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Economic Freedom and Interventionism
Ludwig von Mises

Reprinted from National Review, June 22, 1957.

16
Full Employment and Monetary Policy

At the price determined in an unhampered market all those who consider it satisfactory can sell and all those who are prepared to pay it can buy. if commodities remain unsold, this is not due to their "unsalability" but to speculation on the part of their owners; they hold out because they expect that they will be able to sell later at a higher price.

It is different when the authorities try to influence the market by compulsion. If the government decrees and enforces minimum prices higher than the potential market prices, a part of the supply offered for sale at the official minimum price remains unsold. This fact is well known. Therefore, if a government wants to push the price of a commodity above the potential market price, it does not simply resort to the fixing of minimum prices. Rather it tries to reduce the quantity offered for sale on the market, for instance by purchasing and withholding a part of the supply available.

All this applies also to labor. At the wage rates determined in the labor market everybody who looks for a job can get it and everybody who wants to employ workers can hire them. In the unhampered labor market, wage rates always tend toward full employment.

Market wage rates rise when the marginal productivity of labor outruns the marginal productivity of capital goods; or, more simply, when the per-head quota of capital invested increases. This is effected either by accumulation of new capital or by a drop in the number of workers. An increase in the amount of capital is the result of saving and consequent investment. A reduction in the supply of labor on the market can be brought about by restricting immigration. In the age of liberalism, in the traditional classical meaning of the term, there were practically no migration barriers. In this age of welfarism and unionism, well-nigh all governments have either completely prohibited immigration or, as for instance the United States and other American republics, stipulated definite quotas. Beyond that, some American unions have tried to reduce still more the number of jobseekers in their segments of the labor market by excluding racial minorities from some kinds of employment and by rendering entrance into certain branches extremely difficult.

There is need to emphasize that only such "artificial" or "institutional" reduction of the labor supply makes it possible for the unions to raise their members' wage rates. Their success in raising the wages of their members is won at the expense of those whom they have excluded. These outsiders are forced to look for jobs in industries in which remuneration is lower than what they would have earned in the field that is closed to them.

Effects of Labor Unions

Labor unionism as we know it today is the outcome of a long evolution. In the beginning only a few branches were organized, mostly those with the best-paid skilled workers. At that time, those who could not find a job in a unionized industry because wages had been pushed above the potential market height and thereby the demand for labor had been reduced, were forced to go into the non-unionized branches of business. Their influx into these branches increased in them the number of jobseekers and thus tended to depress there the height of wage rates. Thus, the higher wages of unionized workers brought about pressures on the jobs and wages of non-unionized workers. The more unionization spread, the more difficult it became for those who had lost their jobs on account of union policy to find other jobs; they remained unemployed. Wherever and whenever the unions succeeded in raising wage rates above the potential market rate, i.e., above the amount the workers would have earned without union interference, "institutional" unemployment developed as a lasting phenomenon.

As the union leaders see it, the determination of wage rates is the outcome of a struggle for power between the employers and the employees. Their interpretation does not acknowledge that wages depend on the state of the market and that the workers who receive the wages form the immense majority of the consumers out of whose pockets the wages are ultimately paid. The average wage earner considers it unfair that the movie star and the boxing champion are paid a hundred times more than the welder and the charwoman. He fails to see that his own behavior, his own purchases on the market, and those of other wage earners like him contribute to this result. An entrepreneur cannot pay more to a worker than he expects to collect from the customers for this man's performance. Even the most infatuated supporters of the exploitation doctrine are finally forced to admit that, at a certain height of wage rates, lasting unemployment of a considerable part of the potential labor force becomes unavoidable.

