Politics and the Price Level

Inflation and the governance of prices

In 1959, the leaders of the Organization for European Economic Cooperation (OEEC, now the OECD) appointed a Group of Independent Experts “to study the experience of rising prices” in the recent history of the advanced capitalist countries. Between the end of World War II and the termination of the Korean War conflict, economic planners had tolerated rising prices as an insurmountable consequence of postwar reconstruction and war-induced commodity speculation. These governments expected inflation to end as economies readjusted following the stalemate in Korea. “In the event, however,” the Group of Independent Experts wrote in their final report, “rising prices proved to be a continuing problem.” 

The OECD report classified four causes to the inflation of the 1950s: rising wages, monopolistic pricing, excess demand, and what they called “special prices”—those influenced, for example, by foreign governments, bad harvests, or the lifting of government price controls. 

At a moment when inflation control is back on the agenda, it is worth observing just how little consensus existed—during a period remembered for its supposed social cohesion and intellectual conformity—on these ostensibly technical concerns. By 1961, when the study group released its final report, its members were not even able to agree on concrete findings regarding the causes of inflation. Richard Kahn, the British economist appointed to the group, insisted on including his objection in the final report: “One of us (Richard Kahn) does not believe that the concept of ‘excess demand’ provides a satisfactory method of analyzing the processes of inflation.”1

If unemployment defined the capitalist epoch from its triumph in the Victorian era to its etiolation during the Great Depression, the invention of the managed economy during the 1920s brought a parallel struggle with persistent inflation. Despite the specialized terms of the debate, the historical dissensus over how governments should respond to rising prices has always betrayed other criteria for evaluating techniques of inflation control.2 These are overwhelmingly political, in that they represent conflicting interests. Akin to the problem of war, when the national interest comes most fully into public scrutiny, conflicts over prices historically persist until particular interests become strong enough to establish as reasons of state their own prerogatives for social change or conservation. The process by which this transcending of politics takes place, and a set of prerogatives becomes common policy, is rarely acknowledged, but it is key to the success of any stabilization. 

The contributions to this series, largely historical in nature, provide a starting point for considering the politics of the price level. As they show, it is these political criteria that determine the selection and timing of techniques for inflation control. By moderating or exacerbating particular increases in prices or incomes, often with the assistance of public subsidies to demand or to producers, price policies reflect the underlying balance of interests in a nation and their competition for control of the state. Because the composition of incomes ultimately shapes the profile of spending, its demands on the existing level and organization of capacity, and the level of investment in an economy dominated by private enterprise, inflation cannot be properly understood without attention to the institutions that determine incomes. Inflation control policies are thus another lens onto the debate over which private incentives should be protected by the cloak of public interest, and which should not. 

Explaining the politics of prices 

Price control was long considered an important instrument of sovereignty. 3 The restorationist judge Lord Hale, on whose foundations Blackstone constructed his commentaries, considered the power to regulate excessive prices, along with coinage of currency, one of the fundamental powers of the king. And it was Hale’s phrase “affected with a public interest” that emerged in the United States after the American Civil War as the controlling opinion for the constitutionality of industry regulation. 

During the eighteenth century, when the Absolutist kingdoms of Europe grappled with the efficiencies to be gained by allowing the emergence of independent profit centers from which to draw tax revenue, the popular assault on an increasingly illegitimate kingly power included this ancient prerogative. Removing state control of prices was understood to further diversify the international division of labor, expand the low price producers, increase productivity, and further drive down prices through the production of greater volumes. Fostering such private initiatives was the very essence of radical politics, inseparable from the reinvention of government as popular sovereignty. Enterprise, long understood to be subject to the sovereign, became a civil liberty. 

