Bank of England, Aug 2009. Bank of England, Aug 2009. Source: lhongchou's photography - Flickr / cropped from original / shared under license CC BY-NC-ND 2.0

As interest rates rise again, it’s clear that the aim of our rulers is to sacrifice wages and public services on the altar of profit, argues Dominic Alexander

As expected, the Bank of England has raised interest rates for the tenth time in a row, by 0.5% to a total of 4%, bringing them back to a level last seen before the 2008 financial crisis. Ostensibly, this is necessary in order to bring down inflation. The problem is that this wave of inflation is clearly caused by supply-side problems, as is widely acknowledged. These are issues to do with investment, shortages and bottlenecks in production. The wage-price spiral is a myth. Raising interest rates does make credit more expensive, and therefore reduces demand in the economy, yet this does nothing to solve any of those supply-side issues. So, why pursue a policy which does not answer the purpose?

In a basic sense, a central bank only has the power to affect monetary policy. Through a limited number of mechanisms, a central bank can either make money or credit cheaper or more expensive. If you hold to an orthodox monetarist understanding of the economy, then capitalism will right itself as long as you manipulate the money supply in the right way at the right time. It is fairly obvious, however, that such narrow economic dogmatism doesn’t answer the problems we face now, nor, probably, has it ever.

The members of the BoE’s monetary policy committee are doubtless aware of the limitations of interest rate rises as an answer to inflation. Nor are their decisions guided simply by a desperation to do something, anything, in an attempt to look like they are trying to achieve the government-imposed target of 2% inflation. Instead, the intent is knowingly to depress demand and force an economic downturn; recession is a feature, not a bug.

The orthodox argument is that reducing demand will ease pressure on supply, and enable the bottlenecks in supply to be overcome, the after-effects of the pandemic to be worked through, and the energy crisis, at least partly due to the war in Ukraine, to be stabilised. On the assumption that all these proximate causes of inflation are solved, then inflation will fall back towards the 2% target by the end of 2023. Thus the current OECD report agrees with the BoE and the government that this is the necessary approach.

A recession for the sake of capital

Even if rising interest rates were to reduce inflation as advertised, that is not, however, the problem solved. Prices of essentials such as food, for which inflation is at 16.7%, will not thereby have fallen. They will remain rising, albeit at a much-reduced pace. Given also that the government seems absolutely determined to prevent significant wage rises in the public sector, that means that the cost-of-living crisis will not have abated, but will have become permanent.

Such a situation cannot help but to make a recession this year more brutal than it would have been anyway. The figures from 2022 already suggest a severe downturn, with business insolvencies jumping 30% to reach the highest level since 2009, and ‘voluntary liquidations reaching their highest level in 62 years’, as businesses close ahead of actual bankruptcy. Meanwhile, larger companies from technology firms to supermarkets are announcing mass job cuts. The IMF expects the UK economy, alone among the G7 nations, to contract by 0.6% in 2023, although other economies in Europe will grow less than an anaemic 1%. This is still technically shallow as recessions go, but it won’t feel that way in the midst of the already devastating cost-of-living crisis.

It looks, however, as if this is genuinely the plan. A severe enough recession that drives up unemployment will reduce workers’ ability to force employers to raise wages. Additionally, our ruling class clearly hopes that the situation will discipline the entire workforce into accepting significantly lower standards of living. The PWC consultancy includes in its ‘good’ news that ‘more than 300,000 UK workers’ could be added to the labour market in 2023, ‘potentially closing the UK’s economic inactivity gap with the US. This should help to reduce staff shortages in highly skilled sectors.’ Transparently, what this means in practice is that the ruling class wishes to use the economic crisis to drive more people into accepting longer hours at poor pay.

Economic inactivity may be due to ill health or caring responsibilities, among other reasons. If a recession added onto the cost-of-living crisis squeezes households sufficiently, more people may be forced to take on longer hours or additional employment. However, since the reasons for economic inactivity are not necessarily very elastic, the effect on employment levels may not be as large as it hoped, and the result may simply exacerbate the existing social crisis while doing little to alleviate the labour shortage.

