For quite a long time now (October 1973), the world has struggled – for the most part inelegantly and certainly ineffectually – against inflation. This unremitting but unsuccessful struggle has had its most dramatic episodes – though its origins lie deeper both in time and causation – since the United States tried to dampen a boom in its domestic economy by restrictive economic measures in July 1969. Since then, the winds of inflation have swept everywhere. No one has been able to control it. In Australia, the more we try to stop it, the worse it becomes.
What is wrong?
The Elusive Answer
Across the world, the academic economists have no answer. Nor do our bankers or businessmen. Our economic writers and journalists are able to tell us what was wrong with our economic policies (such as those embodied in the 1971 budget) after they have shown themselves to be unsound; but they are quite unable to suggest the right policies in advance. Finance Ministry officials, relatively inflexible in their well-meaning conservatism, apply their known rules and remedies and, however many times they fail, return forever hopefully to the only springs of their inventiveness.
We in Australia, though unable to cope with our current economic problems, are no worse than people in other countries. Their experts, officials, bankers and others are quite as helpless as our own. If the Australian Government struggles to make a selection of the non-remedies that are offered to it, so for the most part do the governments of the advanced economies of Western Europe, North America and Japan.
The Ministerial Meeting of the Organisation for Economic Cooperation and Development, held in Paris last June recognised the gravity of the economic situation and, in particular, acknowledged world-wide inflation as a problem that had to be solved. But the Ministers and their impressively expert delegations were unable to offer any real solutions. The Committee of Twenty established by the International Monetary Fund to try to reform the international monetary system has, despite the great competence of its members and of the IMF staff, made little progress but, more importantly, it seems not really to know where it should be going. Dollar and other currency crises follow in rapid succession. Central Bankers and Treasurers meet. Confident assertions of success in stabilising the currency situation are followed by frank confessions of failure. The confident assertions have become noticeably fewer as the succession of crises has grown.
Reflections of the Past
Is there any solution? Must we go on in this way until the end of time? Most people must occasionally get a nightmarish feeling that, in terms of our lack of control of the situation, we are back in the 1920s and 1930s. Then we had a succession of – or abortive proposals for – world economic conferences, world financial conferences, devaluations, currency manoeuvres; and everything we did only seemed to make things worse. The present crises are NOT the same as those of the 1920s and 1930s. There are not the millions of unemployed, the long dole queues and the terrifying prospect that seemed to confront us in the early thirties that the modern economy, deficient in aggregate demand, would slow to a cataclysmic halt.
But, if there are differences, there are also similarities and it is at these that we should look. There is a solution to our present problems and, just like the solution that Keynes outlined to us in 1936, it is very simple. Someone recently said of Keynes' theories, "no one supposes that such inspired simplifications, these 'jumps' in thought, are the work of simpletons, though simpletons may grasp them once they have been done". So at the moment, we are passing the obvious solution by, not because it is so complex that we cannot grasp it, but because we have become conditioned to a particular mode of economic thinking that we never really turn our minds to it. Again, the conditioning of the classical economists in the 1920s and 1930s is striking.
So we need to do two things.
The above could have been written today about today's global or national financial and economic problems.
I wrote it in October 1973 as part of an analysis for a senior Australian Cabinet Minister.
At the time, it had little impact on the national and international policies to which it related.
The United States had tried to do too much in the 1960s. With hot and cold wars, moon landings and welfare, deficits began to appear in budget and foreign-payment balances. Nixon applied fiscal and monetary remedies in 1969 and French pressure forced him to cut the US dollar's link with gold in 1971. The International Monetary Fund ceased to exist as contemplated under its Articles of Agreement of 1944.
The 1970s were not a good decade for the United States. From being the greatest creditor in world history it sank deep into a process which would make it the world's greatest debtor.
However, it persisted with its policies of fighting inflation with hikes in interest rates and advocating free markets and a minimum of government "interference". These United States policies were enthusiastically shared by other major Western countries. The trade unions were destroyed. Reagan did it initially through sacking the air-traffic controllers. Thatcher did it by beating the striking coal miners. Containerisation did it by abolishing union members' jobs.
The economy is nothing without labour. Labour makes the stuff; it delivers the stuff; and it consumes the stuff. Managers – and the rich – have neglected that crucial fact in recent years at the cost of the economy's best interests and, ultimately, their own.
Since 1980, the process of reversing the rise of the working class has been successfully pursued with the middle class being included in the humbling of the rest of the society by the very rich. The tyranny of both the traditional and newly rich has become steadily more firmly fixed in place since the late 1990s. Warren Buffett has told us there is a class war going on now and "We are winning."
He could even have fairly claimed that we, the rich, have already won.
These trends were not difficult to identify. The attempt to fight inflation through hikes in interest rates and fiscal measures caused persistent "stagflation" which I predicted in my book "The Indigent Rich" published in 1971. In "Inflation" published in 1974, I particularly stressed the need for "fixed-capital investment, productivity and production" to resolve problems of both inflation and unemployment.
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