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Harvard Business Review
March-April 1965

Wages and Prices
By Formula?
T The intended effect: avoidance of inflation and more

responsible labor-management leadership.
▲ The likely effect: throttling o f competition, drag on

economic growth, and wage and price fixing.

In rcccnt years our nation’s economic policy
has been focuscd largely on the problem of un­
employment. The reasons for this concern are
plain. The recovery from the recession of
1957~I95& failed to develop momentum and
came to a halt in the spring of i 960 when the
unemployment rate was still above 5 %. The
new recession that followed proved to be mild
and brief. But when the labor force is grow­
ing and becoming more productive, even a minor
recession of business activity can have serious
repercussions. In the early months of 1961
unemployment reached 7 %, and the new Ad­
ministration, as was generally expected, em­
barked promptly on an expansive economic
policy.
At first the Administration placed its empha­
sis on increasing federal expenditures and on

creating as much monetary ease as the state of
our balance of payments might allow. Later,
with unemployment still hovering around 6%,
the need for a more effective policy became
clearer. Official interest gradually shifted from
raising federal expenditures to carrying out a
sweeping reduction of income tax rates, which
still bore the stamp of the Great Depression and
World War II. After a protracted debate, Con­
gress recognized the importance of revising the
tax system, and lower tax rates for individuals
and corporations became law. Meanwhile, the
Administration promulgated more liberal rules
for figuring depreciation on tax returns, took
some steps to improve the matching of jobs and
skills in labor markets, and pressed for an ex­
tension of monetary ease.
By and large, the economy has responded
well to the new direction of economic policy.
Of late, production and employment have in-

A u t h o r ’s n o t e : These views were originally present­
ed as a John F. Murray Lecture sponsored by the Col-

lege of Business Administration, the University of Iowa,
Iowa City, Iowa.

By A rth u r F. Burns




55

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Harvard. Business Review
creased materially, and the unemployment rate
has been moving gradually downward.

Moreover, the precarious condition of the
balance of payments has lately added a dimen­
sion of risk to inflation that we, unlike an earlier
generation of Americans, cannot ignore. Since
Progress Without Inflation
1958 our country has experienced a massive
outflow
of gold and a still larger increase in its
In pursuing its expansive economic policy,
short-term
liabilities to foreigners. The United
the Administration has been aware of the risk
States
has
continued
to serve as banker of the
that unbalanced budgets and rapid additions to
world; but any banker whose reserves dwindle
the money supply may set off a new wave of
while his demand liabilities keep mounting will
inflation. That can hardly be a pleasant pros­
inevitably invite caution on the part of those
pect for any government under modem condi­
who deal with him.
tions. The impact of inflation on the purchas­
Fortunately, our wholesale price level has
ing power of families living on pensions or other
recently remained stable while much of the
types of fixed income is severe. Also, inflation
rest of the world has suffered
inflation. This development has
served to keep down the deficit
IN THIS ARTICLE
in our balance of payments,
Arthur F. Burns, formerly Chairman of President Eisenhower’s but it has not sufficed to elimi­
Council of Economic Advisers and now President of the National nate it. Therefore, if our price
Bureau of Economic Research as well as John Bates Clark Professor level should rise in relation to
of Economics at Columbia University, argues that the Administrathat of competing nations, our
tion’s "general guideposts” for wages and prices could have danger­
exports
would tend to diminish
ous consequences for the economy. If they had the influence in­
relative
to imports. Unless ma­
tended, he believes, they could:
jor steps were taken to counter­
• Throttle the forces of competition.
act such a development, the
• Become a drag on economic growth and efficiency.
deficit in our international ac­
• Lead to an economy which is almost indistinguishable from one in which counts would become larger, and
wages and prices are fixed by government.
this could lead to a run on the
Efforts by management and labor to use the guideposts would, dollar and its ultimate devalua­
Mr. Burns thinks, be beset by many practical difficulties. Ironically, tion. The attending financial cri­
these difficulties may lead not to cutting down the guideposts but to sis would unsettle commercial
enforcing them with federal price and wage controls. The need, he and industrial markets through­
concludes, is not for guidelines for management and labor but out the world. It would leave a
for guidelines for the government in formulating its own economic
legacy of fear that could result
policies.
— The Editors
in a lasting constriction of in­
ternational trade and investment.
Worse still, it might injure fa­
commonly bears harder on those who work for
tally our country’s foreign prestige and, there­
a salary than on wage earners, and it deals
fore, its capacity for political leadership of the
harshly with anyone whose plans for the future
Free World.
depend on savings accumulated in the form of
Clearly, the risks of inflation are formidable,
bank deposits, shares of savings and loan asso­
and they are recognized as such in informed
ciations, government savings bonds, and the
circles both within and outside government.
like. These injustices of inflation tend to breed
Thus, in formulating the nation's economic
political discontent, and so, too, does the wide­
goals, the President’s Economic Report of 19&2
spread awareness that inflation is often the
emphasized "the achievement of full employ­
precursor of recessions. When costs and prices
ment and sustained prosperity,” and urged such
begin advancing rapidly, experience has shown
an achievement “without inflation.”
that speculation in inventories and overbuilding
But how can inflation be avoided? Govern­
tend to develop, that the strength of economic
ment authorities have approached this question
expansion tends to be undermined in the pro­
pragmatically since 1960, just as they did during
cess, and that prosperity is then liable to give
the 1950's and in earlier times. They have,
way to recession.
however, made it plain that they would be dis­




