The Critics of Keynesian Economics

XVIII

WILHELM RÖPKE was born near Hamburg, Germany, in 1899. He taught at the universities of Jena and Marburg in Germany, of Graz in Austria, and of Istanbul in Turkey. From 1926 to 1927 he visited the United States as a professor sponsored by the Rockefeller Foundation. In 1933 he was one of the first German professors dismissed by Hitler for his liberal convictions. In 1937 he accepted the chair for international economics, which he still occupies, at the Graduate Institute of International Studies at Geneva. Professor Röpke served as economic adviser to the Briining Government of Germany from 1930 to 1932 and has been serving the Adenauer Administration in the same capacity since 1949. Columbia University conferred an honorary degree upon him in 1954.

Among his most important works are: Crises and Cycles, 1936; International Economic Disintegration, 1942; Civitas Humana, 1948; and The Social Crisis of Our Time, 1950.

The following appeared as a pamphlet published by the American Enterprise Association in January, 1952. It is not directly an analysis of Keynes’s General Theory, but of the United Nations Report on National and International Measures for Full Employment. Like R. Gordon Wasson’s article, however, it analyzes “full employment policies” based on Keynesian assumptions.

THE ECONOMICS OF FULL EMPLOYMENT

WILHELM RÖPKE

I

BACKGROUND AND SUMMARY OF THE U. N. REPORT

No single economic issue in our time has been responsible for so much confusion, passion and acrimonious discussion as the one which goes under the glib heading of “full employment.” And, because of the terminology used, there is no other economic issue which appears so attractive and yet may be so dangerous as the one based on this misleading and bitterly discussed concept.

When, as at the present time, the main concern of the Western World is not to find jobs but rather workers, and when we are faced with a condition not of deflation but of inflation, it might appear that the question of “full employment”—in the sense of a continuous absence of any amount of “involuntary” unemployment guaranteed by government action and monetary manipulation—is no longer topical.

Such an impression, however, is illusory. For apart from the fact that the enormous tensions and difficulties of the present rearmament boom are the direct consequences of “full employment policies” being practiced everywhere, onto which new “military inflation” is now being grafted, we also have two other factors to face in the present situation. One is that in some countries “full employment” has become the slogan to justify almost every action of the government. Thus the ideology has become so ingrained, and the corresponding policy so immovable, that in spite of high inflationary pressure and dangerous over-full employment no determined reversal of policies has become noticeable. The other is that while at the present moment interest in the issue of “full employment” seems to have receded, it is safe to assume that this situation is only a respite, which will end the moment there is a flagging of the present boom.

It is, in fact, all too probable that “full employment”—always in that special sense as it is understood by the Post-Keynesian school—will soon again become the center of discussion of economic and financial policies, even if there is no imminent prospect of a major economic recession in the West. Indeed, at this moment it is not difficult to detect the influence of “full employment” concepts and ideologies on present plans for the development of “under-developed countries”—plans whose ambitious scale and optimistic assumptions are out of proportion to the sober facts.

THE U. N. REPORT

Nowhere has the doctrine of “full employment” been more simply and succinctly stated than in a Report made in December 1949 to the United Nations on “National and International Measures for Full Employment.” 1 This Report outlines the theory of “full employment” on which a number of European countries, and the United States to a limited extent, have proceeded during the past two years with resultant increasing socialism and inflation.

In view of the fact that in this Report there is contained much of the philosophy that will actuate future policies of the United Nations, and in view of the subsequent developments throughout the Western World since the Report was issued, it is highly important that there be a clear understanding of the “full employment” doctrine expressed in this Report, both as to its theory and practice. It is equally important that there be a clear understanding of its fallacies and inevitable consequences. The purpose of this study, therefore, is to submit the Report to critical analysis, with the object of evaluating these extreme views and their potentially disastrous consequences, in the hope that the issue can be turned from one of passionate dispute into a joint effort of moderation, reasoned analysis and practical common sense.

The Report claims the double authority of being both an official document of the U. N. Secretariat and a statement worked out and “unanimously” agreed upon by five economists of repute.2 It must be pointed out, however, that the choice of experts made the panel one highly weighted in favor of Post-Keynesian orthodoxy, with the notable exception of Professor J. M. Clark of Columbia University. He entered a separate statement. This marred the appearances of unanimity. It also has great significance in that it draws attention to a fact which is of capital importance and which goes a long way toward upsetting the whole theory of “full employment,” namely—that the height of wages may have something to do with the level of employment.

