In previous posts I argued that: (1) the UK’s working classes have lost out as a result of our rulers’ responses to covid, the war in Ukraine, and inflation; and (2) this outcome wasn’t necessary. The next step is to explain why elites responded in the way that they did, why they chose policies detrimental to the working class. In this essay, the focus will be on the decision to tighten monetary policy in the face of rising prices. Subsequent posts will examine the choices of proxy war with Russia and lockdowns.
Explanations of the policy response to inflation have come in three types: those emphasising a monetarist bias; those concentrating on central bank credibility; and those focusing on distributional conflict. The first two can be readily dismissed, as we’ll see, but the third puts us on the right track: the response to inflation has been detrimental to the working class because policymakers have prioritised the interests of productive capital; this reflects not only a structural advantage enjoyed by capital but also the weakness of Britain’s labour movement.
As I’ve detailed elsewhere, current price rises have been driven primarily by supply-side shocks (lockdowns, the war in Ukraine) and secondarily by corporate profiteering. The policy response, however, has been to hike interest rates, giving the impression that our rulers are treating inflation as a problem of excess aggregate demand. According to this approach, tighter money should remove demand from the economy and so bring prices down. This may well happen. But the point here is that, from the standpoint of the working class, a better approach would be for policymakers to promote supply-enhancing measures and to rein in price gouging. So why haven’t they done these things?
As suggested by commentators such as Daniel Denvir and Tim Barker, one possible explanation is that those in charge of this policy area – central bankers – have a monetarist bias. Bank of England officials may have raised interest rates and neglected the interests of working class Britons because they are “predisposed” to treat inflation as a problem of too much money. It’s certainly the case that monetarism – the belief that inflation is “always and everywhere a monetary phenomenon” – has since the late 1970s exerted considerable influence on British policymakers. The Bank, moreover, is institutionally oriented towards a monetarist response: the operational independence it gained in 1998 made it responsible for price stability, and the main way it can regulate prices is by manipulating interest rates. In theory, then, this explanation is plausible.
However, it doesn’t tally with reality. Across a number of its publications, the Bank admits that “disruptions to global supply chains” are at the root of current price rises and that it “can’t do anything about these … problems”. It also acknowledges that firms have engaged in profiteering and this has exacerbated inflation. Thus, rather than having its vision distorted by a monetarist lens, the Bank clearly sees that non-monetary factors are behind today’s rising costs. Yet, it has still tightened monetary policy.
Another explanation could be that policymakers at the Bank feel the need to act. Their official responsibility for price stability has understandably created a public expectation that they will do something to bring down costs. They were also criticised in the early phases of the current inflation for not hiking interest rates quickly enough, for being “behind the curve”. This led certain commentators and politicians to question the Bank’s “mandate” – i.e., it having responsibility for monetary policy – suggesting its credibility has taken a hit. While these criticisms would appear misguided, given that non-monetary factors are driving today’s inflation, research by political economist Manuela Moschella shows that central bankers are concerned about upholding their reputation: they fear that if they lose credibility, they risk losing their independence. Such concerns may have prompted Threadneedle Street to tighten monetary policy to counteract claims of ineptitude and project an image of authority. Britain’s working classes may have lost out because the Bank wanted to save face.
We can dismiss this explanation, too, as upon closer inspection it doesn’t make sense. The figures most vocal in making the above criticisms of the Bank are part of the ruling elite – economic elites with close ties to Threadneedle Street and senior Conservatives. Neither group would seriously risk the Bank losing its operational independence: for economic elites this would weaken their power as monetary policy would become subject to democratic pressures once more; and for politicians this would make them responsible for this policy area, preventing them from being able to hive-off “unpopular decisions” to technocrats. Consequently, these elites would never publicly censure the Bank if its credibility was genuinely at stake. And if its credibility was never genuinely at stake, the Bank’s raising of interest rates wasn’t about saving face.
But if these criticisms didn’t convey a loss of credibility for the Bank, what was their purpose? For senior Conservatives, their purpose may have been quite straightforward: they were about ensuring voter wrath at rising prices was directed towards Threadneedle Street and not the government. For economic elites, however, the purpose is perhaps less transparent. In making these criticisms of the Bank, they were clearly signalling that they wanted rate hikes. But given that the present inflation is being driven primarily by non-monetary factors, and the Bank itself has admitted this, why would economic elites want tighter money?
