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Incomes policy

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Incomes policies in economics
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...

 are economy-wide wage
Wage
A wage is a compensation, usually financial, received by workers in exchange for their labor.Compensation in terms of wages is given to workers and compensation in terms of salary is given to employees...

 and price controls
Price controls
Price controls are governmental impositions on the prices charged for goods and services in a market, usually intended to maintain the affordability of staple foods and goods, and to prevent price gouging during shortages, or, alternatively, to insure an income for providers of certain goods...

, most commonly instituted as a response to inflation
Inflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...

, and usually below market
Free market
A free market is a competitive market where prices are determined by supply and demand. However, the term is also commonly used for markets in which economic intervention and regulation by the state is limited to tax collection, and enforcement of private ownership and contracts...

 level.

Incomes policies have often been resorted to during wartime. During the French Revolution
French Revolution
The French Revolution , sometimes distinguished as the 'Great French Revolution' , was a period of radical social and political upheaval in France and Europe. The absolute monarchy that had ruled France for centuries collapsed in three years...

, "The Law of the Maximum"
General maximum
General Maximum or The Law of the Maximum was a law created during the course of the French Revolution as an extension of the Law of Suspects on 29 September 1793...

 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
World War II, or the Second World War , was a global conflict lasting from 1939 to 1945, involving most of the world's nations—including all of the great powers—eventually forming two opposing military alliances: the Allies and the Axis...

. Peacetime income policies were resorted to in the USA 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
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...

 during World War II but less successful in the post-war era. Experience was mixed but somewhat more favorable in countries such as Australia
The 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 Paul Keating. Employers were not party to the Accord. Unions agreed to restrict wage demands and the government...

 and the Netherlands
Netherlands
The Netherlands is a constituent country of the Kingdom of the Netherlands, located mainly in North-West Europe and with several islands in the Caribbean. Mainland Netherlands borders the North Sea to the north and west, Belgium to the south, and Germany to the east, and shares maritime borders...

.

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
Externality
In economics, an externality is a cost or benefit, not transmitted through prices, incurred by a party who did not agree to the action causing the cost or benefit...

 cost of raising prices and/or wages, solving a market failure
Market failure
Market failure is a concept within economic theory wherein the allocation of goods and services by a free market is not efficient. That is, there exists another conceivable outcome where a market participant may be made better-off without making someone else worse-off...

 that encourages inflation.

Some economists agree that a credible incomes policy would help prevent inflation. However, this would have other effects. By arbitrarily interfering with price
Price
-Definition:In ordinary usage, price is the quantity of payment or compensation given by one party to another in return for goods or services.In modern economies, prices are generally expressed in units of some form of currency...

 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
Bureaucracy
A bureaucracy is an organization of non-elected officials of a governmental or organization who implement the rules, laws, and functions of their institution, and are occasionally characterized by officialism and red tape.-Weberian bureaucracy:...

 for their enforcement. This is what 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
Recession
In economics, a recession is a business cycle contraction, a general slowdown in economic activity. During recessions, many macroeconomic indicators vary in a similar way...

s 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
Monopoly
A monopoly exists when a specific person or enterprise is the only supplier of a particular commodity...

 or oligopolies
Oligopoly
An oligopoly is a market form in which a market or industry is dominated by a small number of sellers . The word is derived, by analogy with "monopoly", from the Greek ὀλίγοι "few" + πόλειν "to sell". Because there are few sellers, each oligopolist is likely to be aware of the actions of the others...

, particularly nationalised industry
Nationalization
Nationalisation, also spelled nationalization, is the process of taking an industry or assets into government ownership by a national government or state. Nationalization usually refers to private assets, but may also mean assets owned by lower levels of government, such as municipalities, being...

, 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
Money supply
In economics, the money supply or money stock, is the total amount of money available in an economy at a specific time. There are several ways to define "money," but standard measures usually include currency in circulation and demand deposits .Money supply data are recorded and published, usually...

, either directly or by means of interest rate
Interest rate
An interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender. For example, a small company borrows capital from a bank to buy new assets for their business, and in return the lender receives interest at a predetermined interest rate for...

s. They argue that price inflation is only a symptom of previous monetary inflation
Monetary inflation
Monetary inflation is a sustained increase in the money supply of a country. It usually results in price inflation, which is a rise in the general level of prices of goods and services . Originally the term "inflation" was used to refer only to monetary inflation, whereas in present usage it...

 caused by central bank
Central bank
A central bank, reserve bank, or monetary authority is a public institution that usually issues the currency, regulates the money supply, and controls the interest rates in a country. Central banks often also oversee the commercial banking system of their respective countries...

 money creation
Money creation
In economics, money creation is the process by which the money supply of a country or a monetary region is increased due to some reason. There are two principal stages of money creation. First, the central bank introduces new money into the economy by purchasing financial assets or lending money...