No sooner were the kings’ powers broken than republican governments confronted similar problems of production, distribution, stability, and change. Following Louis XVI’s flight to Varennes, the National Convention, under threat of foreign invasion and embargoed colonial trade, confronted immediate shortages of bread and American commodities—coffee, candles, sugar, among them. Prices rose. To ensure order during the defense of the republic, in 1793 the National Convention passed the Law of the General Maximum, launching an enduring interpretive debate over the economics of price control and money. 4

Control of prices has also been a key feature of American law since the nineteenth century. In the early Republic, state governments employed licensing laws to fix minimum charges for such occupations as porters, carters, wagoners, draymen, and wood sawyers. After the Civil War, the political economy in the United States was largely redefined by competition over real income among three classes: farmers; large corporations in manufacturing, processing, and distribution; and industrial workers. Responding to the challenge, state governments in the 1870s fixed the prices charged by grain elevators and railroad corporations. Statute by statute, they enlarged the remit of public rate regulation over the next five decades to include fuel, meat, insurance, housing, and human labor. Under theories of “natural monopoly” elaborated by the founders of the American Economics Association (AEA) the states established public utility commissions. Congress established the Interstate Commerce Commission in 1887, the Federal Reserve Board in 1913, and the Federal Trade Commission in 1914. 

Following World War I, the US Department of Agriculture undertook a decades-long exploratory program on the problem of declining farm prices and the resulting redistribution of resources from country to town, rural to urban communities. Wealthy organized farmers lobbied repeatedly for the McNary-Haugen acts of 1926–1927, which proposed a government export corporation to purchase surplus commodities at guaranteed high prices for dumping in foreign markets. With the coming of the New Deal, the general suspension of antitrust laws under the National Recovery Administration, and the Supreme Court’s eventual expansive reading of the Constitution’s interstate commerce clause, the taboo against price policy was openly challenged. During World War II, an unprecedented government-financed mobilization program under comprehensive control of prices brought production to capacity, with inflation almost entirely suppressed.

Contemporary debates on inflation control remain loaded with political conflict. When, by the summer of 2021, the prospect of an accelerating increase in the price level became apparent, economists and journalists turned with expectation to the meetings of the Federal Reserve. The Fed, to its credit, initially announced it would not begin raising interest rates until 2023: the pandemic-induced inflation, Chairman Jerome Powell assured his financial constituency, was “transitory.” This explanation for inaction betrayed the weakness of programmatic full-employment policy after decades of official inattention. Every month of continued rising prices undermined the public basis of the central bank’s program.

When a few voices attuned to the interests served by the ostensibly apolitical decisions of monetary policy openly questioned the government’s response, the economics priesthood closed ranks in condemnation. Were rising prices and record profits not in part a sign of exploitative corporate prowess? Was an interest rate hike not striking bluntly at the wrong sources of rising prices? NPR gave voice to Obama CEA-chair Jason Furman, who reassured millions of commuters that “Companies always want to maximize their profits. I don’t think they’re doing it any more this year than any other year.” The Wall Street Journal opinion page was more direct: “The White House and congressional Democrats have decided that bashing businesses for rising prices is more politically useful than admitting Washington [is at] fault for the debt-fueled federal spending, misguided incentives and epic money creation that are driving inflation.” So sacred are the tenets of government-by-interest rate that the possibility of discussing alternatives was rapidly foreclosed.

Meanwhile, business reporters openly noted the perspective of corporate executives to explain rising costs. The Journal’s news desk reported that energy companies use lucrative earnings from record fuel prices to purchase their own stock, rather than to invest in productive capacity. Airline executives boast “We are very, very confident of our ability to recapture over 100% of the fuel price run up.” Business journalists’ conclude matter-of-factly: “Firms flex pricing power.” Asked in May about the cause of rising prices, Powell himself explained: “We see that companies have the ability to raise prices and they’re doing that.” Unremarked is the possibility that such decisions could be restrained, or at least subjected to public scrutiny. 

Despite early assurances to the contrary, the Federal Reserve has raised its target federal funds rate in two increases of a combined .75 percent since March 2022. This can only moderate price increases through reducing real investment, employment growth, and consumption. “It is time to raise rates,” the New York Times tells its readers. “Though He slay me, yet will I trust in Him.”

The case of the Cold War

No period in the history of price setting has more clearly defined present debates than the politics of the Cold War. Writing about the Kennedy-Johnson planning efforts, George Soule, former editor of the New Republic and director-at-large of the National Bureau of Economic Research, explained that “It is the aim of the planners, as a rule, to expand production and to avoid increase in prices.” The Kennedy and Johnson administrations did not have the legal tools for this task. Concentrated points of control in supply chains—“processors and distributors” as Soule described them—were able, in periods of rising demand, to charge more for their products than the rise in unit costs.5 Rising sales on stable or declining unit costs means rising productivity. The Kennedy-Johnson economists’ goal was to ensure equitable distribution of the gains of rising productivity through a system of wage-price guidelines. But as productivity rose in the 1960s boom, the majority of these gains accrued to corporate balance sheets through higher prices. 

