A contribution to discussion by Peter Latham

Inflation is back in the news again, this time because the rate has come down. The news media and the Government seem intensely relaxed now the annual rate is “only” 4.2%. (1) Yet vast sums have gone to the banks and corporations in the meantime, not least because higher interest rates, raised to bring inflation down, have speeded up the transfer of wealth from the poor to the rich. As a result, householders have permanently lost the income already spent on higher prices, and are still paying more now for gas, electricity, petrol, food and essential goods. Mortgages are higher and rents have always been high anyway. Life has been made harder, partly because of the Bank of England's so-called solutions. Even successful strikes for more pay have not fully recovered the incomes lost.

The question arises: how would a progressive government tackle inflation differently, to narrow the gap between rich and poor? Can we escape from capitalist economics on this question? A valid answer should be a collective effort based on proper investigation.

PROFITS AND INFLATION 

Meanwhile, people are clearly wary of the Governor of the Bank of England’s message that “we are all in it together.” It has been hard to find people willing to apologise for the raising of interest rates. Instead, many people trust their own experience, understanding that wages are not the cause of inflation. Jon Trickett MP quoting a recent Ipsos opinion poll, wrote: “large majorities confirmed that rising prices were driven by corporate greed in one sector after another”. (2)

The trade union response has been encouraging, with Unite producing a timely report (3)

explaining how the rise in wholesale oil and gas prices pushed up prices everywhere. It criticises too the firms who have used inflation to raise their prices above their increased costs. A new name for this is “price gouging.” The old name is profiteering. Furthermore, the middle ground of social democracy, such as within the Labour Party, seems to understand the need for alternative approaches to bringing down inflation. They favour, for example, arguments for state-led capital investment in the productive economy, including price controls, and public ownership of public transport. This is despite the Starmer leadership’s move away from these things and, therefore, is potentially healthy.

What does cause inflation? The recent rise in prices was set off by the oil and gas companies raising wholesale prices a couple of years ago, which then fed through the economy in cycles, producing a rapid general rise in prices. Back in the 1970’s “greedy workers” were blamed for setting off a “wage-price spiral” leading to inflation of 15%, even over 20% at one point. In fact, in 1973 the market price of crude oil rose from $3 per barrel to $12, after the Middle East oil producers imposed an oil embargo on the West. This was because the West had supported Israel in Arab-Israeli war of that year. (4)

These are practical examples. At the theoretical level, inflation is caused by an excess of purchasing power in relation to the goods available. Such situations occur to some extent in every boom. (5) In boom conditions price increases usually lead directly to more production, leading in turn to the next slump. When inflation takes hold during a boom, the rise in production may well be checked by actual conditions, such as shortages of labour, plant or raw materials. Shortages may themselves bring price increases as capitalists (especially monopolists) always raise prices as high as they can to maximise profits. Capitalist economics plays down the place of inflation in the boom-slump cycle.

Another way of looking at it is this: inflation is caused by changes in the flows of money and capital in the economy and around the world. Money circulates in exchange for commodities, and can be transformed into capital. If the flows of money and capital alter, then this can be inflationary. Some economists think that the export of capital by the West, including for military bases and war production, can be inflationary as it can put money flows out of balance. (6) The USA has expanded its military bases around the world for many years now, and is militarising Asia and eastern Europe at speed.

In other words, inflation comes and goes as part of the normal workings of the capitalist system. To understand the true causes of inflation, we have to study more the doings of the capitalist class, and rely less on what they choose to tell us.

A point to note is that the ruling class resort to one device after another to claim that there is no money, that public expenditure cannot be afforded (except for fighting wars), and that recession can be avoided by cutting taxes, raising interest rates, and shrinking the state. Inflation is merely the latest excuse for these wrongdoings.

CAPITALIST CRISIS 

To imply that the current mess is a “British recession” is to underestimate the scale of the crisis. Global Gross Domestic Product continues to decline with no sign of a rebound. The United Nations Conference on Trade and Development (UNCTAD) says that the global economy is “flying at stall speed” with most of the world experiencing a recession. However, Marxist sources question the term “recession,” arguing that the term is a smokescreen hiding the true nature of the crisis. Vijay Prashad has commented: “Most governments have used conventional tools to try and grow their way out of the great depression, but these approaches have placed an enormous cost on household budgets already hit hard by high inflation, and have curbed the investments needed to improve employment prospects”. (7) UNCTAD notes that central banks prioritise short term monetary stability over long term financial sustainability. “This trend, together with inadequate regulation of commodity markets and continuous neglect for rising inequality are fracturing the world economy.”

Significantly, Prashad explains how five of the G20 countries will experience better growth rates in 2024: Brazil, China, Japan, Mexico and Russia, because of their various more enlightened policies.

Some social democrats in Britain want the state to take more control and lead the economy out of crisis, using investment in production, expanding the social infrastructure to redistribute wealth, and maintaining demand. They are in good company, being on the same page as leading Marxists, and some of the more progressive governments in the world. Even some less progressive governments use the state more than we do.

Outside the G20, there is good economic practice. Nicaragua, a poor country of 6 million people, has educated its children out of illiteracy, increased its education budget each year (by 457% since 2006), doubled the number of teachers, provided free teacher training and free education from primary school to university, and free school meals, all when inflation is still at 10%. (8)

We in Britain should understand this kind of option is before us. Arguing for it is easier with a better understanding of progressive economics, which includes public planning of the economy to increase resilience to temporary troubles like inflation.

(1) Office for National Statistics, November 2023 ons.gov.uk

(2) Morning Star 30-31 December 2023

(3) Corporate Profiteering and the Cost of Living Crisis, June 2022, unitetheunion.org

(4) Wikipedia

(5) Political Economy, John Eaton - Lawrence and Wishart, London 1949, Chapter 13 usefully refutes the idea that rising wages lead to a wage-price spiral.

(6) Monetary Crisis of Capitalism, A. Stadnichenko - Progress Publishers, Moscow, 1975

(7) The World’s Economic Centre of Gravity is Returning to Asia, Vijay Prashad, Tricontinental 52^nd Newsletter 2023 - thetricontinental.org

(8) Morning Star, 27 May 2023

The Bank of England – not in it together. Pic by acediscovery