THE FUNDAMENTAL IDEAS OF THE U. N. REPORT

While the U. N. Report recognizes that unemployment may have quite different causes—lack of capital, frictions and maladjustments, etc.,—the major cause as seen in the report is a “deficiency of effective demand.” 3 This is the point on which everything else hinges and which, as we shall see later, vitiates this whole philosophy of “full employment.” The Report leaves the term “effective demand” undefined. But it is clear that what is meant is the sum total of purchasing power used for buying commodities or services, no matter whether this purchasing power is based on previous production or created by monetary expansion.

After having made their amazingly simple statement and after having admitted that a reasonable definition of “full employment” must include the allowance of a residual unemployment of 2 to 4 percent (which is not only normal and necessary, giving the “play” needed for the labor market as for any other market, but also socially bearable and manageable) the authors of the Report go on to explain the process by which the “deficiency of effective demand” is created in our economic system.4

What we find here is an outline of the mechanics of the Keynesian “full employment engineering,” which has now become rather familiar. But the exposition is so simplified as to read sometimes like a parody. Once more we are told that maintenance of full employment requires that savings and investments, current revenue and expenditure of the government, and exports and imports of a country must be in balance. And if one of these three pairs of factors shows an excess of one over the other, full utilization of resources demands that this excess be offset by an opposite imbalance of another pair of factors e.g., an excess of savings over investments must be offset by an excess of exports over imports, or of government expenditure over revenue, to the same extent.

It should be noted, and it is most significant, that the authors of the Report only speak of an imbalance causing a deflationary underemployment. They entirely leave out of account the possibility of an opposite imbalance causing an inflationary overemployment. Thus they do not seem to see that this is exactly the situation in which the West has found itself ever since the second World War. Anticipating some of our later criticism, it should also be noted that there is no hint whatever, in the Report, that this simple “full employment” mathematics approaches the meaningless in that the several pairs of factors which must be in balance may act upon each other in a way which is wholly unpredictable. That is, deficit spending of the government, meant to offset an excess of savings over investments, may actually discourage private investment still further, as happened in the United States under the “pump-priming” policy of the 1930’s.

Such, then, is the chain of reasoning of the Report: Unemployment is almost always and everywhere the result of a “deficiency of effective demand”; this “deficiency” is the result of some essential “global” entity or entities not being in balance; to ensure “full employment” we must ensure their being always in balance. To this end, it is of capital importance to maintain a high level of investments. Since, however, there is no force automatically bringing about and maintaining the required balance, attainment of full employment and its maintenance require sustained actions on the part of the government.5 Implicit in this line of reasoning is the assumption that the government at all times will have omnipotent wisdom in the sense that its actions will always produce the desired and planned for result.

THE RECOMMENDATIONS OF THE REPORT

Just as the underlying philosophy of the Report, as described above, is familiar to students of the Post-Keynesian school, so the action recommended by the authors of the Report follows, on the whole, along well known lines.

In private enterprise economics, the authors point out, stability in the level of private investment can only be promoted by what they call indirect control. Apart from monetary and credit measures—particularly variations of the interest rate—two ways are recommended by the Report: one is the use of special tax incentives for influencing private investments; the other is the policy of offsetting fluctuations in private investments by countervailing fluctuations in public investment.

Such measures of stabilizing the level of investment, however, may not be sufficient, the Report argues, to bring total demand up to the level which is necessary to ensure full employment. In that event these procedures must be supplemented by measures raising consumer demand to the desired level, preferably by revenue and expenditure programs of the government, thus making it a real virtue to enlarge the normal share of governmental expenditure as much as possible. Fears of the state running increasingly into debt are waived aside with the insouciance and flimsy arguments characteristic of this whole school.

To summarize the program outlined in the Report, the following passages are presented for the convenience of the reader.

On the question of fiscal policy:

The adaptation of the fiscal policy of the state to the needs of full employment will undoubtedly be one of the principal vehicles for stabilizing effective demand at the full-employment level in private-enterprise economies. The means for such an adaptation consist of changes in the level and kinds of expenditure, changes in the level and kinds of taxation, as well as changes in the relations between these two; and finally, in the adaptation of both taxation and expenditure to increase their flexibility in response to fluctuations in effective demand.6

On the control of the volume of private investment:

Governments can provide special credit facilities or give guarantees or special tax inducements to private investors when it is desired to promote the expansion of investment in the private sector of the economy. . . . It may also be feasible for governments to co-operate with the private industries concerned in the establishment of long-range investment programmes in well-established industries.7

On the planning of public investment:

In those cases in which the public sector of the economy includes certain basic industries such as mining, steel production and public utilities, and a substantial part of transport, housing and industrial construction . . . the level of investment could largely be stabilized as a result of a co-ordinated public investment programme. The stabilization of the total volume of investment could further be ensured by timing the execution of postponable public investment projects so as to dovetail with the fluctuations in private investment.8

