The lesson of the 70s

The Tories have a new line of attack on Labour – that they would take us back to the 1970s, as Hammond alleged this morning (2’19” in). This raises the question: what was so bad then?

It’s not that wages did badly. Bank of England data show that they rose 22.7% between 1970 and 1979 after adjusting for RPI inflation. That’s substantially better than in the last ten years.

Nor, really, was the problem that much of industry was state-owned. True, it was. But most Tories at the time didn’t see this as a massive problem. As the Institute for Government has pointed out (pdf), the 1979 Tory manifesto “barely mentioned” privatization and the privatizations of the early 80s were seen mainly as revenue raising measures rather than as a deliberate means of expanding the market economy: that rationalization only followed later.

Nor even is it that the 70s saw high personal taxes on the rich. They did. But these continued well into the 80s. It wasn’t until 1988 that the top income tax rate was cut from 60%. If John McDonnell keeps his word, the top tax rate under a Corbyn premiership will be lower than it was for most of Thatcher’s.

Instead, there’s another reason why Tories in particular regard the 70s as a period of crisis. It’s because it was – for profits. The share of profits in national – and also the rate of profits – slumped in the mid-70s. Not unrelatedly, so too did the share of the top 1%.

The reasons for this are discussed well in Marglin and Schor’s The Golden Age of Capitalism. Essentially, the long boom led to rising wage demands*, slower productivity and a spike in oil prices. Inflation – which people remember as the hallmark of the 70s – was the product of this. Workers wanted higher wages, capitalists wanted higher mark-ups and this led to higher prices. As Wendy Carlin and Sam Bowles say  “inflation arises from conflicts among economic actors, when they are powerful enough that their claims on goods and services are inconsistent.”

From this perspective, the true achievement of the Thatcher government was not so much to shrink the state as to weaken working class power and hence restore the conditions necessary for profitability.

Now, you might think there that what I’m saying is that the crisis of the 70s was a rich man’s problem.

No. Falling profits caused a sharp fall in capital spending. Had profits not recovered, it’s likely that capital spending would have fallen further and so growth would have been consistently weak and unemployment high. In this sense, low profits in a capitalist society are everybody’s problem.

This is why the slump of the 70s matters. It suggested that the full employment and rising wages of the Golden Age were unsustainable. Yes, Thatcher rescued capitalism, but at the expense of the misery of unemployment for millions.

In this sense, though, it is dangerous for Hammond to remind us of that period. We can read the 70s not just as evidence that social democracy is doomed to fail, but as evidence that the demands of capital and the demands of workers are, ultimately, fundamentally irreconcilable. As I said, in this sense it is he rather than McDonnell that is the Marxist.

* Of course, high wages in themselves don’t squeeze profits if they are returned to capitalists as workers spend those wages. In the 70s, though, this didn’t happen in part because households’ savings rose.

Another thing. In his interview with Nick Robinson this morning, Hammond said: “Since 1979 when Britain turned its back on the policies of Corbyn and McDonnell…living standards in this country have doubled.” By one obvious measure, this isn’t right. GDP per head has risen only 85% since 1979Q2. What’s more, GDP per head since 1979 has risen by only 1.6% per year, compared to a rise of 2.6% per year between 1955 (when current data began) and 1979.  By this measure, turning our back on the policies of Corbyn and McDonnell led to slower growth.  

Comments

[cjcjc]

Absolutely right - I'm sure that everyone who was there recalls the 1970's as a veritable golden age!
I know I do...not.

[gastro george]

One point: "Essentially, the long boom led to ... a spike in oil prices."

Middle East crisis and OPEC surely?

[e]

@ gastro george

In fact your point is a very important one. The “oil price shock” caused the inflation, which caused the inflation linked wage demands, which threatened the 'settled' profit rates. This 'crisis', used so well by the “anti-wet” Tories to their advantage, was our path to our neoconservatism. So great yeah, lets get a debate started; a debate including foreign policy terrain and how this impacts on home economics (the '70s had it all) would be no bad thing.

[Patrick Kirk]

In the 80s the Tories stood for the idea of a property owning democracy. I bought my first place when I was 23. Now I have kids that age and they can't possibly afford to buy. This leaves me wondering why Hammond is wittering on about the 1970s when the problem that costs his party votes is due to present day policies.

[Peter K.]

