Incomes policies in
economics
Economics () is the social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services.
Economics focuses on the behaviour and intera ...
are economy-wide
wage
A wage is payment made by an employer to an employee for work done in a specific period of time. Some examples of wage payments include compensatory payments such as ''minimum wage'', '' prevailing wage'', and ''yearly bonuses,'' and remune ...
and
price controls, most commonly instituted as a response to
inflation
In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reductio ...
, and usually seeking to establish wages and prices below
free market
In economics, a free market is an economic system in which the prices of goods and services are determined by supply and demand expressed by sellers and buyers. Such markets, as modeled, operate without the intervention of government or any o ...
level.
[
]
Incomes policies have often been resorted to during wartime. During the
French Revolution
The French Revolution ( ) was a period of radical political and societal change in France that began with the Estates General of 1789 and ended with the formation of the French Consulate in November 1799. Many of its ideas are considere ...
,
"The Law of the Maximum" imposed price controls (by penalty of death) in an unsuccessful attempt to curb inflation,
[
] and such measures were also attempted after
World War II
World War II or the Second World War, often abbreviated as WWII or WW2, was a world war that lasted from 1939 to 1945. It involved the vast majority of the world's countries—including all of the great powers—forming two opposin ...
. Peacetime income policies were resorted to in the U.S. in August 1971 as a response to inflation. The wage and price controls were effective initially but were made less restrictive in January 1973, and later removed when they seemed to be having no effect on curbing inflation.
[
] Incomes policies were successful in the
United Kingdom
The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain, is a country in Europe, off the north-western coast of the continental mainland. It comprises England, Scotland, Wales and North ...
during World War II but less successful in the post-war era.
Theory
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.
Some economists agree that a credible incomes policy would help prevent inflation. However, by arbitrarily interfering with
price signal
A price signal is information conveyed to consumers and producers, via the prices offered or requested for, and the amount requested or offered of a product or service, which provides a signal to increase or decrease quantity supplied or quantit ...
s, it provides an additional bar to achieving
economic efficiency, potentially leading to
shortage
In economics, a shortage or excess demand is a situation in which the demand for a product or service exceeds its supply in a market. It is the opposite of an excess supply ( surplus).
Definitions
In a perfect market (one that matches a si ...
s and declines in the quality of goods on the market and requiring large government
bureaucracies
The term bureaucracy () refers to a body of non-elected governing officials as well as to an administrative policy-making group. Historically, a bureaucracy was a government administration managed by departments staffed with non-elected offi ...
for enforcement. That happened in the United States during the early 1970s.
When the price of a good is lowered artificially, it creates less supply and more demand for the product, thereby creating shortages.
[
]
Some economists argue that incomes policies are less expensive (more efficient) than
recession
In economics, a recession is a business cycle contraction when there is a general decline in economic activity. Recessions generally occur when there is a widespread drop in spending (an adverse demand shock). This may be triggered by various ...
s as a way of fighting inflation, at least for mild inflation. 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 the sectors of the economy dominated by
monopolies
A monopoly (from Greek el, μόνος, mónos, single, alone, label=none and el, πωλεῖν, pōleîn, to sell, label=none), as described by Irving Fisher, is a market with the "absence of competition", creating a situation where a speci ...
or
oligopolies
An oligopoly (from Greek ὀλίγος, ''oligos'' "few" and πωλεῖν, ''polein'' "to sell") is a market structure in which a market or industry is dominated by a small number of large sellers or producers. Oligopolies often result from ...
, particularly
nationalised industry
State ownership, also called government ownership and public ownership, is the ownership of an industry, asset, or enterprise by the state or a public body representing a community, as opposed to an individual or private party. Public ownershi ...
, with a significant sector of workers organized in
labor unions
A trade union (labor union in American English), often simply referred to as a union, is an organization of workers intent on "maintaining or improving the conditions of their employment", ch. I such as attaining better wages and benefits ( ...
. Such institutions enable collective negotiation and monitoring of the wage and price agreements.
Other economists argue that inflation is essentially a
monetary
Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The primary functions which distinguish money are as ...
phenomenon, and the only way to deal with it is by controlling the
money supply
In macroeconomics, the money supply (or money stock) refers to the total volume of currency held by the public at a particular point in time. There are several ways to define "money", but standard measures usually include Circulation (curren ...
