James E. Meade
Invited Address
Seventh International Atlantic Economic Conference
Stagflation in the United Kingdom
JAMES E. MEADE*
As you know well, the nasty word 'Stagflation' has been invented to describe the even
nastier state of affairs in which the economy is
simultaneously both Stagnant and Inflationary,
the main symptoms of the disease being the appearance, at one and the same time, of heavy
unemployment and of a rapid rate of rise of
money prices.
This relatively new disease has recently spread
as an epidemic through the community of countries of which we are a part-namely, the industrially developed, free-enterprise, liberal, mixedeconomy democracies. Its incidence has been
very varied, ranging from very slight in Austria
to very severe in the U.K. But it has been widespread and in my opinion its possible consequences should be taken very seriously.
For if one wished to undermine the structure
of a liberal society one might find it difficult
to choose between a policy of debauching the
currency by a runaway inflation or a policy designed to ensure a prolonged period of heavy
unemployment. Germany in the early 1920's
experienced a complete runaway inflation which
reduced the value of the mark virtually to zero;
and this was followed in the early Thirties by a
horrific period of mass unemployment which
impoverished practically the whole community.
Runaway inflation followed by mass unemployment killed democracy in Germany. To combine
inflation and unemployment simultaneously
could be an even surer recipe for disaster.
Of course I am not for one moment suggesting that the immediate danger in the U.K. is
*Cambridge, England, Invited address to the International Atlantic Economic Conference, May 10-18,
1979, Salzburg and Vienna, Austria. This lecture is a
revised version of the Snow Lecture given in Cambridge, England in November 1978.
anything comparable to that of the dreadful
interwar German experience when the rate of
explosive price inflation and the level of mass
unemployment were of quite different orders
of magnitude from anything which we are at
present experiencing. But there is one ominous
feature of the experience of recent years which
does, I think, suggest that the position should
be taken very seriously. In the U.S. over the
last decade or two, each level of unemployment has been associated with ever higher rates
of inflation as the years have passed; and it is
not difficult to see why this phenomenon of
Stagflation might well get progressively worse
unless something fairly radical is done about it.
Let me illustrate by means of the following
simple arithmetical parable. Suppose that we
are all organized into powerful pressure groups
of trade unions, professional associations, giant
business corporations, industrial cartels and the
like, each tight group prepared to use its monopoly powers to enforce its own claims on the
national income. Suppose that we all demand a
rise in our real standards of pay of, say, 5 percent
a year; but suppose that producitivty per head
is rising only by, say, 2 percent a year. We all
start this year by demanding our 5 percent rise
in money pay. This causes money costs per unit
of output to go up by 3 percent, since improved
productivity will account for only 2 percent of
the 5 percent rise in money wage costs. Except
in so far as profit margins are excessive, reductions in output and increases in unemployment
can be avoided only if total money demands for
goods are allowed to expand so that producers
can sell their outputs at prices inflated by 3 percent to cover the 3 percent rise in their costs.
In this case, the cost of living will go up by 3
percent. Next year we will demand an 8 percent
ATLANTIC ECONOMIC JOURNAL
rise in pay of which 3 percent is designed to
offset the current rate of inflation of the cost
of living and 5 percent to give us the real rise in
our standards which we are demanding. But this
8 percent rise in money wages will cause a 6
percent rise in money costs on our assumption
that improved productivity continues to reduce
costs only by 2 percent per annum. If selling
prices are to keep in line with costs and unemployment is thus to be avoided, selling prices
must rise by 6 percent. The following year,
therefore, we all demand a wage increase of 11
percent, of which 6 percent is designed to offset the inflation o f the cost of living and 5 percent to give us our real rise. And so on. Each
year the rate of price inflation increases, probably in an explosive manner as soon as we start
to put forward wage claims designed not merely
to make up tbr past rises in the cost of living
but to anticipate future increases in the rate of
inflation.
Attempts to get a quart out of a pint pot
will, of course, always be frustrated; but the
process can have some very unfortunate side
effects. It leads to an increasingly serious problem of uncontrolled inflation or an increasingly
serious problem of unemployment or some
combination of the two.