. This view holds that without a totally planned economy
Planned economy
A planned economy is an economic system in which decisions regarding production and investment are embodied in a plan formulated by a central authority, usually by a government agency...

 the incomes policy can never work, because the excess money
Money
Money is any object or record that is generally accepted as payment for goods and services and repayment of debts in a given country or socio-economic context. The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally in the past,...

 in the economy will greatly distort areas which the incomes policy does not cover.

France


During the French Revolution
French Revolution
The French Revolution , sometimes distinguished as the 'Great French Revolution' , was a period of radical social and political upheaval in France and Europe. The absolute monarchy that had ruled France for centuries collapsed in three years...

 in the 1790s, "The Law of the Maximum"
General maximum
General Maximum or The Law of the Maximum was a law created during the course of the French Revolution as an extension of the Law of Suspects on 29 September 1793...

 was imposed in an attempt to decrease inflation. It consisted of limits on wages and food prices. Many dissidents were executed
Guillotine
The guillotine is a device used for carrying out :executions by decapitation. It consists of a tall upright frame from which an angled blade is suspended. This blade is raised with a rope and then allowed to drop, severing the head from the body...

 for breaking this law. The law was repealed 14 months after its introduction.

By turning the crimes of price gouging
Price gouging
Price gouging is a pejorative term referring to a situation in which a seller prices goods or commodities much higher than is considered reasonable or fair. In precise, legal usage, it is the name of a crime that applies in some of the United States during civil emergencies...

 and food hoarding into crimes against the government, France
France
The French Republic , The French Republic , The French Republic , (commonly known as France , is a unitary semi-presidential republic in Western Europe with several overseas territories and islands located on other continents and in the Indian, Pacific, and Atlantic oceans. Metropolitan France...

 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 lower than what it cost to create it (i.e. cost of baking bread
Bread
Bread is a staple food prepared by cooking a dough of flour and water and often additional ingredients. Doughs are usually baked, but in some cuisines breads are steamed , fried , or baked on an unoiled frying pan . It may be leavened or unleavened...

, growing vegetable
Vegetable
The noun vegetable usually means an edible plant or part of a plant other than a sweet fruit or seed. This typically means the leaf, stem, or root of a plant....

s, etc.,) chose to hide their expensive goods from the market, either for personal use or for sale on the black market. However, the General Maximum was very successful in deflecting a volatile political issue away from the Committee of Public Safety
Committee of Public Safety
The Committee of Public Safety , created in April 1793 by the National Convention and then restructured in July 1793, formed the de facto executive government in France during the Reign of Terror , a stage of the French Revolution...

 and Robespierre
Maximilien Robespierre
Maximilien François Marie Isidore de Robespierre is one of the best-known and most influential figures of the French Revolution. He largely dominated the Committee of Public Safety and was instrumental in the period of the Revolution commonly known as the Reign of Terror, which ended with his...

, enabling them to focus on larger political issues more closely related to completing the French Revolution
French Revolution
The French Revolution , sometimes distinguished as the 'Great French Revolution' , was a period of radical social and political upheaval in France and Europe. The absolute monarchy that had ruled France for centuries collapsed in three years...

.

In creating the General Maximum, Maximilien Robespierre
Maximilien Robespierre
Maximilien François Marie Isidore de Robespierre is one of the best-known and most influential figures of the French Revolution. He largely dominated the Committee of Public Safety and was instrumental in the period of the Revolution commonly known as the Reign of Terror, which ended with his...

 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
Maximilien Robespierre
Maximilien François Marie Isidore de Robespierre is one of the best-known and most influential figures of the French Revolution. He largely dominated the Committee of Public Safety and was instrumental in the period of the Revolution commonly known as the Reign of Terror, which ended with his...

 offered the people an answer regarding whom to blame for their poverty and their hunger. Furthermore, considering its association with the Law of Suspects
Law of Suspects
The Law of Suspects is a term which is used to refer to an enactment passed on 17 September 1793 during the course of the French Revolution. It allowed for the creation of revolutionary tribunals to try those who were suspected of treason against the Republic and to punish those convicted with death...

