Political Economy Students' Journal

In his 1950 “Full Employment, Planning, and Inflation”, Friedrich Hayek lays out criticism of what he saw as the main drivers of economic policy after the II World War. Such analysis is mainly done in the theoretical realm, neglecting in some way the question of whether such premises have practical grounds behind it. As such, in the following essay, I will seek to argue the inherent disconnection existing within Hayek’s economic theory and its political viability. I will thus, not draw an economic judgment on Hayek’s ideas concerning central planning, but rather explore their apparent impracticability. This will be done by first giving a brief exposition of the main arguments laid out in the article, to shed light on the tension found in Hayek between long-term and short-term implications, which will afterward be related to political systems, to suggest a political infeasibility of long-term economic policies.

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Hayek purports to discredit policies that call for central planning. At his time, the world was seeing huge support for Keynesian economic policies, namely those of full employment, defined by Hayek as the “maximum of employment that can be brought about in the short run by monetary pressures” (Hayek, 1950). Without going into much detail about why Hayek thought this was a bad policy, he essentially pointed out the dilemma that countries would face if they were to implement full employment, with regards to monetary pressures. He argued that a country would either have to continue with credit expansion to maintain the high levels of employment and face inflation, or they would eventually need to stop it and subsequently create “recurrent waves of unemployment”. This is mostly because while in a process of expansion, demand on the labor market will mainly be attracted towards occupations where expenditure is made. As a result, once expenditure stops, we see a fall in the demand for those areas, resulting in unemployment. Not only that, but he also points out that full employment could have a reverse effect, in the case it is created from a mismatch between the demand and supply of labor, given that the mobility of workers would be more determined by the distribution of the expenditure, rather than the actual necessary labor distribution in one sector or the other. As an alternative to central planning, Hayek then proposes a “re-allocation of labor” as the solution, defined not by the government, but purely by market forces, to maintain “more or less stable” monetary conditions.

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On the whole, this is the economic argument put forward by Hayek in the article, and one thing that becomes evident from it is a clear negligence of short-term implications in comparison to long-term implications. On its own, this could be seen as a mere curiosity of his analysis. However, Hayek does not focus on long-term implications solely because of the negative economic implications that he perceives central planning to have. He does this, in my view, because of his philosophical and political reasonings, and particularly, because of his views on liberty and its promotion. From his perspective, apart from being economically unsound, economic planning serves to reinforce government control over individuals, considering that “government in effect decides what and how much he is to produce” (Hayek, 1950). Consequently, the government would be encroaching on “A condition of liberty in which all are allowed to use their knowledge for their own purposes, restrained only by rules of just conduct of universal application” (Hayek, 1971). Or, in other words, government would be increasingly infringing on people’s negative freedoms, by coercing them. 

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As such, Hayek ends up being very critical of any approaches that he sees as being focused on “short-term” gains, as he would look at them with an inherent distrust that their result would lead to bigger costs (particularly to individual liberties). But here arises what I would say is the first problem in Hayek’s approach. By rejecting short-term solutions, Hayek inevitably ends up adopting a very theoretical reasoning. As he himself puts it in the introduction of a different work of his, the Constitution of Liberty, his aim is not “chiefly concerned with the problems of any particular country or of a particular moment of time but, …, with principles which claim universal validity.” (Hayek, 1960). In the article being analyzed, one could say he does the same. As a result, he enters a conundrum, whereby on the one hand, he seeks to contradict the tendencies towards central planning on his own time while, on the other hand, he tries to “warn” future generations of the harms of State control. The problem with this resides in the neglect of any considerations of possible particularities that led to the rise in central planning policies in his own time, focusing instead on general assumptions that can be said to be “universal”. However, particularities do matter, for instance how the Great Depression affected people or the effects of the II World War in the shaping of public support for certain policies. By not addressing these issues, Hayek seems to fall short of changing people’s minds. He fails to find a connection between his theory and practical realities, thereby making it difficult for individuals to relate to his own ideas, and consequently leads to their overall rejection in the public sphere. On the contrary, a contemporary of his, Keynes, was very keen on stressing the particularities of the living conditions of people at the time, thereby making it easier for the public to connect with his view on full employment (as it had immediate short-term effects, like the increase of employment).

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This apparent inability of Hayek to link his theory with practical reality then results in why I suggest he is at odds with public policy in general. He ends the article by suggesting that economic policy needs to be “governed less by the pressing needs of the moment than by an understanding of the long period effects” (Hayek, 1950). However, he does not couple this with any suggestion of how a political system should be arranged to achieve it, but rather suggests a deep distrust of the capabilities of democratic institutions, probably due to the focus given by governments on short-term aims to get public support for elections (Spurling, 2020). This then begs the question of what the alternative should be. One could maybe point to non-democratic political systems to enact policies that converge with the long-term analysis proposed by Hayek. However, political systems in general all share a need to respond to public pressure (Easton, 1953), avoid political instability, and achieve political legitimization. Regardless of how they respond towards it (democratically or not), political systems have an inherent interest in short-term policies, as they linger the most on people’s minds, not differing greatly in economic public policies (Mulligan, Gil, Sala-i-Martin, 2004). Consequently, Hayek’s proposition of making economic policy focused on long-run effects is less politically feasible. Hayek calls out democratic institutions for this, but even in non-democracies typically associated with him (Chile under Pinochet), the support for the policies was mainly explained through short-term economic considerations – the overcoming of an economic crisis (Huneeus, 2000) -, rather than long-term calculations. Consequently, those same policies ended up being limited in time, in line with falling public support.

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In conclusion, by focusing on the long-term implications of economic policy, Hayek finds himself “stuck” in the theoretical sphere. Lacking an analysis of how reality (political systems, historical events) affects public policy support or lack thereof, he creates a disconnection between his theory and its practicality. Consequently, his ideas are thus perceived as less appealing, not only to the public in general but also to political systems, as the latter seeks to respond to the former’s concerns for political legitimization.

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Bibliography

 

Easton, David. The political system: an inquiry into the state of political science. 1st ed. New York: Knopf, 1955.
Hayek, Friedrich A. von, Ronald Hamowy, e Friedrich A. von Hayek. “Introduction”, in The constitution of liberty: the definitive edition, 47-57. The collected works of F. A. Hayek, v. 17. Chicago: University of Chicago Press, 2011.

Hayek, F. A. "Fourteen. FULL EMPLOYMENT, PLANNING AND INFLATION" In Essays on Liberalism and the Economy, Volume 18 edited by Paul Lewis, 200-209. Chicago: University of Chicago Press, 2022. https://doi.org/10.7208/chicago/9780226781471-016

Hayek, F. A.. "3. Principles and Expediency" In Law, Legislation, and Liberty, Volume 19 edited by Jeremy Shearmur, 79-96. Chicago: University of Chicago Press, 2022. https://doi.org/10.7208/chicago/9780226782003-007

Huneeus, Carlos, e Lake Sagaris. “The Chicago Boys: Legitimation Through Economic Success”, in The Pinochet Regime, 271-307. Boulder: Lynne Rienner Publishers, 2000.

Mulligan, Casey B., Ricard Gil, and Xavier Sala-i-Martin. “Do Democracies Have Different Public Policies than Nondemocracies?” The Journal of Economic Perspectives 18, no. 1 (2004): 51–74. http://www.jstor.org/stable/3216875. 

Spurling, B. «The peril of modern democracy: Short-term thinking in a long-term world — United States Studies Centre». Accessed 8th December 2022. https://www.ussc.edu.au/analysis/the-peril-of-modern-democracy-short-term-thinking-in-a-long-term-world.