I can’t help but feel a sense of déjà vu at the current debate about global inflation. The similarities between today’s spiralling situation and the inflationary crisis of the Seventies are too striking to be ignored.
Nearly 50 years ago, the oil crisis of 1973 sent inflation skyrocketing across Western countries. It was a textbook case of imported inflation, which in a context of close-to-full employment and strong union bargaining power triggered self-reinforcing inflationary pressures, as companies raised prices to defend profit margins while workers in turn demanded wage increases. This price-wage (or wage-price) spiral was a response to the inflationary pressures coming from abroad — not their cause.
However, the Seventies crisis came at a time when the “compromise” between labour and capital that had provided the bedrock for the post-war economic-political settlement was already heavily strained, as each side attempted to claim a greater share of a shrinking cake. Economic and political elites realised that the inflationary crisis provided them with the perfect opportunity to deal a deadly blow to the post-war full employment regime, which in their view had led to the working masses becoming too powerful. They concluded that it was time to strike back — to break the back of organised labour and reassert the unfettered power of capital over society.
Inflation represented the perfect casus belli. With the theoretical backing of monetarist economists such as Milton Friedman, they crafted a narrative that blamed all economic problems — beginning with inflation — on excessive union power, unreasonable wage demands by workers and bloated welfare systems. The neoliberal counter-revolution had begun, a crucial aspect of which was the deliberate engineering of unemployment through a radical tightening of monetary and fiscal policies, in order to crush the bargaining power of unions. Combating inflation was not the end — it was the means.
As Alan Budd, economic advisor to the Thatcher government, would later admit: “There may have been people making the actual policy decisions… who never believed for a moment that this was the correct way to bring down inflation. They did, however, see that [monetarism] would be a very, very good way to raise unemployment, and raising unemployment was an extremely desirable way of reducing the strength of the working classes.”
In many ways, the same thing is happening today. As in the Seventies, inflation is surging, threatening the post-pandemic recovery and raising once again the prospect of stagflation — the simultaneous incidence of stagnant or negative growth and accelerating inflation. And as in the Seventies, establishment economists and commentators have been quick to blame the surging prices on excess demand (people having too much money to spend), fuelled by excessive wage increases and over-expansionary fiscal and monetary policies during the Covid crisis.
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