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Part Four: Monetary Reconstruction > Chapter 21. The Principle of Sound Money

3. The Full-Employment Doctrine

The inflationist or expansionist doctrine is presented in several varieties. But its essential content remains always the same.

The oldest and most naive version is that of the allegedly insufficient supply of money. Business is bad, says the grocer, because my customers or prospective customers do not have enough money to expand their purchases. So far he is right. But when he adds that what is needed to render his business more prosperous is to increase the quantity of money in circulation, he is mistaken. What he really has in mind is an increase of the amount of money in the pockets of his customers and prospective customers while the amount of money in the hands of other people remains unchanged. He asks for a specific kind of inflation; namely, an inflation in which the additional new money first flows into the cash holdings of a definite group of people, his customers, and thus permits him to reap inflation gains. Of course, everybody who advocates inflation does it because he infers that he will belong to those who are favored by the fact that the prices of the commodities and services they sell will rise at an earlier date and to a higher point than the prices of those commodities and services they buy. Nobody advocates an inflation in which he would be on the losing side.

This spurious grocer philosophy was once and for all exploded by Adam Smith and Jean-Baptiste Say. In our day it has been revived by Lord Keynes, and under the name of full-employment policy is one of the basic policies of all governments which are not entirely subject to the Soviets. Yet Keynes was at a loss to advance a tenable argument against Say's law. Nor have his disciples or the hosts of economists, pseudo and other, in the offices of the various governments, the United Nations, and divers other national or international bureaus done any better. The fallacies implied in the Keynesian full-employment doctrine are, in a new attire, essentially the same errors which Smith and Say long since demolished.

Wage rates are a market phenomenon, are the prices paid for a definite quantity of labor of a definite quality. If a man cannot sell his labor at the price he would like to get for it, he must lower the price he is asking for it or else he remains unemployed. If the government or labor unions fix wage rates at a higher point than the potential rate of the unhampered labor market and if they enforce their minimum-price decree by compulsion and coercion, a part of those who want to find jobs remain unemployed. Such institutional unemployment is the inevitable result of the methods applied by present-day self-styled progressive governments. It is the real outcome of measures falsely labeled prolabor. There is only one efficacious way toward a rise in real wage rates and an improvement of the standard of living of the wage earners: to increase the per-head quota of capital invested. This is what laissez-faire capitalism brings about to the extent that its operation is not sabotaged by government and labor unions.

We do not need to investigate whether the politicians of our age are aware of these facts. In most universities it is not good form to mention them to the students. Books that are skeptical with regard to the official doctrines are not widely bought by the libraries or used in courses, and consequently publishers are afraid to publish them. Newspapers seldom criticize the popular creed because they fear a boycott on the part of the unions. Thus politicians may be utterly sincere in believing that they have won "social gains" for the "people" and that the spread of unemployment is one of the evils inherent in capitalism and is in no way caused by the policies of which they are boasting. However this may be, it is obvious that the reputation and the prestige of the men who are now ruling the countries outside the Soviet bloc and of their professorial and journalistic allies are so inseparably tied up with the "progressive" doctrine that they must cling to it. If they do not want to forsake their political ambitions, they must stubbornly deny that their own policy tends to make mass unemployment a permanent phenomenon and must try to put on capitalism the blame for the undesired effects of their procedures.

The most characteristic feature of the full-employment doctrine is that it does not provide information about the way in which wage rates are determined on the market. To discuss the height of wage rates is taboo for the "progressives." When they deal with unemployment, they do not refer to wage rates. As they see it, the height of wage rates has nothing to do with unemployment and must never be mentioned in connection with it.

If there are unemployed, says the progressive doctrine, the government must increase the amount of money in circulation until full employment is reached. It is, they say, a serious mistake to call inflation an increase in the quantity of money in circulation effected under these conditions. It is just "full-employment policy."

We may refrain from frowning upon this terminological oddity of the doctrine. The main point is that every increase in the quantity of money in circulation brings about a tendency of prices and wages to rise. If, in spite of the rise of commodity prices, wage rates do not rise at all or if their rise lags sufficiently behind the rise in commodity prices, the number of people unemployed on account of the height of wage rates will drop. But it will drop merely because such a configuration of commodity prices and wage rates means a drop in real wage rates. In order to attain this result it would not have been necessary to embark upon increasing the amount of money in circulation. A reduction in the height of the minimum-wage rates enforced by the government or union pressure would have achieved the same effect without at the same time starting all the other consequences of an inflation.

It is a fact that in some countries in the 1930s, recourse to inflation was not immediately followed by a rise in the height of money wage rates as fixed by the governments or unions, that this was tantamount to a drop in real wage rates, and that consequently the number of unemployed decreased. But this was merely a passing phenomenon. When in 1936 Lord Keynes declared that a movement of employers to revise money-wage bargains downward would be much more strongly resisted than a gradual and "automatic" lowering of real wage rates as a result of rising prices,8 he had already been outdated and refuted by the march of events. The masses had already begun to see through the artifices of inflation. Problems of purchasing power and index numbers became an important issue in the unions' dealings with wage rates. The full-employment argument in favor of inflation was already behind the times at the very moment when Keynes and his followers proclaimed it as the fundamental principle of progressive economic policies.

  • 8. See Keynes, The General Theory of Employment, Interest and Money (London, 1936), p. 264.