3.3.6.1 Political Control of Prices and Incomes
Political control of prices and incomes is largely unsustainable; market forces are stronger and more economically efficient.
Some governments attempt to control economic performance by constraining the operation of internal markets. This has mostly proved to be impractical. It requires bureaucracy, and the market manipulation results in a misallocation of resources.
For example, the 1966 Labour Party Election Manifesto promised political control over prices and incomes:
“In order to safeguard the real value of wages, the Labour Government launched the first serious attack on the rising cost of living. The weapon specially fashioned for this attack is the policy for productivity, prices and incomes, which forms an essential part of the National Plan. Without such a policy it is impossible either to keep exports competitive or to check rising prices at home. The alternative, in fact, is a return to the dreary cycle of inflation followed by deflation and unemployment.”
The party won Britain’s general election with a convincing majority but the policy didn’t work:
● The controls on pay created resentment. Some strong unions were able to force exemptions for their members, and it was difficult to block loopholes. As reported in a 1968 cabinet paper, Strained consensus and Labour,[1] “the TUC membership overwhelmingly voted to reject legislation that restricted collective bargaining.”
● Price controls are also unrealistic in an era when competition is largely global. Businesses simply choose not to supply goods and services if the price is unacceptable to them. Many can sell to people in other countries.
More recent attempts to control public sector pay have only postponed the need to adjust to market forces. Britain’s Conservative government held down pay in the National Health Service (NHS) as part of its policy of quietly strangling the service to force people to switch to private providers. In July 2023 it was reported that Pay offer fails staff and won’t end our strikes, says doctors’ union. The problem was passed on for the incoming Labour government to resolve a year later, as Starmer pledges to fix ‘broken’ NHS ahead of pay talks.
Governments can temporarily protect consumers against high prices, as was the case with gas and electricity prices during the ‘energy crisis’ resulting from Russia’s invasion of Ukraine. A temporary price cap was introduced and “The Government compensated energy suppliers for selling at below cap prices.”
For most countries, it is impractical to control currency exchange rates – which directly affect prices. In one notorious example reported by the BBC, 1992: UK crashes out of ERM, the government had to announce that it had “suspended Britain’s membership of the European Exchange Rate Mechanism”. The currency markets were more powerful than the Exchequer:
“Chancellor Norman Lamont raised interest rates from 10% to 12%, then to 15%, and authorised the spending of billions of pounds to buy up the sterling being frantically sold on the currency markets.
But the measures failed to prevent the pound falling lower than its minimum level in the ERM.”
The overall conclusion must be that political control of prices and incomes can only be a temporary measure.
This page is intended to form part of Edition 4 of the Patterns of Power series of books. An archived copy of it is held at https://www.patternsofpower.org/edition04/3361a.htm.
[1] The 1968 cabinet paper, Strained consensus and Labour, is no longer online. It had been available in March 2016 at https://www.nationalarchives.gov.uk/cabinetpapers/themes/strained-consensus-labour.htm.