Inflation is now a topic back on the agenda. During the 1970s this was a particular problem for governments. Inflation was 9.2% on average during 1973 and unemployment had reached 900,000 in 1972.
The standard economic line of the time was that inflation was caused by workers pressing for higher wages. Workers were told to show pay restraint in their wage demands, or a ‘wage-price spiral’ will be the result.
Economists claimed that when workers win wage rises, companies simply pass on the cost through price increases, meaning that other employers are forced to follow suit, and there is a general increase in prices. This false economic theory concluded that workers should not struggle for better pay and working conditions since they would lose out through higher inflation.
At the time, Edward Heath tried to control wage demands by setting up a Pay Board to work in conjunction with the Price Commission. Later the Labour government tried to impose a pay limit with the TUC through a Social Contract. In 1976 the unions agreed to 4.5% as a guide line for pay increases. But the TUC opposed a ceiling of 5 per cent (inflation was then running at 8.3%), suggested by James Callaghan and there followed the ‘ winter of discontent’, Margaret Thatcher and decades of anti-trade union legislation.
Marx gave an account of inflation in the first volume of Capital. Marx showed that if the total amount of gold is replaced by inconvertible paper money, and if the amount of that paper money then issued is in excess, prices go up accordingly:
“If the quantity of paper money issued is, for instance, double what it ought to be, then in actual fact one pound has become the money name of about one-eighth of an ounce of gold instead of about one quarter of an ounce…
The values previously expressed by the price£1 will now be expressed by the price £2”. (Capital, Vol.1, Allen & Unwin edition, p. 108).
A recent example of blaming workers for inflation was an article by the economist Sean O’Grady published in The Independent under the heading “Ministers fail to grasp basic economics” (4/10/21).
O’Grady stated that wage increases cause inflation and wages can only rise if productivity does. He tells workers to accept a lower standard of living and not to struggle for better wages. He preaches economic abstinence and political quiescence.
The analysis of inflation that Marx gave in his lecture to the General Council of the First International in June 1865, published after his death as a pamphlet, Value Price and Profit, completely demolished O’Grady’s argument.
In fact, inflation, in the strict meaning of the word, is caused by governments not workers or employers. As the Socialist Party of Great Britain pointed out:
“Inflation is caused by governments going on year after year and putting into circulation hundreds of millions of pounds of additional paper money…Wherever and whenever currency has been issued in excess, the price level has risen; and wherever and whenever currency has been restricted, prices have stabilised or fallen” (Questions of the Day, ‘Inflation and Employment” p. 94).
Marx showed that increased wages do not push up the general price level of commodities but does lead to a generalised reduction in the rate of profit. Workers, then, should ignore economists like O’Grady and struggle for higher wages and better working conditions when trade circumstances allow.
Marx reminded workers:
“By cowardly giving way in their everyday conflict with capital, they would certainly disqualify themselves for the initiating of any large movement”
However, as Marx noted, workers are only dealing with effects and not causes. They are struggling in a system that is weighted in favour of the capitalist class. The capitalist class own and control the means of production and distribution, protected by the machinery of government, to the exclusion of the rest of society. He said that the working class should set out to “abolish the wages system”.
The wages system only exists as labour power is a commodity. When commodity production and exchange for profit is abolished in socialism and is replaced with the production of useful goods and services meeting human need, prices, including wages, will no longer be necessary.
Workers have no alternative but to democratically and politically organise for the abolition of capitalism and the establishment of socialism: the common ownership and democratic control of the means of production and distribution by all of society.