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As the Marxist economist Michal Kalecki long ago pointed out, inflation is typically accompanied – and further fuelled – by heightened group conflict over resources. Rising prices intensify the distributional struggle between labour and capital as each vies “to defend the real value of their wages and profits”. The distributional conflict has certainly escalated in Britain this past year or so. Not only have firms price gouged, as I’ve already covered, but there has also been considerable increase in labour unrest: whereas 234,000 days were lost to strike action in 2019, there were nearly 2.5 million days lost from June to December 2022. Within the context of this distributional struggle, a tighter monetary policy serves the interests of economic elites – the interests of capital – as a weakened economy is one with less job security and more chastened workers. There would be less economic growth, but capital would be better placed to claim a larger share.
This explanation does move us in the right direction in terms of answering both why economic elites want higher interest rates – despite the economic illiteracy of this response – and why the working classes have lost out. But there are some difficulties we have to address. First and foremost, it’s not clear that in the scenario depicted above, capital would have to call on the state to help it defend its profit-share. Even if labour was capable of winning higher wages, rather than “reduce profits” capital could simply “increase prices”, as Kalecki notes.[i] When you have this option, why bother with the state.
The labour-capital antagonism is basic to our society, however, and the particular iteration of this conflict we’ve been discussing is situated within a wider context, one in which labour has been getting stronger. Due to factors such as chronic ill-health, inadequate childcare provisions, and a rise in early retirement, Britain’s workforce is shrinking; and as demand for labour outstrips supply, workers will be able to command higher pay; their bargaining power will increase.
Of course, we shouldn’t get ahead of ourselves. British workers remain weak by historical standards (more on this below). But as Kalecki stresses, capital fears that as the power of workers grows, so too will their “self-assurance and class-consciousness”, undermining “discipline” and “political stability”.[ii] This sort of fear is certainly in play. Representatives of capital in politics and media have warned that labour shortages “are the shape of things to come” and that after “four decades in which capital [has] dominated labour, [the] pendulum [is] beginning to swing the other way”. Capital would clearly want to reverse these trends and uphold a regime in which it is dominant.
Thus, when we situate this inflation-induced distributional conflict in the broader context of Britain’s tight labour market, we can see why economic elites want higher interest rates. It’s not so much that they want the state to help them defend their share of material rewards, but more that they want the state to help them maintain their class power. And in tightening monetary policy, the Bank is representing this class interest. Andrew Bailey, the Bank’s governor, stated that a shrinking workforce is “the reason why we have had to raise the Bank Rate”. Similarly, in their address to the Treasury Select Committee in February 2023, leading Bank officials said that, “if things we see lead to greater intensity in [the] distributional battle”, then “monetary policy will be tighter” to bring about “a loosening in the labour market”.[iii] Our rulers have tightened monetary policy because they are allied with the interests of capital; and this alliance goes a significant way to explaining why Britain’s working classes have lost out.
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But before we can be satisfied, two further issues must be considered. Firstly, does our argument apply to capital per se or to a particular fraction of capital? Or, to put this differently, while it makes sense that productive capital – “firms producing goods and services for sale” – would prefer tighter money for the reasons given above, it’s not clear that rentier capital – which concerns accumulating income through “exclusive ownership or control of a scarce asset” – would share this preference.
Parts of rentier capital would support – or at least wouldn’t oppose – a policy of tighter money. Inflation is ruinous for creditors as the nominal value of the debt owed to them remains constant while its actual value and the real interest rate decline. Owners of stock would dread more bargaining power for workers since “[h]igher capital gains [are] stimulated by wage repression”. Yet for other rentiers monetary tightening is disastrous. Higher interest rates have devalued financial assets such as bonds by draining this market of liquidity; according to a report by Colidr Asset Management, in 2022 the value of UK bonds decreased by £1.3 trillion. Asset managers are another loose money constituency as their fees are tied to the value of their clients’ assets, which deflate as the money supply contracts. Tighter money also hurts real estate owners; Goldman Sachs warns that “soaring interest rates” could wipe-off £14 billion from UK commercial property by the end of 2024. No wonder Kalecki said that monetary contraction leads to the relative “impoverishment of the rentier”.