Wages and Prices
inclined, as long as the economy is still operat­
ing short of full employment, to seek general
price stability by imposing monetary or fiscal
restraints. And the one need that they have
stressed above all others is that wages and prices
be set in "responsible” fashion by private parties
— in other words, that trade union leaders and
business managers need to moderate their eco­
nomic power in ways which will take account
of the national interest in preventing inflation.

Advent of Guideposts
Exhortation with regard to prices or wages is
by no means a novel practice of government.
In its days of secular authority, the Church
spoke firmly on the need for just pricing. In
later times governments often blamed profiteers
for increases in food prices. In the postwar
period it has become customary for governments
to stress the importance of stability in the gen. eral level of prices rather than the rectitude of
individual prices. As of old, however, the au­
thorities seek to limit private power in the
marketplace by moral suasion. In today’s world,
as everyone knows, some trade unions can raise
wages beyond the level that would prevail in a
competitive labor market, just as some corpora­
tions have the power to push prices above com­
petitive levels.
It is understandable enough, therefore, why
our successive Presidents in the postwar period
have seen fit to lecture the private community
on the need for noninflationary conduct. Gen­
eral Eisenhower, for example, warned during
his presidency that “businesses must recognize
the broad public interest in the prices set on
their products and services” and that “greater
stability of the general level of prices” is “un­
likely unless the national average of increases
in wage and salary rates and related labor bene­
fits remains within the limits of national pro­
ductivity gains.”
In the last few years governmental pro­
nouncements of this sort have become more
frequent and louder. In fact, the urging of
moderation on private parties has reached a
scale that marks something of a break from the
earlier policy of dealing with inflation. Thus:

57

A On the other hand, general appeals to public
responsibility are being implemented by wage and
price guideposts. Trade unions and business firms,
in other words, are 110 longer merely asked or ad­
monished to moderate their private power in the
public interest; they are advised with a show of
specificity how this can best be done.

Once exhortation has been fortified by for­
mula, it can no longer be dismissed as sheer
rhetoric. It then takes on new authority over
the minds of men, and its capacity for good or
ill becomes much greater.

Intended Nature
The guideposts have been a major part of the
Administration’s economic policy since early
1962, when they were first set forth by the
Council of Economic Advisers. What are these
guideposts or guidelines?

1. Wages — This guideline specifies that the
annual rate of increase in wage rates, including
fringe benefits, should be equal in a particular firm
or industry to the annual trend increase in national
productivity, that is, to the average annual per­
centage rate of growth over a term of years in the
output per man-hour of the economy at large.
2. Prices — This guideline specifies that when
the trend of an industry’s productivity rises less
than the national trend of productivity, its prices
“can appropriately rise enough” to accommodate
the rise in labor costs per unit of output that is
indicated by the wage guideline; and that when an
industry’s productivity rises more rapidly than the
national average, its prices “should be lowered” in
keeping with the decline in unit labor costs.