• There is another kind of explosive mechanism
which may also be at work. People are very concerned with wage differentials. Jones feels badly
used not simply because his pay is low but also
because he has lost out in comparison with
Smith. Suppose that candlestick makers consider
that they should be paid 5 percent more than
butchers and bakers and that at the same time
butchers and bakers consider that they should
be paid at least as much as candlestick makers.
Starting from the same wage the candlestick
makers demand a 5 percent rise. The butchers
and bakers respond quickly with a demand for
a similar 5 percent rise, in order to keep in line
with the candlestick makers. The candlestick
makers then respond with another 5 percent
demand in order to get ahead once more to
which the butchers and bakers respond with
another 5 percent demand in order to catch
up once more. And so on. In vain attempts to
escape from the frustration of this leap-frogging process each group may put forward its
claims more and more rapidly and may put
forward on each occasion larger and larger
claims in an attempt to offset in advance the
anticipated counter-claims of the other group.
In these conditions the rate of wage inflation
will quickly explode; and if, in an attempt to
control an explosive inflation, selling prices
are not allowed to rise as rapidly as wage costs,
unemployment will result. Once again we encounter Stagflation.
By 1975 the situation in the U:K. had become very serious indeed. In that year, demands
for wage increases of no less than 30 percent
were not uncommon; and we may then have
been near the edge of the precipice, from which
we withdrew by means of some commonsensical, effective ad hoc measures. But is the problem really solved? At present we are pleased to
have got the rate of rise of wage earnings down
to some 15 percent per annum and the rate of
price inflation down to some 10 percent. But
productivity is certainly not rising by the 5 percent gap between a 10 percent rise in selling
prices and a 15 percent rise in rates of pay, so
that money wage costs are rising more rapidly
than selling prices. Thus we face a demand for
return to free collective bargaining at a time
when, merely to prevent the rate of inflation
from starting once more on an upward path
or to avoid a further rise in unemployment
as profit margins are squeezed, there must be
further substantial reductions in the rates of
rise of money wages. If we wish to do even
better and to bring inflation down farther from
what really is still a hideously high rate and
actually to reduce, unemployment .below whal
is still an abnormally high level, the need for
further wage restraint is still more marked. But
in fact we hear talk once again of wage claims
of 20 percent or more. May we not be stand-
MEADE: STAGFLATION IN THE UNITED KINGDOM
ing once more on the edge of the precipice?
This state of affairs leads to a cruel dilemma
for those who are responsible for the country's
financial policy. Before each budget the Chancellor of the Exchequer can rely nowadays upon
receiving much conflicting advice, some urging
expansive monetary and budgetary policies designed to stimulate monetary expenditures on
goods and services in order to create jobs and
reduce unemployment and others urging restrictive policies to reduce money expenditures in
order to keep down prices and fight inflation.
And this conflict of advice shows itself not only
within the country but also internationally between countries. Thus the government of a
country like Germany which has a lower rate of
price inflation and favorable excess of exports
over imports is urged to expand its internal demand for goods and services by the authorities
in other countr:es hke the U.K. with its higher
rates of price inflation and its perpetual threat
of an excess demand for imports. Surely, it is
argued, it is the duty of Germany, which has
only a moderate rate of domestic price inflation,
to adopt an expansionary domestic policy which
will help to increase the demand for its own
products and also for imports from countries
like the U.K.; for this wilt help to reduce unemployment both in Germany and the U.K, and
at the same time to correct an imbalance in international payments by increasing the imports
of the surplus country, Germany, and the exports of the deficit country; the U.K. But the
Germans may very understandably be reluctant
to expand their own domestic demands because
they wish, above all, not t o stoke up their own
domestic price inflation. And in the light of
their past history who can blame them for that?
I hope that I have said enough to give you at
least a vague idea of the nature of the disease
and of my reasons for believing it to be a serious
one and for doubting whether we have yet
found a cure.
Let us go back in history to the great depression of the 1930's in order to trace the history
3
of the disease. At that time, there developed a
great deficiency of effective demand for goods
and services throughout the world economy•
Men and machines lay idle and foodstuffs and
raw materials piled up in unused heaps, although
at the same time impoverished citizens throughout the world were in crying need of food, shelter, warmth and clothes, to say nothing of some
of the amenities of life. This poverty in the
midst of potential plenty was a phenomenon
which many of us regarded as both foolish and
wicked. It was in these circumstances that Keynes
elaborated his system of thought whereby in
such conditions the governments of the world
might in concert stimulate effective demands
for goods and services--demands the satisfaction
of which would relieve poverty and the fulfillment of which would at the same time provide
work for the unemployed.
