The Path of Least Resistance

The manner in which inflation operates explains why it is so difficult to resist when policy mainly concerns itself with particular situations rather than with general conditions and with short-term rather than with long-term problems. It is usually the easy way out of any temporary difficulties for both government and private business—the path of least resistance and sometimes also the easiest way to help the economy get over all the obstacles that government policy has placed in its way.³⁵ It is the inevitable result of a policy which regards all the other decisions as data to which the supply of money must be adapted so that the damage done by other measures will be as little noticed as possible. In the long run, however, such a policy makes governments the captives of their own earlier decisions, which often force them to adopt measures that they know to be harmful. It is no accident that the author whose views, perhaps mistakenly interpreted, have given more encouragement to these inflationary propensities than any other man’s is also responsible for the fundamentally anti-liberal aphorism, ‘in the long run we are all dead’.³⁶ The inflationary bias of our day is largely the result of the prevalence of the short-term view, which in turn stems from the great difficulty of recognising the more remote consequences of current measures, and from the inevitable preoccupation of practical men, and particularly politicians, with the immediate problems and the achievement of near goals.

Because inflation is psychologically and politically so much more difficult to prevent than deflation and because it is, at the same time, technically so much more easily prevented, the economist should always stress the dangers of inflation. As soon as deflation makes itself felt, there will be immediate attempts to combat it—often when it is only a local and necessary process that should not be prevented. There is more danger in untimely fears of deflation than in the possibility of our not taking necessary counter-measures. While nobody is likely to mistake local or sectional prosperity for inflation, people often demand wholly inappropriate monetary counter-measures when there is a local or sectional depression.

These considerations would seem to suggest that, on balance, probably some mechanical rule which aims at what is desirable in the long run and ties the hands of authority in its short-term decisions is likely to produce a better monetary policy than principles which give to the authorities more power and discretion and thereby make them more subject to both political pressure and their own inclination to overestimate the urgency of the circumstances of the moment. This, however, raises issues which we must approach more systematically.

17. (b) Inflation—The Deceit is Short-lived

I certainly have no wish to weaken the case for any arrangement that will force the authorities to do the right thing. The case for such a mechanism becomes stronger as the likelihood of the monetary policy’s being affected by considerations of public finance becomes greater; but it would weaken, rather than strengthen, the argument if we exaggerated what can be achieved by it. It is probably undeniable that, though we can limit discretion in this field, we never can eliminate it; in consequence, what can be done within the unavoidable range of discretion not only is very important but is likely in practice to determine even whether or not the mechanism will ever be allowed to operate.

Limited Central Bank Influence

There is one basic dilemma, which all central banks face, which makes it inevitable that their policy must involve much discretion. A central bank can exercise only an indirect and therefore limited control over all the circulating media. Its power is based chiefly on the threat of not supplying cash when it is needed. Yet at the same time it is considered to be its duty never to refuse to supply this cash at a price when needed. It is this problem, rather than the general effects of policy on prices or the value of money, that necessarily preoccupies the central banker in his day-to-day actions. It is a task which makes it necessary for the central bank constantly to forestall or counteract developments in the realm of credit, for which no simple rules can provide sufficient guidance.³⁷

The same is nearly as true of the measures intended to affect prices and employment. They must be directed more at forestalling changes before they occur than at correcting them after they have occurred. If a central bank always waited until rule or mechanism forced it to take action, the resulting fluctuations would be much greater than they need be. And if, within the range of its discretion, it takes measures in a direction opposite to those which mechanism or rule will later impose upon it, it will probably create a situation in which the mechanism will not long be allowed to operate. In the last resort, therefore, even where the discretion of the authority is greatly restricted, the outcome is likely to depend on what the authority does within the limits of its discretion.

This means in practice that under present conditions we have little choice but to limit monetary policy by prescribing its goals rather than its specific actions. The concrete issue today is whether it ought to keep stable some level of employment or some level of prices. Reasonably interpreted and with due allowance made for the inevitability of minor fluctuations around a given level, these two aims are not necessarily in conflict, provided that the requirements for monetary stability are given first place and the rest of economic policy is adapted to them. A conflict arises, however, if ‘full employment’ is made the chief objective and this is interpreted, as it sometimes is, as that maximum of employment which can be produced by monetary means in the short run. That way lies progressive inflation.

