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The Theoretical Problems of a National Wage-Price Policy*

Published online by Cambridge University Press:  07 November 2014

M. W. Reder
M. W. Reder*
Affiliation:
Carnegie Institute of Technology
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Extract

The problem of deciding upon a national wage-price policy has become increasingly urgent in recent years both because of the growing importance of “full employment” as an objective of economic policy in the United States and elsewhere, and because of the economic conditions accompanying and following the war which have had the effect of creating a “full employment” situation. Many economists, including some with such widely divergent views on public policy as Sir William Beveridge and the late Professor Henry Simons, have in recent years expressed concern over the possibility that labour unions might create inflationary pressures by demanding large wage increases in time of “full employment.” (The problem may arise before full employment is reached; this possibility is mentioned below.) However, the economists who are concerned with this possibility are by no means agreed as to what policy can or should be adopted to cope with it. In this paper we shall analyse various possible alternative policies and the theoretical problems that underlie them.

Traditionally the government, as regulator of the currency, has been responsible for maintaining its value, i.e. controlling the general price level. While discharging this responsibility is by no means an easy task, it is, theoretically at least, capable of achievement. However, to couple this responsibility with that of maintaining continuous full employment of the labour force, is to saddle the government with two responsibilities which it may be impossible to discharge simultaneously. The following argument will serve to clarify the nature of the difficulty.

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Articles
Information
Canadian Journal of Economics and Political Science/Revue canadienne de economiques et science politique , Volume 14 , Issue 1 , February 1948 , pp. 46 - 61
Copyright
Copyright © Canadian Political Science Association 1948

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Footnotes

*

The author is indebted to his colleagues, Professors G. L. Bach and W. W. Cooper and Messrs. H. Minsky and P. P. Frucht for many enlightening discussions on the subjects treated herein. The author, of course, is solely responsible for what appears here.

References

1 SirBeveridge, William, Full Employment in a Free Society (New York, 1945), pp. 198–200.Google Scholar

2 Simons, H.C., “Some Reflections on Syndicalism” (Journal of Political Economy, vol. LII, pp. 1–25 Google Scholar; “The Beveridge Program: An Unsympathetic Interpretation” (Journal of Political Economy, vol. LIII, pp. 212–33Google Scholar). ProfessorSlichter, S. H. states the whole problem very clearly in the Proceedings of the Academy of Political Science, 05, 1946, pp. 3–16.Google Scholar

3 This is similar to the famous “dog and master” problem. Cf. Allen, R.G.D., Mathematical Analysis for Economists (New York, 1938), pp. 431–3.Google Scholar

4 This is a case of “one-sided” instability; the system is stable for downward movements in the price level, but not for upward movements. If the price level rises, it will tend either to stay up or go higher, but if it should fall it will rise again (if necessary by having the monetary authority increase effective demand by running a larger deficit). On the subject of one-sided instability, see Samuelson, P. A., “The Stability of Equilibrium: Linear and Nonlinear Systems” (Econtrmetrica, 01, 1942, pp. 1–25).Google Scholar

5 The existence of large organizations (formal or informal) of business firms or large labour unions will greatly add to the instability of the system; i.e. the tendency of the price level to begin a cumulative rise. That is because a small group of firms (at the limit, one) or a small union (or individual wage-earner) might fear that raising their selling prices (or wage rates) would lead to a decline in sales and employment because other firms would not follow suit. But if a large group of firms or unions were by agreement (implicit or explicit) to raise prices (wage rates) they could be reasonably sure that the monetary-fiscal authorities (that is the Central Bank and the Treasury) would have to take steps to increase effective demand (if necessary) to prevent a decrease in employment and output. However, instability may develop even with universal pure competition provided there is a general belief that prices will rise.

6 Cf. Lester, R. A. and Robie, E. A., Wages under National and Regional Collective Bargaining (Princeton, N.J., 1946).Google Scholar

7 The monetary authorities cannot allow the fixed income share to become zero for this would imply an infinite price level; i. e. the monetary system would collapse. This is because it would be impossible to calculate in money terms with an infinite (or finite but rapidly changing) price level and hence it would be necessary either to invent a new and more stable (in value terms) money or to revert to barter.

8 The techniques developed by von Neumann, and Morgenstern, , The Theory of Games and Economic Behavior (Princeton, N.J., 1944)Google Scholar, might prove useful in further explorations of this problem.

9 This has always been a potential problem of “political economy,” but until recently labour unions were either too weak to put pressure on the government to adopt specific monetary-fiscal policies, or were too imbued with traditional financial beliefs to do so. Business men, on the other hand, were closely allied with creditor, particularly banking, interests and took their cues as to “sound” monetary-fiscal policy from these sources.

10 Cf. Allen, , Mathematical Analysis for Economists, p. 203.Google Scholar

11 Paucilateral monopoly must be sharply distinguished from oligopoly; the latter deals with the market relations between several sellers (buyers). Paucilateral monopoly is concerned with the relations between a set of bargainers some of whom may be buyers (sellers) only; and some both buyers and sellers. I owe the term “paucilateral monopoly” to Professor T. de Scitovzsky.

12 Cf. for example, Simons, H.C., “Rules vs. Authorities in Monetary Policy” (Journal of Political Economy, 02, 1936)CrossRefGoogle Scholar; also A Positive Program for Laissez-Faire (Chicago, 1934)Google Scholar; Public Policy Pamphlet, no. 15; Bach, G. L., “Monetary-Fiscal Policy, Debt Policy and the Price-Level” (Papers and Proceedings of the American Economic Association, 05, 1947, pp. 228–42).Google Scholar Ellis, H. S. in Financing American Prosperity (New York, 1945), pp. 126–98Google Scholar adopts a related, but somewhat more eclectic position.

13 I am greatly indebted to my colleague Professor G. L. Bach for many enlightening discussions on both his personal viewpoint and that of Henry Simons (although they are not always identical) on this and related subjects; however, he is not responsible for any, and would surely disagree with much, of what is here said.

14 Cf. his essay “Some Reflections on Syndicalism” (Journal of Political Economy, 03, 1944, pp. 1–25).Google Scholar

15 C.f. Hicks, J. R., Value and Capital (Oxford, 1939), chap. XX.Google Scholar

16 Ibid.