The market economy is ultimately controlled by the conduct of the consumers, that is by the conduct of all the people. In buying or in desisting from buying, the consumers determine what ought to be produced, of what quality and in what quantity. They determine who should make profits and who should suffer losses. They make rich men poor and poor men rich. The consumers are continuously shifting control of the material factors of production into the hands of those entrepreneurs, capitalists, and landowners who are most successful in supplying them, the consumers, in the cheapest and best possible way. Thus, in the capitalistic economy control of the factors of production is, as it were, a revocable mandate granted by the public. The operation of the market, in a daily repeated plebiscite, assigns to everybody the place in which he is to contribute to the united effort of all. This daily plebiscite determines the height of everybody's income.

The Alternative?Socialism

The individual resents the fact that he is forced to adjust himself to the conditions of the market and must forgo many of his own wishes and inclinations. However, it is obvious that the immeasurable benefits that cooperation under the system of the social division of labor affords to everybody must be paid for by some sacrifices. Whatever society's economic organization may be, it must always prevent man from behaving without due concern for the existence of others. The alternative to the hegemony of the market under capitalism is not absolute freedom, but the unconditional surrender of all to the supremacy of the socialist planning authority.

Society cannot do without an institution that channels the available workers into those branches in which they are most urgently needed and withdraws them from those in which there is less need for them. The labor market serves this purpose in raising wage rates in expanding industries and reducing them in shrinking industries. The alternative is to assign to each man a job by government order.

The tyranny of the labor market is milder than that of socialist regimentation. It grants to the individual a margin within which he is free to ignore the market's directives. If he is prepared to put up with a lower income, he can choose vocations in which he can either dedicate himself to his ideals or indulge his inclination for laziness. But the command of the socialist dictator does not brook contradiction.

There is only one method to abolish lasting mass unemployment, the return to the freedom of the labor market. Lasting mass unemployment is always institutional. It is the inevitable effect of the enforcement of wage rates that are higher than the potential market rates at which all jobseekers could find employment. It does not matter whether these minimum wage rates were decreed directly by the government or induced indirectly by the fact that the government is not willing to protect the enterprises and the strikebreakers against the violence of the unions.

The political power of the unions has succeeded in suppressing the dispassionate discussion of these problems. But it could not prevent the undesirable consequences of the unions' policies from wreaking havoc. In the twenties, in many European countries mass unemployment became the main political embarrassment. It was clear that these conditions could not continue indefinitely. Something had to be done. Smart politicians thought that they had found a solution. As it was deemed impermissible to antagonize the unions, and to tamper with the money wage rates dictated by them, they resorted to currency devaluation, reducing purchasing power and, thus, real wage rates. England took the lead in 1931. Very soon other countries followed.

For a while the nostrum worked. Some time passed before the unions began to pay full attention to the drop in the monetary unit's purchasing power. But when the index of the cost of living became the main issue in wage negotiations, the monetary method of eliminating mass unemployment had exhausted its serviceableness.

A New Messiah

It was precisely at this juncture that Lord Keynes entered the scene with his good tidings, the allegedly new economic doctrine designed to supersede all previous economic teachings, including those of the earlier writings of Keynes himself. Following in the wake of the politicians who in 1931 had demolished the British gold standard, and of their imitators, he pointed out that "a gradual and automatic lowering of real wages," that results from a lowering of the monetary unit's purchasing power, will be less strongly resisted than attempts to revise money wages downward. But in 1936, when Keynes' book was published, this no longer agreed with the facts.

Keynes' General Theory of 1936 and his later writings are hardly different from the bulk of inflationist literature which for more than a century has flooded the world. Like the authors of all these pamphlets, Keynes tries to dispose of all those who do not share his opinions by calling them "orthodox." He never tries to disprove their teachings rationally. He enriched the prosaic language of diplomatic correspondence by terms borrowed from the messianic jargon of the "monetary cranks." For instance, in the British document that inaugurated the events which finally led to the establishment of the International Monetary Fund, he declared that credit expansion performs the "miracle ... of turning a stone into bread." But he did not add any new idea to the old, long since entirely refuted and discredited arguments of the inflationists. All Keynes accomplished was to coin a new slogan?"full employment"?which became the motto of present-day policies of inflation and credit expansion.