The reasonable goal of a high and stable level of employment can probably be secured as well as we know how while aiming at the stability of some comprehensive price level. For practical purposes, it probably does not greatly matter precisely how this price level is defined, except that it should not refer exclusively to final products (for if it did, it might in times of rapid technological advance still produce a significant inflationary tendency), and that it should be based as much as possible on international rather than local prices. Such a policy, if pursued simultaneously by two or three of the major countries, should also be reconcilable with stability of exchange rates. The important point is that there will be definite known limits which the monetary authorities will not allow price movements to exceed—or even to approach to the point of making drastic reversals of policy necessary.

Weak Opposition to Inflation

Though there may be some people who explicitly advocate continuous inflation, it is certainly not because the majority wants it that we are likely to get it. Few people would be willing to accept it when it is pointed out that even such a seemingly moderate increase in prices as 3 percent per annum means that the price level will double every twenty-three and a half years and that it will nearly quadruple over the normal span of a man’s working life. The danger that inflation will continue is not so much due to the strength of those who deliberately advocate it as to the weakness of the opposition. In order to prevent it, it is necessary for the public to become clearly aware of the things we can do and of the consequences of not doing them. Most competent students agree that the difficulty of preventing inflation is only political and not economic. Yet almost no one seems to believe that the monetary authorities have the power to prevent it and will exercise it. The greatest optimism about the short-term miracles that monetary policy will achieve is accompanied by a complete fatalism about what it will produce in the long run.

There are two points which cannot be stressed enough: first, it seems certain that we shall not stop the drift toward more and more state control unless we stop the inflationary trend; and, second, any continued rise in prices is dangerous because, once we begin to rely on its stimulating effect, we shall be committed to a course that will leave us no choice but that between more inflation, on the one hand, and paying for our mistake by a recession or depression, on the other. Even a very moderate degree of inflation is dangerous because it ties the hands of those responsible for policy by creating a situation in which, every time a problem arises, a little more inflation seems the only easy way out.

We have not had space to touch on the various ways in which the efforts of individuals to protect themselves against inflation, such as sliding-scale contracts, not only tend to make the process self-accelerating but also increase the rate of inflation necessary to maintain its stimulating effect. Let us simply note, then, that inflation makes it more and more impossible for people of moderate means to provide for their old age themselves; that it discourages saving and encourages running into debt; and that, by destroying the middle class, it creates that dangerous gap between the completely propertyless and the wealthy that is so characteristic of societies which have gone through prolonged inflations and which is the source of so much tension in those societies. Perhaps even more ominous is the wider psychological effect, the spreading among the population at large of that disregard of long-range views and exclusive concern with immediate advantages which already dominate public policy.

It is no accident that inflationary policies are generally advocated by those who want more government control—though, unfortunately, not by them alone. The increased dependence of the individual upon government which inflation produces and the demand for more government action to which this leads may for the socialist be an argument in its favour. Those who wish to preserve freedom should recognise, however, that inflation is probably the most important single factor in that vicious circle wherein one kind of government action makes more and more government control necessary. For this reason all those who wish to stop the drift toward increasing government control should concentrate their efforts on monetary policy. There is perhaps nothing more disheartening than the fact that there are still so many intelligent and informed people who in most other respects will defend freedom and yet are induced by the immediate benefits of an expansionist policy to support what, in the long run, must destroy the foundations of a free society.

(The Constitution of Liberty, pp. 330–33, 336–39)

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¹Including the most ‘orthodox’ political economists, who invariably supported freedom of association. See particularly the discussion in J.R. McCulloch, Treatise on the Circumstances Which Determine the Rate of Wages and the Condition of the Labouring Classes (London, 1851), pp. 79–89, with its stress on voluntary association. For a comprehensive statement of the classical liberal attitude toward the legal problems involved see Ludwig Bamberger, Die Arbeiterfrage unter dem Gesichtspunkte des Vereinsrechtes (Stuttgart, 1873).