"Falling profits caused a sharp fall in capital spending. Had profits not recovered, it’s likely that capital spending would have fallen further and so growth would have been consistently weak and unemployment high. In this sense, low profits in a capitalist society are everybody’s problem.

This is why the slump of the 70s matters. It suggested that the full employment and rising wages of the Golden Age were unsustainable. "

What if better macro policy was tried? Inflation was also due to oil prices. Seems like an open question.

[Guano]

An important factor in the 1970s "crisis" was the deliberate heating-up of the economy by the Heath government before joining the EEC colliding with the rapid rise in oil prices in 1973.

This was exacerbated by a formula the Heath government had devised for indexing wages to price rises. If prices rose below a certain level, wage increases would be modest. If the rose above a certain level, wage increases would be significant. The rise in oil process pushed inflation up and led to quite significant wage increases.

Possibly Hammond is saying that a Tory government today would renege on its agreement about index-linking of wages with prices.

[Blissex]

«the long boom led to rising wage demands*, slower productivity and a spike in oil prices.»

The usual parochialism -- the long boom of the UK was hardly enough to achieve this. I suspect that the key factor was the rise in oil prices, and that may have been triggered by tight supply conditions as the Japanese economy boomed, becoming the factory of the world, and existing oildfields were maxed out.
Also "atlantic" economies were rather wasteful of cheap oil, and oil producing countries were too backwards to consume much of their own oil. These two graphs are quite important to undertstand the 1970s:

mazamascience.com/OilExport/output_en/Exports_BP_2016_oil_bbl_GB_MZM_NONE_auto_M.png
mazamascience.com/OilExport/output_en/Exports_BP_2016_oil_bbl_SA_MZM_NONE_auto_M.png

«Inflation – which people remember as the hallmark of the 70s – was the product of this. Workers wanted higher wages, capitalists wanted higher mark-ups and this led to higher prices.»

Others have pointed out that the key factor was the oil price supply shock, even if there had been signs before:

«Inflation was also due to oil prices. Seems like an open question.»

It is not really an "open question", more that inflation was wage-led is the standard neoliberal narrative, where "inflation" is always a "wages-to-prices spiral" enabled by noddy-keynesian policies, therefore central banks should assert monetary dominance and nullify any keynesian fiscal policies. That said there were obvious trade union excesses, by a small minority of trade unions, but they were political more than economic.

[Blissex]

«The share of profits in national – and also the rate of profits – slumped in the mid-70s. [ ... ] Falling profits caused a sharp fall in capital spending.»

I think our blogger mentioned that this was a point particularly made by his Oxford professor, A Glyn, so I got his book "Capitalism unleashed" (and I have just noticed the existence of his 1972 book "British Capitalism, Workers and the Profits Squeeze"). BTW the W Carlin mentioned here by our blogger is A Glyn's widow.

Like our blogger I reckon that the sharp drop in aggregate profits was curable by moderating rather than smashing the labour side. The 1973-1975 collapse in the share of profits was obviously a special case of fall below its normal range 18-20% and the graph shows it had recovered to its normal range already in 1977, well before thatcherism.
Then of course the profit share went up to the 23-25% range in 1983-1995 and to 20-22% in 1999-2017.

Obviously in the 1970s somebody had to lose from worse terms of trade, but the apportioning of the loss could have been smoother and more distributed, and without a sharp turn towards economic rents from land and financial speculation, rather than profits from value added.

But while economic rent is purely redistributive, GDP accounting for several sectors infested with it is based on assuming that for those sectors GDP is equal to GDI, which helps misrepresent growth in redistribution as growth in output, and this is loved by governments desperate to reduce the apparent debt-to-GDP ratio.

[Blissex]

«a Tory government today would renege on its agreement about index-linking of wages with prices.»

Like pension contributions, index linking of salaries is today a privilege reserved only for the higher levels of workers.

The large fall in the real value of wages in the below-median region of the income distribution has happened because since 2008 nominal wages have not kept up with inflation, a policy designed to make them more "competitive". Same for pre-retirement social insurance, to make them more "affordable".
Conservative government are very keen to help workers to win the race to bottom.

[Blissex]

An interesting view, I think mostly fair, of A Glyn's analysis of the 1970s and the fall in the profit share:

http://www.renewal.org.uk/articles/the-economics-of-andrew-glyn

[e]

@ Blissex

Thatcher was elected Tory opposition leader in '75. The narrative we recognise now as neoliberalism took root during her opposition and was consequently placed to win by '79, quite regardless of what had or hadn't been recovered.