The weapons recommended for this process
of stimulating effective demand were of three
kinds. First, public authorities might themselves
spend more on public works of various kindsroad-making, housing projects, capital development in nationalized industries, and so on. Second, the Central Bank could take steps to increase the supply of money and to reduce the
rates of interest at which funds could be borrowed for investment in capital development
of every kind in the private sector of the economy. Third, rates of tax might be reduced and
social benefits and similar governmental outlays increased in order to leave the ordinary
tax-paying citizen with a larger amount of taxfree income to spend on goods and services.
The immediate increases in incomes caused by
these initial increases in expenditures on goods
and services would lead to further secondary
increases in expenditures and so in incomes,
which in turn would lead to further tertiary increases, and so on through the repercussions of
Professor Lord Kahn's famous multiplier effects.
Keynes was strongly opposed in the 1930's
to any attempts to expand employment by the
alternative means of a reduction of money
4
ATLANTIC ECONOMIC JOURNAL
rates, and this for two reasons. First, he considered that it would be largely ineffective. Reduced
wage costs can provide an incentive to employers to take on more labor only if reduced wage
incomes do not lead at the same time to an offsetting reduction in the workers' demands for
the products of industry. Keynes gave reasons
for believing that in the conditions of the t930's
the main effect of reductions in money wages
would be to cause a fall in all money costs,
money prices, money incomes, and money profits, leaving the levels of real employment and
real output much unchanged. Second, he pointed out that there were immense political difficulties in inducing an effective and fair all-round
cut in money wage rates, whereas the alternative policy of stimulating demand for the products of industry would be not only more effective and reliable, but also incomparably fairer
and easier politically.
This Keynesian technique of demand management, as it came to be know, was never designed to cope with all forms of unemployment.
In a dynamic economy, there will always be
some people on the move from contracting to
expanding activities, and they will be without
work during this Frictional process of movement. Moreover, Structural industrial situations
can arise in which workers remain unemployed
in spite of a strong demand for thief products
because of an inadequate supply of specialized
machinery or of a few specially skilled workers
needed to cooperate with them in the productive process.
Keynes never intended that his demand management techniques should be used to cope
with such Frictional and Structural Unemployment, but only with what we may call General
Unemployment; namely, with those situations
in which there is widespread unemployment of
labor and of capital equipment of all kinds, due
to a general deficiency of demand for the products of industry.
It is, of course, impossible to draw a hard
and fast line between these different types of
unemployment. Even at the bottom of the
most severe General Depression there may be
some few industries producing new products
in which the available specialized equipment
and specialized labor force are insufficient to
cope with the demand. As general demand is
stimulated, there will be more and more particular bottlenecks of this kind where demand
is excessive in relation to potential specialized
productive resources. It is difficult to say at
what precise point one should regard General
Unemployment to have disappeared and the
remaining pockets of unemployment to be wholly Frictional or Structural cases; but at some
point the line must be drawn.
Keynes was a practical man. He did his great
work on these subjects in the 1930's when there
was heavy unemployment in an atmosphere of
falling rather than rising money costs and prices.
He was not then concerned with the danger that
a policy of demand management for the reduction of unemployment might be frustrated by
an explosion of money wage costs. But I can
vouch from personal knowledge that in the discussions of plans for postwar reconstruction he
was very conscious of this danger for the postWorld War II economy.
Thus during the 1930's Keynes was preaching the doctrine that governments should take
on one more important function; namely, that
of demand management. During the war, thought
was given to postwar reconstruction; and in the
White Paper of t944 on Employment Policy
general demand management for the maintenance of Full Employment was officially recognized by the all-party government in the U.K.
to be a proper governmental function. Nor was
this great revolution of thought confined to the
U.K. In the United States a similar governmental obligation to be concerned with maintaining
a high level of employment was recognized by
an Act of Congress. Indeed, when Keynes died
in April 1946 at the very moment of transition
from War to Peace Economy he left a world in
which virtually all the governments of our type
MEADE: STAGFLATION IN THE UNITED KINGDOM
of country were explicitly or implicitly committed to the Keynesian policies of demand
management.
