> I agree, but I think saying "economically impossible" is assuming too much.
> The relationship between unemployment and inflation depends on institutions,
> like wage bargaining and market structure. (As you say, it moves around.) In
> principle, you can design institutions to change the relationship, even
> radically - which brings the issue back to the political question. The
> crisis of the 70's was partly a political struggle about whether or not to
> try to do this - whether to change institutions by deregulating the labor
> market, or by altering the wage bargaining process (incomes policies), or to
> just give up on full unemployment. In the end, the first and third options
> were chosen.
Yeah - but the trouble is that "designing institutions to change the relationship" is so much easier said than done, and implementing any given design is even harder. You're right that I shouldn't say 'economically impossible' - after all, some countries did see full employment for a sustained period in the 1950s and 1960s - Australia, for example, had sub-2 per cent unemployment for most of the post war period until the 1970s (except during recessions). I should say, rather, that it is not in the power of policy alone to ensure it - the postwar experience was dependent on boom conditions that were not created by policy. Once they faded, either real wages or profits (or both) had to grow more slowly, one way or another.
And yeah this is what my dissertation's on, more or less (inflation and macroeconomic policy in Australia 1945-85), and I could go on about it way too much. (Skip the next three pars if it's boring!) But Australia is an interesting case study here, because it did have a centralised industrial arbitration system which set Award wages right across the job spectrum. It was a judicial system, and thus not directly under government control, but from the early 1950s (in the wake of the Korean War inflation) government submissions began to focus on its role in inflation prevention and the judges took it seriously. But it ran into two problems –
1) That it was not clear what rate of wage increase was compatible with relatively stable prices – the classic productivity rule was problematic because of large swings in the terms of trade (effectively there was a three-way distributional conflict between labour, capital and farmers).
2) Under full employment conditions, the arbitration system began to lose its grip – there was nothing preventing employers from offering over-Award wages, and gradually average earnings rates pulled away from official rates, forcing the system to catch up or lose control (in those conditions capital and economists tended to fear market wage determination).
So the arbitration system turned out not to be an alternative to macro-policy effectively using unemployment to discipline wages, especially in a foreign exchange crisis. But the system did always hold out the hope of a ‘rational’ wage policy for some in Labor and elsewhere on the left. In the 1970s came desperate experiments with wage and price freezes, and eventually in the 1980s the Accord – a system of official agreements between the Labor government and the union movement for wage restraint in return for public ‘social wage’ spending and (they hoped) a return to full employment. The wage restraint part was successful, and there were certain ‘social wage’ gains like Medicare, but stagflation lasted an extra decade in Australia, and the government in the end tried to replicate the Volcker shock with ‘the recession we had to have’ at the turn of the 1990s (Treasurer and later PM Keating’s words), finally beating inflation with the tried-and-true discipline of unemployment.
More generally, the problem for capitalism with politicising the wage bargain for purposes of macroeconomic rationality is that it opens the door to other political demands around the wage, like the old-fashioned demand that profits take the restraint instead. In the right circumstances it could be part of a good strategy for a strong labour movement – but the Accord shows the perils of accepting wage restraint in a weak position and leaving the other side of the bargain to the future. I think a wage bargain needs to be combined with some serious seizure of the means of production, or at least investment, or capital will keep the upper hand. We shouldn't fall into the social democratic fallacy of thinking we can just design a more rational set-up and imopse it on reality from above.
Mike Beggs