During the Cold War, the manufacturing industry proved most resistant to guidelines on prices and profits. As Soule wrote, “when there are only a few producers, agreement on prices or the tacit following of a price leader may more easily occur.” The legal scheme bequeathed by the New Deal-cum-Cold War state exempted the power of comprehensive price control from the general police power. Though the Korean War Defense Production Act established military stockpiles and direct subsidies for producers, manufacturers and food processors had lobbied tirelessly, to ensure repeal of its price control titles. 

In 1961 the Group of Independent Experts of the OECD understood this exemption of manufacturing prices from regulation as a source of inflationary pressure. “For the United States,” they wrote, “there is reason to believe that attempts in a few industries to raise rates of profit at high levels of sales, or to have a lower break-even point, contributed to the rise of industrial prices that occurred” during the 1953-60 period.6 Accounting for rising costs, the OECD group considered the size of the price rise during the 1950s excessive: “gross profits in certain industries would be very high if something like capacity operations in the economy were attained.” As Lyndon Johnson and the Eighty-Ninth Congress would soon discover, corporate incomes were indeed engorged by the rising capacity utilization stimulated by the Vietnam War. Under the inflation these profits produced, the government was incapable of holding wages to guideline norms. 

In pursuit of full employment, various governments across the North Atlantic attempted to restrain private pricing and wage-making through productivity guidelines along the American model. Rather than the “price controls” of the wartime decades, economists came to discuss the problem of controlling sectoral and class income claims in terms of “incomes policies,” directed primarily at organized labor. In addition to the annual Economic Report of the President, published by the Council of Economic Advisers; the Federal Republic of Germany published reports recommending guidelines; the French Commissariat général du Plan included guidelines and formal controls under the Fourth, Fifth, and Sixth Plans; the Austrian government established a Price-Wage Commission; and the British published guidelines through its National Economic Development Council and National Incomes Commission, both established in 1962. 

The economic theory behind these new inflation control programs placed excessive demands on the organized politics of the mixed economies. Within the new councils and commissions for planning the macroeconomy there remained the vestigial rights and privileges of private property. After some success in the early 1960s, such guideline policies almost uniformly failed against the accelerating inflation at the decade’s turn. By the 1970s, economists and administrators sought to give such incomes policies greater force. Denmark had frozen wages in 1963; Great Britain in 1966 and again in 1972. The French froze prices in 1963, the Swedish in 1970, and the Norwegians in 1972. In 1971, the Nixon administration froze both wages and prices for three months, followed by a partial system of wage-and-price controls. 

None of these efforts succeeded in halting world inflation. There were two reasons for this failure. First was that, given private control of investment, profit limitation often came at the price of capacity expansion. Of all the sectors impacted by the Nixon freeze, for example, none was more important than energy: while the controls insulated the US from the geopolitical price shock from the Middle East, under their restraint on profits the oil companies nevertheless reduced output and shortages developed. “I have yet to see… any firm evidence that efforts of the sector… have produced any significant increase in investment or in employment, and that is the test,” said Jack Jones of the British Trades Union Congress (TUC) of British incomes policies in 1977. “In my view, an industrial strategy which relies only on polite talks with industrialists and trade associations… is not a strategy at all.”7

So long as investment and production remained by law privately controlled, investment decisions were held hostage to private prerequisites on profit rates. The political scientist Gerhard Lehmbruch appraised the failure of such experiments in West Germany and Austria: “Enlarging the field of corporatist economic decision-making beyond incomes policies (or, more exactly, control of wage policies) would have meant, among others, control of profits and of investment…” The late Leo Panitch described these 1970s experiments in inflation control as the “specific form of state-induced class collaboration in capitalist democracies” characterized by a “belief in the neutral state and its promulgation of ‘planning’.” To Panitch, faith in the state’s neutrality in the class struggle revealed “the emptiness of this planning.” 8