, 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
World War II, or the Second World War , was a global conflict lasting from 1939 to 1945, involving most of the world's nations—including all of the great powers—eventually forming two opposing military alliances: the Allies and the Axis...

, price controls were used in an attempt to control wartime inflation. The Franklin Roosevelt Administration instituted the OPA (Office of Price Administration
Office of Price Administration
The Office of Price Administration 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 was originally to control money and rents after the outbreak of World War II.President Franklin D...

). 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
Korean War
The Korean War was a conventional war between South Korea, supported by the United Nations, and North Korea, supported by the People's Republic of China , with military material aid from the Soviet Union...

 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
Richard Nixon
Richard Milhous Nixon was the 37th President of the United States, serving from 1969 to 1974. The only president to resign the office, Nixon had previously served as a US representative and senator from California and as the 36th Vice President of the United States from 1953 to 1961 under...

 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, especially Keynesian. The 90-day freeze was unprecedented in peacetime, but such drastic measures were thought necessary. Also motivating the controls, 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
Bretton Woods system
The Bretton Woods system of monetary management established the rules for commercial and financial relations among the world's major industrial states in the mid 20th century...

 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
Depreciation
Depreciation refers to two very different but related concepts:# the decrease in value of assets , and# the allocation of the cost of assets to periods in which the assets are used ....

 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
Monopoly
A monopoly exists when a specific person or enterprise is the only supplier of a particular commodity...

 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
Stagflation
In economics, stagflation is a situation in which the inflation rate is high and the economic growth rate slows down and unemployment remains steadily high...

.

Indeed, the first wave of controls were successful at curbing inflation temporarily while the administration used expansionary fiscal and monetary policies. 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
Oil
An oil is any substance that is liquid at ambient temperatures and does not mix with water but may mix with other oils and organic solvents. This general definition includes vegetable oils, volatile essential oils, petrochemical oils, and synthetic oils....

 and natural gas
Natural gas
Natural gas is a naturally occurring gas mixture consisting primarily of methane, typically with 0–20% higher hydrocarbons . It is found associated with other hydrocarbon fuel, in coal beds, as methane clathrates, and is an important fuel source and a major feedstock for fertilizers.Most natural...

 prices persisted for years after 1973, causing gasoline lines during the 1970s). During times of high inflation, controls have been called for; in 1980 during unprecedented inflation, BusinessWeek
BusinessWeek
Bloomberg Businessweek, commonly and formerly known as BusinessWeek, is a weekly business magazine published by Bloomberg L.P. It is currently headquartered in New York City.- History :...

editorialized in favor of semi-permanent wage and price controls.

Canada


During the 1974 federal election, the Conservative Robert Stanfield
Robert Stanfield
Robert Lorne Stanfield, PC, QC was the 17th Premier of Nova Scotia and leader of the federal Progressive Conservative Party of Canada. He is sometimes referred to as "the greatest prime minister Canada never had", and earned the nickname "Honest Bob"...

 proposed the imposition of a wage and price freeze on the Canadian economy as a response to rising inflation due to the oil crisis
Oil crisis
Oil crisis may refer to:1970s*1970s energy crisis*1973 oil crisis*1979 energy crisisPost 1970s*Oil price increase of 1990*2000s energy crisis...

. The Liberal Trudeau
Pierre Trudeau
Joseph Philippe Pierre Yves Elliott Trudeau, , usually known as Pierre Trudeau or Pierre Elliott Trudeau, was the 15th Prime Minister of Canada from April 20, 1968 to June 4, 1979, and again from March 3, 1980 to June 30, 1984.Trudeau began his political career campaigning for socialist ideals,...

 government was opposed to this idea, but after winning the election, introduced the Anti-Inflation Act
Anti-Inflation Act
The Anti-Inflation Act was a Canadian Act of Parliament that was passed in 1975 by Pierre Trudeau's government in order to slow down the rapidly increasing price and wage inflation...

 in 1975. This act contained wage and price controls on parts of the economy. In 1979 the anti-inflation board was dissolved.

United Kingdom


The Callaghan
James Callaghan
Leonard James Callaghan, Baron Callaghan of Cardiff, KG, PC , was a British Labour politician, who was Prime Minister of the United Kingdom from 1976 to 1979 and Leader of the Labour Party from 1976 to 1980...

 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, imitating Nixon's policy in America. Price controls and food subsidies ended with the election of Margaret Thatcher
Margaret Thatcher
Margaret Hilda Thatcher, Baroness Thatcher, was Prime Minister of the United Kingdom from 1979 to 1990...

 in 1979.

