Price controls against ‘profit-led inflation’: Lessons from the incomes policy debate

Abstract Why do some economists support price controls in the face of inflation during peacetime? Our thesis is that, in the history of economic thought, understanding the role of profits in inflationary dynamics is the crucial variable. To demonstrate this, we investigate the extensive literature on incomes policy, insofar as much of the thinking on macroeconomic price control in peacetime is part of this literature. This corpus is crossed by a major schism: some advocate price and wage controls while others limit control to wages alone. We show that the defence of price controls is always based on the thesis that profits play an autonomous role in inflationary dynamics. Conversely, the advocates of an incomes policy reduced to wage controls see margins as mere transmission belts for excessive wage increases into prices. Price controls are thus rejected ex ante, even before any criticism of the consequences of their application.