Nothing without Labour

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.

It wasn't.

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.

But the self-destruction continued.

Not by everyone.

The attempt to curb inflation by monetary measures provoked inflation which could not be alleviated by local production. Supplies had to be imported by the United States. Those supplies were provided increasingly by the Asian Tigers who were later joined by China and India. Some elements in United States inflation eased as a result but the job losses in "stagflation" became embedded ever more in the American situation.

Not only did inflation ease and unemployment increase but the balance of trade and payments moved ever more markedly against the United States and in favour of the Asian Tigers, China and India.

This was not a sudden development. It matured over about twenty years as I described in "The Multiple Abyss" (1996) and "America's Suicidal Statecraft" (2006).

As the policies matured and Deng's option to join "the rich" bore fruit, China moved from being a relatively backward economy in the mid-1970s to being the world's second largest economy now, with superpower and space-race ambitions and promise of becoming the world's top economy in the near future. Meantime, the United States has had its credit rating reduced by S & P, its approved debt ceiling raised above the present $14 trillion and its space enterprise largely suspended.

Is that as far as global rearrangements are likely to go?

Will stability soon be restored to the global economy and finance?

Will the dramatic changes of past decades in the economic, political and strategic power situation be brought to a speedy and relatively painless close?

The answer to all three questions seems to be "no."

Since the Lehman collapse of 2008, the United States has wasted valuable time, reputation and money turning a disastrous scenario into a catastrophic reality.

In "America's Suicidal Statecraft", I compared Bernanke's idea of helicopters dropping money from the skies to the 1970s practice of the Emperor of the Central African Republic throwing paper money to his grateful citizens when he went walkabout. The gratitude didn't last. The Emperor was dethroned, imprisoned and executed.

The fate of Bernanke and his president might be more merciful but unpleasant nevertheless.

Trillions of dollars have been spent for virtually no result except to make a United States – and Western recovery – more difficult, more complex and more long drawn out than before.

Bearing in mind the "hedonic" features of American statistics, the United States is almost certainly in "recession" right now. The question is not whether the United States is in a double-dip recession. Rather it is in continuing recession deriving from long-lasting, fundamental, uncorrected errors of policy.

What is terrifying is that the situation is even more critical than three years ago. During those three years, the problems confronting the United States have become bigger and more menacing than ever,

Not only bigger and more menacing but even less well identified than ever and more subject to pointing fingers at others rather than accepting responsibility for putting their own house in order and helping others so as to promote global stability and peaceful change.

The United States has recently tended, for example, to highlight the sovereign debt of the Eurozone countries as the central threat to global stability. That may be planned to distract attention from its own massive debt and deficit, and from the highly unstable speculative financial system which still operates in the United States itself.

Alessio Rastani's view that it is not governments but "Goldman

Sachs [that] rules the world" is not funny. Not at all, because it reflects what many see as an everyday reality.

"The market," Rastani says, "is toast." After all the years spent in adoration of the market, it might seem a sacrilege to express such a thought – even think it; but it too reflects everyday reality. Moreover, it is not just the little day-trader who characterises today's "market". The whole community - the bankers, the hedge-fund managers, the ordinary Joe and Josephine in the street – swings the levers of the global poker machines now, not so much in expectation of becoming rich as in hope of grabbing at financial survival.

Everyone has been caught up in the addiction to gambling on the stock markets, foreign exchange and commodity markets – wherever a prospect exists of making or saving a fast buck.

It is not possible to construct a real economic and financial recovery while this casino philosophy and practice continue to rule.

But its reform – or more accurately its replacement - will not be easy to achieve and cannot be done quickly.

It will take several years at least to return to rational economic policies for domestic and global economies. That is if – at last – we begin right now to do the right things.

What are the "right things"?

The quote from 1973 said "we need to do two things?"

What are they?

The first is to acknowledge that we are dealing with a new economic and financial situation. We must make fundamental changes, not just tinker with details at the margin. In this context a solution to Greek debt will not solve the problem of global debt – sovereign, commercial and personal. Nor will it correct the range of financial and economic policies which caused the perilous and ultimately devastating accumulation of financial disequilibria.

The second thing we must do is to look again at our broad macroeconomic policies so that they deliver full employment and stable growth within the sort of society that Keynes and others envisaged. At the same time, we must take account of the many revolutions that have occurred in production, distribution and exchange over the last several decades.

To tackle these changes, we must imagine we are at a point of reflection on policies similar to that at the end of the 1930s. We need to consider what should now replace the ineffectual United Nations and its Specialised Agencies as well as global financial institutions. We need to reflect on urgent practical issues such as what our reserve currency for international transactions should be. What should be the role, if any, of a reserve currency? What should be the role of gold?

What we do know is that while the market must be allowed to play a vital part in our economic and financial life, it cannot be allowed a completely free run. It may be funny to declare that "the market is toast" but we must devise a new "toaster" – not necessarily through more regulations but smarter regulations if we are not to continue to burn our toast to a cinder.

What then should we do?

I cannot set out all the detail in this article. I have done that already in "America's Suicidal Statecraft". However, in broad terms -

The current UNGA should appoint a small but distinguished and gifted group (DIGG) charged with examining data and proposals connected with the current global financial situation. It should produce a report of practical measures before the end of 2011 based on proposals for sustainable growth through fixed capital investment, productivity and production instead of policies of restriction and austerity.

The measures should aim at full employment through public enterprise, wise public banking and direct public investment. The emphasis should be on production of goods and services for a stable and growing market and the effective elimination of the massive current speculation in capital, currencies, commodities and commerce.

The basic model for stability and for moderation of the volatility that encourages speculation should be the domestic and global economic and financial system that characterised the quarter century in the highly developed countries from 1945 to 1970. This basic model will have to be modified for economic, financial, social, technical and scientific changes since but, among other things, it should restore the rights, privileges and status of the working and middle classes as well as modify the "sitting pretty" situation of the rich.

The broad objective should be to achieve peaceful change based on social and economic justice within a genuinely democratic system.

DIGG's report should recommend immediate measures to minimize distress while more basic reconstruction of domestic and global economies takes place. A process should be started to construct a new IMF and IBRD as well as new agencies for such key economic and social sectors as agriculture and trade. We must look towards a revolution in domestic and global policies which is likely to require the UN or other central multilateral authority to meet in continuous session to oversee the progress – or further deterioration – of the global economy.

This would herald a peaceful revolution. We need to embark on it urgently to avoid a monumental financial collapse. We need to embark on it also to avoid revolutionary violence on an unprecedented scale.