There followed a quarter of a century of the
most unparalleled economic growth and prosperity. We in the U.K. are sometimes apt to
think of it as a period of failure. This is the exact opposite of the truth in that our standards
of living have never grown at a faster rate. Our
problem during those years was that other countries were doing even better than we. I know
that post hoc propter hoc is not convincing logic.
But the great postwar economic settlement has
in my view a lot to do with this period of unprecedented economic success, built on the two
foundations of domestic demand management
and of the international freeing of trade and
payments through the International Monetary
Fund and the General Agreement on Tariffs
and Trade-and Keynes was a principal arthitect
of both the domestic and the international elements of this reconstruction.
But over the last few years it has all turned
sour and we are now cursed with the epidemic
of Stagflation. What has happened?
In my view there are two main factors at
work: first, the temptation for the politicians
to use the tools of demand management for the
overstimulation of the economy and, second,
the uncontrolled power of labor monopolies
to press for wage increases.
In the good old days-or, as I prefer to put
it, in the bad old d a y s - of the Gold Standard
and of Balanced Budgets, there was little or no
opportunity for the authorities to exercise discretionary power over the level of total demand.
The supply of money and the consequential
ease or tightness of funds on the capital market
had to be managed by the Central Bank with
the overriding purpose of keeping the sterling
price of gold fixed in a free world market for
gold. The rigid conventional requirement that
the government's budget should be balanced
except in extreme crisis such as that of a major
war made it impossible to vary government ex-
penditures and taxes so as to stimulate demand
through budget deficits. The Keynesian revolution replaced both these rigid conventional constraints-indeed, one might almost call them
constitutional constraints-with the simple
hope that politicians would have the good sense
to use their discretionary powers over monetary
and fiscal policies in a disciplined manner.
But expansion of demand is always more attractive politically than contraction. Making
funds available at cheaper rates for house purchase, paying larger child benefits or old-age
pensions, reducing the rate of income tax-aU
these are policies which provide immediate specific benefits to specific groups of voters. The
inflationary dangers which may result are vague,
dispersed, and delayed; and a week is a long
time in politics, On the contrary, to contract
demand hits certain specific citizens clearly
and immediately, and the advantages of avoiding inflation are vague, dispersed and delayed.
As a result the stimulation of the economy
through demand management techniques has
on balance been overdone.
After 1922 in the interwar period in the U.K.
the unemployment percentage, except for one
or two months, never fell below I0 percent and
in 1932 rose to 23 percent. After the Second
World War for many years we drove the economy at unemployment percentages of 1.5 percent and 2 percent, while 3 percent was regarded
by some as a threat of serious unemployment.
There is no doubt in my mind that Keynesian
stimulation of demand has been used to tackle
Frictional and Structural as well as General
Unemployment. This has led to a general inflationary situation; and as people have come
more and more to expect and anticipate price
rises so, by the processes which I described earlier in this lecture, the inflation rate has tended
to explode.
Closely connected with this are the effects
of the way in which we nowadays set about fixing money wage rates. Organized associations of
labor have been given legal immunity and privi-
6
ATLANTIC ECONOMIC JOURNAL
lege to take monopoly action (by way of strikes,
boycotts, closed shops, etc.) in order to achieve
what each separate group judges for itself to be
the proper reward for its own particular work.
These monopolies are separate from and independent of each other. They leap-frog in attempts to impose inconsistent differentials and
in conjunction they strive to obtain a quart out
of the available pint pot. This is generally called
free collective bargaining. But English is a rich
language and I prefer to call it 'uncontrolledmonopoly' rather than 'free-collective' bargaining. Combine this system of uncontrolled monopoly bargaining with a so-called Keynesian
governmental undertaking that, whatever happens to the level of money wages, demand will
be stimulated sufficiently to avoid any General
Unemployment; and you have a set of institutions which might well have been expressly designed to set in motion and to maintain that
process of explosive inflation which I described
at the beginning of this lecture-particularly if
you add for good measure the political probability that demand will in fact be overstimulated
beyond the point needed to avoid General Unemployment. It is a recipe for disaster, which
can be averted from time to time by the temporary reinstatement of strict monetary and fiscal
constraints which will result in unemployment
and a Stagflating economy as the upward pressure of rates of pay meets the reimposed downward pressure of the monetary and fiscal constraints.
