Review of the book
Unemployment and the Unions
by Friedrich Hayek
[Reprinted from, "Hayek, Poverty, Morality and
the Free Market."
Land and Liberty, March-April, 1981]
Keynes was wrong. According to Prof. Hayek, it is not aggregate
demand but its distribution that determines the level of employment,
and Keynes was mistaken in inferring from the special circumstances of
Britain's return to the gold standard in 1925 that an increase in
demand always stimulates employment. What is important is that the
supply of particular goods and services is responsive to the demand
for them: if the demanders seek more of one product and the suppliers
produce more of another, the equation of total supply with total
demand will not prevent a surplus of the 'wrong' product and the
redundancy of those who manufacture it.
It is futile, then, to increase aggregate demand when what is
required is the flexibility of suppliers to meet specific demands.
Such flexibility is most easily attained when there is freedom for
prices, including the price of labour, to move up or down and so
indicate where resources are best employed. Prices are signals which
reflect a volume of information about wants and costs too great for
any central planning agency to comprehend. The market signals tell
entrepreneurs what to produce. Anything that interferes with these
signals, such as price controls, distorts the messages the market is
trying to convey, and the result is misinterpretation and an imbalance
of supply and demand which causes unemployment.
For Prof. Hayek the chief villains of the contemporary British scene
are the trade unions. Not only are they incapable of affecting the
general level of wages (gains for one group of workers being secured
at the expense of other groups of workers) but their ability to raise
the price of their members' labour actually creates unemployment. When
demand for one product increases while that for another declines,
there should be a transfer of labour from firms making the less
popular product to those making the more popular one, but all too
often the workers in the firm whose business is expanding cream off
most of the benefits for themselves by restricting the entry of new
workers. For this reason, Prof. Hayek asserts that there will be no
salvation for Britain until the legal privileges of trade unions are
removed and relative wages, like other prices, are open to continued
Hayek declares that it was the rigidity of the wage structure
maintained by the trade unions which drove Keynes to advocate the
reduction of real wages by inflation, but argues that as the effect of
inflation is to defer the necessary adjustments it can be effective
only if applied at an accelerating rate. Potential unemployment piles
up as inflation proceeds and becomes evident as soon as inflation
stops or slackens, as eventually it must. Hayek believes that attempts
to reduce inflation gradually will fail, because the painful symptoms
as the drug is withdrawn will last too long to be politically
acceptable. He thinks it should be stopped dead since we will more
readily bear severe pain for a short time than lesser pain for longer.
Supporters of the market economy will share Hayek's enthusiasm to set
it free, but the attitude of trade unions is not the only obstruction.
Inflation is the responsibility of governments: they alone practise it
and they alone can stop it, if they have the will to do so.
Among the most interesting of Hayek's remarks are those about the
amorality of the market signalling system. The market is frequently
criticised because its decrees do not accord with ideas of social
justice. Hayek suggests that the market is primarily concerned with
communicating what is to be done rather than with rewarding what has
already been done and that it therefore has nothing to do with
fairness (which in any event is a subjective matter) but is simply a
neutral mechanism. Fascinatingly, Hayek contends that the moral
instincts we have inherited from a face-to-face society-when buyers
and sellers dealt with one another directly are a hindrance today when
people have to adjust to the wishes of others whom they will never see
and who are utterly remote from them.
It is a valid point that we must not foul up the market by misguided
altruism, but in his eagerness to protect the market Hayek dismisses
the moral instincts (apart from honesty) as no more than primitive
feelings we ought to have outgrown. One of the virtues of the market
is surely that it does not preclude, but happily accepts, private
conduct and forms of social organization that go beyond self-interest.
Co-operatives and charities, personal giving as well as personal
eccentricity, can flourish under capitalism in a way that free
enterprise cannot do under socialism.
Prof. Hayek does not ask why poverty may persist even when there is
no interference with market signalling. If production is buoyant but
the needs of millions of people are not being met, there is something
radically wrong with the environment in which the market mechanism is
operating. It is this that leads to a sense of injustice and this that
must be investigated and put right if a really free international
market is to be established.