[Anonymous 2]

Also relevant was the abandonment of Bretton Woods. As I recall Nixon wanted the freedom to press the Fed to run an expansionary policy ahead of the 1972 election. Breaking the dollar link with gold enabled a large boost to money supply which fed through to inflation not just in the US but in Europe as well. Arguably the oil and other commodity price booms of 1973 were the result of this monetary expansion.

[Blissex]

«the abandonment of Bretton Woods. ... Arguably the oil and other commodity price booms of 1973 were the result of this monetary expansion.»

The cause-effect cascade is a difficult discussion, but to me (and to De Gaulle) the Nixon move was more an effect of a weakening of the USA's position than a cause. A quote from the diary of V Bonham-Carters as to a visit to JF Kennedy, 1963-05014:

«[President Kennedy] went on to describe how [de Gaulle] was now blocking all progress in Europe- in defence, economic, etc. I asked him how he thought this road-block could be broken. He said, 'The root of the matter is that not only you in Britain but we in the USA have now become debtors and not, as we always used to be, creditors. The gold reserve has ebbed at the following rate (he then gave the figures for the last few years).»

And yes, despite the weakening Nixon wanted a "butter and guns" policy that was to be highly inflationary. But this could have resulted in much smaller effects unless the oil supply were already tight because of fast rising japanese demand.
OPEC would not have been able to raise prices without a tight supply, and indeed after the scottish and alaskan oilfields started producing in the 1980s their pricing power waned considerably.

BTW there is an interesting detail about oil and Bretton Woods that I read "somewhere": that at least in the 1970s the ruling classes of Arabia were still very traditionalist, and they still considered gold the paragon of value, and they reckoned the price of oil in gold rather than dollars.
When Nixon broke the last type of convertibility, they were afraid that it was done to pay for their oil in devalued dollars so they increased the dollar prices to maintain the gold price of a barrel.
Which is an irony, because at Bretton Woods the USA rejected JM Keynes proposal of a "bancor" because they were afraid that the UK and other poor european nations would then take advantage to pay for USA imports in devaluing bancors rather than in hard dollars.

[Blissex]

«Thatcher was elected Tory opposition leader in '75.»

Indeed, but things are more complicated than that: she was elected as a weak, compromise candidate, indeed a bit as T May today.

«The narrative we recognise now as neoliberalism took root during her opposition»

That narrative predates her leadership: the Selsdon group came before and was the expression of long standing sentiment. Today we think of M Thatcher and "thatcherism", because of her personality, but most of her policies were actually pushed forward by other people.
The 1920-1930s tories who were heirs to 1850s "Victorian Liberal" whiggism and detested "one nation" toryism found in her a powerful vehicle, she was perhaps more of a symptom than the leader of a movement.
Arguably thatcher-ism should be called "joseph-ism" or "ridley-ism".

BTW a random search turns up this entertaining "selsdonian" post from March 2016 accusing G Osborne of being a T Heath lookalike because he had “willingly embraced socialism” with his profligate spending policies:

http://con4lib.com/this-government-is-looking-more-like-ted-heaths-every-day/

[Dave Timoney]

The audience for Hammond's speech is not the general population, let alone young people with no experience of the 70s but a vague appreciation from parents that houses were cheaper then. He is arguing against the principle of a return to earlier times, whch on the face of it seems an add manoeuvre for a conservative.

Specifically, he is warning the Tory base (and Brexiteers in particular) not to try and wind the clock back to the 1950s. In other words, he is trying to defend the neoliberal putsch that was effected in the Conservative Party under Thatcher. I don't rate his chances.

[Steven Clarke]

Chris,

I am of that small but distinguished part of humanity that has read your book, The End of Politics. You argue there, as here, that it was the problem of profits that made post-war social democracy unsustainable.

But you also made a convincing argument that post-war social democracy didn't reduce inequality and battle poverty as much as its defenders would have hoped. The NHS and council housing benefited higher income earners more than the working classes. In fact, there was a huge swing to Mrs Thatcher by the lowest social classes in 1979.

Do you believe a similar criticism can be leveled at Corbyn's programme? Free tuition and price controls may disproportionately benefit the better off.