²Characteristic is the description of the ‘liberal’ attitude to unions in C.W. Mills, The New Men of Power (New York: Harcourt Brace, 1948), p. 21:

‘In many liberal minds there seems to be an undercurrent that whispers: “I will not criticise the unions and their leaders. There I draw the line.” This, they must feel, distinguishes them from the bulk of the Republican Party and the right-wing Democrats, this keeps them leftward and socially pure.’

³A.V. Dicey, ‘Introduction’ to the second edition of his Law and Opinion (London: Macmillan, 1914), pp. xlv–xlvi. He continues to say that the law

makes a trade union a privileged body exempted from the ordinary law of the land. No such privileged body has ever before been deliberately created by an English Parliament [and that] it stimulates among workmen the fatal delusion that workmen should aim at the attainment, not of equality, but of privilege.

Cf. also the comment on the same law thirty years later, by J.A. Schumpeter, Capitalism, Socialism, and Democracy (New York: Harper & Row, 1942), p. 321:

It is diffcult, at the present time, to realise how this measure must have struck people who still believed in a state and in a legal system that centred in the institution of private property. For in relaxing the law of conspiracy in respect to peaceful picketing—which practically amounted to legalisation of trade-union action implying the threat of force—and in exempting trade-union funds from liability in action for damages for torts—which practically amounted to enacting that trade unions could do no wrong—this measure in fact resigned to the trade unions part of the authority of the state and granted to them a position of privilege which the formal extension of the exemption to employers’ unions was powerless to affect.

still more recently the Lord Chief Justice of Northern Ireland said of the same act (Lord MacDermott, Protection from Power under English Law [London: stevens & Sons, 1957], p. 174) : ‘In short, it put trade unionism in the same privileged position which the Crown enjoyed until ten years ago in respect of wrongful acts committed on its behalf’.

⁴Roscoe Pound, Legal Immunities of Labor Unions (Washington, D.C.: American Enterprise Association, 1957), p. 23, reprinted in E.H. Chamberlin, and others, Labor Unions and Public Policy (Washington, D.C.: American Enterprise Association, 1958).

⁵Justice Jackson dissenting in Hunt v. Crumboch, 325 US 831 (1946).

⁶Ludwig von Mises, Die Gemeinwirtschaft (2nd ed.; Jena: Gustav Fischer, 1932), p. 447.

⁷Few liberal sympathisers of the trade unions would dare to express the obvious truth which a courageous woman from within the British labour movement frankly stated, namely, that ‘it is in fact the business of a Union to be anti-social; the members would have a just grievance if their officials and committees ceased to put sectional interests first’ (Barbara Wootton, Freedom under Planning [London: Allen & Unwin, 1945], p. 97). On the flagrant abuses of union power in the United States, which I shall not further consider here, see Sylvester Petro, Power Unlimited: The Corruption of Union Leadership (New York: The Ronald Press Company, 1959).

