The cost of living crisis can be described very simply. Prices are too high and profits too low. Therefore, any proposal that does not solve any of these problems should be rejected. The Bank of England jamming interest rates did not respond, and neither did its warning of high unemployment and a prolonged recession.
The Bank offers fantasy economics, where rising wages are now or later responsible for rising prices. But since inflation is already at 9.1 percent, and is estimated to hit 13 percent this year, while average wages are predicted to rise only 4.5 percent, it is clear that wage increases are driving overall inflation. Nor will they, in the Bank’s own predictions, next year, with wage growth continuing to lag far behind the rate of inflation. There is no “wage-price spiral”.
In fact, today’s inflation is the ugly product of two forces. First, instability in the rest of the world, from Russia’s invasion of Ukraine to China’s ongoing Covid restrictions, has disrupted the supply of basic goods. Second, extreme weather events such as wildfires and droughts, which worsen over time, add their own costs and uncertainty to the mix. No part of this global instability is affected by British interests or wages. There is no interest in London high enough to end the war in Ukraine. There are not enough wages in Britain to reduce gas prices in Qatar.
This is a new kind of crisis for Britain – the first of the new, unstable era of the Anthropocene. We are used to living in a country with reliable weather in a world where terrible floods or fires can happen in other places, but never seriously affect us. That stable world is gone. The best we can hope to do with these great elemental forces is to defend ourselves against them. But here is where our economic system not only fails to provide that protection: it exacerbates the problem for many of us.
This is because the next factor driving high prices and low wages is profit. Profits for the largest listed companies have increased by 73 percent since the end of 2019, before the pandemic began. Of the rise in prices in Britain in the first six months of this year, almost 60 percent was accounted for by additional income. Only 8.3 percent were paid. The Competition and Markets Authority found that even before the pandemic, “markups” – the increase in costs taken by companies as income – sharply increased for the largest and most profitable companies. Every last penny of excess profit earned by Shell or BP or other profiteers is a penny taken out of the wallets and bank accounts of the rest of us. Profits like those of the oil majors, made without additional risk, without innovation, and without entrepreneurship of any recognizable kind, are what economists have called for 200 years “economic rent” : a parasitic claim on the rest of society, whether paid for by Landlords in the 18th century or oil barons in the 21st century.
Economics, as Adam Smith, the first modern economist, wrote, is a moral science. And what the profiteers are doing is a violation of basic morality. There are no technical solutions to moral problems – no smart predictive model can make the problem go away. Morality is about choosing a side. Are you for the gross profits at the top, or for decent wages, benefits and pensions for others? Do we want protection, or profit?
So the people who know best how to tackle inflation and end the cost of living crisis are not at the Bank’s headquarters on Threadneedle Street. They are not in the Edwardian offices of the Treasury in Whitehall. And they certainly don’t go around the country trying to convince members of the Tory party that they are Margaret Thatcher reincarnated. The people who know best how to deal with the cost of living crisis are Amazon workers in Coventry and Tilbury, who walked out of their jobs after the company offered a mock 35p salary increase. They are the dock workers in Felixstowe, who voted 92 per cent to strike for better pay. They are ticket inspectors and train guards up and down the country, fighting the RMT against real pay cuts. And they are the 70,000 who have pledged, along with Don’t Pay UK, to refuse to pay their energy bills when the new price cap charges kick in.
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The old order cannot solve the new crisis. It is time for new forces to act.
[See also: The Bank of England is recklessly driving the UK into a deep recession]
