On the Theory of Price Control

THE object of this paper is to consider, from a theoretical point of view, the price development in a wartime economy with price control short of a general price ceiling. If there is an absolutely complete and universal price ceiling, changes in prices are automatically ruled out. But in hardly any war economy are price increases so completely absent as to make superfluous a study of the development of prices and the factors affecting this development. In no modern war economy, on the other hand, are prices so free to move as to make an equilibrium analysis, based on a continuous and immediate adjustment of supply and demand through changes in prices, a fully adequate approximation of actual developments. A highly instructive model of the behavior of prices in a free-price economy under the stimulus of wartime inflation has been developed by Dr. Koopmans.' Such a model can be considered only as a limiting case which actual developments would approach if there were no control over prices. The present paper starts from the reverse point of view, though it is realized that such treatment assumes great strength in the price control mechanism if it is operating as it is likely to be in a milieu of greatly excessive demand. Price formation will be studied from the supply rather than from the demand side. Wage increases, for instance, will be considered as a price raising factor because they raise costs, not because they swell the public's purchasing power. There seems to be some justification in taking this extreme point of view. Excessive purchasing power does not in itself exercise a price-raising influence. Taxation and compulsory savings may take away a large part of this purchasing power, and the rest may be absorbed by various kinds of voluntary savings. Or, if consumers are left with the money, it may be directed away from the scarce commodities, and thus be prevented from exercising a priceraising influence, by an extensive rationing system. Or finally, if the stream of money is neither absorbed by the government nor canalized into safe regions by rationing, it may simply beat, but not break, the dams erected by the pricecontrolling authorities, in which case excessive demand will result in shop shortages, not in rising prices. In fact, with a high rate of excess profits taxation, entrepreneurs have little stimulus to raise their prices to the point of equilibrium unless costs go up.2