Knowledge that Transforms

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

In the May number of this REVIEW Mr. Everett E. Hagen made some criticisms of a recent article of mine.' These criticisms I shall here attempt to answer. Mr. Hagen asserts that my assumes a decade of technological stagnation. That is not true; I merely recognize the fact that as defined by the Department of Commerce, is not a measure of the real but is a purely monetary concept, which cannot be reduced to terms of goods and services by means of price deflators, because it includes so many elements that have no price and in recent years so many that would have no value whatever in years of normal peacetime prosperity. It is not a measure of but of expenditures, confusing out of with out of capital, and not distinguishing between productive and unproductive. The gross product is increased by government deficits, no matter for what purpose incurred; the real product, the total of useful goods and services, which is the only proper measure of labor productivity, is not increased by government deficits unless those deficits are incurred for the production and not merely the redistribution of useful goods or services. A reduction in government spending in the next few years would reduce the gross or at least its rate of growth; it would not necessarily reduce and would likely cause an increase in the volume of useful goods and services produced. To a large extent the criticism just directed against gross product applies to national and to a slightly smaller extent it applies also to payments. Income include a large amount of transfer income, not resulting from current production by the recipients or by their property, such as pensions, interest on war debt, and payments by non-income-earning corporations out of their capital. Disposable income eliminates government pensions and interest on war debt in so far as they are paid for out of personal taxes; it also unfortunately eliminates currently productive governmental activities. To the extent that the real can be measured by calculations of income, and disposable income between them come closest to filling the requirements, but neither is as good as consumer expenditures or the sum of consumer expenditures and gross private capital formation. Something also might be said in behalf of gross less government deficits. My optimistic estimate shows the following annual rates of increase from I940 to I950:

prewar trends had continued. The war only made them go to work a few years earlier. I remain convinced therefore that, although my estimates of the labor force and the amount of civilian employment are lower than the others quoted by Mr. Hagen, they are more nearly correct. As for gross national product, the sooner statisticians and economists discontinue treating that misleading monetary concept as if it were equivalent to the real national product or the output of workers or the national welfare, the better for all concerned.

Joseph Mayer, Harold G. Moulton, Meyer Jacobstein, Lewis H. Kimmel, An Appraisal of Criticisms of the Brookings Institution Estimate, The Review of Economics and Statistics, Vol. 27, No. 4 (Nov., 1945), pp. 189-191