And finally, all these measures being considered insufficient in the advanced industrial countries, the Report proposes:

For the maintenance of an adequate level of effective demand, such countries would therefore place their main reliance upon the expansion of consumer demand. In many countries a long-term programme for the expansion of consumption could be carried out by employing the instruments of fiscal policy discussed above . . . Furthermore, the control of monopoly prices may serve the purpose of increasing consumer demand through the reduction of profit margins. Some countries may wish to extend this principle further and use price control more generally in order to effect a more equitable distribution of income.9

The authors conclude with a proposal which illustrates well the fact that the policy of “full employment” is as mechanical as the underlying theory namely, that the fiscal machinery of keeping up the level of effective demand should be brought into operation automatically whenever the actual level of unemployment exceeds for three successive months a pre-announced level by a stated percentage. Under the heading “Automatic Compensatory Measures in the Event of Unemployment” the Report states the proposition as follows:

We believe that the adoption by each country of a system of automatic compensatory measures which would come into operation in clearly defined circumstances announced beforehand is a most important element in a successful full-employment policy. . . . We suggest that the automatic counter-measures should be so constructed as to produce an expansion of effective demand whenever unemployment exceeds the range defined in the full-employment target by some pre-determined amount for three consecutive months. The increase in the unemployment percentage necessary to bring the automatic measures into operation may vary with the circumstances of different countries, but in each country it should be no higher than is necessary to give a clear indication of deflationary tendencies in the economy; and it should be high enough to make it possible for measures for expanding effective demand to be undertaken on a scale sufficiently large to make an immediate and substantial impact on the employment situation.10

Economic policy would thus, indeed, attain the dignity of engineering, without regard to the fact that society can never be made into a machine nor can statistics succeed morality as a guide to behavior and policy.

II
THE FUNDAMENTAL FALLACIES

It should be stated very emphatically at the outset that the conflict of opinions in this field do not arise because some people desire maximum employment and others do not. In common with many other catchwords of our time—so it is with this phrase, of which the present author wrote about ten years ago: “The term ‘full employment’ has a dangerous quality that is calculated to disarm criticism from the start. Everyone advocates full employment in a reasonable sense, because no one considers involuntary mass unemployment for more than a short period as anything but a national disaster.”11 But the basic issue considered in the Report is not whether we should aim at the general and obviously desirable objective of achieving and maintaining a maximum level of utilization of all productive forces. On the contrary, the program projected in the Report is concerned only with a special theory of maximum employment, and with an equally special policy to sustain the theory.

This special theory of the Report explains under-employment as a disturbance in the general flow of money and income, which is said to find its expression in a lack of “effective demand.” According to this theory, there is a danger of continuous pressure towards deflation. To this corresponds the special policy proposed by the Report which consists in monetary expansion equipping people with the “deficient effective demand.” Against the alleged danger of continuous deflationary pressure the authors of the Report would set continuous monetary counterpressure. Even if there is unemployment not caused by a general contraction of demand, so goes the theory, it can be cured by monetary expansion. That is the teaching of the present school of “full employment” of which the U. N. Report is such a remarkable representative. Its monotonous answer to the problem of unemployment is: monetary expansion. It does not seriously look for other remedies which are less convenient, less spectacular, less sweeping and less spurious.

Can such a bold policy be carried through without serious prejudice to the most elementary values of our society, which are to be ranked higher than some degree of temporary unemployment or the inconvenience of other measures against unemployment? Or does it lead us into inflation, permanent fiscal disorder, loss of elementary liberties and civic rights, destruction of the free economy, the spread of socialist controls, inefficiency, material waste, national isolation and international disintegration? And if even this frightening price is paid, can the goal of full employment be reached in this way and indefinitely maintained? That is the real issue.

A reasonably balanced stand in this issue can be summarized under two main points:

(1) It is true that a situation may arise when mass unemployment ensues as the result of general disturbance in the flow of money and income principally due to a prolonged paralysis of investment activities, as occurred during the depression of the early 1930’s. And it is further true that, in such a case, one remedy among several possibilities may be a policy of general monetary expansion. Also, it is true that in order to bring about such a general monetary expansion, a judicious combination of drastic monetary and fiscal measures may be less dangerous than a policy of letting things drift. But such a situation—the “secondary depression” as the present author called it during the Great Depression in the early thirties12—is altogether exceptional. And even then the greatest circumspection is called for if any “pump-priming” policy is to be a real success.

