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Inflation and Social Justice

Text of an address given by E.F. Schumacher to the AGM of the Catholic Institute for International Relations on 13th June, 1975. A small pamphlet was also published by the CIIR containing the following text, the format of which has been adapted to appear online for the first time. Schumacher’s situational analysis of the moment—the details, players, statistical figures and broader context—are of historical significance.  Aspects of his thought-provoking analysis into the underlying nature of inflation  as an economic phenomenon, as well as its representation by economists and in general parlance, still merit reflection in the present day.

To judge by the flood of public utterances on the state of the nation, we are in the later phases of a bad economic crisis  which has a number of disagreeable features, inflation being the worst. We are told that we must cut the rate of inflation by half, so as to be more nearly in line with our main competitors and to put ourselves in a good position to benefit from the upswing in the world economy, confidently predicted for early next year; that we shall then be able to balance our international accounts, even start repaying our monstrous debts, and, once the North Sea Oil really starts flowing in bulk, get back onto the happy road of economic growth. All of which makes me burst out in verse:

“When GNP begins to grow once more
We shall be even happier than before.”

I think such pictures of the future are now called ‘scenarios’ and the one I have just sketched out is considered to be the scenario of healthy optimism. What could be more wonderful than to get back onto that road of ‘You’ve never had it so good?’ And, of course, really so little is needed to get there: just stop making excessive wage demands, just cut down on Government expenditure, just work a bit harder, and don’t exceed the 50 miles per hour speed limit on ordinary roads!

This kind of optimism is enough to depress even the staunchest heart. Where shall we be when we have got through the present crisis and are back exactly where we were in 1973? Surely we shall be in a more dangerous and insupportable position than ever before? The threefold crisis — the crisis of resources, the ecological crisis and the social crisis — will still be with us, in an accentuated form. Everything will be even more brittle and vulnerable.

The present situation, I am sure, has nothing in common with any previous ‘depression’ or ‘recession’ — except, of course, some of the symptoms like unemployment. It is not part of a ‘cycle’, is not a ‘correction’ or a ‘shake-out’ or anything of this sort: it is the end of an era. A year ago, Barbara Ward, also speaking at your AGM, put it into very simple words: “The party is over”.

What sort of a party was it? We allowed ourselves to be entertained by three illusions:

— First, there was the illusion of an inexhaustible supply of cheap fuels and raw materials.
— Second, there was the illusion of an almost equally inexhaustible supply of workers willing to do boring, repetitive, soul-destroying work for very modest rewards.
— Third, there was the illusion that science and technology would soon, very soon indeed, make everybody so rich that no problems remained except what on earth to do with all our leisure and wealth.

I think you will agree with me when I say: these illusionary entertainers, which made the party what it was, all three of them, have left, have completely vanished: they had cast a spell over us, had taken us on a trip. Everyday now it seems more incredible that we were ever taken in by them and believed what they told us. We are waking up and see a great deal of debris around us — but the spell is still there, in a subtle kind of way: most of what we say and do is still based on the implicit assumption that the three entertainers will soon return and the party will be resumed.

In fact, we all know that the three great entertainers will not return; that the party is over. Whose party was it anyhow? That of a small minority of countries and, inside those countries, that of a minority of people. And as the party became more and more swinging, an increasing number of people began to realise that the party was not for them but that, at the same time, they were needed to keep the party going. And that is why we have inflation now. It is these people who have done the most to wake up society, and you may say they have done most to set the inflationary spiral going.

Who are they? They are suppliers of essential goods and services who have discovered how essential they in fact are and have thereby discovered their power. They have come onto the scene, powerfully, both externally and internally.

Let us take the external side first. Imagine yourself in charge of one of the oil exporting countries, say, fifteen years ago. You heard pronouncements from the chiefs of the big international oil companies that “in the sixties the world will burn more oil than it has burned in its entire previous history”, and that the companies were so efficient they would provide it. And at the same time you found the price you got for your oil was being reduced, by unilateral decision of these companies, in 1959 and again in 1960.

Much the same ten years later: you heard the companies proudly announcing again that in the seventies more oil would be burned than in all previous history taken together — and all the time you found the real price of crude oil slipping away, below the levels of ten or even twenty years earlier. Gradually you would have felt very upset. The Shah of Iran pointed out on February 3rd 1971 “Although one of the principal objectives of the Organisation of Petroleum Exporting Countries, which was established in 1960, was the raising of posted prices of oil to their pre-1960 levels, nevertheless not only has this goal not been achieved, but, due to the general inflation throughout the world, the real value of our earnings has been considerably reduced . . . Our real income per barrel from oil has actually fallen by something like 20% . . . Obviously such a situation cannot continue any longer.” And of course we know that the situation did not continue any longer.

