‘Full Employment’ as Inflation

November 27, 1950

One of the great ironies which future historians will observe about our time is that the American free-enterprise system, which out of its unprecedented productivity was subsidizing the controlled economies of Europe, was not only being criticized by the recipients of its charity as being ridiculously out of date, but was itself shamefacedly trying to make amends by starting to imitate the very socialistic systems it was having to support.

One is reminded of this situation by an article by Prof. Wilhelm Röpke of Geneva in a new quarterly published in Frankfurt, Zeitschrift für das Gesamte Kreditwesen, available in an English translation under the title The Journal of Finance and Credits. Dr. Röpke’s article exposes the delusions behind a policy of so-called “full employment.” His description of this policy as it exists in Europe applies with uncanny accuracy to the American imitation of it:

“The measures envisaged include a continuous reduction of the interest rate; deficit spending; in case of need, large-scale public works financed by the creation of credit; the heaviest of taxation on the classes with higher incomes and great wealth, with the object of restricting savings, which are so much feared; encouragement of demands by the trade unions for increased wages, and so forth.”

This policy, which has been pursued by Britain and by nearly every Western European country (with the exception of Belgium, Italy, and Switzerland), puts continuous “full employment” before every other consideration. And its apostles use that phrase to imply that there is no other way to reach their goal except by the inflationary policies just outlined.

“Full employment” is desirable, of course, in the sense that no one wants involuntary unemployment with its consequent loss of income. But “full employment” is not the sole end of human activity. It is not even the primary end. The primary end of economic action is to maximize production. “Full employment” is only a means to the end of maximum production for the satisfaction of human desires. It is one of the central errors of the zealots for “full employment” that they subordinate ends to means.

This initial error is only the first of a chain, and of a series of self-contradictions. It is the “full employment” philosophers who complain most of “chronic private underinvestment.” But it is precisely the same group who most vigorously applaud government policies that paralyze the desire to invest. These policies include stiff taxation of successful investment, ruthless exploitation of the monopolistic position of labor unions, special subsidies at the general expense, threats of ever more socialization, currency manipulation of various kinds, a contempt for private property, arbitrariness and an abandonment of all firm economic principles by governments. Though investment is always directed to an uncertain future, and requires the highest degree of optimism and confidence, all these “full employment” policies make investment more and more of a risk, more and more of a game in which one can lose much but can gain only a little.

The full-employment champions, in short, have no faith in a process of continuous adjustments in conditions of liberty and free competition. The policy they advocate finally results in a continuous competition between a wage policy which seeks to push wages upward, and a credit policy which, to counteract the wage policy, seeks to increase employment.

The upshot of all this, as Dr. Röpke points out, is that the final remedy of the full-employmentists for every trouble is to increase the volume of money and credit. Hence “full employment” tends to result in full inflation. This has to be disguised by repressive measures. And so we get the result of “pent-up” inflation.

Dr. Röpke adds a note. “Full employment” policies, in combination with exchange control, result in Europe in the well-known deficit in the balance of payments. “This policy obviously depends on a foreign benefactor being found.”