Please do not think that my one obsessional
desire is to bash the trade unions and to grind
the faces of the poor. I am, in fact, a rather oldfashioned Radical who really does believe in
Liberty, Equality and Fraternity-without, I
may add, holding the view that putting anyone
who disagrees with you under the guillotine is
the most obvious way to express one's belief in
Liberty or Equality-or, for that matter, in Fraternity.
I could lecture you for hours on the desirability of many positive social and economic
policies for the promotion of these three great
objectives-by national health and educational
systems which help to equalize conditions and
opportunities and to break down class barriers,
by systems of industrial relations which do not
involve managers treating workers as a different
species of animal and vice versa, by tax and
social security measures for the promotion of a
more equal distribution of income and wealth,
and by the prevention of excess monopoly
profits through the promotion of competition,
through the outlawing of restrictive business
practices, and, where undue monopolistic power
is inevitable, through price control or the nationalization of the enterprise.
But these are not the topics of my lecture
today. Nor am I concerned today with the great
victory for the principle of freedom of association which was won in the past by the removal
of outrageous restrictions on the rights of workers to form free trade unions.
Freedom of association does not, however,
imply any right to limit the personal freedoms
of those who do not choose to join, or are prevented from joining, the association. Thus measures which prevent the employment of additional labor in an exceptionally well-paid occupation except on terms imposed by those who
are already enjoying the privilege of working in
that occupation seem to me a very doubtful
way of increasing personal Liberty (since it
limits the freedom of choice of occupation by
the outsider) or of increasing Equality (since it
prevents lower paid persons from entering a
higher paid occupation) or of demonstrating the
Brotherhood of Man between those inside and
those outside the charmed circle. Indeed, what
I am concerned with today is precisely the implication of constructing an economic system
on the principle not of limiting restrictive monopoly powers, but of positively endowing large
powerful independent groups with monopoly
powers to enforce their claims on the community-which implies, of course, powers to attempt to enforce conflicting claims on each other.
What, then, must we do to be saved?
MEADE: STAGFLATION IN THE UNITED KINGDOM
As far as the need for monetary restraint is
concerned I cannot go the whole way with the
monetrarists, who rely simply upon controlling
the growth of the total supply of money. This
in my view is to throw out the baby with the
bath-water. Even with a controlled supply of
money, total expenditures can vary very greatly as transactions are financed by a given stock
of money passing more or less rapidly from
hand to hand or by the use of trade credits
and other substitutes for money. Rather let
Keynesian techniques of demand management
continue to be used; but let us revise the precise purpose for which they are used. In place
of what Parliament used to recognize as the
constitutional constraints of the Gold Standard
and the Balanced Budget, let Parliament now
recognize as a strict constitutional financial restraint, a sacred rule that fiscal and monetary
policies should be used, not directly to maintain full employment, but to maintain a steady
rate of growth of, say, 5 percent per annum in
the total money demand for goods and services
and so in the total money demand for labor,
that is to say, in total national money earnings.
But if this financial strategy were adopted,
it would remain important that profit margins
as well as money wage rates should be restrained.
As I have already argued, the appropriate measures for this purpose are the promotion of
competition among producers-an important
element of which is competitoin with imported
products-the outlawing of restrictive business
practices, and price control or nationalization
where strong monopolistic elements are unavoidable.
There are, of course, very serious problems
involved in the implementation of any such
constitutional rule for financial restraint. Can
suitable political institutional arrangements be
devised whereby Parliament could effectively
commit itself to such a financial restraint? And
is the technical economic problem soluble? The
economic system consists of a very complicated
network of dynamic interrelationships with all
7
sorts of delays between the various interactions.
With what degree of success can one hope to
find forms of monetary and fiscal control which
will affect expenditures promptly enough and,
even with the help of the most skilled control
engineers, to devise working rules for their use
so as effectively to keep total money expenditures on a predetermined steady growth path?