Australia


Australia implemented an incomes policy, called the Prices and Incomes Accord during the 1980s. The Accord was an agreement between trade unions and the Hawke
Bob Hawke
Robert James Lee "Bob" Hawke AC GCL was the 23rd Prime Minister of Australia from March 1983 to December 1991 and therefore longest serving Australian Labor Party Prime Minister....

 Labor
Australian Labor Party
The Australian Labor Party is an Australian political party. It has been the governing party of the Commonwealth of Australia since the 2007 federal election. Julia Gillard is the party's federal parliamentary leader and Prime Minister of Australia...

 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. 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 America's price and wage controls in 1971, but soon gave up the policy to focus on controlling the price of oil.

The Netherlands and Belgium


The polder model
Polder Model
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 in the 1980s and 1990s. However, the term was quickly adopted for a much wider meaning, for similar cases of consensus...

 in the Netherlands is characterized by tri-partite cooperation between employers' organization
Employers' organization
An employers' organization, employers' association or employers' federation is an association of employers. A trade union, which organizes employees is the opposite of an employers' organization...

s such as VNO-NCW
VNO-NCW
VNO-NCW is a Dutch employers' federation.-History:VNO-NCW was founded in 1996 as fusion of the Christian-democratic Nederlands Christelijk Werkgeversverbond , which was founded as fusion of the Protestant PCW and the Catholic NKW, and the liberal Verbond van Nederlandse Ondernemingen...

, labour unions such as the FNV
Federatie Nederlandse Vakbeweging
The Federatie Nederlandse Vakbeweging is a federation of trade unions of the Netherlands.-History:...

, and the government
Government
Government refers to the legislators, administrators, and arbitrators in the administrative bureaucracy who control a state at a given time, and to the system of government by which they are organized...

. These talks are embodied in the Social Economic Council (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
Finland , officially the Republic of Finland, is a Nordic country situated in the Fennoscandian region of Northern Europe. It is bordered by Sweden in the west, Norway in the north and Russia in the east, while Estonia lies to its south across the Gulf of Finland.Around 5.4 million people reside...

, namely Comprehensive Income Policy Agreement
Comprehensive Income Policy Agreement
Finnish national income policy agreements or comprehensive income policy agreements are tripartite agreements between Finnish trade unions, employers' organizations, and the Finnish government. They are policy documents covering a wide range of economic and political issues, such as salaries,...

 and universal validity of collective labour agreements
Universal validity of collective labour agreements
In Finland, 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 individual's employment contract, union member or not. It requires that half of the workforce in that sector support...

.

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
Belgium , officially the Kingdom of Belgium, is a federal state in Western Europe. It is a founding member of the European Union and hosts the EU's headquarters, and those of several other major international organisations such as NATO.Belgium is also a member of, or affiliated to, many...

, 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 Robert Muldoon
Robert Muldoon
Sir Robert David "Rob" Muldoon, GCMG, CH served as the 31st Prime Minister of New Zealand from 1975 to 1984, as leader of the governing National Party. Muldoon had been a prominent member of the National party and MP for the Tamaki electorate for some years prior to becoming leader of the party...

 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 Lange
David Russell Lange, ONZ, CH , served as the 32nd Prime Minister of New Zealand from 1984 to 1989. He headed New Zealand's fourth Labour Government, one of the most reforming administrations in his country's history, but one which did not always conform to traditional expectations of a...

 and Finance Minister Roger Douglas
Roger Douglas
Sir Roger Owen Douglas , is a New Zealand politician who formerly served as a senior New Zealand Labour Party Cabinet minister. He became arguably best-known for his prominent role in the radical economic restructuring undertaken by the Fourth Labour Government during the 1980s...

.

Zimbabwe


In 2007, Robert Mugabe
Robert Mugabe
Robert Gabriel Mugabe is the President of Zimbabwe. As one of the leaders of the liberation movement against white-minority rule, he was elected into power in 1980...

's government imposed a price freeze in Zimbabwe
Zimbabwe
Zimbabwe is a landlocked country located in the southern part of the African continent, between the Zambezi and Limpopo rivers. It is bordered by South Africa to the south, Botswana to the southwest, Zambia and a tip of Namibia to the northwest and Mozambique to the east. Zimbabwe has three...

 because of hyperinflation
Hyperinflation
In economics, hyperinflation is inflation that is very high or out of control. While the real values of the specific economic items generally stay the same in terms of relatively stable foreign currencies, in hyperinflationary conditions the general price level within a specific economy increases...

. That policy led only to shortages.

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