the authors of the pamphlet do make some demands. They point out that our balance of payments difficulties are to a very large extent due to our heavy expenditure on arms, to the huge scale of British investment abroad in the post war years and to an international monetary system in which there is a perpetual danger of speculation against the pound. We have invested about £4,500 millions abroad since the war and military expenditure overseas in foreign exchange amounted in 1964 to £334 millions. The total cost of military expenditure overseas in that year was about £577 millions and net long term capital investment abroad in 1964 amounted to £363 millions and in 1965 to £218 millions in spite of the budget. Clearly if we made really drastic cuts in military expenditure overseas and in investments abroad it would go a long way towards correcting the balance of payments deficit. In 1965 the deficit on current account only amounted, after all, to some £136 millions. The deficit on visible trade was declining during the fifties and was much lower than pre-war.

To remove the danger of speculation against the pound would be a bigger problem. Sterling held abroad was £4,548 millions at the end of 1965, four times our reserves. But once we were clearly paying our way speculation against the pound would cease to be a danger and could wait the long term solution – a new international currency issued by a World Government with power to tax member nations in proportion to their spending on arms.

But investment abroad does help under-developed countries to some extent; and could and should be replaced by interest free intergovernmental lending insofar as we achieved a balance of payments surplus. Spending on arms could be diverted to aid to other countries and support for the UN. The pamphlet is right to demand cuts in arms spending and in overseas investment; but spending on arms in foreign exchange is only I¼ per cent of the National Income and the National Plan says that we should be able to increase production by three times as much as this every year. Cutting all overseas military expenditure altogether would not make such a prodigious contribution to the fulfilment of the National Plan as sometimes is supposed.

Why does the pamphlet not also make more positive demands? Why not support the TUC in its demand that incomes policy apply to all incomes, profits and dividends as well as wages and salaries, as promised in Labour’s 1964 election manifesto?

Is it suggested an incomes policy cannot be applied to all incomes when industry is run on a capitalist basis? We are learning this by experience; but that is no reason for not putting forward the demand. If the Government cannot meet the demand while industry is run on a capitalist basis they will obviously have to change the basis of industrial ownership. And about time too. Chapter Two of the pamphlet demonstrates that it is futile to talk about control of profits or dividends while industry is run on a capitalist basis. Profits are a residual; and as the TUC said in its Economic Report in 1949 ‘the amount of profit made by an individual undertaking depends upon a number of factors and since many of these cannot be precisely estimated or controlled in advance, close statutory or administrative determination of profits before they are made is not practicable.’ The ETU confirmed the common sense of this verdict by producing a quite impracticable plan for transferring company profits to the Exchequer without changing the basis of industrial ownership.

In an expanding economy taxes on industry like the profits and corporation taxes tend to be passed on to the consumer in higher prices. If the Corporation Tax or some other tax were increased in such a way as to prevent profits or dividends from increasing annually by more than 3½ per cent it would undermine incentive as did the 1952 Excess Profits Levy and lead to cuts in investment. The Income Equalisation Tax proposed by The Economist after the 1964 election would have the same kind of effect. Management would say that increasing efficiency was simply not worth while if no-one was allowed to benefit thereby.

A voluntary limitation of dividends, as in 1948-9, merely means that profits accumulate for shareholders, leading to capital gains. The same thing would happen if temporary legislation for the limitation of dividends were introduced, as proposed by Mr Gaitskell in 1951.

However strict price controls may be, however heavy the taxes on profits and however tough the curbs on demand, restraint in wage claims is bound to lead to gains for shareholders for so long as industry is run for private profit, bound to reduce the worker’s share of the earnings of industry. But it is also true, as George Brown claims, that restraint in wage claims helps to stabilise prices and maintain exports.

The pamphlet questions this. It says that even a quite large wage restraint would have almost no impact on the balance of payments and later that an incomes policy would contribute almost nothing to economic growth. But the price paid by one person is the income of the recipient, the price received by a company is the income of the people among whom its revenue from sales is distributed. That increases in money incomes must lead to higher costs and prices is evident enough to any wage earner or housewife and there is no reason why this proposition should be questioned by socialists.

The pamphlet recognises that the great wage restraint exercised by the German unions in the early fifties did help the German economy. Increased profits do not necessarily mean a proportionate increase in investment; but more was ploughed back and the relative stability of German wage costs did help Germany to compete in export markets.

