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(Redirected from Price control)
In economics, 'incomes policies' are wage and price controls. Sometimes these are instituted as a response to inflation, usually for political reasons (to be seen to be doing something) rather than as recommendations from economists. They are also a fundamental component of a command economy.
Such policies were resorted to in the USA in the 1960s and 1970s as a response to stagflation, where they caused a great deal of harm and were eventually removed since they were not economically viable . Classic economics argues that such controls have superficial effects only; they adjust the nominal price of goods, not their real price (e.g. a loaf of bread might fall in price by half, but income at the same time would fall by two-thirds; the nominal price has fallen, but the real price has risen), and that they fundamentally cannot reduce inflation.
Incomes policies vary from "voluntary" wage and price guidelines to mandatory controls like price/wage freezes. One variant is "tax-based incomes policies" (TIPs), where a government fee is imposed on those firms that raise prices and/or wages more than the controls allow. This is seen as internalizing the external cost of raising prices and/or wages, solving a market failure that encourages inflation.
Some economists agree that a credible incomes policy would help prevent inflation. However, they would have other effects. By arbitrarily interfering with price signals, they provide an additional bar to achieving economic efficiency, potentially leading to shortages and declines in the quality of goods on the market, while requiring large government bureaucracies for their enforcement.
Some economists argue that incomes policies are less expensive (more efficient) than recessions as a way of fighting inflation, at least for mild inflation. Yet others argue that controls and mild recessions can be complementary solutions for relatively mild inflation.
The policy has the best chance of being credible and effective for those sectors of the economy dominated by monopolies or oligopolies, particularly nationalised industry, with a significant sector of workers organized in labor unions. These institutions enable collective negotiation and monitoring of the wage and price agreements.
Other economists argue that inflation is essentially a monetary phenomenon and the only way to deal with it is by controlling the money supply, either directly or by means of interest rates. They argue that price inflation is only a symptom of previous monetary inflation caused by central bank money creation. This view holds that without a totally planned economy the incomes policy can never work, because the excess money in the economy will greatly distort areas which the incomes policy does not cover.
During World War II, price controls were used in an attempt to control wartime inflation. The Roosevelt administration instituted the OPA (Office of Price Administration). That agency was rather unpopular with business interests and was phased out as quickly as possible after peace had been restored. However, the Korean War brought a return to the same inflationary pressures, and price controls were again established, this time under the OPS (Office of Price Stabilization).
Where the State can never set prices properly, due to lack of information (how ''is'' the "correct" wage rate decided for bus drivers, brain surgeons and fishermen?), granularity (wages vary by location; the rate for a plumber in Chicago may be very different to the rate in rural Kentuky) and responsiveness (wages change constantly; the State updates at best once or twice a year), employers are forced to either over-pay or under-pay their employees. Where an employer is forced to under-pay, staff in that profession become very hard to find and in fact the employer finds other, non-monetry methods of renumeration. This in fact, with the price controls introduced in the USA for World War II, is where the tradition of employer based health care originated. Employers began to pay for employees health care as a way of increasing their renumeration without increasing their wages. Where employers are forced to over-pay, that line of work becomes very attractive and people leave under-paid professions for those over-paid jobs. This causes a reduction in efficiency in the economy; some jobs are understaffed, which makes life difficult for the company or the population (what happens if there aren't enough plumbers to go around?), some overstaffed, which wouuld normally lead to a reduction in wages, but since wages are fixed, forces the company to continue to pay excessively when it would not have to. This in turn increases the general cost of goods and services within the economy (whilst being very nice for the lucky people in the over-paying jobs, which means this behaviour is really a form of subsidy; everyone else pays for those people to be better off), which reduces the overall rate at which everyone becomes better-off. Finally, having the State set wages and prices turns these matters into political footballs, being influenced by politics rather than purely by economic factors.
In the early 1970s, inflation had been much higher than in previous decades, getting above 6% briefly in 1970 and persisting above 4% in 1971. U.S. President Richard Nixon imposed price controls on August 15, 1971. This was a move widely applauded by the public and some number of (but by no means all) economists. The 90 day freeze was unprecedented in peacetime, but such drastic measures were thought necessary. Also motivating the controls, it should be noted that on the same date that the controls were imposed, 15 August 1971, Nixon also suspended the convertibility of the dollar into gold, which was the beginning of the end of the Bretton Woods system of international currency management established after World War II. It was quite well known at the time that this would likely lead to an immediate inflationary impulse (essentially because the subsequent depreciation of the dollar would boost the demand for exports and increase the cost of imports). The controls aimed to stop that impulse. The fact that the election of 1972 was on the horizon likely contributed to both Nixon's application of controls and his ending of the convertibility of the dollar.
