Incomes policies in economics are wage and price controls, most commonly instituted as a response to inflation. Economics is the social science that studies the production distribution, and consumption of goods and services. A wage is a compensation workers receive in exchange for their labor. Price in Economics and Business is the result of an exchange and from that trade we assign a numerical Monetary value to a good, In economics inflation or price inflation is a rise in the general level of prices of goods and services over a period of time
Such policies were resorted to in the USA in the 1960s and 1970s as a response to stagflation, but were removed within a few years when they seemed to have no effect on curbing inflation. The 1960s decade refers to the years from the beginning of 1960 to the end of 1969 This article is about the Decade 1970-1979 For the Year 1970 see 1970. Stagflation is an economic situation in which Inflation and Economic stagnation occur simultaneously and remain unchecked for a period of time Incomes policies were also unsuccessful in the United Kingdom in the 1970s. The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom, the UK or Britain,is a Sovereign state located However, experience in some other countries, including Australia and the Netherlands has been more favorable. For a topic outline on this subject see List of basic Australia topics. The Netherlands ( Dutch:, ˈnedərlɑnt is the European part of the Kingdom of the Netherlands, which consists of the Netherlands the Netherlands
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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. This is seen as internalizing the external cost of raising prices and/or wages, solving a market failure that encourages inflation. In Economics, an externality is an impact on any party not directly involved in an economic decision Market failure is a concept within economic theory wherein the allocation of goods and services by a Free market is not efficient.
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. Price in Economics and Business is the result of an exchange and from that trade we assign a numerical Monetary value to a good, Economic efficiency is used to refer to a number of related concepts Economic shortage is a term describing a disparity between the amount demanded for a product or service and the amount supplied in a Market. Bureaucracy is the structure and set of regulations in place to control activity usually in large organizations and government
Some economists argue that incomes policies are less expensive (more efficient) than recessions as a way of fighting inflation, at least for mild inflation. A recession is a contraction phase of the Business cycle. The U 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. In Economics, a monopoly (from Greek monos, alone or single + polein, to sell exists when a specific individual or enterprise has sufficient An oligopoly is a Market form in which a Market or Industry is dominated by a small number of sellers (oligopolists Nationalization, also spelled nationalisation, is the act of taking an industry or assets into the Public ownership of a national government A trade union or labour union is an organization of workers who have banded together to achieve common goals in key areas such as wages hours and working conditions forming 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. Monetary policy is the process by which the Government, Central bank, or monetary authority of a country controls (i the Supply of Money, In Economics, money supply, or money stock, is the total amount of money available in an Economy at a particular point in time Interest is a fee paid on borrowed capital Assets lent include Money, Shares, Consumer goods through Hire purchase, major assets They argue that price inflation is only a symptom of previous monetary inflation caused by central bank money creation. Monetary inflation is the term used by some economists of the Monetarist tradition and Austrian economists, to differentiate direct inflation in the Money supply A central bank, reserve bank, or monetary authority is the entity responsible for the Monetary policy of a country or of a group of member states 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. A planned economy or directed economy is an Economic system in which the Government or Workers' councils manages the Economy. Money is anything that is generally accepted as Payment for Goods and services and repayment of Debts.
Examples
United States
During World War II, price controls were used in an attempt to control wartime inflation. World War II, or the Second World War, (often abbreviated WWII) was a global military conflict which involved a majority of the world's nations, including The 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 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).
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. The Bretton Woods system of monetary management established the rules for commercial and financial relations among the world's major industrial states 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). Depreciation is a term used in Accounting, Economics and Finance to spread the cost of an Asset over the span of several years 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 [1], 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, some economists saw controls as possibly working effectively (though they are usually skeptical on the issue of controls). In Economics, a monopoly (from Greek monos, alone or single + polein, to sell exists when a specific individual or enterprise has sufficient Because controls of this sort can calm inflationary expectations, this was seen as a serious blow against stagflation. Stagflation is an economic situation in which Inflation and Economic stagnation occur simultaneously and remain unchecked for a period of time
The controls were abandoned in 1972 (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.
United Kingdom
The Callaghan government in the United Kingdom in the 1970s sought to reduce conflict over wages and prices through a "social contract" in which unions would accept smaller wage increases, and business would constrain price increases. Leonard James Callaghan Baron Callaghan of Cardiff, KG, PC (27 March 1912 – 26 March 2005 was Prime Minister of the United Kingdom from 1976 to 1979 The policy was unsuccessful.
Australia
Australia implemented an incomes policy, called the The Accord during the 1980s. The Accord was an agreement between trade unions and the Hawke Labor government. Robert James Lee (Bob Hawke, AC (born 9 December 1929 was the 23rd Prime Minister of Australia and longest serving Australian Labor Party Prime Minister 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. An Enterprise Bargaining Agreement (EBA consists of a collective industrial Agreement between either an Employer and a Trade union 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.
Netherlands
The Polder model in the Netherlands is characterized by tri-partite cooperation between employers' organizations such as VNO-NCW, labour unions such as the FNV, and the government. The polder model is a term with uncertain origin that was first used to describe the internationally acclaimed Dutch version of Consensus policy in economics specifically An employers' organization, employers' association or employers' federation is an association of Employers A Trade union, which organizes VNO-NCW (known in English as the Confederation of Netherlands Industry and Employers is a Dutch Employers' federation. A trade union or labour union is an organization of workers who have banded together to achieve common goals in key areas such as wages hours and working conditions forming Template talkInfobox Union for usage --> The Federatie Nederlandse Vakbeweging (Dutch Federation Dutch Labour Movement For the government of parliamentary systems see Executive (government. These talks are embodied in the Social Economic Council (Dutch: Sociaal-Economische Raad, SER). The Sociaal-Economische Raad (Social Economic Council SER is a major economic advisory council of the Dutch government 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, namely Comprehensive Income Policy Agreement and universal validity of collective labour agreements. Finland, officially the Republic of Finland ( is a Nordic country situated in the Fennoscandian region of northern Europe. The Comprehensive Income Policy Agreement (tulopoliittinen kokonaisratkaisu often called tupo; inkomstpolitiskt avtal is a tri-lateral treaty crafted by the Finnish Universal validity of collective labour agreements is a condition that a Collective agreement in an economic sector becomes a universally applicable legal minimum for any
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. Year 1982 ( MCMLXXXII) was a Common year starting on Friday (link displays the 1982 Gregorian calendar)
The Polder model is widely, but not universally regarded as successful incomes management policy [1].
Zimbabwe
In 2007 Robert Mugabe's government imposed a price freeze in Zimbabwe. Coupled with high inflation this soon led to shortfalls.
References
- ^ http://www.presidency.ucsb.edu/ws/index.php?pid=3868 Richard Nixon speech announcing Phase Four price controls, June 13th, 1973
External links
- 4000 Years of Price Controls. Ludwig von Mises Institute
- Price Controls by Fiona Maclachlan, The Wolfram Demonstrations Project. The Ludwig von Mises Institute ( LvMI) based in Auburn Alabama, is a Libertarian academic organization engaged in research and scholarship in the fields
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