⁸In this chapter, more than in almost any other, I shall be able to draw upon a body of opinion that is gradually forming among an increasing number of thoughtful students of these matters—men who in background and interest are at least as sympathetic to the true concerns of the workers as those who in the past have been championing the privileges of the unions. See particularly W.H. Hutt, The Theory of Collective Bargaining (London: P.S. King, 1930), and Economists and the Public (London: Jonathan Cape, 1936); H.C. Simons, ‘Some Reflections on Syndicalism’, Journal of Political Economy LII (1944), reprinted in Economic Policy for a Free Society (Chicago: University Chicago Press, 1948); J.T. Dunlop, Wage Determination under Trade Unions (New York: Macmillan, 1944); Economic Institute on Wage Determination and the Economics of Liberalism (Washington, D.C.: Chamber of Commerce of the United States, 1947) (especially the contributions ‘Wage Determination as a Part of the General Problem of Monopoly’, by Jacob Viner and ‘Monopolistic Wage Determination as a Part of the General Problem of Monopoly’, by Fritz Machlup); Leo Wolman, Industry-wide Bargaining (Irvington-on-Hudson, N.Y.: Foundation for Economic Education, 1948); C.E. Lindblom, Unions and Capitalism (New Haven, Conn.: Yale University Press, 1949) (cf. the reviews of this book by A. Director, University of Chicago Law Review XVIII [1950]; by J.T. Dunlop in American Economic Review XL [1950]; and by Albert Rees in Journal of Political Economy LVIII [1950]); The Impact of the Union, ed. David McCord Wright (New York: Harcourt Brace, 1951 [especially the contributions ‘Some Comments on the Significance of Labor Unions for Economic Policy’, by M. Friedman and ‘Wage Policy, Employment, and Economic Stability ’, by G. Haberler]); Fritz Machlup, The Political Economy of Monopoly (Baltimore: Johns Hopkins Press, 1952); D.R. Richberg, Labor Union Monopoly (Chicago: Henry Regnery, 1957) ; Sylvester Petro, The Labor Policy of the Free Society (New York: The Ronald Press Company, 1957); E.H. Chamberlin, The Economic Analysis of Labor Power (1958), P.D. Bradley, Involuntary Participation in Unionism (1956), and G.D. Reilly, State Rights and the Law of Labor Relations (1955), all three published by the American Enterprise Association (Washington, D.C.) and reprinted together with the pamphlet by Roscoe Pound (LegalImmunities of Labor Unions; B.C. Roberts, Trade Unions in a Free Society (London: Institute of Economic Affairs, 1959); and John Davenport, ‘Labor Unions in the Free Society ’, Fortune (April, 1959), and ‘Labor and the Law ’, Fortune (May, 1959). On general wage theory and the limits of the powers of the unions see also J.R. Hicks, The Theory of Wages (London: Macmillan, 1932); R. Strigl, Angewandte Lohntheorie (Leipzig and Vienna: Franz Deuticke, 1926); and The Theory of Wage Determination, ed. J.T. Dunlop (London: Macmillan, 1957).

⁹See particularly the works by H. C. simons and W. H. Hutt cited in the preceding note. Whatever limited validity the old argument about the necessity of ‘equalising bargaining power’ by the formation of unions may ever have had, has certainly been destroyed by the modern development of the increasing size and specificity of the employers’ investment, on the one hand, and the increasing mobility of labour (made possible by the automobile), on the other.

¹⁰This must be emphasised especially against the argument of Lindblom in Unions and Capitalism.

¹¹Chamberlin, The Economic Analysis of Labor Power, pp. 4–5, rightly stresses that ‘there can be no doubt that one effect of trade union policy . . . is to diminish still further the real income of the really low income groups, including not only the low income wage receivers but also such other elements of society as “self-employed” and small business men’.

¹²Cf. F. Machlup in these two studies: ‘Monopolistic Wage Determination as a Part of the General Problem of Monopoly’ and The Political Economy of Monopoly.

¹³A conspicuous example of this in recent times is the case of the notoriously unorganised domestic servants whose average annual wages (as pointed out by M. Friedman in D. Wright’s The Impact of the Union, p. 224) in the United States in 1947 were 2.72 times as high as they had been in 1939, while at the end of the same period the wages of the comprehensively organised steel workers had risen only to 1.98 times the initial level.

¹⁴Cf. Bradley, Involuntary Participation in Unionism.

¹⁵Cf. S.P. Sobotka, ‘Union Influence on Wages: The Construction Industry’, Journal of Political Economy LXI (1953).

¹⁶It would be difficult to exaggerate the extent to which unions prevent the experimentation with, and gradual introduction of, new arrangements that might be in the mutual interest of employers and employees. For example, it is not at all unlikely that in some industries it would be in the interest of both to agree on ‘guaranteed annual wages’ if unions permitted individuals to make a sacrifice in the amount of wages in return for a greater degree of security.