The social and the national in price stabilization

Popular consent was the second cause for the failure of incomes policies. During the 1970s, North Atlantic governments exhorted their publics to participate in incomes policies on the grounds of “growth,” but continuing inflation revealed the weakness of this purpose as a cause in itself capable of securing popular consent to planning. If macroeconomic stability required falling real wages or controls on employer profits, what good was it? A general expansion, in which all lines of industry are stimulated by an undirected expansion of spending, proved impossible without inflation. Particular public goals, such as affordable housing, increased income for disadvantaged groups, a growing renewable energy sector, or greater social equality, compete for resources with other private goals, such as luxury housing, corporate profits, or fossil fuel company operations. Some sanctions must come into play to consciously allocate resources toward a capacity profile geared toward the desired composition of full-employment demand. 

War, NBER founder Wesley Mitchell wrote, alters economic calculation. Rather than figuring goods in terms of money to direct production by the profit motive, managers must figure money in terms of goods to plan necessary financing for the social project. Prices are controlled, the government enters the market as a purchaser and as a distributor, frequently distributing on a non-price basis. Resources must be allocated to wherever they can expand the necessary composition of final goods required by the program. Unless some particular composition of output is defined, government efforts to break any particular set of capacity bottlenecks in the course of a general expansion will only reveal other points of resistance up and down the supply chain. “The factor that sets the effective limit to accomplishments shifts from month to month, still more from year to year, and from country to country,” Mitchell wrote. 9

What those committed to the principle of incomes policy discovered during the last crisis of capitalism was that the objective of national planning had to be spelled out to the public in terms more specific than “economic growth” if private participation was to be ensured. For such a strategy to have any chance of success, the bottleneck-breaking authorities must have some sense of the desired composition of final spending which their efforts are intended to satisfy. In a representative government, only elected leaders can provide a moral sanction for such national planning. “What was the collective purpose that could weld individuals together and whose expression could be the object of politics?” the historian Richard Adelstein asked of the Progressive-era legal reforms. “What… was the public analogue to corporate profits?”10 The question has confronted peacetime government ever since. In the United States, only the armaments program of World War II, and the particular composition of procurement contracts and materials required to meet them, has supplied such a collective purpose. It has had no parallel in America’s national history. 

The debate over incomes policies during the 1970s turned on this underlying theoretical point. As Great-Society economist Gardiner Ackley wrote during the Nixon controls: 

Many believe that the ‘consent’ of the great economic interest groups—which, in the long run, is the only possible basis for a successful system of inflation control—can only be secured and maintained if the system of wage-price restraints is coordinated with the other tools of government policy in order quite consciously to promote a progressive redistribution of income in specific directions which society approves. Indeed, to the extent that the source of existing inflationary pressure lies in a fundamental dissatisfaction with the existing income-distribution on the part of one or more powerful groups, while other groups resist any significant change in that distribution, there can probably be no real ‘consent’ to an incomes policy.11

The unhappy search for popular consent during the 1970s exhausted the Cold War-liberal faith in what had become of the welfare state. 

The need for a larger social vision brought Ackley, the consummate American Keynesian technocrat, to a belated realization earlier reached by countless leaders of movements for social transformation—from the “industrial democracy” of the Gilded-Age socialists and the Populist Party’s “cooperative commonwealth,” to Martin Luther King Jr’s “Arc of History”—the realization that those who hope to self-consciously open new chapters in human experience must of necessity turn the page of their own history. 

Nixon, in his cynical way, attempted this renaissance: it won him an inauguration, but at the cost of the prestige and moral authority of the federal government. Weakened by the Nixon administration’s exploitation of the situation, public officials’ role in controlling prices came under coordinated business attack during the 1970s. Employer organizations such as the Business Roundtable; research institutes funded out of business grants and private fortunes, such as the Cato Institute, the American Enterprise Institute, and the Heritage Foundation; and professional associations such as the Federalist Society remade the legal scheme bequeathed by the New Deal. In the process, the courts and Congress pared government rate regulation considerably. As interests recomposed, under deindustrialization and growing trade liberalization, into a competition for national income between the energy sector and the growing service industries, among them the most refractory being health care, a popular understanding of the responsibility for prices was displaced from the institutions of production and distribution to the Federal Reserve and the Treasury. Prices fixed privately by giants in the market are now the norm: hence the crisis when the sovereign interest requires an expansion of effective demand. 

