The Mystery of Rising Prices
An interesting letter from a reader appeared in the Daily Mail on 26th April of this year: interesting because it put a question that baffles most people and because nobody gave the answer.
Here is the question: —
“In these days of mechanisation it seems strange that most manufactured goods should get dearer. Our wonderful new methods are claimed to give up to ten times the results achieved by older manual methods. Can anyone explain this apparent paradox?”
It is a fair question, and the facts as stated are beyond dispute. Almost every day our newspapers carry reports of some startling increase of productivity, and alongside them announcements of higher prices. What then is the explanation of what the writer of the letter calls “this apparent paradox”? There are several factors, three of which are important. Firstly, the effects of increases of output are almost always wildly exaggerated; secondly, there are large industries in which productivity is falling; and thirdly, prices rise because it has long been government policy to take actions which inevitably raise prices. This last has by far the largest effect, sufficient to offset other changes that might otherwise lower the price level.
Governments and the Price Level
Continually since 1939 it has been the policy of successive governments, National, Labour and Tory, to inflate the currency; that is, to increase the amount of notes in circulation far beyond the amount that would have been sufficient to keep up with the growth of production, trade and population. The note issue in 1938 was under £600 million; it reached £1,400 million in 1945, and is now over £2,000 million. At one time most economists knew well what the effect on the price level is when an inconvertible currency (i.e., not freely convertible into gold) is excessively expanded: now they have forgotten or, like the politicians, prefer to turn a blind eye. Governments do this because, whatever they may say about wanting prices to fall or to keep steady, they really prefer gently rising prices and wages and profits, which give so many people the illusion of being better off. Also they wonder whether a fall in prices might mean a really big rise in unemployment, which would lose them votes.
The measure of the inflation of the currency can be seen in the fact that a gold pound, the sovereign, can be sold for three times its face value of 20/-. Another mark of inflation is the progressive fall of the pound in relation to the dollar. In 1938 the pound would exchange for 4.86 dollars. In 1940 it was reduced to 4 dollars, and in 1949 to 2.8 dollars. In 1932 the American dollar had already been cut to about half its gold content. Some economists expect a further devaluation before very long in Britain. This inflation is then largely the cause of prices being generally at least three times what they were in 1938.
If the government wanted to do so, they could limit or reduce the amount of currency and thus stop the price rise or bring about a fall. Several governments have done this in the past, including the Russian government in 1947.
Misleading Claims about Increased Productivity
We see, then, that even if there were a big increase in productivity through the use of more efficient machinery and methods or other causes, its effect on lowering prices could be offset by the government’s currency policy. But the claims of increased productivity are themselves widely misunderstood and exaggerated.
It is an elementary principle that if by some means the amount of labour required to produce an article could be reduced to half, the price could be halved, but we would expect this to take place only after the new method had become the typical one in at least a large part of the whole industry. If one firm only had possession of the new method they would not cut their price to half, but would use their favoured position to make larger profits, perhaps reducing the price a little in order to capture trade from their less efficient competitors.
But before we get to this point we have to be sure that what looks like a doubling of productivity really is what it seems. And here we are only too often presented with misleading information by newspapers that probably do not have full information (because firms rarely disclose it) and which, in any event, are more interested in sensationalism than in accuracy.
News of new machinery is usually presented in the form that some new machine attended by a small number of workers will do the work of a much larger number working by hand or with another machine. It is in this form that announcements about the power-driven coal cutters is reported; and recent examples have been the automatic factory and office machines loosely described as “automation.” But though we may reasonably assume that some increase in productivity is expected, this kind of information tells us nothing at all about increased productivity. Increased productivity in the last resort means producing an article with less labour, and to know to what extent this has been achieved we need to know about all the labour, including that required to make and maintain the machine. Often this information is not disclosed, as is pointed out in the booklet on Automation, published by the Department of Scientific and Industrial Research.
An example a few years ago was a report that “the world’s biggest signal box” had been opened by British Railways at York. In almost all the newspaper reports the item seized upon as news was that 27 men could now do the work formerly done by 70 men in a number of separate signal boxes. Doubtless the change over will in time produce some real saving of labour, but most of the Press reports omitted to state that the new box cost £500,000 (Manchester Guardian, 1st June, 1951). It will take a long time before the saving of the labour of 43 signalmen equals the amount of labour taken up in construction.