The evident failure of such a policy under the Roosevelt administration—which in fact did not succeed in bringing about a self-sustaining prosperity until the armament boom of the second World War set in—illustrates particularly well the necessity of relying less on reckless “deficit spending,” and more on measures apt to encourage entrepreneurial confidence and initiative, instead of radical state intervention that is only too likely to kill these energizing forces. But whatever may be the right policy in this exceptional case of the “secondary depression,” this surely is not the situation which has prevailed in the West since 1940, nor is likely to prevail in the foreseeable future. As we shall see, the economic condition of most countries today is in fact the exact opposite of that which the “full-employment” school supposes.

(2) If we admit the occasional possibility of general economic standstill, and of monetary expansion being a recommendable policy, we must state all the more clearly that to generalize on this abnormal eventuality constitutes the fatal error of the “full-employment” school. For it is emphatically untrue to contend that, normally and on the average, unemployment is caused by a general disturbance of money circulation (deflation) and is therefore capable of being cured by a policy of continuously filling the gap of “effective demand” without inflation and all the other disastrous consequences which we shall consider more closely.

Indeed, it should be obvious that there are as many causes of unemployment as there are causes of economic maladjustment. Many of these have nothing to do with the money flow—such as: people doing wrong things or working at wrong places or with wrong methods; changes of demand; dislocations of markets, nationally or internationally; lack of capital; shortages of raw materials and other complementary products; changes of governmental policies; flooding of the labor market by migration or natural population increase; and particularly, excessive wage demands, by which “labor prices itself out of the market.”

Any one or any combination of such causes may bring about at any time a considerable amount of unemployment or “unused capacity” of production. But it would, of course, be quite wrong to suppose that this makes it safe to expand “effective demand” without the immediate danger of inflation. Once such a policy is admitted there is no degree of maladjustment, inefficiency, dislocation, slackness, immobility, stickiness of costs or wage demands which can not be used as a justification for a monetary expansion large enough to fill the gap of “effective demand.”

When the U. N. Report speaks of deficiency of “effective demand” it leaves the term undefined, as we have already observed. But more often than not, the Report seems to use it in the meaningless sense of the loss of income and employment, which is the natural consequence of any sort of maladjustment. And it presumes the possibility of safely filling this gap by a corresponding infusion of money. Now there is no doubt that, at least for a while, almost any kind and amount of unemployment can be made to disappear by monetary expansion. This is why, during the war, there was no unemployment. To this fact the authors of the Report point with a sort of strange nostalgia. But to pursue the policy of “full employment” regardless of the causes of unemployment means nothing else than to drown all economic maladjustments in a flood of money. As new causes of maladjustment arise a new dose of inflation will have to be applied, in order to keep up “full employment.”

A policy, therefore, which sees unemployment of whatever kind, and due to whatever cause, as sufficient reason for increasing “effective demand” is necessarily tantamount to a policy of constant inflationary pressure. But that is precisely the policy which today goes under the name of “full employment” and which the U. N. Report now wants to persuade all nations to accept as an international obligation.

Very much the same result follows when we analyze what happens when a government applies the same principle of “full employment through thick and thin” in order to perpetuate general boom conditions. There is fairly universal agreement today that it is part of a reasonable policy of economic stabilization to cope with the problem of a general depression, as it occurs in the ups and downs of the business cycle, by a policy of credit expansion. The error of the “full employment” school, however, is to believe that it is safe to continue such a policy as long as there still exists some amount of unemployment or other form of “idle capacity.”

Long before general full employment is reached there will appear at certain “strategic” points of the economy shortages of important kinds of labor and other productive resources. These will create more and more tensions and higher costs, the more the general expansion is continued, under the pretext that full employment is not yet universal, even though it has been attained in the “bottleneck” areas of the economy. Rather early, let us say, bricklayers, skilled metal workers, or steel or some other strategic raw material will become scarce, while in other branches there are still unemployed. When this critical mark has been reached monetary expansion will lead to higher prices and costs rather than to more employment. It follows, therefore, that by this policy of increasing “effective demand” full employment will be reached only at the cost of inflation and the maladjustments characteristic of every major boom. The social evil of partial unemployment will then be combatted by the even greater social evil of general inflation.

To perpetuate this highly unbalanced condition of boom full employment (which, in reality, means “overemployment”) calls for an ever higher dose of inflation. This is precisely the way by which the “full employment” policy of the Third Reich in Germany went after a few years—around 1936—from the phase of “compensatory credit” expansion to the phase of “inflationary” expansion, which was one of the main reasons of the collectivist system of the Nazi regime. We would do well to remember that the “full employment” of the Third Reich is so far the only example of such a policy carried through in peacetime, with some measure of temporary success. And we should also remember the tragic price that had to be paid for this spurious success. It is strange and startling to find that the U. N. Report makes no reference to this experience.