Is there a way to reconcile this conflict between productive and rentier capital? The scholar Brett Christophers suggests that there is, up to a point. He argues that while tighter money is precipitating a property market crash, this presents an opportunity for corporate landlords and institutional investors in the medium-to-long-term: they can buy cheap and wait for the market to rebound. Christophers further contends that UK fiscal policy is working to mitigate some of the damage monetary tightening has done to rentier interests. The government’s energy price guarantee keeps gas and electricity costs down for users by subsidising energy firms through public borrowing. This not only ensures that the rents owed to energy firms aren’t reduced but also helps people “sustain [their] ability to pay rents” across the broader economy. We should also note that the Bank of England has shown a willingness to intervene and maintain liquidity in financial markets – its purchase of £65 billion of bonds following Kwasi Kwarteng’s disastrous mini-budget in September 2022, for example. Thus, the consequences of monetary tightening and the broader policy environment aren’t entirely at odds with rentier interests.
Yet, the outcomes and measures raised by Christophers are either opportunistic or reactive; they reflect responses to situations as and when they arise. We can say the same about the Bank’s willingness to step-in and stabilise financial markets. By contrast, the policy of monetary tightening to discipline labour is proactive, it’s about pre-empting a situation before it emerges. This therefore suggests that our rulers are prioritising the interests of productive capital ahead of rentier capital. Why this is the case will only be briefly speculated on here, as this is a major question in its own right. However, I would suggest that the likes of Cédric Durand and Thomas Fazi are right when they link productive capital’s ascendancy to an international environment in which great power competition is prompting deglobalisation and the reshoring of industrial capacity.
So, rather than capital per se, it’s more accurate to say that Britain’s working classes have lost out because our rulers have allied with the interests of productive capital. This leaves the second issue: why haven’t the working classes been able to have the state represent their interests? At one level, the answer is obvious: because labour is too weak. But this doesn’t tell us why it’s too weak at this particular juncture.
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There is the view – first voiced in The Communist Manifesto – that under capitalism the state will inevitably prioritise the interests of capital: “the executive of the modern state is but a committee for managing the common affairs of the whole bourgeoisie”.[iv] A more sophisticated version of this perspective is the structural dependence thesis, which contends that regardless of the ideological hue of the government, within a market economy, policymakers are severely constrained in their ability to bring about distributional outcomes favouring labour. As Carlo Fiori et al. explain, this is because
Capitalists … enjoy a structural power which derives from their control over investment. If governments try to implement any policies or reforms that damage capitalist interests and undercut profitability or business confidence, profit-maximising capitalists respond by reducing investments and thus economic activity.[v]
Reduced economic activity results in less revenue for governments, weakening their capacity to provide public goods and increasing their chances of being removed from office. Governing elites, then, aren’t likely to persist with measures that augment labour’s share at the expense of capital. Instead, the tendency would be for them to adopt policies “facilitating and encouraging private investment” – that is, to govern in the “interest of capital”.[vi] And to be clear, individual capitalists don’t have to consciously coordinate with one another to exercise this control over the state: reducing investment is simply the rational thing to do in the face of shrinking profits. Why take the risk if the returns aren’t worth it? Hence structural power; capital can shape policy decisions without organising itself into a collective agent.
Labour’s structural weakness can be detected behind the Bank’s tighter monetary policy. Higher interest rates tilt the distributional struggle in productive capital’s favour. Yet the latter doesn’t appear to have engaged in concerted effort to influence policy elites, beyond the public criticisms and signalling discussed above. As political scientists Jonathan Hopkins and Kate Alexander Shaw show, even without capital organising and asserting its collective preferences, many UK policymakers see their role as being to allay “the fears of the British business community to ensure continued investment”.[vii] The main purpose of Andrew Bailey’s recent speech to the British Chambers of Commerce was to assure business that it could have ongoing confidence in the economy, “that the labour market is loosening” and that “the unwinding of second-round effects [i.e., demands for higher wages]” remains the Bank’s priority.
Yet the working classes’ structural disadvantage isn’t the only reason their interests aren’t being represented by the state. A risk with the structural dependence thesis is that we apply it too rigidly. The UK has seen “significant long-run variation of distributive shares”, with labour at times getting a bigger slice, such as in the 1950s and 1960s.[viii] We wouldn’t have this fluctuation if capital’s power was solely a structural phenomenon, indicating that other factors also influence distributional outcomes.
According to the sociologist Fred Block, there are moments when capital’s “veto on government policies doesn’t work”, for example during periods of war or major economic crises.[ix] Following the destabilising effects of the Great Depression and the Second World War, successive British governments committed to maintaining full employment, a significant concession to labour. Larger shares for wages in Britain have also correlated with high trade union density, a legal-institutional framework conducive to collective bargaining, and the presence of a strong leftwing party.[x] The heyday of this “worker collectivism”, as Ruth Dukes and Wolfgang Streeck term it, was in the three decades after the Second World War, during which labour, through the means of the mass strike, was able to win better terms and conditions from capital and the state.[xi] Yet, over the last forty years, the commitment to full employment has dissipated and worker collectivism has been dismantled.