The coal mines are an interesting example. Astonishing claims have been made about the increased productivity expected from the use of machinery in the mines, but the annual output of coal per worker employed in the coal industry has remained practically unchanged in the years 1951 to 1956, at about 315 tons per year, compared with an output of about 330 tons a year 70 or 80 years ago; which brings us to another important factor often overlooked.
The coal mines are typical of a number of industries in which the general trend is for output to fall not rise. When coal mining was in its infancy the rich seams near the surface were exploited and output was high. As these are exhausted miners have to go deeper, and poorer seams are extracted—with the result that more and more labour is required for each ton of coal. New machinery helps, but if the labour required to make the increasing amount of machinery produced in the engineering trades for the use of the coal industry is taken into account, the real fall in output is even greater than is shown by the above figures.
In an address to the Rotary Club of Los Angeles (reported in Manchester Guardian, 15th Feb., 1957), the chairman of the Socony Mobil Oil Company, Mr. B. B. Brewster Jennings, surveyed a number of the raw material industries and showed that what is true of coal is true of many other industries:
“. . . raw materials all over the world are harder and costlier to get. We have seen this very clearly in our own coal industry, in which year by year more non-productive work is needed for every ton of useful coal. For most of our raw materials the picture is much the same.”
He instanced copper, the American oil industry, with more and deeper wells to produce the same output of oil, and iron ore in Canada. His conclusion was that man’s ingenuity will keep up with the rapidly increasing demand for these materials, but only at the cost of more and more capital being invested to do it; which is another way of saying that more labour is required in these industries for each ton of output.
This general trend in the raw material industries shows itself in the fact that raw material prices in the last half century have risen considerably more than the rise of the prices of manufactured goods. And it explains why we so often read that industries which are known to have introduced new machines and methods which reduce the labour required in manufacture (e.g., the motor industry) nevertheless announce higher prices “because of the increased cost of raw materials.”
The Real Increase of Productivity
The real increase of productivity in industry and transport, etc., as a whole is consequently not the very large amount conveyed by sensational newspaper reports, but on a much more modest scale. The Earl of Halsbury, managing director of the National Research Development Corporation, who has written much about “Automation,” was merely restating the accepted view among economists who have studied this problem when, in a recent interview, he said: —
“Productivity in the United Kingdom rose at one and a half per cent, per annum in the United Kingdom for the first forty years of this century. It’s now rising at three per cent, per annum, double the old rate. . .” (Everybody’s, 16/2/57)
In America, according to the Bureau of Labour Statistics, productivity (i.e., the output per worker) in manufacturing industry rose between 1929 and 1953 by 70 per cent. As the period covered is 24 years, this means an average yearly increase of under 3 per cent. (Times, 18th January 1956).
Is this a gloomy view ?
The real facts about productivity may be a shock to those who believe that “automation” will bring a paradise of a workless world and to those who believe that capitalism can offer a spectacular rise of the standard of living. Actually a 3 percent increase of productivity each year could double output in about 30 years, but capitalism presents another gloomy aspect, that its wars and armaments make nonsense of the increase of productivity. Almost all of the increase of productivity of British industry in this century has been swallowed up in the expenses of armaments (now nearly 10 per cent. of the national income) and in succeeding destructive wars, which in a few years can destroy the achievements of a quarter of a century.
Socialism the Only Way to Secure the Benefits of Productivity
Socialists have the only hopeful answer to these gloomy facts of life under capitalism. Only Socialism can end war and armaments and thus stop that waste of production. Equally important, only Socialism can secure that the labour force and the materials now devoted to the financial, trading, and other activities necessary to Capitalism but needless in a Socialist system of society, can be freed for the production of useful articles and services. In this, Socialism offers the certain prospect that the output of useful articles could in short time be doubled. But this involves the abolition of capitalism and the establishment of Socialism in its place.
And, incidentally, to go back to our starting point, the problem of the writer of the letter to the Daily Mail will be solved in a way he has not thought of. Under Socialism prices will not be high or low; there will be no prices!