III
EUROPEAN AND AMERICAN EXPERIENCES

The members of the modern school of “full employment,” including the authors of the U. N. Report, persist, with imperturbable determination, in regarding every type of unemployment whatsoever—whether it be due to lasting structural changes or to temporary economic causes, of short-term or long-term character, partial or total—as the expression of a “lack of effective demand.”

Their sole remedy for the trouble is to increase the volume of money and credit whenever and wherever some unemployment becomes visible. That is the form in which the theory is nowadays put into effect in a number of European countries, particularly in Great Britain, the Scandinavian countries, and the Netherlands. The result is, as was to be expected, a constant inflationary pressure. Since the Korean crisis it has taken on alarming dimensions in all those countries and can no longer be controlled except by a determined but politically difficult reversal of the whole policy of “full employment.”

It is almost unnecessary to add that the constant inflationary pressure in these countries, which results from “full employment” policies, is inextricably mixed up with a more or less elaborate system of collectivist controls which prevent prices, interest rates, and exchanges from truly expressing the real inflation. And all of this is at the cost of the destruction of the price mechanism, of the choking of the economic processes, of disorder and of international disintegration, together with the loss of free enterprise and liberal democracy.

While these above mentioned countries illustrate the actual consequence of “full employment” policies as recommended by the U. N. Report, there are in Europe other countries like Germany and Italy which evidence particularly well the fact that the actual economic situation of almost all European countries is the exact opposite of that assumed by Keynes. In these two countries it is particularly obvious that it would be disastrous to give way to the pressure brought to bear by the “full employment” school, including American representatives, in spite of the existence of a still considerable amount of unemployment. For whereas the “full employment” school works with the idea of a deficiency of investments relative to savings as the principal cause of unemployment, here we have the exact contrary case—an almost unlimited willingness by business to use capital, even at high interest rates, which cannot be satisfied because of a shortage of capital. Here the problem is not how to find investments as an outlet for savings but how to find savings as a non-inflationary basis for investments.

The U. N. Report occasionally admits that unemployment may be due to lack of capital instead of “deficiency of effective demand,” but its authors think that this is only important in “underdeveloped countries.” A more careful study of present conditions in Europe, however, would have convinced them that they have been guilty of grossly underestimating the importance of this factor. It is the case in almost all Europe today.

A country like Germany, moreover, provides a particularly interesting and extreme example of the fallacy of the “full-employment” theory. This theory conceives the labor market of a country as a homogeneous fluid mass. Whereas it is a fact that full or over-full employment for a country as a whole may be concomitant with underemployment in particular trades, branches, or regions, without any prompt adjustment. For example, unemployment in Germany today is confined to certain groups of unskilled workers and to the millions of refugees—whereas even before the Korean crisis the general business conditions were already rather those of prosperity, with shortages of skilled workers, and a steady increase of the total number of employed.

Even prior to the international rearmament boom Germany presented, like many other countries, a state of affairs which has been called “prosperity unemployment,” a phenomenon which, at the same time, seems to have been produced in the United States by excessive wage demands. To apply to such a situation the patent-medicine of “full employment” is to create inflationary pressure, with its well known domestic consequences, to say nothing of a deficit in the international balance of payments.

That is why the German government and the German Central Bank were right in the summer of 1950 in resisting the campaign of the “full-employment” school, as represented by certain German groups and American experts in Germany, and why the Government and Bank were correct in warning that such a course would lead immediately to inflationary conditions and a strain of the balance of payments. When finally, considerable concessions had to be made to this vociferous campaign of the “full-employment” enthusiasts, the subsequent serious crisis of the German balance of payments nearly upset the newly created machinery of the European Payments Union, thus proving how justified resistance to this pressure had been. Nevertheless, this development did not prevent bitter criticism of the German authorities from those who, a few months earlier, had criticized them just as bitterly for their reluctance to plunge into “full employment” policies.

While developments in Italy show striking parallels with those in Germany, the United States seems to offer an altogether different picture. And yet the case of the United States provides further illustration of some fundamental fallacies of the “full-employment” school.