The 90 day freeze became nearly 1,000 days of measures known as Phases One, Two, Three, and Four, ending in 1973. In these phases, the controls were applied almost entirely to the biggest corporations and labor unions, which were seen as having price-setting power. With such monopoly power, even economists saw controls as possibly working effectively (though they are usually skeptical on the issue of controls). Because controls of this sort can calm inflationary expectations, this was seen as a serious blow against stagflation.
Such supply-side controls are well known to have serious limitations. Crucially, they lead to shortages of many goods and to declines in the quality of products (as a way to get around the controls). This is why macroeconomists argue that price and controls must be combined with restraint on the aggregate demand side. Unfortunately, Nixon and (at the Federal Reserve) Arthur Burns did exactly the opposite of what economists recommend. Their policies encouraged increased aggregate demand during 1971 and 1972. So the worst predictions of the skeptics became true and the controls were abandoned (about the same time as the Bretton Woods system was finally abandoned).
Since that time, the U.S. government has not imposed maximum prices on consumer items or labor.
A problem with price controls is that they directly conflict with individual liberty. If a farmer works and produces corn, it is his property and it is properly his choice as to what price he sets for what he sells. If a State however passes a law forcing him, on pain of criminal penalities, to sell his corn for nothing, he would in fact fully be a slave of sorts, since he would be being forced to work for nothing. (He would still have the choice of not working as a farmer at all, of course, which is probably what he would do!) It is extremely rare for price controls to be set to nothing, but the degree to which the farmer is forced to earn less than he would have done otherwise is the degree to which the State has expropriated his labour on behalf of those who purchase his corn.
★ Jawboning
★ Free price system
★ 4000 Years of Price Controls. Ludwig von Mises Institute
★ Price controls are back
In economics, 'incomes policies' are wage and price controls. Sometimes these are instituted as a response to inflation, usually for political reasons (to be seen to be doing something) rather than as recommendations from economists. They are also a fundamental component of a command economy.
Such policies were resorted to in the USA in the 1960s and 1970s as a response to stagflation, where they caused a great deal of harm and were eventually removed since they were not economically viable . Classic economics argues that such controls have superficial effects only; they adjust the nominal price of goods, not their real price (e.g. a loaf of bread might fall in price by half, but income at the same time would fall by two-thirds; the nominal price has fallen, but the real price has risen), and that they fundamentally cannot reduce inflation.
| Contents |
| Explanation |
| Incomes policy in the United States |
| Conflict with Individual Liberty |
| See also |
| External links |
Explanation
Incomes policies vary from "voluntary" wage and price guidelines to mandatory controls like price/wage freezes. One variant is "tax-based incomes policies" (TIPs), where a government fee is imposed on those firms that raise prices and/or wages more than the controls allow. This is seen as internalizing the external cost of raising prices and/or wages, solving a market failure that encourages inflation.
Some economists agree that a credible incomes policy would help prevent inflation. However, they would have other effects. By arbitrarily interfering with price signals, they provide an additional bar to achieving economic efficiency, potentially leading to shortages and declines in the quality of goods on the market, while requiring large government bureaucracies for their enforcement.
Some economists argue that incomes policies are less expensive (more efficient) than recessions as a way of fighting inflation, at least for mild inflation. Yet others argue that controls and mild recessions can be complementary solutions for relatively mild inflation.
The policy has the best chance of being credible and effective for those sectors of the economy dominated by monopolies or oligopolies, particularly nationalised industry, with a significant sector of workers organized in labor unions. These institutions enable collective negotiation and monitoring of the wage and price agreements.
Other economists argue that inflation is essentially a monetary phenomenon and the only way to deal with it is by controlling the money supply, either directly or by means of interest rates. They argue that price inflation is only a symptom of previous monetary inflation caused by central bank money creation. This view holds that without a totally planned economy the incomes policy can never work, because the excess money in the economy will greatly distort areas which the incomes policy does not cover.