The Council originally characterized its pro­
nouncement on the guidelines as a contribution
to public discussion of how the national interest
may be judged in the case of private wage and
price decisions. The guidelines were certainly
not intended to be interpreted as directives to
industry or labor. In fact, they were described
by the Council as “general guideposts” which
still had to be reconciled in individual situations
with “objectives of equity and efficiency.” In
other words, “specific modifications” were re­
quired to adapt the guidelines “to the circum­
stances of particular industries.”
The more important types of modification
that would be likely to arise in practice were
actually listed by the Council. For example, the
▼ On the one hand, the classical weapons of
suggestion was advanced that wage increases
monetary and fiscal restraint, which in the past
should exceed the “general guide rate” if the
were relied on as the main defense against infla­
bargaining
position of workers in a particular
tion, are now frowned on.




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Harvard Business Review

industry or locality had previously been weak
or if an industry was unable to attract suffi­
cient labor.
Actual Effect
As was bound to happen, however, it was the
crisp formula of the “general guideposts,” not
the qualifications or disclaimers, that mainly
caught the public eye. And, with the passage
of time, the Administration has itself become
bolder. Thus:
C The January 1964 Report of the Council no
longer speaks of the guidelines as a contribution to
public discussion of how the national interest may
be judged; instead, it describes them as a “stand­
ard” for private wage and price decisions.

«T h e Report of 1962 had avoided specifying
the annual trend increase of national productivity
on the ground that this was “a large and complex
subject and there is much still to be learned.” The
Report of 1964, on the other hand, is free from
all methodological doubts and presents without
qualification a figure of 3.2% as the annual trend
increase of productivity in the private economy
that is currently applicable.
® The Report of 1962 had indicated that the
“general guideposts” were “only first approxima­
tions” that would need to be adapted extensive­
ly “to the circumstances of particular industries.”
The Report of 1964, on the other hand, states
flatly that the guideposts "can cover the vast ma­
jority of wage and price decisions” and, while the
modifications that had been suggested earlier “still
apply, . . . it must be emphasized that they are
intended to apply to only a relatively few cases.”

Thus, the official position, as now developed
or clarified, is that the national interest can be
best served by setting wages and prices in ac­
cordance with the formula of the general guide­
lines — not, to be sure, in every instance, but
almost that.

Troublesome Consequences
As every economist knows, there are only two
ways of raising the real earnings of labor. They
can be raised by ( 1) increasing output per manhour of work or (2) enlarging the share of total
income that accrues to wage and salary workers.
Of these two sources, the first is basic, and it
has always been vastly more important in our
country than the second. The guidelines have
the great merit of calling attention to this fact.
Taking the economy as a whole, it is the cost of




labor that dominates production costs. If the
cost of labor per unit of output rises, business
firms will ordinarily seek to protect their profit
margins by raising prices. But a rise in wage
rates, using this term broadly so as to include
fringe benefits, need not involve a rise in pro­
duction costs. It will do that only if the rise in
the hourly wage rate is proportionately greater
than the increase in output per man-hour.
Therefore, if the average percentage increase in
wage rates across the nation merely equals the
average percentage increase in output per manhour, the general level of prices could remain
stable without reducing the fraction of the na­
tion’s output accruing to stockholders and other
income claimants.
By expressing this basic truth, the guideposts
have helped to direct the attention of thoughtful
citizens to ways of raising output per man-hour
— ways such as investing in more and better
tools of production, improving the education and
skills of workers, improving the quality of man­
agement, and eliminating featherbedding and
restrictive trading practices.
Public enlightenment, however, has been an
incidental aspect of the guideposts. Being a tool
of policy, they point to a course of action. Their
essential purpose is to curb inflation — or, more
precisely, to permit monetary and fiscal policies
to stimulate production and employment with­
out stirring up inflationary pressures from trade
unions or corporations. And if the guidelines
for prices and wages were generally observed,
it is indeed true that the existing links between
the flow of money to markets, on the one hand,
and the flow of goods and services to purchasers,
on the other, would be broken. In such a world
the levels of wages and prices would be gov­
erned by formula, and they would no longer
reflect the changing forces of market demand
and market supply — as they now do.
If the policy of the guideposts became fully
effective, it would therefore change drastically
the workings of our commodity and labor mar­
kets, and thereby modify — for better or worse
— the character of our economic system.