In the case of the United States, it may be conceded that rather soon after the war the question arose whether private investments would be forthcoming in a steady amount sufficient to ensure the desired economic equilibrium. There was concern over possible unemployment, such as had arisen in the 1930’s, when the generally unsuccessful efforts of the New Deal to bring about a stable and natural equilibrium had been rationalized as necessary because of an alleged “mature economy.” But now, as then, the truth of the matter seems to be that no understanding of the problem of deficient investment activities is possible without full regard to other characteristics of economic policy—such as the tendency of massive and comprehensive state interference—which may discourage private investment and diminish the demand for labor. For these policies, while meeting with the hearty approval of the members of the “full-employment” school, are likely to discourage investment decisions. Such decisions, being directed to the uncertain future, always require the highest degree of courage, optimism and confidence. Stiff taxation of investment profits, ruthless exploitation of labor monopolies, cynical disregard of firm principles in economic and financial policy, threats of socialization, currency manipulation, reckless budget deficits and ever higher public debts, contempt for private property nationally and internationally, arbitrariness and insecurity everywhere—all these may be regarded as highly progressive. But one must not be surprised if, when such conditions prevail, the amount of investment is less than it might and should be.

The conclusion is that, for maximum employment to be assured by a high level of investments, the right course is not a policy which frightens people away from such hazardous activity. Rather the opposite policy, which will encourage such activity and stimulate investment in an orderly manner, is the correct one. If a country like the United States should prefer, instead of the last-named policy, the course of “full employment” it would be following the dangerous road which seeks to compensate continuously the unbalancing factors of economic life by monetary expansion. Of particular moment here might be the action of powerful trade unions, which tend continuously to push wages upward beyond the point where all workers can be employed at current wages. Monopolistic wage rates, therefore, are likely to cause unemployment even under general conditions of prosperity. If the government, committed to the principle of “full employment,” combats by credit expansion this “prosperity unemployment,” which has been created by excessive wages, and which outdistances increases in industrial productivity, the government is necessarily caught in a vicious circle whose outcome is again constant inflationary pressure.

The entire economic policy of a country under such circumstances threatens more and more to develop into a permanent race between a wage policy that, by imposing excessive wages, creates unemployment, and a credit policy that tries to compensate this effect of wage policies by monetary expansion. As the race develops the combination of full employment and of inflationary pressure makes possible and gives rise to higher and higher wage claims; these in turn induce a further credit expansion; thus is the wage spiral kept in perpetual motion.

IV
THE CONSEQUENCES

Theoretical analysis as well as international experience seem to lead inevitably to the conclusion that policies of “full employment,” as understood today, involve consequences which should prompt the members of the “full employment” school to think twice before they shoulder the formidable responsibility of continuing their campaign.

We have seen that there is enough reason to fear that one of the most serious effects of “full employment” as a continuous policy will be an equally continuous pressure of inflation. There is further good reason to suppose that, in modern post-Hitlerian and post-Schachtian times, this pressure of inflation will prompt governments to turn it into “repressed inflation,” namely, to combat the natural effects of inflation by collectivist measures. Thus the policy of “full employment” is likely to end, via inflation, in the destruction of the market economy and free enterprise by a system of collectivist controls. In this way, we get that curious type of national economic order which—and it is difficult to say precisely what is cause and what is effect—is characterized by a combination of “full employment,” collectivism, and inflationary pressure. It is this type of “national collectivism” that we find in various degrees and varieties in many European countries today.

Nobody can be unaware of what all these consequences named so far mean to liberty, civic rights and constitutional government. To this list of consequences we have to add another very serious one. It is the probable effect of “full employment” on industrial productivity, economic development, and labor efficiency. Anybody passably familiar with the waste, the sluggishness, loss of incentives and the rigidity of the labor market that result from “full employment” and “repressed inflation” will understand why, from this point of view also, “full employment” must be viewed with pronounced pessimism.

That “full employment” may even retard the whole general economic development of a country in a very serious way can be seen in the following strong words of an otherwise rather charitable reviewer of the U. N. Report.

Even economic growth—in the stock of capital, productivity, efficiency, innovation—is likely to suffer in the end from the consequences of extreme full employment, in the long run probably more than in the short. The chief points of conflict here are diminishing flexibility and incentives, the probable strait-jacketing of foreign trade, and particularly the stimulation of consumption in lieu of investment—a procedure defended with such logic in the report.13

Now the disquieting thing is not that the U. N. Report takes little or no cognizance of these real dangers of “full employment.” Its authors are indeed not entirely unaware of them. But what is alarming is the lightheartedness with which they stick to their program in spite of their knowledge and the insouciance with which they belittle the inevitable consequences and trust in pseudo-solutions—if not in the magic effects of simple words. Their general line is (1) to argue away the danger of inflation, or (2) to belittle its consequences, or (3) if neither the one nor the other seems possible any more, to have recourse to its “repression” by collectivist controls. If, finally driven into a corner, they take cover behind a verbal smokescreen—that is, when compelled to face the very real danger of excessive wage increases—their answer simply amounts to the suggestion that something or other should be done about it.

