Friday, November 13, 2009

recession notebook 1.

The UK has two measures for inflation, the CPI and the RPI, which have diverged as the economy has become more and more tied up with housing speculation. The Retail Price Index has a stronger asset price bias, and serves as a better index for calculating wealth. The Consumer Price Index is less exposed to asset price fluctuations and serves as a better index for measuring production.

Between the second quarter of 2008 and the second quarter of 2009, UK output fell 4.5% in nominal terms, and 6.5% with output adjusted to CPI prices. At the same time the workforce has been reduced by 2%, as 650,000 people have lost their jobs.

So, while workers who managed to keep their jobs are somewhat worse off, as price inflation has exceeded wage increases, workers' "share" of overall production relative to capitalists' "share" of production has actually increased. I mentioned last year that this would probably happen, and that big capital would logically seek to reverse this movement through inflation. The government has certainly instituted classic inflationary policies: tax cuts, targeted corporate aid, reduced interests rates, even printing money, but this hasn't chased through as yet to increased prices.

In arguing that labour's share of production would hold, I mentioned Marx's theory of rigid real wages alongside Keynes' theory of rigid money wages. I was wrong to insist on real wage rigidity, for the simple reason that reduced productivity in a recession, in the absence of money wage increases, will inevitably reduce real wages in the short term. In the medium term, cutting into "conventional minimum" real wages will damage productivity, so these ought to be as "defensible" as Keynes' money wages. The conventional minimum real wage is also partly determined by social and psychological factors, so workers might accept a lower real wage temporarily in a recession, without this reduction sabotaging productivity.

The situation I described above, with labour taking a greater share of reduced production, goes against another of Keynes' hypotheses: that the schedule of the marginal efficacy of capital is likely to be downward sloping. In effect, British capitalism has not been driven back "uphill" surrendering unprofitable sectors, and defending a more profitable hinterland. On the contrary, British capitalism has lost productivity overall. It has retreated downhill, becoming less profitable as it has shrunk. Like Kafka's giant mole, it scuttles back into its burrow.

Predictably enough, some banking interests have actually become more profitable as a result of these upheavals.

These are the government's statistics:

nominal GDP


CPI index