, directly or by changing
interest rate
An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, th ...
s. They argue that price inflation is only a symptom of previous
monetary inflation caused by
central bank
A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a country or monetary union,
and oversees their commercial banking system. In contrast to a commercial bank, a central ba ...
money creation. They believe that without a totally
planned economy the incomes policy can never work, the excess
money
Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The primary functions which distinguish money are as ...
in the economy greatly distorting other areas, exempt from the policy.
Examples
France
During the
French Revolution
The French Revolution ( ) was a period of radical political and societal change in France that began with the Estates General of 1789 and ended with the formation of the French Consulate in November 1799. Many of its ideas are considere ...
in the 1790s,
"The Law of the Maximum" was imposed in an attempt to decrease inflation. It consisted of limits on wages and
food prices
Food prices refer to the average price level for food across countries, regions and on a global scale. Food prices have an impact on producers and consumers of food.
Price levels depend on the food production process, including food marketing ...
.
Many dissidents were
executed
Capital punishment, also known as the death penalty, is the state-sanctioned practice of deliberately killing a person as a punishment for an actual or supposed crime, usually following an authorized, rule-governed process to conclude that t ...
for breaking this law.
[
] The law was repealed 14 months after its introduction.
By turning the crimes of
price gouging
Price gouging is a pejorative term used to describe the situation when a seller increases the prices of goods, services, or commodities to a level much higher than is considered reasonable or fair. Usually, this event occurs after a demand or ...
and food hoarding into crimes against the government,
France
France (), officially the French Republic ( ), is a country primarily located in Western Europe. It also comprises of Overseas France, overseas regions and territories in the Americas and the Atlantic Ocean, Atlantic, Pacific Ocean, Pac ...
had limited success. With respect to its overt intention, that of ensuring the people were able to purchase food at a reasonable rate, the Maximum was mostly a failure. Some merchants having found themselves forced into a position to sell their goods for a price below cost (e.g. cost of baking
bread
Bread is a staple food prepared from a dough of flour (usually wheat) and water, usually by baking. Throughout recorded history and around the world, it has been an important part of many cultures' diet. It is one of the oldest human-made f ...
or growing
vegetable
Vegetables are parts of plants that are consumed by humans or other animals as food. The original meaning is still commonly used and is applied to plants collectively to refer to all edible plant matter, including the flowers, fruits, stems, ...
s) chose to hide their expensive goods from the market, either for personal use or for sale on the
black market
A black market, underground economy, or shadow economy is a clandestine market or series of transactions that has some aspect of illegality or is characterized by noncompliance with an institutional set of rules. If the rule defines the se ...
. However, the General Maximum was very successful in deflecting a volatile political issue away from the
Committee of Public Safety and
Maximilien Robespierre
Maximilien François Marie Isidore de Robespierre (; 6 May 1758 – 28 July 1794) was a French lawyer and statesman who became one of the best-known, influential and controversial figures of the French Revolution. As a member of the Esta ...
, enabling them to focus on larger political issues more closely related to completing the
French Revolution
The French Revolution ( ) was a period of radical political and societal change in France that began with the Estates General of 1789 and ended with the formation of the French Consulate in November 1799. Many of its ideas are considere ...
.
By creating the General Maximum, Robespierre shifted the attention of the French people away from government involvement in widespread shortages of money and food to a fight between consumers and merchants. The text of the General Maximum was written towards businessmen who were profiting on a large scale from the demise of the French economy. However, in practice, the law ultimately targeted local shopkeepers, butchers, bakers, and farmers-the merchants who were profiting the least from the economic crisis. With the General Maximum, Robespierre offered the people an answer regarding whom to blame for their poverty and their hunger. Furthermore, considering its association with the
Law of Suspects
:''Note: This decree should not be confused with the Law of General Security (french: Loi de sûreté générale), also known as the "Law of Suspects," adopted by Napoleon III in 1858 that allowed punishment for any prison action, and permitted the ...
, when a citizen informed the government about a merchant who was in violation of the law, they were considered to have done their civic duty.
United States
During
World War II
World War II or the Second World War, often abbreviated as WWII or WW2, was a world war that lasted from 1939 to 1945. It involved the vast majority of the world's countries—including all of the great powers—forming two opposin ...
, price controls were used in an attempt to control wartime inflation. The
Franklin Roosevelt Administration instituted the OPA (
Office of Price Administration
The Office of Price Administration (OPA) was established within the Office for Emergency Management of the United States government by Executive Order 8875 on August 28, 1941. The functions of the OPA were originally to control money (price contr ...