Incomes policy in the United States
During World War II, price controls were used in an attempt to control wartime inflation. The Roosevelt administration instituted the OPA (Office of Price Administration). That agency was rather unpopular with business interests and was phased out as quickly as possible after peace had been restored. However, the Korean War brought a return to the same inflationary pressures, and price controls were again established, this time under the OPS (Office of Price Stabilization).
Where the State can never set prices properly, due to lack of information (how ''is'' the "correct" wage rate decided for bus drivers, brain surgeons and fishermen?), granularity (wages vary by location; the rate for a plumber in Chicago may be very different to the rate in rural Kentuky) and responsiveness (wages change constantly; the State updates at best once or twice a year), employers are forced to either over-pay or under-pay their employees. Where an employer is forced to under-pay, staff in that profession become very hard to find and in fact the employer finds other, non-monetry methods of renumeration. This in fact, with the price controls introduced in the USA for World War II, is where the tradition of employer based health care originated. Employers began to pay for employees health care as a way of increasing their renumeration without increasing their wages. Where employers are forced to over-pay, that line of work becomes very attractive and people leave under-paid professions for those over-paid jobs. This causes a reduction in efficiency in the economy; some jobs are understaffed, which makes life difficult for the company or the population (what happens if there aren't enough plumbers to go around?), some overstaffed, which wouuld normally lead to a reduction in wages, but since wages are fixed, forces the company to continue to pay excessively when it would not have to. This in turn increases the general cost of goods and services within the economy (whilst being very nice for the lucky people in the over-paying jobs, which means this behaviour is really a form of subsidy; everyone else pays for those people to be better off), which reduces the overall rate at which everyone becomes better-off. Finally, having the State set wages and prices turns these matters into political footballs, being influenced by politics rather than purely by economic factors.
In the early 1970s, inflation had been much higher than in previous decades, getting above 6% briefly in 1970 and persisting above 4% in 1971. U.S. President Richard Nixon imposed price controls on August 15, 1971. This was a move widely applauded by the public and some number of (but by no means all) economists. The 90 day freeze was unprecedented in peacetime, but such drastic measures were thought necessary. Also motivating the controls, it should be noted that on the same date that the controls were imposed, 15 August 1971, Nixon also suspended the convertibility of the dollar into gold, which was the beginning of the end of the Bretton Woods system of international currency management established after World War II. It was quite well known at the time that this would likely lead to an immediate inflationary impulse (essentially because the subsequent depreciation of the dollar would boost the demand for exports and increase the cost of imports). The controls aimed to stop that impulse. The fact that the election of 1972 was on the horizon likely contributed to both Nixon's application of controls and his ending of the convertibility of the dollar.
The 90 day freeze became nearly 1,000 days of measures known as Phases One, Two, Three, and Four, ending in 1973. In these phases, the controls were applied almost entirely to the biggest corporations and labor unions, which were seen as having price-setting power. With such monopoly power, even economists saw controls as possibly working effectively (though they are usually skeptical on the issue of controls). Because controls of this sort can calm inflationary expectations, this was seen as a serious blow against stagflation.
Such supply-side controls are well known to have serious limitations. Crucially, they lead to shortages of many goods and to declines in the quality of products (as a way to get around the controls). This is why macroeconomists argue that price and controls must be combined with restraint on the aggregate demand side. Unfortunately, Nixon and (at the Federal Reserve) Arthur Burns did exactly the opposite of what economists recommend. Their policies encouraged increased aggregate demand during 1971 and 1972. So the worst predictions of the skeptics became true and the controls were abandoned (about the same time as the Bretton Woods system was finally abandoned).
Since that time, the U.S. government has not imposed maximum prices on consumer items or labor.
Conflict with Individual Liberty
A problem with price controls is that they directly conflict with individual liberty. If a farmer works and produces corn, it is his property and it is properly his choice as to what price he sets for what he sells. If a State however passes a law forcing him, on pain of criminal penalities, to sell his corn for nothing, he would in fact fully be a slave of sorts, since he would be being forced to work for nothing. (He would still have the choice of not working as a farmer at all, of course, which is probably what he would do!) It is extremely rare for price controls to be set to nothing, but the degree to which the farmer is forced to earn less than he would have done otherwise is the degree to which the State has expropriated his labour on behalf of those who purchase his corn.
See also
★ Jawboning
★ Free price system
External links
★ 4000 Years of Price Controls. Ludwig von Mises Institute
★ Price controls are back
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