Incomes Policy
It is interesting that there is no discussion of incomes policy in the book (or the index) by David and Peter Ady, The British Economy in the Nineteen- Fifties, published in 1962.
During the years following the Second World War and in the 1950s and 1960s, unemployment in the UK was low but rising slowly. It was 1.0% in June 1951 and rose to 2.2% in May 1969 (see Brittan 1976: 250). Each percentage point increase in unemployment represented 100,000 more people out of work. The individual social cost to an involuntarily unemployed person was high in terms of poverty and social distress, so the multiplication by 100,000 of such costs was considerable. Nevertheless, in terms of percentages, during the Great Depression in the 1930s when unemployment rates were between 10% and 20%, and in the decades subsequent to the 1960s (the number of unemployed persons in the UK rose to 3.5 million in 1986), a figure of 2.2% was considered to be relatively low.During the post-war decades, Keynesian demand management were still in effect. That is, fiscal but also monetary policies designed to increase investment to plug the gap between aggregate demand and income were employed. However, policy makers were conscious of the fact that excessive aggregate demand might lead to rising wage costs as unions took advantage of their strong position in the labour market to push for higher money wages, in turn causing businesses to respond by increasing their prices. So the question became, how to maintain full employment without inflation? For a time, the Phillips curve seemed to provide an answer: if the level of unemployment were kept at 2.5%, or what was regarded as the natural rate of unemployment, then the rate of price rises would be stabilised. However, this empirical relationship soon collapsed as described in Section 4, and the conflict between maintaining full employment and keeping prices under control re-emerged.
In his 1991 book, Unemployment: A Problem of Policy, written after he had retired from the National Institute, David defined incomes policy as referring to
measures intended to influence directly the level, or the rate of change, of money incomes, especially wages and salaries.. Historically, wages policy and incomes policy were first discussed as a means to contain the cost inflation which accompanied the full employment which came to be taken for granted in the years following the war. Analytically it fitted comfortably into the Keynesian paradigm (ibid.: 118).
He then goes on to enumerate the various forms which incomes policy could take. For example,
a highly centralized system in which all money wages were fixed by a single authority. At the other end of the spectrum the policy might consist of no more than jawboning, resorted to, at one time or another, by virtually every post-war Chancellor of the Exchequer, urging all concerned to exercise restraint in claims for higher wages or salaries. Incomes policies can be embodied in voluntary agreements between workers and employers, or between workers and employers’ organisations and the government, or they can be imposed by law. They can be permanent features of the economic landscape or they can be introduced temporarily in response to some economic crisis (ibid.: 119).
The problem with the systematic use of incomes policy in the decades following the Second World War was that, while it fitted the Keynesian model of analysing the economy, it did not fit the monetarist model which assumed full employment. But it was the monetarist model that was gradually adopted by policy makers in Conservative governments especially that of Margaret Thatcher. As a result of monetarism, the government was no longer committed to keeping the unemployment rate low, but rather to preventing prices from rising too fast. However, during the 1980s, both the unemployment rate and inflation were increasing at the same time.
Since it is important for understanding incomes policy to know how economists thought the economy worked, it is necessary to look both at the Keynesian and monetarist models. In Unemployment: A Problem of Policy, David devoted some time to considering the monetarist model and the evidence which should support it. He started with a discussion of the quantity theory of money (QTM) using the well-known equation MV = PT, where M is the quantity of money in circulation, V is the velocity of circulation, P is the price level and T is the number of transactions. If Q stands for real national income, then MV = PQ, where Q is an index number for output and P is an index number of prices, and thus, PQ = Y is the nominal national income. If m = log M and we adopt the same notation for the other variables, we have the logarithmic form of the money equation as m + v = p + q = y. This equation can then be used to test empirically the strength of the relationships between the variables. There are two versions of the QTM, the first saying that the money stock and nominal income move together, and the second, older version asserting that the money stock and prices move together.
