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John Palmer

Economic Prospects

(May 1973)

From Notes of the Month, International Socialism (1st series), No. 58, May 1973, pp. 1–4.
Transcribed & marked up by Einde O’ Callaghan for the Encyclopaedia of Trotskyism On-Line (ETOL).

John Palmer writes: ‘Strange’, the Economist magazine noted recently, ‘the newly found modesty of Mr Heath and his colleagues when it comes to speaking of the outlook for the economy.’ For at first sight it would seem that the Tories have something to crow about. After nearly a decade of stuttering, fitful economic growth output is currently rising at an annual rate of more than five per cent. And, as a reflection of the expansion in production, unemployment is well down from its autumn peak of more than one million.

The official government line about the outlook for the next year or two is that the growth target of five per cent a year should be maintained – bringing in its wake the long awaited upsurge in capital investment by industry. This in turn, should enable British exports to win an enlarged slice of export markets – even in the face of Common Market competition.

But the Tories have been reluctant to hail the advent of economic salvation for British capitalism. And with good reason. For in spite of the undoubted upturn in the economy in the past six months the prospect of this being maintained beyond the autumn are increasingly doubtful.

As so often in the past the balance of payments is a time bomb ticking away at the heart of the recovery. Already the UK foreign trade balance has moved decisively into the red and the estimates for the overall payments deficit by the end of 1973 range from £500 millions to £1,000 millions – with economic opinion swinging towards the bigger figure. The record trade deficit for March certainly points to it.

However even these estimates may prove too low. The signs are that with the economic expansion barely six months old, serious bottleneck shortages in components and materials are already developing. In the past these bottlenecks have triggered the final stages of a payments crisis. But they have usually only occurred after a rise in production and consumption had been followed by some increase in capital investment. This time the shortages are emerging before any recovery from the three year stagnation in investment spending on new plant and machinery has taken place.

Of course these production bottlenecks are themselves a reflection of the inadequacy of industrial investment in Britain during the past 20 years. As a result British firms are now more import-dependent than ever before particularly when they begin even the earliest stages of a production upturn.

At the same time the outlook for British exports is far from encouraging. The principal effect of the successive devaluations of the pound since 1967 (recently disguised as floating the pound) has been to raise the price of imports without leading to a sufficient compensating increase in export sales. It does seem that British industry (like American) is so seriously and structurally uncompetitive that changes in the value of the currency tend to make matters worse rather than better.

It is true that world export demand has recovered from the low level of 1970 and early 1971. But this seems unlikely to last. In the first place more and more countries are erecting direct – and more commonly indirect – trade barriers against foreign imports. Secondly the remarkable upsurge of rising prices in the United States will almost certainly lead to deflationary action being taken by the Nixon administration. This – combined with threatened new import levies – must hit British exports to this vital US market.

It is precisely inflation which poses the most general threat to the British economic recovery. In spite of the government’s almost total success in ramming both Phase One and Phase Two down the throats of trade unionists prices are continuing to accelerate. Prices are presently rising at more than seven per cent a year. The main impetus is coming from abroad; partly as a backwash of other countries’ inflation (imported by the multi-national companies) and partly because of a sharp rise in the price of primary products and food stuffs. The full impact of these price rises has not yet begun to be felt either by British industry or the consumer.

Food prices alone are rising at an annual rate of more than 20 per cent and the prices of fuels and basic materials have risen by no less than 20 per cent over the last six months. In the coming months these will be added to the already breathtaking leap in prices in the shops. But more will follow. Under Phase Two and even more under Phase Three of Heath’s policy firms will be much freer to pass on the full impact of these cost increases. In addition spokesmen for the Confederation of British Industry have made clear that, independent of any price increases due to import costs, industry also intends to raise prices to increase profit margins. The very generous Phase Two regulations permit companies to raise prices by as much as they like providing only that profit margins (not just the mass of profits) do not exceed the best two of the last five years of the firm’s profit record.

The acceleration in inflation this summer and autumn will not be restrained by the imposition of the wage freeze. As the Economist has also noted, the effect of the freeze on wages, given this background of prices, will be to undermine personal consumption – the principal pillar of the current expansion in output.

The government’s options in the face of the looming payments crisis are very restricted. If they try to avoid a full-scale crisis by letting the exchange rate of the pound fall lower and lower in the currency markets they will risk a full-scale battle with the Common Market majority which wants the pound refixed at a new exchange rate. But even if the pound does continue to slide this will only mean still higher prices for imports with little hope of compensating increases in export income.

The more likely course the government will take, given the importance to the international monetary scene of a return to more stable exchange rates for key currency, like sterling, is to impose a traditional ‘stop’. A squeeze on consumption sufficient to bring down the level of imports would have to be massive to bring the balance of payments out of the red. And it could only work by choking off the economic growth.

Conclusion: the recovery in production is threatened both by the wave of price rises and more directly by the prospect of a full-scale payments crisis. The background of world currency instability restricts the manoeuvering room of the Tories. Faced with the alternative of letting the pound continue to float on the money markets, thus disrupting the already fractured Common Market alliance, they seem likely to be forced to choke off the recovery, and deflate the economy. In any event the government will not be able to make any significant concessions on wages under Phase Three this autumn. Rather the year end will see a new and even more intensive stage of the Tory assault on wages.