Practical Effects
Let us try to visualize a little more definitely
how the guideposts, if they were generally and
fully respected, would work out in practice.
Statistical records stretching back into the
nineteenth century demonstrate that, although
the over-all productivity of our economy occa­

Wages and Prices
sionally declines, its trend has been steadily up­
ward. If this continues to be true, as we may
reasonably suppose, general observance of the
guidelines will result in higher wages every year,
regardless of the stage of the business cycle or
the level of unemployment or the state of the
balance of payments. The rise of wages will be
the same, on the average, in years of recession
as in years of prosperity; but in any given reces­
sion the rise of wages could easily be larger than
in the preceding years of prosperity. Further­
more, the average wage will tend to rise in any
given year by the same percentage in every firm,
regardless of its profitability or the state of the
market for different kinds of labor.
However, general observance of the guidepost for prices will not freeze individual prices
or the relations among them. What it would
tend to freeze is ( i) the general level of prices
and (2) the ratio of individual prices to unit
labor costs of production. The tendency of the
price-cost ratio to remain constant will be
stronger in some industries than in others.
Stricdy speaking, the guidepost for prices speci­
fies merely that the ratio of price to unit labor
cost of production should not rise; it does not
argue against a decline of the price-cost ratio.
Hence, firms or industries experiencing a weak
demand for their products or keen foreign com­
petition may need to be content with prices that
decline relative to their unit labor costs. On the
other hand, firms or industries that are favored
in the marketplace would be unable to raise
prices relative to their unit labor costs even if
their incoming orders were many times as large
as their production. Nor would they be able to
raise prices to compensate for increases in costs
of production other than those of labor.
The broad effect of these tendencies would
be to keep more or less constant the percentage
share of the national income — or of national
output — going to labor. Changes in the use of
capital relative to the use of labor, whether
upward or downward, could still have a large
influence on the size of the national income
but not on the proportion of income accruing
to labor. Unless major shifts occurred in the
occupational or industrial distribution of em­
ployment, any fluctuation in labor’s percentage
share of the national income would be due
primarily to the discrepancy between the move­
ment of over-all productivity in a particular
year and the corresponding trend increase.
Nonlabor income, in the aggregate, would also




59

tend to be a constant percentage of the na­
tional income.
It is well to bear in mind, however, that sincc
profits are only a fraction of nonlabor income,
die share of profits in the total national in­
come could either rise or decline. In the post­
war period, the amount paid by corporations
on account of excises, customs duties, property
taxes, licensing fees, and other indirect taxes
has risen more rapidly than their net output.
If this trend continues, the income share of
investors in the corporate sector will tend to
undergo a persistent decline, while that of labor
will tend to remain constant.
Throttling of Competition
In the hypothetical economy that I have
sketched, monopolies — whether of business or
labor — would no longer have the power to push
up the price level. Put more precisely, if trade
unions and business firms complied voluntarily
with the guidelines, they would relinquish any
market power that they have not yet used or
that they might gain in the future. This is
worth noting, but it is not the main point.
The fundamental point of the preceding
analysis is that general observance of the guideposts would throttle the forces of competition no
less effectively than those of monopoly. The
point is important because, unlike much of the
rest of the world, the rivalry among U.S. busi­
ness firms is very keen. Even in industries where
a few corporations dominate the market — as in
the case of automobiles, steel, and aluminum —
each corporation competes actively against the
others in its industry, against rival products
of other industries, and against foreign suppli­
ers. Competition in labor markets is also strong­
er than casual references to labor monopoly may
suggest. After all, only a little over a fourth of
the population working for wages or salaries is
unionized, and many of the trade unions are
weak. By and large, it is competition — not
monopoly — that has vast sweep and power in
our everyday life. Since free competitive mar­
kets would virtually cease to exist in an economy
that observed the guidelines, this transformation
of the economy merits serious reflection.
To be sure, compliance with the guidelines
would be voluntary in the economy we are con­
sidering. That, however, may not mean much.
For when economic freedom is not exercised,
it is no longer a part of life. As far as I can see,
an economy in which wages and prices are set

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Harvard Business Review

voluntarily according to a formula suggested by
the government would be almost indistinguish­
able from an economy in which wages and
prices are directly fixed by governmental au­
thorities. In either case —
. . . the movement of resources toward uses that
are favored by the buying public would be im­
peded;
. . . the tendency to economize on the use of
what happens to be especially scarce, whether it
be materials or labor or equipment, would be weak­
ened;
. . . since prices will no longer tend to equate
demand and supply in individual markets, some
form of rationing would need to be practiced.