¹⁷To illustrate the nature of much contemporary wage bargaining in the United States, E.H. Chamberlin, in The Economic Analysis of Labor Power, uses an analogy which I cannot better:

Some perspective may be had on what is involved by imagining an application of the techniques of the labour market in some other field. If A is bargaining with B over the sale of his house, and if A were given the privileges of a modern labour union, he would be able (1) to conspire with all other owners of houses not to make any alternative offers to B, using violence or the threat of violence if necessary to prevent them, (2) to deprive B himself of access to any alternative offers, (3) to surround the house of B and cut off all deliveries of food (except by parcel post), (4) to stop all movement from B’s house, so that if he were for instance a doctor he could not sell his services and make a living, and (5) to institute a boycott of B’s business. All of these privileges, if he were capable of carrying them out, would no doubt strengthen A’s position. But they would not be regarded by anyone as part of ‘bargaining’—unless A were a labour union.

¹⁸Cf. Petro, The Labor Policy of the Free Society, p. 51:

Unions can and do serve useful purposes, and they have only barely scratched the surface of their potential utility to employees. When they really get to work on the job of serving employees instead of making such bad names for themselves as they do in coercing and abusing employers, they will have much less difficulty than they presently have in securing and keeping new members. As matters now stand, union insistence upon the closed shop amounts to an admission that unions are really not performing their functions very well.

¹⁹Cf. C.I. Barnard, ‘Functions and Pathology of Status Systems in Formal Organizations’, in Industry and Society, ed. W.F. Whyte (New York: McGraw-Hill 1946), reprinted in Barnard’s Organization and Management (Cambridge, Mass.: Harvard University Press, 1949).

²⁰Cf. Sumner Slichter, Trade Unions in a Free Society (Cambridge, Mass: Harvard University Press, 1947), p. 12, where it is argued that such rules ‘introduce into industry the equivalent of civil rights, and they greatly enlarge the range of human activities which are governed by rule of law rather than by whim or caprice.’ See also A.W. Gouldner, Patterns of Industrial Bureaucracy (Glencoe, Ill.: The Free Press, 1954), especially the discussion of ‘rule by rule’.

²¹See particularly Franz Böhm, ‘Das wirtschaftliche Mitbestimmungsrecht der Arbeiter im Betrieb’, Ordo IV (1951); and Götz Briefs, Zwischen Kapitalismus und Syndikalismus (Bern: Francke, 1952).

²²See the essays ‘Wage Determination as a Part of the General Problem of Monopoly’, by Viner and ‘Wage Policy, Employment, and Economic Stability’, by Haberler; ‘Some Comments on the Significance of Labor Unions for Economic Policy’, by Friedman; and the book The Labor Policy of the Free Society by Petro.

²³Such contracts binding on third parties are equally as objectionable in this field as is the forcing of price-maintenance agreements on non-signers by ‘fair-trade’ laws.

²⁴Such legislation, to be consistent with our principles, should not go beyond declaring certain contracts invalid, which is sufficient for removing all pretext for action to obtain them. It should not, as the title of the ‘right-to-work laws’ may suggest, give individuals a claim to a particular job, or even (as some of the laws in force in certain American states do) confer a right to damages for having been denied a particular job, when the denial is not illegal on other grounds. The objections against such provisions are the same as those which apply to ‘fair employment practices’ laws.

²⁵See A. Lenhoff, ‘The Problem of Compulsory Unionism in Europe’, American Journal of Comparative Law V (1956).

²⁶See Petro, Power Unlimited: The Corruption of Union Leadership, esp. pp. 235ff. and 282.

²⁷See the articles by G. Haberler and myself in Problems of United States Economic Development, ed. by the Committee for Economic Development, Vol. I (New York, 1958).

²⁸Cf. Arthur J Brown, The Great Inflation, 1939–1951 (London: Oxford University Press, 1955).

²⁹See J.R. Hicks, ‘Economic Foundations of Wage Policy’, Economic Journal LXV (1955), esp. p. 391:

The world we now live in is one in which the monetary system has become relatively elastic, so that it can accommodate itself to changes in wages, rather than the other way about. Instead of actual wages having to adjust themselves to an equilibrium level, monetary policy adjusts the equilibrium level of money wages so as to make it conform to the actual level. It is hardly an exaggeration to say that instead of being on a Gold Standard, we are on a Labour Standard.

