Ludwig M. Lachmann: Review of The Economics of Full Employment (1945)

Ludwig M. Lachmann’s journal book review examines six studies prepared at the Oxford University Institute of Statistics by T. Balogh, F. A. Burchardt, M. Kalecki, K. Mandelbaum, E. F. Schumacher, and G. D. N. Worswick. He praises the volume’s division of intellectual labour: Balogh and Kalecki supply its principal theoretical arguments, while the other contributors develop subsidiary explanations and applications. His approval is substantial but selective:

Their two papers are genuine contributions to economic science, closely reasoned, always interesting, mostly original.

The review nevertheless questions whether the proposed instruments of full employment can preserve investment incentives, productive supply, international exchange, and coherent political priorities. Lachmann organizes his discussion around three connected problems: redistributive taxation, the wage-price spiral, and the possibility of maintaining full employment within a single country. His central objection is that the management of effective demand does not remove the constraints imposed by profitability, international interdependence, or political bargaining.

Kalecki prefers redistributive taxation to continuing budget deficits as a means of raising the marginal propensity to consume. To protect investment, he proposes taxing gross income while deducting expenditure on fixed capital, whether for replacement or expansion. Lachmann recognizes the proposal’s ingenuity but tests its institutional details. When investment is financed through borrowing, who receives the tax advantage—the lender or the borrower? He also asks whether arrangements could be devised by which income invested in one year would subsequently be treated as lost. These questions expose unresolved problems in assigning and safeguarding the proposed exemption.

Schumacher’s objection to persistent deficits receives a more ironic treatment. His concern is that accumulating public debt could produce wealthy rentiers whose conspicuous consumption eventually raises demand enough to make further deficits unnecessary. Lachmann brings out the peculiarity of this argument: the policy would have solved unemployment, but its resulting distribution of wealth and consumption would remain morally objectionable. The issue therefore moves beyond the achievement of full employment to the social composition of the economy that achieves it.

The wage-price discussion makes that distributive purpose more explicit. Kalecki proposes stabilizing prices through subsidies financed by taxes on non-wage incomes, linking wage bargaining to demands for higher taxation of larger incomes. Worswick envisages rising real wages, falling disposable non-wage incomes, and a declining budget deficit. Alternatively, a price stop could force rising wages to be absorbed through lower profits. Because wage-earners consume a larger proportion of their incomes, this redistribution would increase effective demand, requiring additional taxation or reduced public investment to prevent excess demand.

Lachmann’s decisive objection concerns supply rather than the adjustment of aggregate expenditure. If wages continue rising while prices remain fixed, profits may eventually disappear, reducing output and consumption:

For in the absence of profit no amount of "effective demand" will call forth effective supply.

He identifies the assumption behind the proposed redistribution: non-wage incomes are treated as residual amounts that can be squeezed indefinitely. His examples of legal and sartorial services challenge that assumption by suggesting that their provision also depends on the incomes received by suppliers. The criticism is therefore broader than a defence of profits alone. Demand management cannot simply disregard the conditions under which different productive services remain available.

Balogh’s international analysis extends the problem from domestic distribution to the compatibility of national policies. Lachmann presents its central result as a conflict between an internationally integrated economy and independently pursued employment objectives:

For the more fully integrated the World Economy, the less possible it is for individual countries to insulate themselves against disturbances originating abroad.

Where countries follow divergent policies, disturbances transmitted through trade and investment undermine national insulation. Balogh consequently advocates large, relatively self-sufficient regional unions pursuing common policies and planned economic progress. Lachmann separates this conclusion from Balogh’s assumptions about American instability and recurrent crises resembling 1929. Even if those assumptions are rejected, a country determined to conduct wage and price policy independently of external conditions may still be driven to restrict international commerce. Capital controls sharpen the difficulty because their enforcement also requires control over foreign transactions through which capital transfers can be disguised. Lachmann is less persuaded by Balogh’s optimism about recruiting poorer countries, especially alongside warnings against foreign loans.

Mandelbaum’s study of Germany in 1936–38 receives only brief attention. Lachmann calls it interesting but questions the characterization of its subject as a major capitalist country. His concluding criticism then shifts from economic mechanisms to political choice. Throughout the volume, appeals to “social priorities” appear to supply an authoritative basis for policy, although its conclusion acknowledges that such priorities remain politically contested. Against Kalecki’s assurance that these priorities would exclude wasteful bridge-building undertaken merely to provide employment, Lachmann imagines five constituencies whose local political support requires precisely such expenditure. Naming social priorities does not establish an objective rule capable of overriding political interests.

The review closes by questioning the historical framework guiding these proposals:

We may at least doubt whether economists preparing to fight the vicissitudes of 1950 with methods based on the experiences of 1929 and very little else, are really in a much better position.

Lachmann’s relevance lies in this combination of theoretical appreciation and scrutiny of policy mechanisms. He does not dismiss the contributors’ analytical achievements; he asks whether their instruments can withstand changing economic circumstances and the incentives of producers, trading partners, and political actors.