In all likelihood, therefore, a shift from our
present market economy to one of voluntary
compliance with die guidelines would adversely
affect efficiency. It would also adversely affect
the rate of economic growth and the rate of im­
provement of the general standard of living.
It is true, of course, that controlled economies
can and do escape complete rigidity. The exi­
gencies of life do not permit their authorities to
be blind to considerations of efficiency or social
harmony, so that price and wage edicts have to
be modified here and there. Black markets tend
to develop, and — despite their unsavory char­
acter — they often perform a useful function
in facilitating production. Moreover, managers
gradually become skillful in “gray practices,”
such as reclassifying labor in order to escape the
wage restraints or modifying products in order
to escape the price restraints. Our hypothetical
economy of voluntary compliance would also
have its safety valve; that is to say, the guide­
lines would be modified in "a relatively few
cases” in the interest of equity or efficiency.
However, gray or black markets, which impart
some fluidity and resilience to authoritarian
economies, could not exist in the economy of
voluntary compliance that we have been con­
sidering here.

Are the Guides Workable?
This theoretical sketch of how our economy
would work if the guidelines were generally
and fully observed has blinked institutional fac­
tors — such as the adjustments caused by the
disappearance of auction markets, die new role
of trade unions, and so on. Moreover, our theo­
retical sketch has tacitly assumed that voluntary




compliance with the guidelines is merely a mat­
ter of will. Life is not that simple. Even if
everyone responded to the government’s plea for
“cooperation” and sought faithfully to act in ac­
cordance with the guidelines, it would frequendy be difficult or actually impossible to
do so.
There is, first of all, a vast gap in our sta­
tistical arsenal. To comply with the guideline
for wages, businessmen would need to know the
trend increase of the over-all output of the na­
tion per man-hour. Once this highly complex
magnitude had been estimated by the govern­
ment, it would presumably be subjected to out­
side review, revised if need be, and accompa­
nied by a specification of the boundaries of the
year (if a year be the interval) to which it would
apply. All firms dealing with labor, except
those newly established, would then know what
wage adjustment was expected of them.
Compliance with the price guideline would
be infinitely harder. For this purpose, every
company would need to know the trend increase
in the productivity of its own industry and how
this increase compares with the trend increase
of over-all productivity of the economy. Such
information is not generally available, nor is it
readily usable.

Applying die Indexes
The productivity indexes now being pub­
lished, besides being often out of date, lump to­
gether a great variety of products. In time,
more detailed and more current indexes of pro­
ductivity will doubdess be constructed, but
there are limits to what is statistically feasible.
Even if measures of this type become available
for each of a thousand or ten thousand indus­
tries, much confusion or perplexity will still
remain:
• Should a manufacturer of bricks, for example,
be guided in his pricing by an index of productiv­
ity for the stone, clay, and glass group or by an
index confined to brick manufacture?
• If the latter, is the pertinent index a nation­
wide measure, one confined to his region, or per­
haps to his locality or plant?
• How should a manufacturing firm proceed
when its output is not standardized or when it
makes a hundred different items, instead of just
one product?
• If the appropriate index is not available, as
may long remain the case for many firms, especial­

Wages and Prices
ly in the service trades, what is the best “proxy”
for it?