). 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
, date = {{Ubl, 25 June 1950 – 27 July 1953 (''de facto'')({{Age in years, months, weeks and days, month1=6, day1=25, year1=1950, month2=7, day2=27, year2=1953), 25 June 1950 – present (''de jure'')({{Age in years, months, weeks a ...
brought a return to the same inflationary pressures, and price controls were again established, this time under the OPS (
Office of Price Stabilization
An office is a space where an organization's employees perform administrative work in order to support and realize objects and goals of the organization. The word "office" may also denote a position within an organization with specific dut ...
).
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
Richard Milhous Nixon (January 9, 1913April 22, 1994) was the 37th president of the United States, serving from 1969 to 1974. A member of the Republican Party, he previously served as a representative and senator from California and was ...
imposed price controls on August 15, 1971.
This was a move widely applauded by the public
and a number of Keynesian economists.
The same day, Nixon also suspended the convertibility of the dollar into gold, which was the beginning of the end of the
Bretton Woods system
The Bretton Woods system of monetary management established the rules for commercial and financial relations among the United States, Canada, Western European countries, Australia, and Japan after the 1944 Bretton Woods Agreement. The Bretto ...
of international currency management established after World War II.
The 90-day freeze was unprecedented in peacetime, but such drastic measures were thought necessary. It was quite well known at the time that this would likely lead to an immediate inflationary impulse (essentially because the subsequent
depreciation
In accountancy, depreciation is a term that refers to two aspects of the same concept: first, the actual decrease of fair value of an asset, such as the decrease in value of factory equipment each year as it is used and wear, and second, the a ...
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.
However, 93% of requested price increases were granted and seen as necessary to meet costs.
With such
monopoly
A monopoly (from Greek language, Greek el, μόνος, mónos, single, alone, label=none and el, πωλεῖν, pōleîn, to sell, label=none), as described by Irving Fisher, is a market with the "absence of competition", creating a situati ...
power, some 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
In economics, stagflation or recession-inflation is a situation in which the inflation rate is high or increasing, the economic growth rate slows, and unemployment remains steadily high. It presents a dilemma for economic policy, since action ...
.
The first wave of controls were successful at curbing inflation temporarily while the administration used expansionary fiscal and monetary policies.
[Friedman, Leon / Levantrosser, William ]
''Richard M. Nixon''
Greenwood Publishing Group, 1991, p. 232 , However, the long-term effects proved to be destabilizing. Left unsuppressed after the initial price controls were relaxed, the overly expansionary policies proceeded to exacerbate inflationary pressures.
Meat also began disappearing from grocery store shelves and Americans protested wage controls that didn't allow wages to keep up with inflation.
Since that time, the U.S. government has not imposed maximum prices on consumer items or labor (although the cap on
oil
An oil is any nonpolar chemical substance that is composed primarily of hydrocarbons and is hydrophobic (does not mix with water) & lipophilic (mixes with other oils). Oils are usually flammable and surface active. Most oils are unsaturated ...
and
natural gas
Natural gas (also called fossil gas or simply gas) is a naturally occurring mixture of gaseous hydrocarbons consisting primarily of methane in addition to various smaller amounts of other higher alkanes. Low levels of trace gases like carbo ...
prices persisted for years after 1973).
During times of high inflation, controls have been called for; in 1980 during unprecedented inflation, ''
BusinessWeek
''Bloomberg Businessweek'', previously known as ''BusinessWeek'', is an American weekly business magazine published fifty times a year. Since 2009, the magazine is owned by New York City-based Bloomberg L.P. The magazine debuted in New York City ...
'' editorialized in favor of semi-permanent wage and price controls.
Canada
![Labour Demonstration against wage controls, Parliament Hill, 1942](https://upload.wikimedia.org/wikipedia/commons/7/76/Labour_Demonstration_against_wage_controls%2C_Parliament_Hill%2C_1942.jpg)
During the 1974 federal election, Progressive Conservative Party leader
Robert Stanfield
Robert Lorne Stanfield (April 11, 1914 – December 16, 2003) was a Canadian politician who served as the 17th premier of Nova Scotia from 1956 to 1967 and the leader of the Official Opposition and leader of the federal Progressive Conservative ...
proposed the imposition of a wage and price freeze on the Canadian economy as a response to rising inflation due to the
oil crisis. The Liberal government under
Pierre Trudeau
Joseph Philippe Pierre Yves Elliott Trudeau ( , ; October 18, 1919 – September 28, 2000), also referred to by his initials PET, was a Canadian lawyer and politician who served as the 15th prime minister of Canada
The prime mini ...
was originally opposed to this idea, but after winning the election, introduced the
Anti-Inflation Act
The Anti-Inflation Act (french: Loi anti-inflation) was an Act of the Parliament of Canada, introduced by Prime Minister Pierre Trudeau's government and passed in 1975, which aimed to slow down the rapidly increasing price and wage inflation.
