The Wartime economy and the theory of price control

During the Second World War, prominent economists in Britain and the USA contributed to the formulation of successful price control schemes, together with the relevant theoretical elaboration. This wartime experience taught two main lessons. Firstly, resources could be allocated efficiently and equitably, regulating markets without abolishing them. Secondly, the success of these regulations depended on mutual accord between workers, producers and governments and, at a higher level, on international cooperation. After the war, the aspiration to set some of the positive outcomes of wartime regulations in terms of price stability, full employment and social justice on a permanent basis, stimulated debate on the pros and cons of extending price controls to peacetime. In this context, a majority of economists and policy-makers became convinced that aggregate demand management was sufficient to achieve these goals simultaneously, while price and wage controls were either unnecessary or altogether harmful. A minority of economists, however, stressed the role of price and wage controls in reducing the risks of wage-price spirals in a context characterized by powerful trade unions and oligopolistic firms. The aim of this chapter is to reconstruct the debate, focusing on the theoretical arguments underlying attempts to achieve price stability through wage controls. Interest in this approach, long ignored by economists and policymakers after the incomes policies of the 1970s, is re-emerging today in connection with the failure of monetary policy to fight deflation.