The legal scheme and intellectual priority given to inflation’s macroeconomic causes shapes our social world. With public budgets restrained, and employer power over production and prices unchecked, we turn to interest rate policy in the brink. Within the labor market, this intellectual prohibition against structural reform protects and enforces the largely autonomous structures of race, sex, gender, ethnicity, and citizenship shaping the distribution of income. Low wages for public school teachers in many states, for example, are the legacy of an era when the profession was dominated by women whom many expected to work only partial careers earning second incomes for their husbands. The growth of open-shop construction is a perverse example of the revolution in ethnic and racial norms: enabled by the chiseling of federal labor and employment law, the right to work for poverty wages has been made into a positive case for diversity in the industry. In our own time, the persistence of differences in income and prestige by gender and race has been a boon to a beleaguered labor movement, which rightly sees them as a basis for new organizing. But until wages policies are coordinated with both the macroeconomic throttle and control of other incomes, the growth of a new labor movement will be vetoed by the public preference for recession over inflation. In a country where elections reign supreme, only a broad social vision will command the popular consent required to coordinate this national program. 

In the experience of the United States, only victory in war has supplied that vision. When American planners sought to use the symbols of patriotism and growth to shoehorn a stabilization policy into the legal schema of the Cold War, the result was a profound disorganization of national life. The inadequacy of these symbols alone for the project of renovating that legal scheme is even greater than for pursuing stabilization within it. Building up institutions to serve this function toward ends more distinguished than human destruction today is a task of historical importance. As the quest for inflation control policies returns from its historical sojourn, and the conflict of social classes is reconvened, these essays offer new perspectives on one intractable problem of our modern forms of social organization. 

  1. William Fellner, Milton Gilbert, Bent Hansen, Richard Kahn, Friedrich Lutz, Pieter de Wolff, The Problem of Rising Prices (OECD: 1964 [1961]), 9-10, Kahn on 33.

  2. That is, insofar as any of the various indexes constructed for measuring groups of prices can be taken as that ostensibly singular concept. The OECD Group of Independent Experts—who urged restraining wages and reducing government spending—thought “undue attention” was given to indexes and that “making a fetish of the cost-of-living index, in particular, has, in some instances, obstructed sound thinking about policy.” Fellner, et al., 25.

  3. Price and Sovereignty,” Harvard Law Review 135, no. 2 (December 2021) 755.

  4. To finance the obligations of the Bourbon dynasty, the French Constituent Assembly of 1789 had issued paper money backed by lands seized from the Church. As the American economist Seymour Harris asked in 1930, “Were the high prices of subsistence [during the French Revolution] caused by excessive issues of Assignats, or are they explicable in terms of curtailed production and impeded circulation of commodities?” He found evidence for both, and weighed them in favor of the latter. 

  5. George Soule, Planning U.S.A. (Bantam: 1967), p. 151.

  6. A “break-even point” refers to a volume of sales required to recoup costs. Lower break-even points require higher prices, while higher break-even points require lower prices.

  7. Leo Panitch, “Trade Unions and the Capitalist State,” reprinted in Panitch, Working Class Politics in Crisis: Essays and Labour and the State (Verso: 1986), 205. 

  8. Panitch, “Trade Unions and the Capitalist State,” 190, 197, and 205; Jones and Lehmbruch on 205. 

  9. Mitchel, “War ‘Prosperity’ and the Future,” NBER, 1943. 

  10. Adelstein, Richard P. “‘The Nation as an Economic Unit’: Keynes, Roosevelt, and the Managerial Ideal,” The Journal of American History 78, no. 1 (1991): 160–87.

  11. Gardiner Ackley, “Incomes Policy for the 1970s,” The Review of Economics and Statistics 54, no.3 (August 1972): 218–223. As even the IMF wrote in 1964: “Their degree of success [i.e. of incomes policies] will vary from country to country with the institutional framework and with the support given by social groups to the objective of price stability.” IMF Annual Report 1964. 


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