How this diminishment of working class power occurred is a complicated story, and I focus only on the most essential factors here, beginning with the abandonment of full employment as a primary goal of government. In the postwar decades, full employment had been maintained through Keynesianism: British governments of left and right used fiscal levers to stimulate demand, which in turn encouraged productive investment, leading to higher levels of economic growth and employment. From the late 1940s to the late 1960s, this approach worked fairly effectively, but by the 1970s it was running into trouble. Fiscal stimulus was no longer prompting productive investment and this was because of falling rates of profit. Consequently, the demand injected into the economy didn’t produce economic growth but rather higher prices and intensified social conflict. In this context, Keynesianism was discredited and alternative ideas started to gain traction among policy elites. What we now know as Thatcherism was one of those alternatives, which explicitly abandoned the commitment to full employment.
The decline of Keynesianism didn’t guarantee Thatcherism’s success, however, and a number of short-term contingencies played a role in the Conservatives’ 1979 election victory. Perhaps the most important concerned attitudes towards inflation. As noted, inflation was a major problem in the 1970s, peaking at a peacetime high of 26.9% in August 1975. The Labour government elected in October 1974 sought to deal with rising prices through its Social Contract, an incomes policy based on the idea that the party could use its ties with the trade unions to persuade workers to exercise wage restraint. The political consequences of this policy were significant, in that Labour’s linking of inflation to excessive wage demands stoked popular opposition to the unions. And as the historian Jim Tomlinson shows, following the so-called 1978/1979 ‘Winter of Discontent’ – which saw mass strikes by public sector workers – an “anti-union perspective” became etched in the public consciousness. This paved the way for the Conservative party’s electoral triumph in 1979 and the Thatcherite assault on working class power.[xii]
This assault consisted of many elements, including the adoption of a full-blooded monetarism. Tight control of the money supply was framed by Thatcherites as the only method for curbing inflation (much like today). But as Margaret Thatcher’s economic advisor Alan Budd acknowledged, monetarism was principally used to destroy jobs as “raising unemployment was an extremely desirable way of reducing the strength of the working classes”. From 1979 to 1983, the number of unemployed in Britain more than doubled to over 3 million, with the industrial areas of Scotland and northern England – bastions of the labour movement – being the hardest hit. Many of these areas are yet to recover, succumbing to chronic unemployment and despair.
It’s worthwhile mentioning here that this deindustrialisation was compounded by globalisation. The opening up of economies that occurred around the world at this time enhanced capital’s mobility, meaning that it could more readily transfer production to low-wage countries. Deindustrialisation not only brought job losses but also contributed to a transformation in the nature of work in the UK, making it less manufacturing-based and spatially concentrated and more service-based and dispersed. The political ramifications of such a change were recognised long ago by Marx: “workers’ power of resistance declines with their dispersal”, as their combining becomes considerably more difficult, leaving them more exposed to the vicissitudes of the market and their employer.[xiii] It’s no coincidence that trade union density has sharply declined alongside deindustrialisation: whereas in 1979 55% of British workers belonged to a trade union,[xiv] by 2021 this figure had fallen to 23%.
Alongside monetarism, the Thatcher governments engaged in more direct measures against worker collectivism. In the 1984/1985 Miners’ Strike, the Thatcherites used the coercive arm of the state to discipline workers, most notoriously during the Battle of Orgreave. A more lasting impact on employer-employee relations, however, was achieved through legislation. In a piecemeal fashion, the 1980, 1982, and 1988 Employment Acts and the 1984 Trade Union Act undermined the legal-institutional framework that promoted collective bargaining; in essence, these laws severely restricted ‘closed shop’ arrangements and the ability of workers to strike. To paraphrase Dukes and Streeck, such laws re-individualised workers, rendering them weaker.[xv] What’s more, this legislative agenda is ongoing. The 2016 Trade Union Act placed additional restrictions on the right to strike, and the current Conservative government is proposing further limitations.
