Full Employment and Monetary Policy

This file is a short single-author policy essay. Its scope is the connection Mises draws among labor unions, institutional unemployment, Keynesian “full employment” policy, and inflation. The central thesis is stark: mass unemployment is not a normal product of capitalism but the effect of interventions that hold wage rates above market-clearing levels; monetary expansion then functions as a disguised way to reduce real wages while preserving the political prestige of unions.

Mises begins with a price-theoretic analogy. In an unhampered market, unsold goods indicate not inherent “unsalability” but a refusal to sell at the prevailing price. Government minimum prices create surpluses; the same logic, he argues, applies 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.

From this premise follows the essay’s governing claim: “full employment” is not produced by policy activism but by free wage adjustment. When unions or laws prevent that adjustment, unemployment becomes institutional rather than accidental.

In the unhampered labor market, wage rates always tend toward full employment.

The first major section explains union wage gains as redistribution within the working class. Unions can raise member wages only when they exclude outsiders from competing for the same jobs—through closed shops, restrictive entry, immigration limits, or racial exclusion. The gain is therefore not a general victory of labor over capital, but a privilege imposed on nonmembers.

Their success in raising the wages of their members is won at the expense of those whom they have excluded.

Mises then broadens the argument into a theory of consumer sovereignty. Wages are not determined by bargaining power alone but by what consumers are willing to pay for the worker’s contribution through the entrepreneur’s product. This is why he rejects exploitation theory and insists that wage policy cannot escape market valuation.

An entrepreneur cannot pay more to a worker than he expects to collect from the customers for this man's performance.

The essay’s middle movement contrasts capitalism not with unrestricted personal freedom but with socialist assignment. Mises concedes that markets discipline individuals and frustrate preferences, but he insists that any social order must allocate labor somehow. Market “tyranny,” in his account, is preferable because it leaves room for choice at lower income, whereas planning replaces price signals with command.

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.

The pivotal policy conclusion is then stated without qualification. Lasting unemployment arises from wage rates above the level at which all job seekers could be employed, whether those rates are imposed directly by government or indirectly by tolerating coercive union practices.

There is only one method to abolish lasting mass unemployment, the return to the freedom of the labor market.

Mises next turns to monetary policy. European governments, unwilling to confront unions or reduce money wages, used currency devaluation to reduce real wages covertly. This worked only temporarily, he argues, until unions began indexing wage demands to the cost of living. Keynes enters the essay at this point as the theorist who supplied a new legitimating language for old inflationism. Mises treats Keynesianism less as a theoretical breakthrough than as a political slogan for credit expansion.

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 final section shifts to the United States, where Mises sees a recurring cycle: unions demand wage increases, employers yield under legal and political pressure, unemployment rises, and public opinion demands “easy money.” He praises a small group of monetary dissenters for restraining runaway inflation, but criticizes them for failing to attack the doctrine of full employment at its root: the privileges of unionism and the refusal to let wage rates adjust.

The essay’s relevance lies in its fusion of labor economics and monetary theory. Mises’s core conceptual move is to deny that inflation is an independent cure for unemployment; rather, it is a political expedient that masks the real cause of unemployment—interference with labor-market pricing. Thus the defense of sound money, for him, cannot be separated from the defense of free labor markets.