Brown (1983) tests the relationship between the money stock and money income for different countries and finds that there were fifteen and a half cases where money changes led income changes, there were fourteen and a half cases of simultaneity and five cases where income led money (the halves refer to a dead heat). When the relationship between the money stock and prices was measured there were eleven and a half cases where money led prices, five of simultaneity, and nine and a half where prices led money. David concluded that, ‘Brown’s data show that changes in the velocity of circulation from year to year are not so much less variable than the changes in money growth that velocity can reasonably be treated as a constant’ (Worswick 1991: 145).
In 1982, Friedman and Schwartz published a massive study of Monetary Trends in the United States and the United Kingdom, covering the period 1867-1975 in the US and the UK.
Time series were assembled for money stock, nominal national income, price deflators, interest rates, the sterling- dollar exchange rate and other variables. The data were “decycled” by an unusual device of triplets of neighboring cycle periods. Monetary Trends formed the agenda of a meeting of the Bank of England's Panel of Academic Consultants in October 1983. Besides Friedman and Schwartz, a number of journal reviews were discussed as well as two specially prepared papers by Hendry and Ericsson (1983) and by Brown (1983). The former concluded that a number of the assertions made by Friedman and Schwartz about their money demand equation ‘were found to be without empirical support' (Hendry and Ericsson 1983: 82) and their failure to produce evidence pertinent to their main assertions ‘leaves these devoid of credibility' (ibid.).David commented that this was ‘strong language' (Worswick 1991: 146). But he goes on to show that in his paper, Brown demonstrates that in the short run the growth of money income is not related to money. It is velocity, not money, which varies with money income growth within cycles and in the period between the world wars this relationship was particularly strong in the UK. Then Brown examined the question of how an expansion of money income is partitioned between changes in output and in price. He found that extra demand had gone mostly into output when there was spare capacity and into inflation when full employment was approached. David concludes by stating that: ‘Finally, when Brown asks the question whether [Friedman and Schwartz] make their case that United Kingdom experience supports a simple quantity theory, with money controlling prices, and output controlled by other factors entirely', he says, “In a word, no”'(ibid.).
During the 1950s and 1960s,[138] a “Stop-Go” was in place in which the “Goes” were mainly encouraged by a relaxation of fiscal policy to raise output and employment and the “Stops” were most engineered by a tightening of monetary policy in the form of higher interest rates, restrictions on bank advances and a stiffening of controls on consumer credit.
In 1964, the Labour government set up a National Board for Prices and Incomes (NBPI) whose primary aim was to control inflation. The Trades Union Congress (TUC) at first reluctantly agreed to participate, and the policy was initially voluntary— and ineffective. A six-month statutory freeze of wages and prices was imposed in the mid-1960s. However, when the Conservatives came to power in 1970, they abolished the NBPI. Prices began to rise especially after the floating of the pound in June 1972 which caused import prices to rise. The Conservatives undertook long negotiations with the TUC to set up a new incomes policy. These failed and the government imposed a wage freeze which remained in effect for the rest of the Conservative administration.In 1973, there was a double energy crisis: war began in the Middle East and the Arab oil producers cut supplies which led to a quadrupling in the world price of oil. A Labour government was returned to power after a general election in the UK in February 1974 and proceeded to drop all wage controls, retaining only threshold agreements and a Price Commission.
This tit-for-tat tussle between Conservative and Labour governments over the type and severity of incomes policies in the face of continuing price rises lasted until the Thatcher government took office in 1979. By that time, unemployment was rising along with prices, and in 1986 the number of unemployed had reached 3.1 million. David's reaction to this figure was to point out that the accumulation of person-years of unemployment was substantially higher in 1986 than in the 1930s!
The failure of incomes policy to contain prices while preserving the level of employment was seen by David, and no doubt many others, as the failure of reasonable people in government, in the TUC and other policy makers to put the collective good ahead of personal advantage. David always expected people to do the right thing and not to act for themselves alone. So he was constantly disappointed when self-interest and disingenuousness (as in the monetarist mantra) at the top of government frustrated the collective good as he saw it. But then he was a socialist and put the interests of the ordinary people before those of the ruling classes. This, of course, was also a key difference between the Labour and Conservative parties.
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