The full-employment doctrine underlying these inflation and credit expansion policies, in complete accord with the teachings of the Communist Manifesto, declares that the very operation of the capitalistic mode of production inevitably generates the emergence of mass unemployment. Unlike the creed of the more consistent Marxians it does not, however, contend that the return of periods of economic depression and large-scale unemployment is absolutely inevitable in the market economy. It attributes to the State (with a capital S) the power to create jobs for everybody. All that the State has to do is to put more money into the hands of the people and thereby to increase demand. It is wrong, this official full-employment doctrine goes on to assert, to call an increase in the quantity of money created for this purpose, inflation. It is just "full-employment" policy. Those "reactionaries" who ramble on about monetary stability and the return to gold are depicted as the worst enemies of civilization, public welfare and the common man.

The climate of opinion of the United States is fully dominated by these ideas. The unions are in a position to succeed in what are euphemistically called wage negotiations because the laws are loaded in favor of the unions and because the Government is always prepared to use its power to their advantage. (In this regard it does not make much difference whether the Administration is Republican or Democratic.) From time to time the unions ask for raises; the employers are forced to yield; as soon as business begins to slacken and workers are discharged, public opinion vehemently asks for more "easy money." After a short period of hesitation the Administration gives in and puts pressure upon the Federal Reserve Board to reduce interest rates, so as to increase the quantity of money and make it "easier."

A Few Dissenters

Fortunately the inflationary policy is still seriously resisted by a group of critics who are not numerous but who are conspicuous by their competence and familiarity with the problems involved. Among these dissenters are several eminent writers, a few influential businessmen and, what is worthy of notice, also some members of the Federal Reserve Board. This handful of men do not have the power to put an end to this nefarious monetary and credit policy. Yet their weighty reasoning has in the last years, especially under President Eisenhower's regime, succeeded in keeping the inflationary ventures within narrow limits. It is the merit of their warning voices that the world's richest country has up to now not embarked upon the pernicious policy of runaway inflation.

The full significance of this success can only be appreciated if one takes into account the vehemence of the pro-inflationist propaganda of university teachers and of "progressive" politicians and journalists. Some of the utterances of these people are really amazing. Thus several years ago the then Chairman of the Federal Reserve Bank of New York declared: "Final freedom from the domestic money market exists for every sovereign national state where there exists an institution which functions in the manner of a modern central bank, and whose currency is not convertible into gold or into some other commodity." The lecture that contained this statement had the characteristic title: "Taxes For Revenue Are Obsolete." In the same vein, a professor of economics pointed out, in a voluminous work, that the government, "can raise all the money it needs by printing it"; the purpose of taxation is "never to raise money" but "to leave less in the hands of the taxpayer."

The weakness of the small group advocating sound monetary policy and fighting all inflationary measures is their disinclination to attack the "full employment" doctrine openly and directly. It is practically impossible to bring this issue up before the public. Certainly there are men with the courage to risk their careers or even their personal safety by criticizing the "full employment" doctrine. But there are neither newspapers nor publishers who would dare to spread doctrines that criticize and reject the institution of unionism in principle. Even those writers who occasionally expose blackmail and embezzlement on the part of individual union officers emphasize again and again that they consider the institution of unionism as such, and the policies of the unions, as beneficial to the welfare of the wage earners and the whole nation; they merely intend to free the unions from dishonest leaders. As long as such ideas about the effects of unionism prevail, even modest attempts at repealing the privileges granted to the unions by the New Deal are doomed to fail, and there cannot be any question of Protecting enterprises and those willing to work against violence on the part of the unions.

At the most recent meeting of the International Monetary Fund there was much talk about the danger of inflation. In order to fight this danger, it is no longer enough to work for a better understanding of monetary problems. It is no less important to enlighten public opinion about the absurdity of the "full-employment" doctrine that guides the conduct of all governments and all political parties today.

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