...
in 1975. This act contained wage and price controls on parts of the economy and remained in force until 1978. In 1979 the anti-inflation board was dissolved and the Anti-Inflation Act repealed.
United Kingdom
The
National Board for Prices and Incomes
The National Board for Prices and Incomes was created by the government of Harold Wilson in 1965 in an attempt to solve the problem of inflation in the British economy by managing wages and prices.
The board's chairman was Aubrey Jones, formerl ...
was created by
the government of Harold Wilson in 1965 in an attempt to solve the problem of inflation in the British economy by managing wages and prices.
The
Callaghan government Callaghan most commonly refers to O'Callaghan, an Anglicized Irish surname.
Callaghan may also refer to:
Places
* Callaghan, New South Wales, Australia
* Callaghan, Edmonton, Canada
* Callaghan, Virginia, United States
* Callaghan, Texas, United ...
in the 1970s sought to reduce conflict over wages and prices through a "
social contract
In moral and political philosophy
Political philosophy or political theory is the philosophical study of government, addressing questions about the nature, scope, and legitimacy of public agents and institutions and the relationships betw ...
" in which unions would accept smaller wage increases, and business would constrain price increases, imitating Nixon's policy in America.
Price controls ended with the election of
Margaret Thatcher
Margaret Hilda Thatcher, Baroness Thatcher (; 13 October 19258 April 2013) was Prime Minister of the United Kingdom from 1979 to 1990 and Leader of the Conservative Party (UK), Leader of the Conservative Party from 1975 to 1990. S ...
in 1979.
Australia
Australia implemented an incomes policy, called the
Prices and Incomes Accord
The Prices and Incomes Accord was an agreement between the Australian Council of Trade Unions and the Australian Labor Party government of Prime Minister Bob Hawke and Treasurer (later Prime Minister) Paul Keating in 1983. Employers were not par ...
during the 1980s. The Accord was an agreement between trade unions and the
Hawke Labor
Labour or labor may refer to:
* Childbirth, the delivery of a baby
* Labour (human activity), or work
** Manual labour, physical work
** Wage labour, a socioeconomic relationship between a worker and an employer
** Organized labour and the labour ...
government. Employers were not party to the Accord. Unions agreed to restrict wage demands, and the government pledged action to minimise inflation and price rises. The government was also to act on the social wage. At its broadest, this concept included increased spending on education as well as welfare.
Inflation declined during the period of the Accord, which was renegotiated several times. However, many of the key elements of the Accord were weakened over time, as unions sought a shift from centralised wage fixation to
enterprise bargaining
Enterprise bargaining is an Australian term for a form of collective bargaining, in which wages and working conditions are negotiated at the level of the individual organisations, as distinct from sectoral collective bargaining across whole industr ...
. The Accord ceased to play a major role after the recession of 1989–92, and was abandoned after the Labor government was defeated in 1996.
Italy
Italy imitated the United States' price and wage controls in 1971, but soon gave up the policy to focus on controlling the
price of oil
The price of oil, or the oil price, generally refers to the spot price of a barrel () of benchmark crude oil—a reference price for buyers and sellers of crude oil such as West Texas Intermediate (WTI), Brent Crude, Dubai Crude, OPEC Ref ...
.
The Netherlands and Belgium
The
polder model in the Netherlands is characterized by tri-partite cooperation between
employers' organization
An employers' organization or employers' association is a collective organization of manufacturers, retailers, or other employers of wage labor. Employers' organizations seek to coordinate the behavior of their member companies in matters of mutual ...
s such as
VNO-NCW VNO-NCW (known in English as the "Confederation of Netherlands Industry and Employers") is a Dutch employers' federation founded in 1996 as a merger of the Christian-democratic ''Nederlands Christelijk Werkgeversverbond'' (NCW), which was founded as ...
,
labour union
A trade union (labor union in American English), often simply referred to as a union, is an organization of workers intent on "maintaining or improving the conditions of their employment", ch. I such as attaining better wages and benefits ( ...
s such as the
FNV, and the
government
A government is the system or group of people governing an organized community, generally a state.