61

the composition of output. Suppose that a firm
has two plants, that each of them makes a
•
Will the judgment of a company’s manage­ unique product, that the output per man-hour
ment on such issues, even if made entirely in good
is constant in each plant, but that the two plants
faith, be acceptable to others — such as its trade
differ in efficiency. If the wage guidepost calls
union, the Council of Economic Advisers, or the
for a 3 % increase in wages, it might appear,
general public — who also seek only what is right?
since no improvement of productivity has oc­
curred in either plant, that a corresponding in­
Better statistics on productivity will reduce
crease in the price of each of the two products
these difficulties; however, they cannot possibly
is justified by the guideline for prices. But are
remove them.
price advances really proper if the firm has shift­
ed some workers from the less efficient to the
Changes in Work Force
more efficient of its two plants and thereby
Another puzzling problem would be posed
raised the output per man-hour of the entire
by changes in the composition of labor that is
firm as much as or more than the trend increase
used in industry. Consider, for example, the
of national productivity? In that event, does
case of a company that has recently decided to
the guidepost for prices require that the produc­
employ more skilled workers of different sorts
tivity of each plant be taken separately or that
and less unskilled labor:
the two be taken in combination?
Another problem that businessmen and tradeSince skilled labor is compensated at a higher
union leaders would need to face is whether
rate, the average wage per hour that is paid by the
the modifications of the guidcposts that the
company to its workers will go up, quite apart
Council of Economic Advisers has officially
from any wage increase that may be needed for
the individual grades of labor. Let us now sup­
sanctioned apply in a particular case. In assum­
pose that the wage guidepost calls for an increase
ing, as I have, a general willingness to comply
of, say, 3 %. Then the company’s employees will
with the guidelines, I have not meant to ab­
naturally expect an increase of this size in their
stract from human nature entirely. Since the
individual rates of pay.
modifications suggested by the Council are
But may not the company’s personnel executive,
phrased in very general terms, men acting in
who has become steeped in the mathematics of the
good faith may feel that their situation is pre­
guidelines, properly insist that the average wage
cisely
the kind of rare case that permits some
has already gone up this much or more on account
departure
from the guidelines. But will busi­
of the more intensive use of skilled labor and that
ness managers and labor leaders always or even
no increase of wage rates is therefore warranted
frequently agree in their interpretation of what
by the government’s guideline? Will the trade
union’s representative grasp this statistical subtle­
modifications are permissible? In any event, is
ty? Will he not argue that the guideline requires
it not likely that the modifications will turn out
an increase of 3% , that other organizations are
to be numerous, rather than, as now intended
putting through such increases, and that simple
by the Administration, relatively few?
justice requires that the same be done by this
In view of these and many other problems
company?
that
are bound to arise in practice, the guide­
Suppose that the personnel executive perseveres
lines
would prove unworkable over a very large
and finally convinces the union’s representative.
segment of industry, even if everyone sought
Will the latter, in turn, be able to persuade the
conscientiously to observe them. To deal with
company’s employees? Can we even be sure that
this critical difficulty, a new governmental ap­
the company’s board of directors will be convinced
paratus might need to be established; its func­
by the argument of its personnel officer?
tion would be to spell out detailed rules and to
In view of modern trends that emphasize the
interpret them in individual cases. Although
use of higher skills, this sort of difficulty would
there is no way of telling just how such an
be bound to occur frequently in an economy of
agency would work, it seems reasonable to ex­
voluntary compliance.
pect that not a few of its clarifying rules and
interpretations would be arbitrary, that its ad­
Other Pitfalls & Puzzles
visory rulings would at times involve consider­
able delay and thereby cause some economic
A related puzzle with which businessmen
trouble, and that the rulings themselves would
would need to grapple arises from changes in




62

Harvard Business Review

have at least some inflationary bias. These fac­
tors inevitably cast a cloud over the preceding
analysis of how an economy of voluntary com­
pliance would function, but they hardly make
the prospect more inviting.

Specter of Controls
I have as yet said nothing about the aspect of
guidcpost policy that has aroused the most skep­
ticism — namely, the likelihood of general ob­
servance on a voluntary basis. In recent years
unemployment has been fairly large, and many
industries have had sufficient capacity to in­
crease output readily. Under such conditions,
upward pressure on prices cannot be great.
Even so, the guidelines have been sharply criti­
cized or defied by powerful segments of the
business and labor community. The critical
test of the inhibiting power of the guidelines
will come, of course, when both labor and com­
modity markets become appreciably tighter —
and this test may come soon. If the recent wage
settlement in the automobile industry is at all
indicative, expectations of a high degree of
compliance with the guidelines are hardly war­
ranted. Similar experiments in other countries
also suggest that general price stability will not
long be maintained through voluntary restraint.
But once the government in power has com­
mitted itself to a policy, it may become difficult
to move off in a new direction. A strong com­
mitment to the policy of the guidelines inevi­
tably means that any extensive private defiance
would, besides frustrating the government's
anti-inflation policy, injure its prestige. There
is always a possibility, therefore, that failure to
comply voluntarily with the guidelines will be
followed by some coercive measure. This might
initially take the form, as has frequently been
proposed, of a review by a governmental board
of the facts surrounding the price or wage
changes that are being contemplated. The
thought behind proposals of this nature is that
once the facts are clearly developed, the force
of public opinion will ordinarily suffice to en­
sure “responsible” action by corporations and
trade unions.
No one can be sure whether this expectation
will be fulfilled. But if it is, the governmental
review board will have virtually become an
agency for fixing prices and wages. If, on the
other hand, the board’s reports were flouted
with any frequency, the next step might well




be outright price and wage fixing by the govern­
ment. It would seem, therefore, that from what­
ever angle we examine the guidelines, direct
controls pop up dangerously around the comer.

