The more I have pondered and considered the words spoken by the Chancellor this afternoon, the more depressed and alarmed I have become. It is very difficult to avoid the conclusion that he had two main purposes in his speech. The first was really to declare war on the trade unions. My hon. Friend the Member for Newton (Mr. Lee) pointed out how calamitous that would be.
In this connection, the Chancellor said that it was not the intention of the Government to intervene in the negotiating machinery between trade unions and employers, but we must very carefully read that part of his speech. As I heard it, it seemed to me that he got very close to giving public instructions to those whose job it is to adjudicate in these arbitrations. As I heard him, it almost seemed to me that he was telling them that it was now their duty, in the public interest, to turn down most of the claims that came before them.
If that is really the case, it will undermine all our negotiating machinery. I believe that the Minister of Labour is speaking tomorrow, and I hope that he will clear up this matter and expound to us, on the text of what the Chancellor said—and not what he thinks ought to be the case—what other meaning can be attached to the words used by the Chancellor in this connection this afternoon. Can the trade unions continue to expect fair and impartial arbitration, or are they going to feel, with justification, that the system is rigged against them, on the instructions which the Chancellor now gives in public speeches, made in the House, to those whose job it is to arbitrate?
The second purpose of his speech was to make a propaganda preparation for the attack upon the trade unions. He elaborated what he first said in the United States, namely, that his policy was so to arrange things that wage increases, if unaccompanied by increased productivity, would result in unemployment. As my hon. Friend the Member for Stechford (Mr. Roy Jenkins) and others pointed out, the economic theory behind this policy is defective, if not nonsensical. But the policy that it contains is rather clever from the Government's point of view. Its purpose is to try to shift on to the trade unions the blame for the unemployment that will result from the Government's own policy, and to make the trade unions the scapegoats for the Government's own sins.
I can see a certain short-run party political attraction in such a policy from the Chancellor's point of view. It certainly pleases the Hailshamites of the Conservative Party, who are only too eager to respond to the bell-ringing evangellism of their leader, calling them to a holy war against the trade unions. The hon. Member for Oldham, East (Sir I. Horobin) said, during the Chancellor's absence—so I think that I should repeat this to him—that if there were no attack on wages, and if the Government flinched from attacking the trade unions, there would be a revolt in the Conservative Party that would "make the Gloucester by-election look like a unanimous vote of confidence in the Government." Those were his words.
The frightening thing about the Chancellor's speech is that he seems to have put these internal party political considerations before the national interest. At any rate, whatever his motives, he has now told us and the nation quite openly that he is prepared for policies which may create unemployment. I think that is a fair way of stating his policy. He is prepared to carry out policies the result of which may be unemployment. If that is his policy, we are entitled to ask him how much unemployment and how far would he push this policy? Perhaps the Minister of Labour will answer tomorrow.
The Financial Times in a recent article calculated that we would need at least 5 per cent. unemployment in this country before there would be any effect on prices as a result of unemployment. The Chancellor himself clearly knows that this policy has to be pushed very far indeed to be effective. In a speech which he made on 12th July to the National Production Advisory Council of Industry he said,
It is one thing to run the economy in balance. It is another deliberately to unbalance it upon the side of depression in order to control wage claims. Moreover, I am not altogether satisfied that those economists and others who argue for this course quite realise the degree of unemployment that may be necessary for this policy to prove even partially effective.
The Chancellor knew the degree of unemployment that would be necessary for this policy to be even partially successful, and yet he has started on such a policy. Therefore, the Chancellor does know what he is doing. He is now adopting the policy which he then rejected because it would cause so much bitterness, misery and disturbance. He denounced that policy on the 12th July last, but it is now the policy which he has adopted, and he is embarking, open-eyed, upon this policy of despair.
The Chancellor attempts to justify this new policy by economic theories and arguments, but they seem to me to rest on a number of very gross over-simplifications. He keeps on telling us that the trouble is due to what he calls an increase in the supply of money. How, then, does he account for the fact, which my hon. Friend the Member for Loughborough (Mr. Cronin) pointed out, that the supply of money has remained practically stable since 1954, and yet wages and prices have gone up? If his theory is that all the trouble is due to increases in the supply of money and that wage increases and rises in prices could only be cured by that method, how does he account for the fact that wages and prices have increased since 1954 while money supplies have remained stable? If he answers that it is because of the velocity of circulation then I ask him—how do any of his measures affect the velocity of circulation in the slightest degree? The fact is that they do not affect it at all.
The greatest over-simplification of all is this view of the Chancellor that the prime cause of inflation is wage demands There is, of course, as everyone will admit, a relationship between wages, productivity and prices, but it is a far less simple relationship than the Chancellor appears to think. The Chancellor is so eager to point out the mote in the trade union eye that he quite forgets the inflationary beam in his own eye. A prime cause of inflation today is this suicidal policy of deliberately holding down production. This policy of drastic rephasing —a word which will begin to be an ugly word in the country, and which is only another word for cuts and slashes—with its control of local authority building, the credit squeeze and the Bank Rate—the aim in all this is to cut down and hold down production at a level below what it could otherwise be. We had production practically unchanged in this country since the end of 1955. It then goes up a point or two and the Chancellor immediately cuts it off again and cuts it back. We are now having underproduction in this country. With our physical equipment we could be producing more than we are, and this is the deliberate policy of the Government.