But still the illusion persisted that it was a Law of Nature that oil was inexhaustible and destined to remain very very cheap for, as they put it, “such time as it is reasonable to plan ahead.” Which was long enough time in the view of our masters to shut down half the European coal industry. Similar stories could be related about other non-renewable materials, such as phosphates (absolutely essential for western agriculture), the price of which has recently quintupled, much the same as the price of oil.

In short, the providers of essential materials, such as oil and phosphates, have gradually realised their essentiality and therewith their power. In the past they had felt completely powerless—they counted for nothing — and now they have discovered their power.

People ask what causes inflation. A very easy question to answer. There is only one cause of inflation: prices are put up. Unfortunately the language of most people who talk economics is so sloppy that they prefer to say prices rise. It is an incorrect way of speaking — as if prices were balloons. No. Prices are put up and when you put it that way, you can ask who puts them up. Those who have the power to do so and can get away with it. The powerless cannot get away with it.

So oil prices, phosphate prices and many other prices have been put up. Changes in power- relationships or power-relativities have led — via inflation — to changes in income-relativities.

Now let us look at the internal side. We observe, of course, very similar developments at home. Various groups of people who hitherto counted for little, have discovered their essentiality and therewith their power. The miners are a case in point. All through the sixties they were told that they were not wanted; society was willing to pay them for taking early retirement — but unwilling to pay them a good wage for going down the pit. Then the situation began to change a little bit with increasing oil prices. In 1972 they said ‘now we want the money’. To get it they went on strike, against all the warning that they would strike themselves out of a job, and then the lights went out and the miners had discovered their essentiality and therewith their power.

As you know, the miners are not by any means unique in this respect. I was recently in San Francisco when what they call the garbage collectors were in the process of discovering their power. They had more power than the municipal government, the government of California and the federal government in Washington. Finally a settlement was reached at a level of annual pay of $17,000. This was not taken very kindly by the lecturers of the University of California who averaged $16,000 a year. But the garbage collectors were unmoved. They publicly invited the lecturers to join them — but none came!

As I said, when power-relationships change, there is invariably and inevitably a tremendous pressure to change income-relativities. The result is inflation. Because those who power has grown want to change the status quo; and those whose power has waned want to defend it. The former normally collect a very great deal of abuse whilst those who defend the status quo feel extremely self-righteous.

Internationally, the oil exporting countries, and particularly the Arabs, are denounced and even threatened. Here is an excerpt from a Press Conference with an Arabian Minister of Petroleum 18 months ago:

Q: How seriously do you take the threat of the use of force against the Arab oil producing countries?
A: Ambush diplomacy is gone for ever, never to return. Oil is a two-edged weapon for the consumers as well. If the consumers co-operate with us they will get our oil to.use for maintaining their prosperity. On the other hand, if they attempt to take our oil by force, they will be burnt by it.
Q: Greater emphasis is now being placed by Arab oil producing countries on the need, in the long run, to slow down the growth in their oil production as a conservation measure. Would you elaborate on this?
A: We were considering oil conservation measure long before the war broke out . . . The Arabs do not need to have an alibi or an excuse for regulating their production.

When there are great changes in power-relativities, both sides, the gainers as well as the losers, invariably invoke the idea of Justice. “We don’t need an alibi” because our actions are ‘Just’. That is what the oil-exporting countries say. And the oil importing countries, what do they say? They say “We demand the right to acquire as much oil as we want; to withhold oil would be an act of injustice; you would be strangling us and we shall not tolerate it.”

Obviously this is a very difficult and dangerous situation, because the determination of what is ‘just’ cannot be an exact science. In this case, however, it should not be too difficult to come to some reasonable understanding.

For the oil-importing countries to refuse to listen to the conservation argument would certainly be not only unjust but also suicidal. No one can be obliged to sell his source of livelihood at such a rate that after 20 or 30 years there may be nothing left at all. The former Secretary-General of OPEC, Dr. Khane, has incessantly pleaded for conservation measures that would mitigate the oil importers requirements and give the oil reserves of the OPEC countries a ‘life’ of at least 50 years. “What is to become of us” he says. “You may be so clever to do it with your marvellous sciences but meanwhile our oil will be gone and what is left for us — nothing but sand and camels.” Some kind of formula — I am tempted to say some kind of social contract — is obviously needed which will define the maximum rate of obligatory output of oil. I would propose that each OPEC country shall be obliged to sell in any one year up to 2% of its proven reserves as ascertained at the beginning of each year, and shall not be obliged to sell more than that. In the absence of new discoveries, this formula would reduce reserves by about 39% in 25 years, 63% in 50 years and 86% in 100 years. The annual rate of sales would fall in proportion. New discoveries, of course, would improve the situation.

The virtue of such a formula is that it provides for a smooth and continuous adjustment, without sudden jerks. The difficulty is that the 1973 rate was not 2% but more nearly 4% which, from the OPEC point of view, is quite intolerably high.