Incipient Realities
This danger must not be dismissed as an illu­
sion. Although the guidelines are still in their
infancy, they have already hardened, as I previ­
ously indicated. Nor has the evolution of the
Administration’s thinking concerning the guide­
lines been confined to a literary plane. In April
1962, only three months after the announce­
ment of the guidelines, the Administration
moved sternly to force the leading steel compa­
nies to cancel the price increases that they had
just posted. This interference with the work­
ings of a private market had no clear sanction
in law, and it caused consternation in business
circles. Fortunately, a crisis was avoided by a
prompt and concerted effort of the Administra­
tion, in which President Kennedy himself took
the leading part, to restore business confidence.
Since then, the government has been more
cautious. But it has continued to espouse the
need for moderation in the matter of wages and
prices, and now and then has even gently rattled
its sword. Early in 1964 President Johnson re­
quested the Council to reaffirm the guideposts.
He emphasized his commitment to this policy
by adding that he would “keep a close watch on
price and wage developments, with the aid of
an early warning system which is being set up.”
Last summer, when intimations of a rise in the
price of steel appeared in the press, the Presi­
dent lost no time in declaring that such action
would “strongly conflict with our national inter­
est in price stability.”

Toward Sounder Policies
As this account of recent history suggests,
the guidepost policy may, under the pressure
of events, move our nation’s economy in an
authoritarian direction. The danger may not
yet be large, in view of prevailing political atti­
tudes, but it could become serious in a time of
trouble or emergency. And this is not the only
risk, as I shall presently note. However, the
fact that many citizens both within and outside
government favor the guidelines must also be
considered, for it means that they see small­
er risks or larger advantages in this policy
than I do.

Wages and Prices
It may readily be granted that the guidepost
policy has the meritorious objective of blunting
the power of monopolists to push up the price
level. This is the feature of the policy that
its proponents often stress. Indeed, they are
apt to argue that it matters little in practice
whether or not the bulk of the economic com­
munity pays any attention to the guidelines —
as long as the major corporations and trade un­
ions do so.
But if the guidelines are circumscribed in
this fashion, they are still subject to the criti­
cism of interfering with the competitive forces
of the markets in which many major corpora­
tions actually operate. Moreover, the absence
of a precise indication of what firms, industries,
or trade unions are covered by the guidelines
can create a mood of uncertainty that will mili­
tate against compliance. Not least important,
the effectiveness of the guidelines in curbing
inflation becomes doubtful when their applica­
tion is restricted. For the very limitation on
wage and price increases in the guideline sector
of the economy would facilitate increases in
the uncovered sector whenever an expansive
economic policy generated a monetary demand
that grew faster than the supply of goods and
services.
Another argument frequently advanced in fa­
vor of the guideposts is that if they were in
fact respected on a sufficient scale, then profit
margins would tend to be maintained and the
chances of prolonging the current business ex­
pansion would therefore be improved. This
consideration is bound to count in men’s think­
ing at a time when our nation is striving
to reduce unemployment and to spread pros­
perity.
We must not, however, become so absorbed
in today’s problems that we overlook those that
will haunt us in a later day. If the guidelines
may stretch out the expansion now by helping
to maintain the relatively high profit margins
of prosperity, may they not at some later time
stretch out contraction by serving to maintain
the low profit margins of recession?
Let me add, also, that I recognize that the
guideline policy was adopted by the Administra­
tion only after it had given serious considera­
tion to alternatives. The thought of its econo­
mists apparently is that, in general:

63

• Other devices must therefore be employed
(in the absence of full employment) to prevent
inflation.
• Policies aiming to increase competition or to
improve productivity cannot accomplish much in
the short run or cannot be pushed hard for po­
litical reasons.
• Direct controls of wages and prices cannot and
should not be seriously considered under peace­
time conditions.
• Consequently, there is only one major way
left for curbing immediate inflation — namely,
through devices of exhortation.
• And the guidelines for wages and prices are
merely a promising specific application of the tech­
nique of exhortation.