In the case of its broad associative definition, government normally consists of legislature, executive, and judiciary. Government is a ...
. These talks are embodied in the
Social Economic Council
The Social and Economic Council (Dutch: ''Sociaal-Economische Raad'', SER) is a major economic advisory council to the cabinet of the Netherlands. Formally it heads a system of sector-based regulatory organisations. It represents the social par ...
(Dutch: Sociaal-Economische Raad, SER). The SER serves as the central forum to discuss labour issues and has a long tradition of consensus, often defusing labour conflicts and avoiding strikes. Similar models are in use in
Finland
Finland ( fi, Suomi ; sv, Finland ), officially the Republic of Finland (; ), is a Nordic country in Northern Europe. It shares land borders with Sweden to the northwest, Norway to the north, and Russia to the east, with the Gulf of B ...
, namely
Comprehensive Income Policy Agreement
Finnish national income policy agreements or comprehensive income policy agreements (, often called ''tupo''; ) are tripartite agreements between Finnish trade unions, employers' organizations, and the Finnish government. They are policy documents ...
and
universal validity of collective labour agreements
A collective agreement, collective labour agreement (CLA) or collective bargaining agreement (CBA) is a written contract negotiated through collective bargaining for employees by one or more trade unions with the management of a company (or with an ...
.
The current polder model is said to have begun with the Wassenaar Accords of 1982 when unions, employers and government decided on a comprehensive plan to revitalize the economy involving shorter working times and less pay on the one hand, and more employment on the other.
The polder model is widely, but not universally, regarded as successful incomes management policy.
This model is also used in
Belgium
Belgium, ; french: Belgique ; german: Belgien officially the Kingdom of Belgium, is a country in Northwestern Europe. The country is bordered by the Netherlands to the north, Germany to the east, Luxembourg to the southeast, France to th ...
, hence its name (the "polders" are a region comprising the Netherlands and the northern part of Belgium).
New Zealand
In 1982, then Prime Minister and Finance Minister
Rob Muldoon
Sir Robert David Muldoon (; 25 September 19215 August 1992) was a New Zealand politician who served as the 31st Prime Minister of New Zealand, from 1975 to 1984, while leader of the National Party.
Serving as a corporal and sergeant in th ...
imposed a simultaneous freeze on wages, prices and interest rates in an effort to curb inflation, despite public resistance. These measures were subsequently repealed by Muldoon's successor
David Lange
David Russell Lange ( ; 4 August 1942 – 13 August 2005) was a New Zealand politician who served as the 32nd prime minister of New Zealand from 1984 to 1989.
Lange was born and brought up in Otahuhu, the son of a medical doctor. He became ...
and Finance Minister
Roger Douglas
Sir Roger Owen Douglas (born 5 December 1937) is a retired New Zealand politician who served as a minister in two Labour governments. He became arguably best known for his prominent role in New Zealand's radical economic restructuring in the 198 ...
.
Zimbabwe
In 2007,
Robert Mugabe
Robert Gabriel Mugabe (; ; 21 February 1924 – 6 September 2019) was a Zimbabwean revolutionary and politician who served as Prime Minister of Zimbabwe from 1980 to 1987 and then as President from 1987 to 2017. He served as Leader of the ...
's government imposed a price freeze in
Zimbabwe
Zimbabwe (), officially the Republic of Zimbabwe, is a landlocked country located in Southeast Africa, between the Zambezi and Limpopo Rivers, bordered by South Africa to the south, Botswana to the south-west, Zambia to the north, and Mozam ...
because of
hyperinflation
In economics, hyperinflation is a very high and typically accelerating inflation. It quickly erodes the real value of the local currency, as the prices of all goods increase. This causes people to minimize their holdings in that currency as t ...
.
That policy led only to shortages.
References
External links
Price Controlsby Fiona Maclachlan,
The Wolfram Demonstrations Project
The Wolfram Demonstrations Project is an organized, open-source collection of small (or medium-size) interactive programs called Demonstrations, which are meant to visually and interactively represent ideas from a range of fields. It is hos ...
PBS Special Report on California Electricity Price ControlsNixon's Wage and Price Freeze – Forty Years After the Freezeby William N. Walker
{{Public policy
Inflation
Macroeconomic policy
Policy
Policy is a deliberate system of guidelines to guide decisions and achieve rational outcomes. A policy is a statement of intent and is implemented as a procedure or protocol. Policies are generally adopted by a governance body within an organ ...
Price controls