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.