Why should socialists attempt to deny that restraint in wage claims helps stabilise costs and prices, helps lower paid workers insofar as it stabilises prices? The direct result of restraint is to increase profits and dividends and not the money incomes of lower paid workers. But it is also true that the latter are unlikely to find living costs rising quite as fast. The mass of wage earners can see that restraint in wage claims would help to stabilise prices; but they can also see that it leads to gains for others when industry is run for profit. They rightly press on with wage claims.

George Brown often talks as if one of the most urgent tasks was to educate ignorant and ill informed workers into understanding that higher money incomes without higher output lead to higher prices. But the really urgent need is for the workers to educate the Government into understanding that restraint in wage claims is bound to reduce the worker’s share of the earnings of industry.

In thirteen years of Conservative rule the workers’ share of the earnings of industry remained constant at 42 per cent. The unions did not increase their share of the gross national product by pressing claims but simply prevented it from declining. The workers have great power in an expanding full employment economy, especially when it is necessary to stabilise prices to maintain exports. That power should not be used simply to press wage claims in the vain hope that this can significantly increase the workers’ share of the national income. It should be used to press wage claims to compel the government to change the basis of industrial ownership and secure for workers by hand and brain the full fruits of their industry upon a basis of common ownership.

Nationalisation with workers’ control is the cry. But we all know very well that if active socialists persuaded the Labour Party to include wholesale nationalisation in its election programme the Labour Party would lose the next election. If we want to achieve socialism by nationalising every company in the country we shall have to wait for mass unemployment, destitution and a revolutionary upheaval with the workers out in the streets and occupying the factories, seizing the means of production.

We are likely to have to wait quite a while for that: but socialism is an urgent economic necessity. Clause Four is in fact calling for an incomes policy based on social justice. The argument about an incomes policy is really an argument about the distribution of wealth.

To turn a capitalist economy into a socialist one is not to nationalise this company or that; it means incorporating the cooperative principles of a limited return on capital and democratic control in company law. Company law is under review at the present time and the Labour Government is due to bring in a second Companies Bill in the next session of this Parliament. Socialists and trade unionists should demand that company law be changed to ensure effective control of companies by workers who work for them; that dividends paid to shareholders be limited as permanently and effectively as the return paid on capital is limited in the case of co-operative societies and nationalised industries – so that shareholders cease to be owners and become creditors and preference shareholders are creditors with no claim on residual earnings or assets.

At the same time earned and property incomes should be taxed separately and the tax on property incomes should be much more steeply progressive than that on earned incomes. A tax on property incomes as such would be a much more effective instrument of redistribution than any tax on company profits; and those with the largest property incomes could be made to pay at more than 20s in the pound. Freehold ownership of land should be abolished and the ultimate ownership of land vested in the nation; and effective steps taken to prevent the transfer of money abroad.

Changing the basis of industrial ownership in this kind of way would be a very difficult thing to do – I discussed some of the problems in my Fabian pamphlet The Company and the Community. But changes of this kind have in the past been advocated by Ministers in the Labour Government – (Albu in New Fabian Essays, 1952, and Callaghan at the 1950 Labour Party Conference). The Co-operative Party appears recently to have been thinking in terms of extending social ownership by a wider application of co-operative principles in industry. The TUC was calling for the legal limitation of dividends for four years after 1951; it should now be calling for a permanent change in the basis of ownership which will set a permanent limit on the return as well as the liability of the shareholder.

Wholesale nationalisation is unpopular with the electorate because it is associated with the concentration rather than the diffusion of power, not because it would help to bring about a fairer distribution of wealth. Even Tories find it useful to talk about a wider distribution of property – while categorically opposing the redistributory taxation necessary to bring it about. With the return on capital limited, workers, consumers and the State representing the community could all participate in the residual earnings of companies. No doubt there would be much real discussion in the Labour Movement both about the ‘most equitable distribution that may be possible’ and about ‘the best obtainable system of popular administration and control.’ The Yugoslavs, Chinese and others have done useful work on new forms of industrial ownership; and the recent Soviet industrial reforms provide for the limitation of the return paid on capital and for workers’ participation in residual earnings. By putting forward demands of this kind trade unionists would be helping to educate the government in the ‘law of the situation’ in which it finds itself.

The working class, finding itself in a very strong position, should state clearly the terms on which it would be prepared to cooperate in an incomes policy. But the price should be a stiff price – a socialist price. Trade unionists should use their very real power to educate the Government and compel it to make the changes in industrial ownership upon which the economic survival of the country depends. Wage claims should be pressed with all possible vigour for as long as industry is run for private profit – but pressed with a purpose. Class power is an instrument of social change; and those who fight the class war will fight the better if they see and proclaim clearly the things for which they are fighting.

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