Friedrich August von Hayek, “Full Employment, Planning and Inflation” (1967)

This file is a single policy essay, arranged in seven numbered sections and reprinted from a 1950 review article. Hayek’s scope is postwar economic policy: the interaction of full-employment doctrine, monetary expansion, inflation, and government control. Its thesis is that “full employment” as actually practiced no longer means a stable condition of freely adjusted markets, but an attempt to maintain employment by monetary pressure; that pressure produces inflation, inflation invites controls, and controls then create new demands for inflation.

In the years that have elapsed since the war, central planning, ‘full employment’, and inflationary pressure have been the three features which have dominated economic policy in the greater part of the world.

Hayek’s first conceptual move is definitional. He separates full employment as a desirable end from the policy technique that had come to bear its name. The problem is not the wish to avoid unemployment, but the belief that employment can be permanently raised through expansionary money.

Full employment has come to mean that maximum of employment that can be brought about in the short run by monetary pressure.

From there the essay attacks the Keynesian habit of treating unemployment chiefly as deficient aggregate demand. Hayek allows that monetary expansion can help in the exceptional case of general unemployment, but argues that modern economies more often suffer from uneven unemployment: some trades, places, and skills are idle while others face scarcity. In such cases more spending does not automatically reach the unemployed workers or employable resources.

But it is just not true that all unemployment is in this manner due to an insufficiency of aggregate demand and can be lastingly cured by increasing demand.

The center of the essay is therefore a theory of maldistribution. Unemployment may reflect a mismatch between the allocation of labour and the structure of demand. Expansion can obscure that mismatch by pulling workers into sectors temporarily favored by new credit, especially capital-goods industries, but when expansion stops the underlying distortion reappears. Stable employment requires adaptation, not permanent stimulus.

Where the cause of unemployment and of low aggregate incomes is such a discrepancy, only a re-allocation of labour can lastingly solve the problem in a free economy.

Sections III and IV develop this point dynamically. Monetary expansion changes the pattern of demand while it is occurring; labour moves toward demands that may not survive the end of expansion. Hayek also questions the humane-seeming policy of preserving existing money wages and jobs. It may delay mobility, accumulate necessary adjustments, and transform what could have been gradual movement into later mass displacement.

The next move links full-employment policy to planning. Monetary and fiscal expansion are indiscriminate: they may reduce unemployment in some sectors while creating shortages, price rises, and wage pressure in others. Governments then try to repress the consequences of their own policy through price controls, rationing, priorities, and allocations. Planning appears not as a coherent design but as a piecemeal response to inflation.

A government which uses inflation as an instrument of policy but wants it to produce only the desired effects is soon driven to control ever increasing parts of the economy.

Hayek then reverses the causal chain. Inflation leads to controls, but controls also make renewed inflation politically and economically tempting. Controls weaken market adjustment and entrepreneurial initiative; inflation masks this weakness by ensuring that almost anything produced can be sold.

The inefficiency of such a ‘planned economy’ is concealed by the effects of inflation.

The relevance of the essay lies in this circular account of intervention. Hayek is not merely warning that inflation is costly; he is arguing that a policy regime can become self-perpetuating. Expansion creates distortions, controls conceal them, controls reduce resilience, and the resulting stagnation is then cited as proof that more expansion is needed. The final section gives the argument its political edge: democratic governments, under pressure to relieve immediate suffering, may lack the restraint required to avoid policies whose delayed costs are greater than their present benefits.

If the outcome of economic policy is not to be altogether different from what has been desired, if we are not to be driven from one expedient to another, economic policy, more even than any other, must be long-range policy, governed less by the pressing needs of the moment than by an understanding of the long-period effects.