But see also the same author’s later article, ‘The Instability of Wages’, Three Banks Review, no. 31 (September, 1956).

³⁰See W. Beveridge, Full Employment in a Free Society (London: George Allen & Unwin, 1944); M. Joseph and N. Kaldor, Economic Reconstruction after the War (handbooks published for the Association for Education in Citizenship [London, n.d.]); Barbara Wootton, The Social Foundations of Wage Policy (London: George Allen & Unwin, 1955); and, on the present state of the discussion, D.T. Jack, ‘Is a Wage Policy Desirable and Practicable?’, Economic Journal LXVII (1957). It seems that some of the supporters of this development imagine that this wage policy will be conducted by ‘labour’, which presumably means by joint action of all unions. This seems neither a probable nor a practicable arrangement. Many groups of workers would rightly object to their relative wages being determined by a majority vote of all workers, and a government permitting such an arrangement would in effect transfer all control of economic policy to the labour unions.

³¹See, e.g., Barbara Wootton, Freedom under Planning, p. 101:

The continual use of terms like ‘fair’, however, is quite subjective: no commonly accepted ethical pattern can be implied. The wretched arbitrator, who is charged with the duty of acting ‘fairly and impartially’, is thus required to show these qualities in circumstances in which they have no meaning; for there can be no such thing as fairness or impartiality except in terms of an accepted code. No one can be impartial in a vacuum. One can only umpire at cricket because there are rules, or at a boxing match so long as certain blows, like those below the belt, are forbidden. Where, therefore, as in wage determinations, there are no rules and no code, the only possible interpretation of impartiality is conservatism.

Also Kenneth F. Walker, Industrial Relations in Australia (Cambridge, Mass.: Harvard University Press, 1956), p. 362: ‘Industrial tribunals, in contrast with ordinary courts, are called upon to decide issues upon which there is not only no defined law, but not even any commonly accepted standards of fairness or justice.’ Cf. also Gertrud Williams [Lady Williams], ‘The Myth of “Fair” Wages’, Economic Journal LXVI (1956).

³²See Petro, The Labor Policy of the Free Society, pp. 262ff., esp. p. 264: ‘I shall show in this chapter that the rule of law does not exist in labour relations; that there a man is entitled in only exceptional cases to a day in court, no matter how unlawfully he has been harmed’; and p. 272:

Congress has given the NLRB [National Labor Relations Board] and its General Counsel arbitrary power to deny an injured person a hearing, Congress has closed the federal courts to persons injured by conduct forbidden under federal law. Congress did not, however, prevent unlawfully harmed persons from seeking whatever remedies they might find in state courts. That blow to the ideal that every man is entitled to his day in court was struck by the Supreme Court.

³³The Chairman of the English Trade Union Congress, Mr. Charles Geddes, was reported in 1955 to have said:

I do not believe that the trade union movement of Great Britain can live for very much longer on the basis of compulsion. Must people belong to us or starve, whether they like our policies or not? No. I believe the trade union card is an honour to be conferred, not a badge which signifies that you have got to do something, whether you like it or not. We want the right to exclude people from our union if necessary and we cannot do that on the basis of ‘Belong or starve’.

³⁴Cf. W. Röpke, Welfare, Freedom, and Inflation (London: Pall Mall Press, 1957).

³⁵Cf. my essay ‘Full Employment, Planning, and Inflation’, Review of the Institute of Public Affairs IV (Melbourne, Victoria, Australia, 1950); and the German version in Vollbeschäftigung, Inflation und Planwirtschaft, ed. A. Hunold (Zurich, 1951); and F.A. Lutz, ‘Inflationsgefahr und Konjunkturpolitik’, Schweizerische Zeitschrift fur Volkswirtschafi und Statistik XCIII (1957), and ‘Cost- and Demand-Induced Inflation’, Banca Nazionale de Lavoro Quarterly Review XLIV (1958).

³⁶J.M. Keynes, A Tract on Monetary Reform (London: Macmillan, 1923), p. 80.

³⁷See my essay ‘Monetary Nationalism and International Stability’.