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(b)    The Price Bureau should be transformed from a state body to a social arbitrator in which all important social interests will be re-presented and which will function on the basis of social agreement.

(c)    In preparation of these measures the discretion necessary to prevent the otherwise inevitable speculation must be ensured.

The entire program presented has a temporary and transitional character and makes sense only as such. Some Solutions obviouslv conflict with the intentions of the system and therefore can be utilized only very briefly. The program should calm down the economy and give us a breathing spell of a year, so that we could prepare an econ-omic policy oriented morę to the long-run which could begin to be carried out in 1972.

3. SUPPRESSING INFLATION

The market economy of a smali country can function efficiently only if prices are relatively stable, i. e. do not rise faster than in other countries which compete on the world market. Therefore special at-tention in economic policy must be devoted to suppressing inflation. Limited by the available space, I will dwell here only on the possi-bilities of control of inflation by means of tax instruments.

Causes of Inflation

Five years after the beginning of the reform half of industrial prices were still under control, and then prices were frozen. Monetary policy was throughout the greater part of the period exceptionally rescric-tive, but prices rosę faster than in the 12 year period before the reform. When the monetary restriction was loosened, there occurred a greater incrcase in prices than in 1964. Anti-inflationary policy was based on the assumption of an excess of dcmand over suDply. It is obvious that this assumption was wrong. Prices rise faster the greater are inventories, and show a tendency to stabilization the faster the upswing in production (except at the peaks of cycles).

Econometric research in the Institute of Economic Studies showed that about four-fifths of the rise in prices can be explained by the rise in personal incomes above the rise in productivity of labor. It follows that the inflationary mechanism in Yugoslavia is for the most part of the cost-push type. The gap between personal incomes and produc-tivity of labor arises pnmarily because of the institutionalized negati-on of the principle of distribution according to the results of work. Privileged industries (petroleum, electrical energy, foreign trade, banking, eac.) have the possibility of raising personal incomes without regard to the actual results of work. Other industries follow that example with morę or less of a lag. Where productivity of labor is not in a position to compensate for the inerease in personal incomes, price inereases occur. The inflationary spiral begins. The cychcal deccieia-tion of growth strengthens inflationary pressures. Price control does

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