Summing up the attitude of the authors we may say that they cannot deny the immense danger of “full employment” leading to inflation but that, when any other argument fails—which is more often the case then they would admit—they simply prefer inflation to anything less than “full” employment. Indeed, they state their preference, even though they say it in a most involved way: “Our task here is . . . to urge that it would be inappropriate for any country to pursue policies having the effect of raising unemployment above the level resulting from seasonal and frictional causes, merely in order to restrain upward pressures on prices.” 14

The explanation of this strange attitude of the authors of the Report may lie in two errors which seem to have led them astray.

The first of these is the tacit assumption that a milder inflation may be a not unreasonable price for avoiding any degree of the major evil of “unemployment.” On this point they convey the impression that we must choose between some measure of inflation and a social catastrophe called “unemployment.” This impression is, however, dangerously misleading, because the cost (of inflation) must in reality be balanced not only against the various kinds and degrees of unemployment but also against ways of combatting unemployment other than this quite special way of so-called “full employment.” In short, unemployment is not always a social catastrophe, and there are other and better ways to deal with it.

The second error which seems to account for the inflationary bias of the Report is the confidence of its authors in the efficacy and virtues of “repressed inflation.” That they do not like this outspoken term is understandable, but it is the policy which they recommend again and again, though in somewhat subtler phrases. It is almost fantastic to assume that they should not have been aware of what modern economists have to say on the nature and the consequences of “repressed inflation” and of the lessons taught by the ample experiences which many countries have had with this particularly pernicious economic disease. Furthermore, it is difficult to believe that the authors did not realize that to recommend “repressed inflation” is to admit that the policy of “full employment,” as one of compensating any flagging of employment by monetary expansion, is incompatible with the system of free enterprise whose preservation the authors nevertheless feel able to promise.

Yet one must not forget that to admit the real extent of the danger of inflation involved in “full employment” policies, and to recognize the truth about repressed inflation, would indeed be equivalent to acknowledging frankly the fundamental fallacies of the whole idea of “full employment.” It is human nature to resist such retreat. But it is a case where retreat is more creditable than desperate resistance.

V
THE INTERNATIONAL IMPLICATIONS

The international implications of the policies of “full employment” as outlined in the U. N. Report, constitute one of its most important aspects. As the Report has particularly interesting things to say on this problem we have earmarked it for special analysis. The subject is so vast and involved that we can only indicate some of the salient points.

There has always been some degree of conflict between autonomous national policies of stabilization and free multilateral world trade, and to find some compromise between these conflicting aims has always been a serious problem. “Full employment,” always as understood in the special sense explained several times, is bound to turn this conflict into a head-on clash and to become one of the main sources of international economic disintegration. Here again, the experience of the Third Reich has served as the model by producing all these external consequences which have now become familiar in all countries pursuing this course—disequilibrium of balance of payments, “dollar shortage,” exchange control, bilateralism, severe quantitative trade restrictions, an elaborate system of ever-changing import and export regulations, national economic isolation, and grave disturbances in the whole system of international payments and international trade relations.

One must realize, in fact, that one of the most indispensable parts of a system of sustained “full employment,” with its inflationary pressure and its machinery of collectivist repression, must be exchange control—which may be defined as a policy of defending a “wrong” exchange rate by police force. Exchange control is the veritable keystone of this system of “national collectivism” into which any policy of sustained “full employment” is most likely to develop. Exchange control, however, means inconvertibility of currencies, and this destroys the multilateral network of international trade. And the destruction of free multilateralism is the synonym for international economic disintegration.

The authors of the U. N. Report are not unaware of these things. In fact, they present a penetrating analysis of the international implications of their program. They most certainly know that its cost is the dislocation and disintegration of international trade—indeed, the very international economic disorder as we have it today and which most persons would agree we can no longer afford.

Confronted with this situation, there are three possible courses. We may accept the formidable cost of “full employment”—namely, international economic disintegration. Or we try to find some workable solution of the problem by constructing some sort of international machinery of constant planned adjustment. Or we may admit that neither the one nor the other is feasible, which means that “full employment” is not feasible either.