After Phase Two

What will be the longer term political effects of the government’s spectacular success in beating off all challenges to the first two phases of its incomes policy strategy? In particular, does it call for a re-thinking of policy by revolutionary socialists?

We have argued that the fight against incomes policy is the central struggle in which a revolutionary socialist leadership in industry – the core of a real revolutionary movement – can be created. We have also argued that success in this struggle depends on fighting for specific, limited and immediate aims (pay, conditions, holidays and so on) as much as, if not more than, upon general propaganda. To the extent that immediate action is less possible, there is necessarily a shift in emphasis from agitation about particular demands to propaganda about incomes policy and the nature of capitalist society generally. But such a shift is likely to be short lived.

‘The decisive battle, for the whole of the government’s pay and prices strategy, has yet to begin,’ states the Economist and at first sight it seems an odd statement to appear, as it does, in an article celebrating the government’s victories. The reasoning behind it is the same as the point we made last month – ‘prices are going to go on rising at a greater rate than the wage adjustments permitted by the Phase Two norms.’ The Economist‘s estimate is that ‘in the next two or three months, the rise in the retail price index on a year ago will be running at over 10 per cent, even if by November this moderates again to February’s figure of around 8 per cent.’ Consequently, by the autumn, a real drop in working-class living standards will be felt.

‘The distinction that was supposed to make the Heath pay and prices policy succeed, where all others have failed, was that this time real incomes would go on rising. Thanks to imported inflation this is now improbable ... When the lag in real incomes sinks in, the credibility of the whole policy could be undermined. The unions’ contention that wages follow, rather than cause, inflation will seem to be vindicated ...’

As a matter of fact the government is very unlikely to win a really decisive battle even in the autumn or early spring. It is caught in the contradiction that the greater the success of the pay and prices policy, the greater the groundswell of discontent it creates. As late as January this year, earnings were still substantially higher, in real terms, than in January 1972. This fact, a consequence of the working-class victories of 1972, facilitated the defeat of the 1973 ‘spring offensive’ on the wages front and that defeat in its turn, by ensuring that real earnings will drop over the summer, lays the foundation for a major upsurge later in 1973 and in 1974.

Unless of course the effect of the defeats is a radical change of mood amongst workers. There is a theory, popularised by the late G.D.H. Cole, that ‘the British labour movement has continually swung to and fro between the attractions of political and industrial action’. By ‘political action’, Cole meant support for the Labour Party and Parliamentary ‘solutions’ as opposed to direct working-class actions of all kinds. According to Cole, disappointment in the results – or lack of them – of the first Labour government (1923) was a factor in the build up to the general strike of 1926. The defeat of that strike led in turn to the rapid growth of the Labour Party in membership and electoral support and thus to the return of the second Labour government (1929–31). And so today, the argument is heard, ‘mere militancy’ having failed to beat the Tories, workers in the mass will be reluctant to carry on the struggle in the same way and will turn increasingly to ‘political’ (by which is usually meant electoral) solutions.

Various kinds of evidence are put forward in support of this proposition. The result of the miners’ ballot, the relative lack of militancy at Fords and so on are interpreted as proving that workers ‘understand the need for political forms of struggle’ and so are unwilling to fight for partial and immediate demands. It is very much more likely that scepticism about the immediate prospect of success in a fight against the government, under leaders who are plainly half-hearted at best, together with the undoubted fact that the pinch had not yet really been felt, accounts for these reverses.

The ‘leftish’ variant of the ‘political solution’ argument, a variant beloved of some of the sectlets that vegetate on the periphery of the revolutionary left, runs like this. The union leaders will not fight the government. The workers know this. Therefore they will not make sacrifices for improved wages, hours or holidays because they know that they will be sold out. They will respond to a call for a ‘general strike to defeat the Tories’ and only to this call.

This is not a case that needs to be taken too seriously. Of course there is an element of truth in the idea that many workers are hesitant to engage in a big fight under leaders in whom they have no confidence. An element of truth, but it should not be pushed too far. As all active trade unionists of any experience know very well, the most backward and conservative elements in the movement are often ready to use ‘leftish’ arguments of this sort as an excuse for doing nothing. The belief that workers who, for the time being, ate not ready to fight for a few pounds or a few days’ extra holiday, are nonetheless awaiting eagerly the call for an all-out struggle to overthrow the government, is based on a remarkable misunderstanding of the realities of the situation. The ‘general strike or nothing’ argument of Joe Gormley and other right wingers is an application of the old, old trick of setting up a straw man and then knocking it down. That some genuine revolutionaries are willing to go along with this charade is an indication that they are ruled by their hearts rather than by their heads.

The ‘rightish’ variant of the ‘militancy has exhausted itself trend of thought follows closely Cole’s original theory. The results of the local government elections may be pointed to as an illustration of the revival of support for the Labour Party. Certainly the party had a big electoral success but on closer examination it is clear that this fact will not bear the interpretation put upon it by, for example, the supporters of the idea that marxists should be inside the Labour Party.

