A preliminary point is that wage fixing must be taken away from the arena of conflict among stronger and weaker unions, stronger and weaker companies, and political ideology and vote-catching. High unemployment is such a serious social blight (as Keynes knew, but too many people seem not to recognise) that wage fixing should not be left to the vagaries of human nature but must be the sole province of an independent objective authority assisted by the best information technology and given legal power to obtain any and all statistics relevant to its work.
This implies a strong degree of centralised control by the government, yet the trend in the more perfluent countries and many others over recent decades has been the other way, towards decentralisation and privatisation. Real power is held by private interests of limited accountability. The development of a sustainable world economy will require more control by stronger governments, and will also require the furthering of democracy so that governments are held accountable at regular intervals. Government by armed criminal gangs, as in Burma, Zimbabwe and North Korea at the present time, for example, is not an option.
It is unlikely that, over time, the wage fraction of total money flow can be maintained at exactly the right size, or that unemployment can stay always at a practical minimum, that is no voluntary unemployment. The best that can be realised is that the wage fraction can remain roughly, a little more or less, at the optimum, and that involuntary unemployment can stay negligible. It is certainly possible to avoid the gross ratio distortions and excessive unemployment experienced during the twentieth century.
Once unemployment has fallen to near practical minimum, a money wage indexation should be instituted, not to maintain living standards, but to maintain full or near-full unemployment during all economic ups and downs.
To repeat the contrast between what is proposed and what is currently practiced, instead of giving priority to trying to maintain living standards and letting the unemployment level go up and down as now, it is proposed that maintaining full employment should be the primary goal and living standards should be allowed to fluctuate as economic conditions dictate. Whatever is available would then be more justly shared, and the economy, being freed from other stresses associated with ratio distortion, would be in near best shape to take best advantage of whatever wealth parameters it has to accommodate. Those parameters are the availability of wealth and the renewal rate and, therefore, the sustainable throughput rate of each wealth species (i.e. resource).
Of course a wealth species can be throughput faster than its renewal rate, but such throughput is not sustainable.
The effect on inflation and interest rates of maintaining optimum proportions of money flow in the economy will be discussed more fully later.
When the new type of indexation starts, the money wage indexation rate should be determined by three variables:
(i) the rate of throughput increase (TI), erroneously called now the “economic growth rate”.
(ii) The rate of increase of the able and willing work force, useable figures on the size of and changes in which are already available.
(iii) The rate of change in the value of money, determined by the relation between two rates of change, of money supply, and throughput.
TI is a component of variables one and three, and so it cancels out, as will be demonstrated shortly. This solves the question that will have arisen: “How do you measure throughput in money units consistent over time?” There is no need in this case.
WORKFORCE in what follows, means those in work plus those actively seeking work, apart from changing jobs. If unemployment is minimal the latter quantity should be small.
At the end of one quarter, let throughput = T(1), money supply = M(1), workforce = W(1).
At the end of the next quarter, let throughput = T(2), money supply = M(2), workforce = W(2).
The value of money (MV) varies directly with throughput, but inversely with the money supply.
So: New MV = old MV x M(1) x {T(2)/M(2)} x T(1).
Money wages must change inversely as any change in MV, change directly as any TI, and change inversely as any change in workforce.
So, in this example:
New money wage:
= Old money wage x {M(2) x T(1) x T(2) x W(1)}/ {M(1) x T(2) x T(1) x W(2)}
= Old money wage x {M(2) x W(1)}/ {M(1) x W(2)}
The TI term, T(2)/T(1), figures inversely in determining the change in money value and directly as one of the three terms determining the required change in money wage. So TI cancels out. Money wages need basically be indexed to just the money supply and the workforce.
“Basically”, because a valid objection to the simplicity of this scheme is that it is only permanently applicable in an economy where throughput per worker in every occupation always changes at the same rate. Obviously this is not and never has been the case. However the differences in rates of throughput change should be small enough for the approximation to suffice over short periods. Its simplicity is an advantage which outweighs small, not life-threatening injustices which will advantage some and disadvantage others from quarter to quarter.
But there must be provision for cases where, in a particular occupation, throughput per worker changes at a rate different from the aggregate, the change being in one direction for so many quarters in a row that an excessively wide gap opens up between what the workers are paid and what their work is worth (there must always be such a gap in the employer’s favour anyway).
If this happens there are two possibilities:
If the gap is to the money advantage of the workers affected, their jobs will be reduced through automation or neglect, though the ones left employed will have a spending power advantage at the expense of the rest of the workforce.
If the gap yawns the other way, the workers affected will be underpaid. This will tend to increase the security of their jobs but will make their spending power less than it could be and affect the whole economy adversely, because the aggregate spending power of the population will be less than optimum. Remember that this discussion is taking place in a context where near-optimum proportionate money flows have been achieved. If the If the money value of work rises faster than the wage for that work in one industry, then in that area proportionate flows will be distorted against wages. This distortion will affect the whole economy in ways analogous to, though less severe than, the Great Depression, when ratio distortion of this kind was severe and general.
So special determinations will be necessary from time to time to correct anomalies in particular occupations.
At one time such determinations would have been a daunting task taking much time and expense, handling masses of data, and open to errors and suspicion and abuse. But today and in the future we have powerful technology for computation and for the storage and retrieval of information. Once the program is written determination should be a rapid task on each occasion and should be able to be error free and objective enough to be respected. An independent authority, similar to the judiciary, should be responsible for the process.
It would not be desirable to make such special adjustments whenever a particular industry showed a drift away from an optimum relationship of wages to work value. It would be better, and feasible, to keep every industry under constant review and wait until the drift had reached a certain extent before making a special adjustment. In fast-changing industries the interval between special adjustments might be short; but it might be years with older, more stable industries. Meanwhile, all workers would continue to receive the quarterly money-wage indexation changes described earlier. This would be guaranteed.
When a special upward adjustment is made, where does the money come from?
The adjustment is only required because the money value of the work under review has risen faster than wages, over a period. So the money for the adjustment would come out of profits. The company could increase prices to cover the increased wages, but in doing so would (i) nullify the adjustment, creating grounds for another adjustment and (ii) disadvantage the company in the marketplace. No doubt some companies would meet required upward wage adjustments by increasing prices, but they would learn the hard way that this would set off a self-reinforcing process damaging to the company and to its workers’ jobs.
Of course it might happen that the money value of the work under review has actually dropped relative to wages over a period. This is not usual but it is possible. In this case money wages would have to be adjusted downwards. This could lead to strikes the first time it happened. Strikes of that kind would have to be weathered, dealt with firmly, with no compromise on the basic principles vital to the maintenance of the precious social benefit of full employment.
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