THE COMPLEMENTARITY OF MONETARY POLICY AND PRICES AND INCOMES POLICY: AN EXAMINATION OF RECENT BRITISH EXPERIENCE
| Published date | 01 February 1977 |
| DOI | http://doi.org/10.1111/j.1467-9485.1977.tb00404.x |
| Date | 01 February 1977 |
| Author | J. A. Trevithick,A. A. Stevenson |
Scottish
Journal
ojPolitica1 Economy,
Vol.
24,
No.
1,
February
1977.
THE COMPLEMENTARITY
OF
MONETARY
POLICY AND PRICES AND INCOMES POLICY:
AN EXAMINATION
OF
RECENT BRITISH
EXPERIENCE
A. A.
STEVENSON
AND
J.
A.
TREVITHICK
I
It has frequently been claimed that the recent British inflation is incapable
of explanation in terms of orthodox macroeconomic theory. Neither
Keynesian nor monetarist analysis can, it is argued, come up with a plausible
diagnosis of the source of the significant upsurge in the rate of inflation
which occurred in 1969 and again in 1974. Adherents to this view naturally
proceed to the conclusion that the type of inflation experienced in these
difficult years is not susceptible to purely economic analysis, being instead
the outcome of some form of socio-political struggle for larger shares either
in the national income or in the total wage bill. It is
no
exaggeration to say
that this interpretation of the inflationary process, which we shall call the
cost-push
view for simplicity, has occupied pride of place
in
the formulation
of the “establishment” approach to economic policy in Britain until fairly
recently.
Unfortunately those who accept the cost-push interpretation tend to
shy
away from providing any empirical validation for their position, relying
instead on broad generalisation and ad
hoc
conjecture. In this paper we shall
try to provide an answer to the question: is there a single economic model
which can explain the inflationary experience in Britain in the
1963-75
period? We believe that an excess demand interpretation of inflation is
capable of explaining the apparently mysterious upsurge
of
inflationary
pressure which occurred during the years 1969 and 1974. The only modifica-
tion required to the simple excess demand model is the recognition that,
during periods of prices and incomes control, the authorities may unwittingly
have pursued inconsistent macroeconomic policies.
To
the extent that the
incomes policies are successful, the “inappropriateness” of the demand
management policies only becomes evident
after
prices and incomes controls
are relaxed, for it is only at this point that the build-up of excess demand can
find its natural outlet in the form of higher wages and prices.
It should not be inferred from the above, however, that we share the
opinion
of
most monetarists that the
only
way to lower the rate of inflation
is
to introduce a restrictive demand policy. While accepting that restrictive
monetary and fiscal policies, if applied on their own, will
eventuaZZy
reduce
the rate of inflation, it is probable that the period
of
adjustment will be
politically and socially unacceptable in terms of the high unemployment and
19
To continue reading
Request your trial