Monetary Restriction and Direct Controls

exactly the same way. It reduces investmentplus-consumption to the volume where the level of employment is not high enough to force up wages and thereby prices and incomes. If we need the iO per cent of output, we can not afford the fiscal policy that would prevent inflation any more than we can afford the monetary policy. And the same holds, of course, for all combinations of the two. Nor does our analysis point to the control of prices or of physical output. As long as employment is at a very high level, workers will press successfully for wage increases and the pressure will come to an end only when the impossibility of increasing prices to cover the increased cost has put enough men out of work to remove the pressure for higher wages. At this point the iO per cent output has also been removed. The use of physical controls to keep output down to the level where prices, costs, and wages do not rise must consist of preventing the iO per cent output right from the beginning. The only way out of this dilemma between accepting inflation and sacrificing the extra iO per cent, is to change our method of wage determination so that the very high level of employment does not result in the fruitless spiral of wages and prices. What is needed is a wage determining mechanism or market which will permit individual wage rates to be adjusted in response to change in the relationship between the demand and the supply in the particular labor market, while keeping the average level of wages from rising very much in relation to the increase in productivity. The criterion on which the wage must be determined in such an artificial market is the relationship between the number of men ready and able to take jobs in the particular labor market and the number of men actually employed in it. This ratio (the index of relative attractiveness) in conjunction with the national average of such ratios would determine whether the particular wage should be increased (and how much) or kept unchanged.1 Unless some such plan is developed for preventing very high levels of employment from raising the general level of wages more rapidly than productivity increases, the benefits of very high levels of employment, which may be of enormous importance in times of national emergency like the present, can be enjoyed only for very short periods and at the expense of severe damage to our greatest secret weapon the price mechanism

Economics · Monetary economics · Economic Theory and Policy