The final essential factor is the Labour party. There has always been a bourgeois, liberal current within the Labour party coexisting (often with some difficulty) with more leftwing elements. The Thatcherite decimation of worker collectivism helped empower this liberal tendency within Labour, allowing it to capture the party and move it to the right. Labour’s support in the late 1980s for then European commission president Jacques Delors’ vision of a “social Europe” was the first sign of this shift. Delors’ vision entailed entrenching social rights at the supranational level. In backing the European commission president, Labour sought to preserve rights, including those of workers, by insulating them from shifting sands of national electoral politics. But what this revealed was that Labour was leaving behind a politics rooted in the collective agency of the British working class and instead was embracing a politics of liberal constitutionalism. The 1998 Human Rights Act and the 2010 Equality Act were further indications of this liberal predominance. Labour governments enacted these laws to codify rights at a constitutional level; yet they passed nothing that would help workers organise a countervailing power to capital.
But it wasn’t just that Labour abandoned working class politics. Under the leadership of Tony Blair, the party actively sided with capital. The Labour governments from 1997 to 2010 insisted that “markets work best” and adopted a laissez faire approach. They prostrated themselves in front of big business: “what more can … we do … to support and enhance the critical role that the banking industry plays in our economy?”, treasury minister Ed Balls asked the British Banking Association in 2006.[xvi] They spoke of globalisation and open, liberal economies as facts of nature, ridiculing those who argued otherwise. And they opened Britain’s labour market to mass immigration from eastern Europe in 2004 with the expressed purpose of increasing competition for jobs and keeping wages down. It’s therefore no surprise that capital’s share of income soared during this period, continuing a trend established in the Thatcher era.[xvii] Should Labour return to government following the next general election, which looks highly likely, the signs are that it would prioritise capital’s interests. Under Keir Starmer, Labour has tacitly condemned the recent waves of union-led strike action and has sought to portray itself as the party of “sound money”.
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Thus, the proxies of working class power – government’s commitment to full employment, high trade union density, a legal-institutional framework favourable to collective bargaining, and the presence of a strong leftwing party – have all been undermined over the last four decades; the conditions which allowed labour to check capital’s structural advantage have been removed. This explains why the working classes are so weak at this particular juncture and why they haven’t been able to have the state represent their interests. Hence our rulers have allied with the interests of productive capital and have adopted a policy response to inflation that is detrimental to the working class.
[i] Michael Kalecki, “Political Aspects of Full Employment”, Political Quarterly, 1943, p. 3
[ii] Ibid.
[iii] “Oral evidence: Bank of England monetary policy report, HC 143”, Treasury Committee, 9 February, 2023
[iv] Karl Marx and Friedrich Engels, The Communist Manifesto, Penguin Books, 2002, p. 221
[v] Carlo V. Fiorio, Simon Mohun, and Roberto Veneziani, “Class, Power, and the Structural Dependence Thesis: Distributive Conflict in the UK, 1892-2018”, Political Studies, Vol. 69, No. 4, 2020, p. 2
[vi] Fred Block, “The Ruling Class does not Rule: Notes on the Marxist Theory of the State”, Socialist Revolution, No. 33, May-June 1977, p. 15
[vii] Jonathan Hopkin and Kate Alexander Shaw, “Organized combat or structural advantage? The politics of inequality and the winner-take-all economy in the United Kingdom”, Politics & Society, Vol. 44, No. 3, 2016, p. 17
[viii] Carlo V. Fiorio, Simon Mohun, and Roberto Veneziani, “Class, Power, and the Structural Dependence Thesis”, p. 16
[ix] Fred Block, “The Ruling Class does not Rule”, p. 24
[x] Carlo V. Fiorio, Simon Mohun, and Roberto Veneziani, “Class, Power, and the Structural Dependence Thesis”, p. 7
[xi] Ruth Dukes and Wolfgang Streeck, “Labour law after neoliberalism”, Journal of Law and Society, Vol. 50, No. 2, June 2023, pp. 1-20
[xii] Jim Tomlinson, “British government and popular understanding of inflation in the mid-1970s”, The Economic History Review, Vol. 67, No. 3, 2014, pp. 750-768
[xiii] Karl Marx, Capital Volume I, Penguin Books, 1990, p. 591
[xiv] Bob Mason and Peter Bain, “The Determinants of Trade Union Membership in Britain: A Survey of the Literature”, Industrial & Labor Relations Review, Vol. 46, No. 2, January 1993, p. 332
[xv] Ruth Dukes and Wolfgang Streeck, “Labour law after neoliberalism”, p. 7
[xvi] Jonathan Hopkin and Kate Alexander Shaw, “Organized combat or structural advantage? The politics of inequality and the winner-take-all economy in the United Kingdom”, p. 20
[xvii] Ibid., pp. 4-20