[e]

“That narrative predates her leadership” indeed it does, which is why your assertion she was a weak compromise candidate, but yet “a powerful vehicle” would indicate not so much complexity.. more a tendency to underestimate emergent political force; and, dare I say, a women.

[Keith]

Hammond is just playing to the toryish false memories of the 1970s and Thatcher idolatry.

As some of your commentators have pointed out the reasons for the social democratic consensus breaking down in the seventies are complex and open to debate. Rates of profit like the rest of the economic system fluctuate unpredictably and depend on many factors. It is easy for the left and right to exaggerate matters like this to effect a extreme change in policy. This is what Thatcher and her backers did quite successfully. On the other hand it is likely that the earlier introduction of other reforms would have allowed a continuation in the consensus, such as changes to monetary policy and exchange rate policy.

All the policies lambasted by the right and lambasted or given faint praise by the marxist left seem to have worked fine for most of the post second world war period in many countries. The 1970s seem to have been an unrepresentative phase of history; used by ideologues to push for changes benefiting privileged groups. Compared to a marxist vision of utopia it may have fallen short but compared to the 1930s the post war keynesian interventionist welfare state was a tremendous advance. There is something bizarre to me in left wing advocates just blithely blowing off the achievements of the thirty glorious years. It also seems odd when you remember that socialism is about equality and security. It is perfectly proper that middle class people should gain from the NHS or council housing as Nye bevan famously argued. Why not? To suppose otherwise is to indulge a strange kind of politics of envy which is a melange of conservatism and radical posturing.

[Prefer Not To Give Name]

Small anecdote, maybe helpful. I remember the 1970's very clearly as my Dad was boss of the largest employer in a region of the UK, which I dare not divulge in case someone hacks my identity. Dad's motives were very clear: steer the company towards a profitable and viable future but always over dinner each night the issue was how the unions would not let him take necessary measures. I remember being very curious as a child and he explained the measures were in the greater good of the company, but not in the *perceived* interests of a minority group within that company. Therefore, strikes would occur that brought the company to its knees and ultimately greater job losses resulted. Examples of these measures prove they were not exactly radical: 1) drivers of trucks were to share in the duty of unloading goods from the trucks instead of having 1 driver and 1 unloader. 2) Flexible shift patterns at the production base were proposed in order to balance demand with supply. At the time, it was a set of workers on a strict schedule. 3) Changes in the product: instead of making the same thing, the facility was trying to make other things too using the same equipment but the workers were supported by the union to resist this change to their "terms" without more pay.

[Doug]

'Prefer not to give name' - your anecdote is not helpful.

How many people would have lost their jobs with your father's proposed changes?

From from what you've said, the changes involved more work with no pay increase. Also, what would have been the effect on workers of the proposed shift changes?

Seems to me the unions were only doing what they were supposed to - defend their members' terms and conditions.

So what was your father going to give up for 'the greater good of the company'?

[Blissex]

«he explained the measures were in the greater good of the company, but not in the *perceived* interests of a minority group within that company. Therefore, strikes would occur that brought the company to its knees and ultimately greater job losses resulted.»

That's a typical story, but what your father wanted was to cram-down the existing worker contracts, to do more with less.

Now there is an important problem: maybe this was needed not to boost the profits of the owners, but indeed to secure the future of the business, but how could the workers know?

How could they trust the manager appointed by the owners to maximize their profits, to instead act in the best interests of the workers?

They couldn't unless the management had worked with them, and openly, for decades, proving that they were acting in good faith and good will; perhaps this happened/happens in Germany with co-determination, but it surely was not the case, for a long time, in England and the UK in general, where management was as a rule instructed by the owners to squeeze and scam the workers as hard as possible.

On this topic there is a classic and very watchable english movie from 1959 that is quite balanced and in many ways still contemporary (rather sadly), "I am allright Jack" https://en.wikipedia.org/wiki/I%27m_All_Right_Jack

[Blissex]

«It also seems odd when you remember that socialism is about equality and security. It is perfectly proper that middle class people should gain from the NHS or council housing as Nye bevan famously argued.»

Really yes! Having a broad class base for socialdemocratic policies is not quite the "popular front" strategy, but it is still both very useful and properly reasonable.

The failure of the "red flag" singing left to appeal to the newly-middle-classed ex-workers like "Sierra man" has been a very bad move.