To me it is an extraordinary thing how quite false economic ideas can get established and be accepted almost universally. In the 1929–31 crisis it became accepted by almost everybody that the way to cure unemployment was through economies and balanced Budgets. This was taken for gospel by everyone, both on this side of the House and on the other. It was thought that the way to cure unemployment was by balancing Budgets and stopping spending. This was a remedy which made the disease worse. It seems to me that the idea now abroad, and taken for granted by everyone, is that the way to stop inflation is to cut production. That has become the parrot cry. It seems that just as the idea of balanced Budgets in 1929–31 made worse the disease it was meant to remedy, so this idea that we cut production in order to cope with inflation also is a remedy which worsens the disease.
As was pointed out by my hon. Friend the Member for Stechford (Mr. Roy Jenkins) if we hold back production, that, at any rate in the short-run, is inflationary. The failure to use capacity to the full means a rise in prices by increasing the unit cost of industrial output. The overheads are spread over a smaller output. Even if in the long run this policy would produce a reduction of prices, as my hon. Friend pointed out, it can do so only at a level of far lower production of goods and a considerable amount of unemployment.
The most important point in connection with this new doctrine that the way to solve inflation is to cut production is that the cutting of production actually increases the inflationary effect of wage increases; because if production is kept down, it makes it impossible to increase productivity to absorb wages. The reason why wage increases can be absorbed in Germany without grave inflationary effects when they cannot be so absorbed in this country is because in Germany production has been going up all the time. When the Chancellor and other hon. Members opposite say that wages can go up only if productivity goes up, they forget that the increase of productivity is, at any rate in the first line, the job of management. It is the job of management to increase productivity by new machines, better layout of production, and so forth.
If the Government hold down production, it makes it impossible for management to increase productivity and we get into a vicious circle. Wages cannot go up unless productivity goes up, and holding down production makes it impossible for management to increase productivity. It is therefore, in part at any rate, the Government policy of holding down production which is responsible for making wage claims inflationary. The Chancellor has the whole thing the wrong way round. If we have full-out production today, we could absorb considerably greater wage increases than we can at the level of production which the Chancellor proposes to enforce.
To us it seems that these policies of the Chancellor and his theories are arid and antediluvian. We must get away from them and make a radically different approach to this problem of home inflation. I think we must start by frankly accepting what is the root cause of inflation. Full employment automatically produces inflationary pressure. It is two ways of describing the same thing. A full employment economy is an economy which is under inflationary pressure. Because if we have full employment, it means that the economy is being exercised at full stretch; resources both human and material are being fully used.
It follows that if nothing is done whatever to control the economy and then we try to do something new and try to increase exports and increase investment, there are only two ways of making room for this increase in an already fully stretched economy, which is what by definition a fully employed economy is. One is that prices go up, and that makes room, because people who cannot raise their wages and salaries quickly enough have to lower their demands upon the economy. We increase production in a full employment economy by pushing up prices, but everybody on a fixed income loses a bit, and that is how we make room for it. I agree with the hon. Member for Bournemouth, West (Mr. J. Eden) that this process weighs very heavily upon people with fixed incomes, especially small fixed incomes. It weighs most heavily on the old-age pensioners who are the real victims of this policy of the Government.
The only other way to make room for an extra activity, if we leave full employment alone, is to raise imports. We bring goods in from abroad to meet the increased demands that we cannot meet by our own economy. Then we get into balance-of-payment difficulties. That is why we think that a Government which will not do anything to control matters properly must alternate between two positions. We get a slight spurt forward, a slight increased productivity and a slightly increased investment. Then we get a balance-of-payments crisis. Then the Chancellor reduces production again, and prices keep on going up because that is an inflationary thing to do. We are getting the worst of both worlds in falling production and rising prices.
So full employment tends towards inflation by its very nature, and the Chancellor's solution of this dilemma, as he tells us quite frankly, is to get rid of the inflationary pressure by getting rid of full employment. We are not forced to accept the Chancellor's solution; there is an alternative policy. We can say, "We will accept that full employment means inflationary pressure but we have to find ways to make use of this inflationary pressure for the good of the economy." It means that we have an economy with a constant head of steam. We should not be frightened of that. We can direct and canalise our economic activity when there is a head of steam in a way that we cannot if we have a good deal of unemployment, as we had between the wars.
We can only do this if we have what the hon. Member for Ealing, South (Mr. Maude) and other hon. Members derided, that is selective controls. That is not doctrinaire Socialism but is a logical necessity if we want to keep our full-employment economy. Selective controls make room for essential activities, extra imports and extra investments. They do not choke off activity, as the Chancellor's policy does. It is always easy to find new outlets in an economy that is always under pressure. If we are to fight inflation we must keep our economy in top gear. The Chancellor has not produced any solution of that kind.
We must have selective controls which discriminate between the more essential and the less essential. The sort of thing we have in mind is building controls which not only check less essential building but automatically concentrate it on the more essential. If we have an economy with a head of steam, building activity will then flow into the more essential lines. The hon. Member for Cheadle (Mr. W. Shepherd) made a most thoughtful speech. He seemed to laugh at controls and then he advocated building control. I could not follow that part of his argument.