Locus of Responsibility

Space will not permit me to unravel this com­
plicated argument, but I at least want to suggest
why I think it may be faulty. Once the govern­
ment looks to trade unions and business firms
to stave off inflation, there is a danger that it
will not discharge adequately its own traditional
responsibility of controlling the money supply
and of maintaining an environment of compe­
tition. In the past our own and other govern­
ments have often found it convenient to blame
profiteers, corporations, or trade unions for a
rising price level. Only rarely have they point­
ed the finger of blame at their own policies —
such as flooding the economy with newly cre­
ated currency or bank deposits.
To the extent that the government relies on
private compliance with its guidelines for prices
and wages, it may more easily be tempted to
push an expansive monetary and fiscal policy
beyond prudent limits. Besides, it may fail to
resist strongly enough the political pressure for
higher minimum wages, larger trade union im­
munities, higher farm price supports, higher im­
port duties, more import quotas, larger stock­
piling programs, and other protective measures
that serve either to raise prices or to prevent
them from falling.
One of the major needs of our times is to give
less heed to special interest groups and to re­
assert the paramount interest of consumers in
vigorous competition. The political obstacles to
reducing artificial props for prices are undoubt­
edly formidable. However, reforms of this type
— supplemented by more stringent antitrust
•
Monetary and fiscal tools must be used to
laws,
effective enforcement of these laws, and
promote expansion as long as the economy is not
reasonable
steps to curb featherbedding — are
operating at full employment.




64

Harvard Business Review

likely to contribute more to the maintenance
of reasonable stability in the general price level
than will the guidelines for wages and prices on
which we have recently come to rely.

in a policy of restraint. This does not mean its
concern about unemployment will cease but, rath­
er, that it will direct its policy measures toward
better matching of the men and women who seek
work with the jobs that need to be filled.

Guidelines for Government

A sensible guideline for monetary and fiscal
policy
is, therefore, not the volume or rate of
Another major need of our times is for better
unemployment
as such, but the relation between
guidelines to aid the government itself in formu­
the
number
of
the unemployed and the num­
lating and carrying out its economic policies.
ber
of
job
vacancies.
As yet, such a guideline is
The widespread tendency of attributing most
merely
a
theorist's
dream
because statistics on
existing unemployment to a deficiency of ag­
job
vacancies
hardly
exist
in
our country. There
gregate demand is an oversimplification. Thus:
are grounds for hoping, however, that this con­
▼ When the amount of unemployment is larg­ dition will be corrected in another few years,
er than the number of job vacancies at existing
so that we will become better equipped for pro­
wages, the aggregate demand for labor is clear­
moting our national goals.
ly insufficient to provide employment for every­
The problem of achieving and maintaining
one who is able, willing, and seeking to work. At
prosperity without inflation in a free society is
such a time, a deficiency of aggregate demand
a very difficult one. We must be willing as a
exists, and a governmental policy that relies on
people to seek out and to explore new ways of
monetary and fiscal devices to expand demand is,
meeting this critical challenge of our times.
in principle, well suited to the nation’s needs.
But we also must remain mindful of the lessons
A When the number of vacant jobs is equal to
of past experience — particularly, the need for
or larger than the number of the unemployed,
prudent control of the money supply and the
however, there is no deficiency of aggregate de­
need for maintaining and enhancing the forces
mand. A government that is seriously concerned
of competition. The progress that we make will
about inflation will not pursue an expansive mone­
depend heavily on the economic understanding
tary and fiscal policy at such a time, and — in­
stead of lecturing the private community on the
of citizens and the intensity of their interest in
need for moderation — will itself lead the nation
public policies.

JUDGES FOR TH E M cKINSEY AW ARDS

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Since i959> die McKinsey Foundation for M anagement
Research, Inc., has made grants to HBR for the purpose
of conferring annual awards for the two best articles published. Each year, the author of the “first” article receives
$ 1 ,000; the author of the “second” article, $ 500, In 1 9 6 5 ,
articles will be judged by this board:

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R a y m o n d B a u m h a r t , S.J., Dean, School of Business Adminis-

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tration, Loyola University (Chicago)
F r e d J. B o r c h , President, General Electric Company
Jo h n H. D a n i e l s , President, Archer Daniels Midland Company
R ° b e h t A. F e r g u s s o n , President, Rust-Oleum Corporation
e i l H. Ja c o b y , Dean, Graduate School of Business Administratl0n> University of California, Los Angeles
Je s s e W . M a r k h a m , Professor of Economics, Princeton University

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A. S m i t h , President, General Cinema Corporation

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