I have little doubt in my mind that the rate of oil imports from the OPEC countries will fall to about half of what it was in 1973 — how quickly, by what means and at what prices, I don’t know.

A different, though similar, problem confronts us internally: power-relativities have changed and now there is great pressure to change income-relativities. We can easily see that for the defenders of the status quo, the ‘maintenance of relativities’ is their chief weapon. They very much like percentage figures, and so we find judges and generals, heads of big companies, top civil servants and others suddenly receiving pay increases amounting to many thousands of pounds — more than the total annual pay of countless essential workers — and the only argument put forward is not that they need the money — much of it goes on taxes anyway — but that these provocative increases are required to maintain ‘relativities’.

The people who have discovered their power, at the same time, don’t talk so much about relativities as simply about ‘more cash on the table’. They use their power to get it, even when they are told that society cannot afford it. They remain incredulous— seeing that society can afford to “maintain relativities’ i.e. the status quo ante.

Of course this is a very uncomfortable situation for any society. It is very difficult to digest as it were substantial changes in power-relativities when one side insists on getting a bigger share of the National Income and the other side insists on maintaining relativities.

The only reconciling force can be ‘Justice’ — that supreme value so difficult to define. But here again, it should not be impossible to come to some kind of consensus, provided we get ourselves to see the total situation, that is to say, the external and the internal situation together.

The external situation, exemplified by oil and phosphates, shows that “the party is over”; it will not be resumed; there are limits to growth; man must learn to be able to say ‘Enough’ when he has got enough. He can consume more-than-enough only by forcing others to put up with less-than-enough and that applies internally and internationally. If ‘Justice’ is a difficult idea, so is, no doubt, the idea of ‘Enough’.

Yet again, it is not impossibly difficult. There is somewhere a level of income where we can say ‘surely, it is enough for all reasonable requirements’. If we want to fight inflation and also prepare ourselves for survival in this world we have in fact already entered — the world ‘after the party’ — I am sure we cannot delay any longer the adoption of a formula — again some kind of social contract — which sets a ‘ceiling of enough’. To begin with, one might say, we can do something directly about salaries. No full-time salary will exceed — what shall we say — £12,000 a year (part-time salaries in proportion). This would at least establish some sort of ceiling for salaried people and establish some kind of credibility when it comes to restraining the excessive pressures from below.

I know there will be objections that people who do not draw salaries (profit earners, self-employed, property owners, etc.) can still make more than £12,000 a year and that to impose such a ceiling on salaries would only make it impossible to ‘attract’ the best people into the most important salaried jobs. But this argument misses the point. Those who cannot accept that enough is enough are not the best people; they are dangerous people who make all our problems insoluble and we cannot have them as top civil servants, industrialists, judges, generals, etc.

It is said ‘Let everybody make equal sacrifices percentage wise’. This means defending the status quo — trying to persuade the people who, for the first time in their lives, have discovered they have some power, not to make any use of their discovery — not even for the purpose of establishing justice. This approach would succeed only by way of bluff or brutality, and never for long. What is more, it would perpetuate economic and social patterns which worked, after a fashion, while the ‘party’ was still on, but cannot work now that the party is over.

Let us ask ourselves, do we really imagine that we could, or should, try to persuade the OPEC countries to let their oil go so cheaply and on such a scale that we can resume our habits of the past and, let us say, double consumption every 10 years? Of course we couldn’t and of course we shouldn’t even try.

Again, do we really imagine we could, or should, resume a way of life where everybody was encouraged and stimulated to maximise consumption, without any limit anywhere, and where the struggle for more ‘growth’ never abated, in fact was never allowed to abate, and was, in fact, pursued with even greater fanaticism and ruthlessness by the rich societies then by the poor? Of course we couldn’t, nor should we even try. One does not have to be an expert to realise that it just doesn’t make sense. It is not physically possible and it would lead us into total ruin.

No one must overlook the fact that it is not easy to live successfully through the ‘end of an era’; it requires courage and imagination to see that there is another way. Some people are already at work making a viable future visible in the present. Some people have seen very clearly that there have to be far reaching changes in the pattern of industrial ownership, (I am not saying that this should necessarily be nationalisation — on the contrary, it should be decentralisation), and that there have to be very far reaching changes in the very nature of our technology. The reforms that are necessary cannot be left ‘until the crisis is over’. They are needed to overcome the crisis. And they have everything to do with Justice — which means help for the poor and restraint on the rich. For those who care for the Spirit, it should be a joyful prospect.

 

Introduction by Jared Spears, Schumacher Center for a New Economics, December 2021.

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E. F. Schumacher

Ernst Friedrich Schumacher was an internationally influential economic thinker, statistician, and economist in Britain. His ideas became popularized in much of the English-speaking world during the 1970s. He is best known for his critique of Western economies and his proposals for human-scale, decentralized, and appropriate technologies. E. F. Schumacher was born in Germany in 1911. … Continued

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