First of all, the poll was at the usual low level – no sign of a mass trend here. Second, though the Labour vote was around 6 per cent higher, proportionately, than in 1970 it was actually down on the 1972 local elections (by about 1 per cent proportionately). If we were to attach serious significance to the results as indicators of a change in mood on the part of large numbers of workers, we would have to say that, in spite of inflation, wage freeze, the Common Market and the rest, there was a marginal shift away from the Labour Party! In fact very little significance can be attached to small shifts of votes in elections at which getting on for two-thirds of the voters abstain.

Whatever validity Cole’s theory may have had for the nineteen-twenties it clearly has very little relevance today when the memory of the Wilson incomes policy is still fresh. The plain fact is that the ‘political alternative’ has to be built – for the Labour Party is certainly not an alternative in terms of policy, its current ‘leftish’ phrasemongering notwithstanding. The problem is how to build the socialist alternative and, under present conditions, there is no doubt that it must be done first and foremost in the course of direct actions, above all of industrial struggles. Only if defeats produced a serious and prolonged demoralisation is a revival of illusions in the Labour Party – as opposed to a protest vote for that party – at all likely. Such a situation would force revolutionaries back into a largely propagandist role. It would be a major setback but it has not happened anil is not a probable outcome. The effect of the defeats will be temporary. There is no justification for a change in our policy.

No ‘Time to Change Course’

With the May Day ‘protest’ out of the way the TUC leadership is now impatient to get on with negotiations with the government against whose policies the ‘protest’ was aimed. The right wing is eager, the ‘left’ goes along shedding crocodile tears. The outlines of a deal are already clear. Amendment of the Industrial Relations Act, consideration of the ‘anomalies’ of Heath’s incomes policy, possibly even some token action on food prices, probably an ‘index-linked norm’ giving limited automatic cost of living increases such as is currently being canvassed in the financial press. All this in return for TUC support for, and TUC policing of, the Phase Three incomes policy swindle.

There is, of course, no certainty that the deal can actually be clinched. The outcome largely depends on the amount of pressure that develops on the TUC from below and on the rate at which the economic difficulties of British capitalism worsen. But government and TUC are at one in seriously wanting an agreement. And the ‘left wing’ of the TUC is at one with the right. Specifically, Jack Jones and Hugh Scanlon want the deal. They will protest, no doubt, but given the chance they will sign.

Which presents the Communist Party with a dilemma. In his Time to Change Course, CP leader, Jack Woddis notes that the Tories

‘... strive to stamp out the spirit of class struggle which had swept over the workers and to ensnare them once again in the toils of class collaboration. So Vic Feather and his colleagues were invited to restart discussions on incomes and prices with the government and the CBI; and to this offer the right wing leaders were only too ready to agree.’

The right wing leaders? What delicacy! Not a mention of the CP’s favourite trade union chiefs, Bro Jones and Bro Scanlon, who, if we are to believe in fairy tales, only went along with ihe talks to ensure that Heath and Co heard the left wing point of view.

The CP is going to have increasing difficulty in combining verbal militancy with practical support for and reliance on its friends in the trade union machines. It is clear enough that the party itself is not going to ‘change course’. In spite of continued mutterings from the Frenchite wing, the party leadership is firmly wedded to left reformist policies. The conduct of the platform and its supporters at the LCDTU conference was a striking demonstration of the CP’s inability to execute the ‘left turn’ that is indicated by the situation in the labour movement. The line of the LCDTU leadership was distinguishable from that of the Labour Party and TUC lefts only in its greater ferocity in attacking left wing critics. It is very likely that we have seen the last Liaison Committee conference. The risks for the CP in permitting an organised discussion amongst representative militants grow rapidly as the TUC lefts move closer to the rights and as the revolutionary left increases its influence.

The CP is still a substantial force, in spite of these difficulties and in spite of its drubbing in the local government elections – the dismal electoral results are now so traditional that their impact on morale is probably minimal. It gained an important success with the election of Les Dixon to the AUEW Executive Council in a contest that looked doubtful on the first ballot and the decision of the April National Committee of the union re-affirming refusal to appear before the NIRC or to obey its rulings can be fairly claimed as a victory for the party. But these very successes aggravate the long term contradictions in the party line.

A large part of the CP membership and periphery are genuinely hostile to the right wing of the labour movement – the Max Morris element is not typical – and are convinced that the party is leading the fight against it. The party leadership seeks to insulate these comrades from the revolutionary left by attacks on ‘ultra-leftism’ which include a calculated attempt at confusion by seizing on the more unreal slogans of the genuine ultra-lefts and tarring the serious revolutionary left with the same brush. This has to be countered by sustained pressure for united action on those issues – and they are vital ones – on which the CP has a formally correct policy. Opposition to all incomes policy frauds under capitalism. Repeal, not amendment, of the Industrial Relations Act and so on. We are not splitters. We are for unity in action on these issues.

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