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.