From whichever side you look at it, there is a strong sense of unreality in the economic strategy being pursued by our rulers. The idea is that reducing the cost of labour, both through devaluing wages and through reducing the cost of social reproduction (that is the public sector), will in the long run make Britain more attractive to investment capital, even despite the rise in interest rates. The same general principle lurks as a justification behind the persistent and crazed calls from Tory MPs for tax cuts in the next budget.

The problem of low investment

It is true that lack of investment has been a particularly marked problem in the UK economy, although it has also been a general issue in the developed world since the crisis of 2008. The strategy to encourage growth subsequently pursued by central banks was to keep interest rates at rock-bottom levels so as to make borrowing to invest cheaper, and to flood markets with credit through quantitative easing. This strategy failed as the ratio of total investment to GDP in 2019 was still lower than that in 2007, before the financial crisis. This was across a period where GDP growth was exceptionally low, while the aggregate of investment included government spending and housing, underlining just how meagre business investment has been.

The ultimate reason for this problem with investment is the long period of low profitability of capital since the 2007-8 crisis. That we are in a period of low profitability may come as a surprise, given the huge profits being made by a range of great corporations, particularly energy companies. However, the rate of profit is a different measure from the absolute mass of profit. Large capital can be making a colossal, even unprecedented, volume of profit at the same time as, overall in the economy, the ratio of profit to capital investment is low. Capital is invested solely with a view towards the rate of profit, and for no other consideration. In circumstances of low profitability, capital shies away from potentially risky productive investments towards safe-havens, such as unproductive profits in real estate or financial speculation.

The periods in history when capitalism has shown both high profitability and rising standards of living, such as the post-war boom, were characterised by rapidly rising levels of productivity due to technological investment. This supported high rates of profit, and increased wages at the same time. The 21st century so far has seen low rates of productivity rises, particularly in the UK, as a result of the low levels of investment. The solution from 2008 until the pandemic had been minimal interest rates, quantitative easing for the financial sector, and public austerity. The decade and more of quantitative easing is almost certainly a major cause of current inflation, since it supported the ballooning of asset prices, without creating any new real value in the economy.

Capitalist austerity or public investment

The new solution is high-interest rates … and public austerity. There is no reason to imagine this will be any more effective at solving the long-term problems, whether those stemming specifically from UK capitalism, or from the world economy. A regime of low wages and low living standards is not going to encourage the capital-intensive technological investment required to raise productivity levels, and bring about a renewal of British capitalism.

It is questionable whether the Tory leadership really cares about all this. Their actual constituency is that part of the financial elite that thrives from the flows of global capital in and out of the City of London, the 0.1%. Consequently, stagflation and the slashing of the public sector and living standards may seem to them a perfectly reasonable price for society at large to pay for the benefit of that elite. 

The UK economy is often compared unfavourably with the German economy, which has higher levels of investment in advanced manufacturing. Yet, there too, workers and the public sector have been subject to a regime of austerity. The stagflation problem is of a global nature, and the establishment answer has generally been to raise interest rates, often accompanied by public austerity.

The answer lies not in the logic of capital accumulation, but in planned investment by the state for the benefit of society rather than profitability. Recall that the crisis of 2008 was not caused by working people, but by capitalist failure. The present inflationary crisis is not driven by a ‘wage-price spiral’, but through the investment and policy decisions of corporations and governments. For well over a decade, it is wages and public services that have been sacrificed in a failed attempt to restore profitability. Instead of placing the burden for capitalism’s inability to solve its problems on the back of the workers, it is time to expropriate the great mass of wealth at the top and put it to useful work at last.

Dominic Alexander

Dominic Alexander is a member of Counterfire, for which he is the book review editor. He is a longstanding activist in north London. He is a historian whose work includes the book Saints and Animals in the Middle Ages (2008), a social history of medieval wonder tales, and articles on London’s first revolutionary, William Longbeard, and the revolt of 1196, in Viator 48:3 (2017), and Science and Society 84:3 (July 2020). He is also the author of the Counterfire books, The Limits of Keynesianism (2018) and Trotsky in the Bronze Age (2020).

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