The wage-price mechanism and the principle of reward

It is the principal paradox of this period that the only sphere of our economic system in which government intervention is urgently necessary is also the only point at which action of the State is now effectively inhibited. It is in the region of wages and prices that we really require the continual economic leadership of government, but in our prevailing trade structure any such suggestion has come to be regarded as impious. Eleven years before the possibility of an incomes policy was first mentioned by the British Government I suggested State action through what I described as the wage-price mechanism; I devoted a chapter to the subject in Europe: Faith and Plan (1958), and returned to it in Right or Wrong? (1961). Through use by government of the wage-price mechanism the conditions could be created within which industry could operate, and then it could be trusted hi free competition to look after itself with the minimum of bureaucratic interference. This guiding principle I now more than ever strenuously maintain. Neither our British problem in the short term, nor our European problem in the long term, will ever be solved without it.

To avoid overwhelming difficulty even within an European economy we shall be obliged in the end to secure the payment of the same rate for the job throughout comparable industries. On that fair basis of competition, the freer industry is, the better. As science increases the means to produce with mass production methods for this immense market it will more than ever be necessary to equate production and consumption by systematically and evenly increasing wages, salaries and fair profit to provide the market which industry will otherwise lack; and this can only be done by the economic leadership of a central authority within an economy largely insulated from the world costing system and the fluctuations of external market prices. It will not be enough to have a common market, it will also be necessary to have organisation within it if production for adequate demand and a fair basis for competition is to be secured. Everything necessary can be done by the instrument of the wage-price mechanism, and the action of government can virtually be limited to these two points. Even control of prices will only be necessary if monopoly exploits its position; otherwise, in a viable economic community prices can be left to the free play of competition.

The flexible instrument of the wage-price mechanism can secure many objectives which are becoming essential. Not only can it systematically equate production and consumption and thus overcome the basic dilemma of the thirties, which threatens to return directly war and near-war conditions and other abnormalities of the present period cease. It can also maintain a proper balance between wage, salary, profit and investment, for if you have power to influence the two former factors you automatically affect the two latter. Within this equilibrium it can secure some redistribution of reward, which is vital if modern society is not to be increasingly divorced from every dynamic principle of industrial development.

The brain-drain menaces the well-being of Britain today and of Europe tomorrow, and if proper incentive is not restored to ability the drain may be followed by something like a stop of supply. It is against every principle by which the industrial revolution of the West has reached its present point of phenomenal development, and against every principle by which man has scaled the heights of evolutionary nature, that high reward should not go to high ability and energy. Yet society is becoming so arranged that the differential award between much skill and little skill is tending more and more to disappear. The reason is that power rests with the massed battalions in the industrial dog-fight by which wage questions are settled, and in that struggle all factors seem to be considered except the maintenance and promotion of exceptional ability. Nothing can remedy this condition, which drifts ever more clearly toward disaster, except the direct intervention of government in determining the basic principles of reward for effort.

Not only outstanding ability, not only the scientists and gifted technicians whose attraction and maintenance should be the first charge on any economic community, are drowning in the present industrial chaos. Any body of men is neglected, however essential, unless they are organised in a big battalion to prevail in the industrial struggle. Amass of the lowest-paid workers for no good reason draw a wage far lower than the main body of their fellow workers, and despite continual discussion of the problem the trade unions have so far failed to do anything about it. It is the top and the bottom of the scale that suffer most.

Agriculture has never yet secured recognition of its basic importance to a healthy community, and it never will be properly treated until the principle of economic leadership by government through the wage-price mechanism is firmly established. When mass production for the large and assured market of Europe is developed, and still more when automation for such a market has immensely increased the power to produce, a far larger pool of wealth will give a rare opportunity to increase the reward and the amenities of the countryman, thus fortifying the equilibrium of the State without any impairment of the purchasing power of the industrial worker. Others who are not organised in big battalions should likewise at this point, and indeed before, directly benefit from government leadership through the wage-price mechanism; the civil service, the police, the fighting services and above all the doctors, nurses and health services on which the whole structure of the State depends, and the pensioners, the old and the infirm.

No equilibrium of an economic community can be established, and no durable equation between production and consumption can be maintained, until government operates what should be the prime function of the State in the modern age: economic leadership through the wage-price mechanism. It will surely be regarded in future as one of the most extraordinary illusions of this period that government has the right and the duty to interfere everywhere in industry except at the two points which matter; wages and prices.

Setting aside the pretentious absurdity of government claiming to teach industry its detailed business, which is simply a mask for fundamental ineffectiveness, what is the function of government in the modern world if it does not give economic leadership in the key questions of wages and prices? Is it just to keep the peace at home and abroad, until the collapse of the economic system risks disorder at home and impels us toward war abroad? Is it just to levy taxes to maintain a growing and largely purposeless bureaucracy, and to hand out money to local authorities? Surely these principles derive from the stage-coach age, for every pressing problem of the modern period is economic. In real terms, government has little function except to talk and posture, if economic leadership is excluded, if intervention in wages and prices is prohibited.

Reward: a cure for the English disease
Even within the limited spheres allowed to government by the dominant forces of the present system, politicians fear any action which can remedy the malady known as the English disease. There will be no health in England until we establish the principle that it does not matter what a man is paid if he is worth it. This means quite simply that he creates more than he earns. If this principle is applied, there will be no more brain-drain, and even without a major revision of the economic system this could be achieved through a reform of the fiscal system. There is no reason why payment by results should not be extended to our methods of taxation. When a firm largely increases its production, particularly in present conditions in the export trade, the chief executives should be rewarded by a corresponding reduction in their taxation. It does not matter in the least if such a man's taxation is reduced to vanishing-point, provided his efforts have increased the wealth of the nation by more than the reward he receives. If British industry has not yet the wisdom to give good young executives an interest in the equity of the firm in American fashion, a remission of their taxation in return for productive achievement can make them free men and give them fresh creative power by enabling them to save and to acquire their own capital.

These revolutionary reforms are necessary to restore the normal working of nature and to cure the English disease. Exactly the same principle should be applied to scientists and technicians. When they can show that an invention or initiative has increased the national wealth, they should be rewarded by a corresponding reduction in their taxation even before any industrial reorganisation has given them the incentive they deserve. I can see no reason why the same principle should not be extended to the factory floor, and initiative resulting in an increase of production rewarded by reduction of personal taxation. These are instruments available to government in the ordinary fiscal system without awaiting an industrial show-down. The government has only to summon the courage to face and to eradicate the crippling egalitarianism of the English disease.

For years I have urged a large transfer of the fiscal burden from direct to indirect taxation. In the old days of poverty economics there was a right and proper prejudice against indirect taxation, which was often a shifting of the burden from the rich to the poor when there was nothing like enough to go round. If this cannot today be described as thinking of the stage-coach age, it can certainly be called thinking of the railway age, for it dates from the period when Gladstone changed Pitt's system of indirect taxation into the direct levy of the present income-tax method, and since then no one has done any really new fiscal thinking. Circumstances are entirely changed in a society which is, at least temporarily, affluent. Certainly, the basic necessities of life—food, clothing and housing—should be free from all tax, but indirect taxation graduated to the luxury element should replace the direct levy which falls on the thrifty and the spendthrift alike. The standards of luxury will of course change as economic prosperity increases and stability is assured, but the principle of taxing spending rather than earning could and should endure.

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