I have no time now to discuss these important
issues.
But clearly one necessary condition for the
feasibility of any such rule for monetary and
fiscal policies is that it should be accompanied
by a suitable reform of wage-fixing arrangements. If money wage rates were allowed to go
up by 15 percent in any year, the total wage
bill could be restricted to a rise of 5 percent
in that year only by a devastating deflation of
the total demand for the products of industry
sufficient to reduce by 10 percent the number
of persons in employment over whom the restricted wage bill was to be spread.
What is needed is some accompanying form
of wage-fixing arrangements which in each sector of the economy would resist wage increases
in so far as they would increase unemployment
or prevent the expansion of employment in
that sector. In any occupation, trade, industry
or region in which there was a scarcity of labor
relatively to the demand, a rise and not a fall
in wage rates is needed to attract workers to
that sector and so to increase employment in
that sector; and remember that this principle
would be operating against a background in
which on the average over all the sectors of the
economy the money demand for labor would
be expanding at a steady rate so that sooner or
later there would be a competitive need in each
typical sector to raise its wage rates to maintain
its labor force. In any sector in which labor was
specially scarce wages would need to rise faster
than this average. In any particular sector in
which there did still exist an excess supply of
labor a rise in wage rates should be avoided in
order not to accentuate the problem of unem-
8
ATLANTIC ECONOMIC JOURNAL
ployment. The cure for unemployment in such
sectors must rely partly upon a gradual improvement in that sector as it enjoyed some share of
the general steady 5 percent per annum expansion in the total demand for labor and partly
upon redundant labor being attracted to those
sectors in which employment opportunities
were expanding and in which the competitive
demand for a limited supply of labor was bidding up the wage rate and making employment
more attractive.
What sort of institutional changes would be
appropriate for this purpose?,
Some would advocate an official incomes
policy covering wage rates in the different sectors of the economy. As an ad hoc crisis measure it may be necessary for a government to
use such techniques to bring the economy back
once more from the edge of the precipice of
runaway inflation. But I dislike the implications
of a system of Central Authoritarian wage-fixing
as a permanent long-run solution of the problem. It is impossible to decentralize such a system. Either it implies the universal application
of some simple crude rule which is bound to
lead eventually to unbearable anomalies in an
economy such as ours with its great diversity
of skills, of industrial, occupational, and regional conditions, and of methods of payment. Or
else it involves a gradual invasion by the central
authorities into the detailed arrangements in
every economic activity, thus constituting a
serious infringement of the freedoms and efficiencies of a more decentralized competitive
market system.
Some would advocate a getting together of
the representatives of employers and employed,
that is to say, of the CBI and the TUC, to decide on the division of each year's 5 percent increase in the total wage bill. I dislike this Corporate State solution because I think that those
in powerful monopoly positions in sensitive sectors of the national economy would be likely to
obtain an undue share, thus condemning the
others to low wages or causing unemployment,
results which would be both inefficient and unfair.
Some would advocate a transformation of
existing enterprises into labor-managed workerowned cooperatives in which the fixing of wage
rates would not arise, since the workers would
simply divide between them whatever share
they could earn of the steadily growing demand
for goods and services in general, after paying
any necessary rents or interest on the land and
capital equipment which they had hired. I am
afraid that I believe that this attractive solution
can be expected to work well only in those activities which are labor-intensive rather than
capital-intensive in their technologies, in which
small-scale enterprise is possible, and in which
the entry of new competing cooperative is relatively easy. But where it is possible it should
be greatly encouraged.
Some would advocate trade union bashing
and a return in the labor markets to a regime in
which the competition of workers for jobs and
of entrepreneurs for workers would bid up
wages where labor was scarce and bid down
wages where labor was plentiful. I do not believe
that a full soltuion is possible on these lines.
Economies of scale mean that in a number of
sectors there cannot be a large number of competing employers; and unfair bargaining positions would arise where a large number of competing individual workers faced a strictly limited number of employers. Moreover, it goes
against the whole of history to overlook the
real psychological need for groups of workers
to form associations to represent their common
interests. And in its full form this competitive
solution would involve the denial of any substantial unemployment benefit, in order to induce unemployed workers to compete more
effectively for jobs; and I would strongly oppose the ungenerous treatment of those who
are unlucky enough to be unemployed.
