Last week I pointed out how large scale job losses in an industry in one region, as might be caused by increased productivity, can significantly impact on the economic development of that region for decades. This week I’m going to look at this in more detail using the example of the closure of coal mining in South Wales (because it’s an example I know well). We will ignore the political aspects of this*, and imagine that the mines were closed purely because they were no longer productive enough to compete with coal producers in other countries.
In the South Wales valleys there is an extensive network of villages, often reached by narrow windy roads. Many of these villages were built to service a mine in the 19th century. When a new mine was to be opened, obviously a road would be built up to the mine entrance, and then houses would be built along that road for the prospective workers. A village would grow up around this. The workforce needed shops and services, and in those days that meant they had to be provided in the village. As society became more affluent in the 20th century, each village became a captive market for the full range of services of modern life. The miners’ income continually circulated round the village from local business to local business.
When the mines closed, this income vanished, and many of these trades and services could not find sufficient demand to keep going – the circulation of wealth came to an abrupt end. Now the residents of these villages were suffering from both income poverty and service poverty. Many goods and services were no longer available in the village, and bus rides to the nearest town are long and expensive. A car became almost a necessity. Those who could not afford a car were stuck in a village with little money, and no access to the services they needed. Over 30 years on, the Valleys region has still not recovered from the economic impact of this loss of income.
Whenever there are significant job losses in a city or region this will obviously lead to a fall in demand in that region, and therefore a loss of income for other businesses in that area. This causes demand to fall further, and the region gets caught in a vicious cycle.
What does mainstream economics have to say about this? As explained last week, the fall in wages should attract new businesses to form. One of the assumptions that underpins this theory is that there is easy entrance and exit into any market. But establishing new industries is not easy: they can’t just magically spring up in the South Wales Valleys. And even when they can attract new businesses, this is not always a panacea. For example, the large supply of cheap labour in South Wales meant that the region could attract call centres – as these became an increasing feature of the modern economy, and new ones needed to be built, it was natural to build them where labour was cheap. But as technology expanded, and call centres went overseas, so did the South Wales jobs. The vicious circle of job losses lowering regional demand, leading to lower incomes for local businesses, leading to yet lower demand, is hard to break.
Working in an anti-poverty programme in South Wales, I sometimes came across an assertion that the newly redundant miners failed to use their redundancy payments to start new businesses because the region had been dominated by a single, nationalised industry and had no culture of entrepreneurship. This claim is never backed up by any research evidence, it just rests on what seems to be an observable truth. What this proposition ignores is that the miners had been through over a year of impoverishment in a bitter struggle to save their livelihoods and way of life. They ended the strike shell-shocked and penniless, and the economic prospects for the entire region looked bleak. The one safety net they had was their redundancy payment. To risk it all on a new business in a region where the economy was in free fall would have been foolhardy indeed!
Which brings us back to the impact on the regional economy of large scale job losses, the central point of this post. Mainstream economic theory has nothing to say about how the reduction in wealth leads to these vicious circles, because economists have a strange, mentally unbalanced need to believe that the market will just fix itself. Next week we will look a bit more closely at this theory.
And yet, if it was the case that the mines were simply not productive enough to be competitive in global markets (and remember, I’m conducting this analysis as if this was the case), what options were there? I am not suggesting that the mines should have been subsidised by the Government simply for the purposes of keeping them open and providing regional income. And of course, it was only a few years after the closure of the mines that the problems with carbon emissions and climate change began to reach public attention. Ultimately, South Wales coal mining was always doomed, even if the miners had won their strike. The response required was neither to try to cling blindly onto coal mining (as we see in parts of the USA today), nor just to believe that the market will sort everything out. The conclusions of the earlier sections of the blog would suggest that the Government needed to identify likely growth sectors and fund investment in these areas in the affected region (see in particular this post on the work of Mariana Mazzucato). An obvious choice in South Wales would have been renewable energy. We will draw these strands together at the end of this series of posts on “Distribution”, once we have looked in more detail at how the distribution of income greatly determines the future path of an economy.
* To understand the political aspects of this decision I recommend reading the “Ridley Plan”, a plan drawn up when the Conservative Party was in opposition by its “Economic Reconstruction Group”, chaired by Nicholas Ridley MP. This was a plan to reduce the size of nationalised industries, on the premise that these were too large. The plan is very strategic in considering how to fend off opposition, including from the unions. In the last section it recommends first taking on an industry with a weaker union where a strike is not likely to be so disruptive to the general public, win the strike, and weaken the resolve of the unions overall. It anticipates the mining industry being particularly challenging, and recommends stockpiling coal and building dual-fired oil/coal power stations (which were less efficient, so this was a poor and politically motivated use of public money). These steps were taken by the Conservative Government when it subsequently came to power.
For added insight into the political circumstances surrounding the strike I also recommend the letter sent by the National Coal Board’s Chairman, Ian MacGregor, to all striking miners. In it he states that Union claims that the NCB planned to close 86 out of 186 pits, with the loss of 70,000 jobs, are untrue. He is emphatic about this, stating (all caps in the original):
“IF THESE THINGS WERE TRUE I WOULD NOT BLAME MINERS FOR GETTING ANGRY OR BEING DEEPLY WORRIED. BUT THESE THINGS ARE ABSOLUTELY UNTRUE. I STATE THAT CATEGORICALLY AND SOLEMNLY. YOU HAVE BEEN DELIBERATELY MISLED.”
Documents made public 30 years after the strike showed that the Government’s immediate intentions were indeed to close 75 pits with the loss of 64,000 jobs. In the end, 115 pits were closed during Thatcher’s time as Prime Minister (lasting 5 years beyond the end of the strike). So it was, in fact, not the Union that was misleading the miners, but the NCB itself. When we understand, from the Ridley Plan, the political dimension to the Government’s strategy, and that this was not just an economic decision, it perhaps becomes easier to understand why the NCB and the Government would mislead the miners, and indeed mislead the nation, about their intentions for the mining industry.
However, do not conclude from this that the Government were the “baddies” and the miners the “goodies”. The leadership of the miners, and Arthur Scargill in particular, also had their political agendas. The point is that the miners’ strike was, in reality, never about the economics of the mining industry – there were political motivations on both sides. If I were to present the closure of the mines as a purely economic decision I think this would stick so badly in the throat of anyone who knows this history that they wouldn’t be able to stomach reading the rest of the post.
This post was about the economic impact of the mine closures, and this impact would have been the same regardless of the motivation for closing the mines. Therefore my analysis proceeds as if the stated Government position was truth, that the mines were no longer “productive” compared to foreign competition, because this is the issue that I wish to analyse.