The authors consider the first course, and though they characteristically prefer the fulfillment of their program of “full employment” to the ideal of international integration, they evidently do not like this course. So they give all their attention to the second course. In this connection they devise a highly elaborate machinery of international adjustment and of reciprocal financial help. The aim is to assure a steady flow of long-term international investments, mostly for the benefit of the “under-developed countries.” The method is to organize, by international agreement, “procedures whereby the international propagation of deflationary pressures and the consequent tendency towards a cumulative contraction of world trade may be effectively prevented.” 15 Under this scheme each participating government commits itself to replenish

. . . the monetary reserves of other countries concurrently with, and to the extent of, the depletion of those reserves which results from an increase in its own reserves induced by a fall in its demand for imported goods and services, in so far as this fall is caused by a general decline in effective demand within its own country.16

In other words, any country which fails to live up to the authors’ program of continuously keeping up what they call (though do not precisely define) “effective demand,”—and which adjusts its balance of payments by restrictive credit policies in order to correct an inflationary pressure, would have to put the equivalent of this adjustment in its own currency at the disposal of those countries who want to go on with “full employment,” undisturbed by inflationary pressure and its awkward effects on their balance of payments. This means that the more extravagant the economic policy of a country is, the more it will be entitled to refill its depleted reserves at the expense of the more responsible countries.

The scheme is ingenious but unwise and unworkable. First of all, the technical difficulties are so numerous and so great that one finds it impossible to see how they could be overcome. Secondly, we have to consider that under this plan, the countries which are not yet convinced of the unqualified wisdom of “full employment,” or which simply fall behind in the general course of inflation, would be compelled to subsidize and relieve the others of some important part of the cost of their “full employment” program. In other words, the authors of the Report have actually succeeded in providing that any disbelief in their program shall be penalized. Perhaps they have not sufficiently taken it into account that governments might be somewhat unwilling to submit themselves beforehand to such a system of sanctions for non-conformity to modern economic orthodoxy.

Most important, however, is a third point. What the whole ingenious scheme amounts to is to contrive the adjustment of international trade by a complex machinery of collectivist international planning which does the work done before by the free functioning of international markets and price movements. Only in this way would the necessary coordination of national trade and investment plans be possible. Behind the whole project is the more or less clear recognition that national economic planning (“national collectivism”) has ended in an impasse, and that the way out is to supersede it by international planning.

But if we accept the stubborn fact that replacement of the market economy with collectivist planning means substituting the free functioning of price mechanism by orders and sanctions of government administration, then international collectivist planning becomes either an illusion or a nightmare. The reasons are clear.

This sort of international collective planning cannot be brought about by the free cooperation of democratic nations, since international planning presupposes an international state able to give and enforce its orders like a national state. Such an international state is utterly Utopian and impractical. For, in order that the plan may work, it is necessary that it be a collectivist international state, whose inevitable centralism cannot tolerate any kind of international federalism. Yet everyone, including the socialists, agree that an international federation is the only way in which, at best, we could hope for an international state in our life-time. So much for the illusion.

International planning thus becomes possible only under the kind of international dictatorship which Hitler called “Grossraum.” Then, however, it would be a nightmare, and surely for the authors of the U. N. Report no less than for all of us.

It would, therefore, appear that not only the present plan but also any other attempt, however ingeniously contrived, to get out of the impasse of national “full employment” by the machinery of planned international adjustment, is a snare and delusion. There is left only one course:—to admit that “full employment,” in the extreme sense of the Report, is not feasible and to be satisfied with a less ambitious, more reasonable and better balanced program of economic stabilization.

CONCLUSION

This is not the occasion to give a detailed idea of an alternative program. There are admittedly a few ideas of the U. N. Report which could be worked into an alternative program, but most of them have been vitiated by the fallacious dogmatism of “full employment.” And any alternative program must be free of this obsessive idea of “effective demand” which blocks the way to the realities of the economic process. Instead of being a policy based upon the continuous filling of “gaps” a practical alternative must be inspired by the concept of a free, natural, and real equilibrium, compatible with national flexibility and a free international economic system.

There is today a prevailing view which makes free multilateral trade responsible for a large part of economic instability. It has become almost an axiom that it is incompatible with national policies of maximum employment. It is high time to correct such views. Although the possibility of serious conflicts cannot be gainsaid, we should not forget that a free multilateral world economy with stable and free exchange relations has in the past and would still be today one of the most powerful factors promoting high and relatively stable national levels of employment. It was not such an international system of economic freedom and stability which brought about the crisis of 1931 and its aftermath. For the fluctuations of employment under universal convertibility of currencies and free multilateralism of international trade, made possible by the gold standard, on the whole were mild. On the contrary, what wrecked the world were the same political and unmoral forces which undermined the liberal international order itself.

Those who are working for the reconstruction of free multilateral trade are working for and not against economic stability. Here, however, is a tragical irony. The present policies of “full employment” are one of the main obstacles to such reconstruction. While employment conditions are thereby being made all the more unstable, demand for further “full employment” is being pushed forward all the more vigorously. It is of the utmost necessity that this vicious circle be broken. The first step to this end is to combat current fallacies on “full employment” and to present convincingly the case for stable high employment, by free, natural, and genuine equilibrium, both nationally and internationally.