To observe or measure the gains the financial sector has enjoyed from the policies of the Bank of England (BoE) since its independence, it is more than evident that the BoE focuses on the needs of this sector and therefore the associated group of constituents working in that sector, in all, around 5% of the working population.
The nature of that sector is that most involved in dialogues or funding think tanks to come up with documents supporting their interests, are the top management of banks, hedge funds, insurance companies, fund, share and derivatives handling activities. Thus the Bank of England acts very much like conduit or representative of financial sector interests, a super trades union, if you will. Broadly speaking the existence of the Confederation of British Industry,
The Phillips curve
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the various Chambers of Commerce and representatives of SMEs are tolerated as long as the preference in economic policy decision preferences lie within the monetary policy or the BoE camp.
As a result of an incorrect interpretation of something called the Phillips curve, the whole notion of labour unions, which represent the people upon which all sectors rely to remain operational, there is resistance to their exxistences and operation and even more so when they are asking for higher real wages in the face of COLIC. Therefore the natural sequence of events here is that as monetarism drives inflation upwards constituents find that their wages are insufficient to maintain the same standard of living and in some cases are faced with being unable to afford to purchase basic essentials. As a result the reaction is to demand higher wages in response to the rising inflation. Just as Milton Friedman thought money volumes generate demand and therefore economic growth, getting the cart before the horse, so do today's monetarists voice oppositions to higher wage settlements because they imagine these will cause inflation. What is notable in each case is the failure to understand the structural constructs set up by monetarism which are, in any case, inflationary. It can be argued that the inflation is favoured by the group ably represented by the BoE, asset holders who benefit directly from asset price inflation. At the same time those on wages and whose wellbeing depends upon price stability or reductions in the prices of goods and services are not provided with sufficient representation. Therefore the policy perspective is not to respond to the needs of wage-earners.
The need for sector policiesIt is apparent that wage-earners tend to be hung out to dry when adjustments are made to the economy through monetary policy means. When the balance of payments was recognized to be an important indicator of the performance of an economy up until 1970, monetary policy would adjust exchange rates to keep this balance under control by sacrificing wages. This, unfortunately, continues to be the case disguised as price stability and inflation targets.
Productivity and inflation
 Inflation-controlling policies, such as Real Incomes Policy, help raise productivity and reduce inflation resulting in a downward movement of the Phillips curve at the lower unemployment ranges. In this way, monetary policy does not create as much inflationary pressure and neither do wage settlements. |
Since the majority of the population earn their income from sectors other than the financial services sectors, it is very evident that this country cannot continue to run a financial sectors policy through the BoE that almost exclusively favours this sector. There is a need for more robust sector policies designed to correct this structural policy-induced inflation. The last run of industrial policies in Britain occurred during the period 1945 through 1965 when the country experienced unprecedented growth, full employment and a constant rise in real wages and declining income disparity. A tripartite industrial policy was coordinated and agreed between business, the governments and trades unions as a normal and rational course of policy planning and agreements. Both Labour and Conservative governments were at home and relaxed about this arrangement and Harold MacMillan, the Conservative prime minister, was able to declare, "
Britons had never had it so good!"
We certainly cannot say this now in a country with the second worst balance of payments for goods in the international league table. With sector policies, each responding to the need to raise productivity the effect is to lower the target wage settlements as a result of productivity and lower rates of inflation, bringing our balance of payments back into a reasonable shape. The Phillips curve on the right shows the impact of productivity on the shape of the curve and this effect cannot be secured through monetarism or anything in the BoE mandate or through any of the current policy instruments; we need a sector policy initiative. This is why complaining about union-promoted higher wage settlements is illogical when members have as much right to request such settlements when the BoE has maintained such a settlemnt on an ongoing basis for a small wealthy minority for many years. In doing so they have been the principal cause of inflation. More attention, including by unions, needs to be paid to ways to improve the performance in the other sectors of the economy. Real economic growth arises from the endogenous demand for growth emanating from the supply side production sector and not from monetary policy monetary injections. Supply side demand leads to non-inflationary expansion while the notion of unrestricted monetary injections, such as through quantitative easing, is prejudicial because of its imposition of a structural inflation.
1 Hector McNeill is director of SEEL-Systems Engineering Economics Lab
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