But as some of you may already have guessed,
I do see much merit in a free competitive market system; and although for the reasons which
MEADE: STAGFLATION IN THE UNITED KINGDOM
I have just given it is not desirable to seek a full
solution of the wage-fixing problem by a complete restoration of unmitigated competition in
labor markets, it is nevertheless necessary that
the present excessive monopoly powers of the
trade unions should be restrained.
What is the civilized way to deal with these
problems? Let us continue to treat generously
those who are unfortunate enough to be unemployed. Let us do nothing to discourage the
formation of free trade unions and similar associations to represent the common concerns of
different groups. Let profit margins be restrained
by the measures which I have already mentioned.
Let the distribution of income and wealth between individuals be influenced by fiscal and
similar measures. But in place of industrial action to determine personal incomes by the accidents of monopoly bargaining power let
there be a resort to arbitration in cases of dispute, a main criterion of such arbitral awards
being to restrict such wage increases as would
impede the expansion of employment in any
sector of the economy. All this taking place in
a financial environment which assured a steady
rate of growth in the total demand for labor.
This would be compatible with a simple return to what I have called uncontrolled monopoly bargaining, but with one essential difference. Either party to a trade dispute and the
government itself could be given the right to
refer that dispute for an arbitral award of the
kind which I have outlined. Industrial action
would still remain possible; but penalties of
one kind or another could be imposed if such
an arbitral award were resisted. There are many
possibilities. But conditions vary so much from
country to country that I will not go into detail,
though I have some specific suggestions for the
U.K. The simple idea is merely to take some
measures which reduce the bargaining power of
any party which is taking industrial action
against an arbitral award.
This set of arrangements would mean that
there was no restriction whatsoever on any
9
wage bargain freely agreed between any group
of workers and employers. But when against
the background of a strictly restrained total
market for goods and services, employers decided to resist a claim, it could be made subject
to an arbitral award. Even so it would not be a
criminal offence for the workers or employers
concerned to take industrial action against the
terms of the award; but in that case they would
not enjoy some of the legal advantages which at
present enhance their monopolistic bargaining
power.
I put forward this set of ideas very tentatively. Their detailed implications would clearly
need much careful examination. But in any case,
while it may all sound very fine in principle, is
there any prospect of such a solution by arbitral
awards being acceptable? Of course, I realize
that its immediate adoption is not politically
possible. In the sort of decent, free, democratic
society in which we are privileged to live, what
is politically impossible today can be made politically possible tomorrow only by developing
a general Understanding of the problem and
building up a general consensus in favor of the
needed changes.
I am an economist and have tried to give you
an economic solution for an economic problem.
Please do not argue that I am a rotten economist
on the grounds that the economic solution is
politically unacceptable. The really difficult part
of our present problem is political; and on that
I would be incompetent, even if I had the time,
to express any worthwhile opinion. I can only
express the hope that our politicians can successfully use their skills to make clear to the
man and the woman in the street the nature of
our problems and to steer the development of
our institutions in the directions which I have
described.
One final word. Some of you may be surprised that I should have lectured on Stagflation in the U.K. without mentioning the Balance
of Payments. Alas, one cannot cover the whole
of economics in one lecture. But if we avoided
10
ATLANTIC ECONOMIC JOURNAL
inflation through the adoption of domestic policies of the kind which I have outlined, our
Balance of Payments problems would be eased
out of all recognition. Keeping the domestic
money national income on a predetermined
steady growth path would, however, mean that
further domestic monetary contractions or expansions could not be used as an instrument
for removing any residual Balance of Payments
problems. The domstic policy which I have
advocated implies, therefore, that we must not
commit ourselves to any international monetary regime which would prevent us from mak-
ing those adjustments in the foreign exchange
rate which would from time to time still be
needed on Balance of Payments grounds.
The appropriate forms of international
monetary cooperation and institutions are most
important. But in my opinion the first priority
for all our countries should be to fred out how
to control our own domestic inflations without
suffering from domestic recessions and unemployment. If we could do that, the problems of
international balances of payments would be
simplified out of all recognition.