Hayek's The Constitution of Liberty - Institute of Economic Affairs

h ay e k ’ s t h e c o n s t i t u t i o n o f l i b e r t y
s t o p p i n g c o e r c i o n i n e m p l o y m e n t
Economic and political dangers
Hayek’s principled objection to coercive unionism is that it
violates the Rule of Law. But he also argues that union wage
policy is ‘economically very harmful and politically exceedingly
dangerous’ (272). Some of these economically harmful consequences
– distortion of the wage structure, unjustified inequalities
among workers, diminished productivity – we have mentioned.
Union activities also restrict the mobility of labour, disadvantage
some industries more than others, and (often in collusion with
enterprise) produce monopolies that limit competition (280–81).
But why, besides causing economic harm, are union policies
‘exceedingly dangerous’ politically? Hayek fears that these policies
will lead to a ‘system of over-all socialist planning’ (273) or ‘the
transformation of the whole of society into a centrally planned
and administered system’ (282).
Hayek identifies two distinct but related causes that can
produce this dangerous result: the crippling of market allocations;
and runaway inflation. The first point is that unions, by
establishing monopolies in the supply of labour, ‘prevent competition
from acting as an effective regulator of the allocation of all
resources.’ Yet the only alternative to the market as a means of
such regulation is ‘direction by authority,’ which in practice would
mean central planning by the state (272–3). Hayek’s second point
is that steep and prolonged inflation, resulting from an uncontrollable
wage–price spiral, will eventually cause serious public alarm
and provoke demands ‘either for the fixing of wages by government
or for the complete abolition of the unions’ (282).
Union wage policies cannot alone cause inflation to grow.
Excessively high wages would simply produce job losses, if government
did not expand the supply of money and credit in order to
ensure full employment (see 337). Hayek attributes this ruinous
governmental policy to Keynesian economics. Keynes recognised
that excessively high wages cause extensive unemployment, but
at the same time he saw that any direct attempt to lower wages
would require ‘a struggle so painful and prolonged that it could
not be contemplated.’ Keynes’s solution was to lower real wages
by lowering the value of money: ‘If labor insists on a level of
money wages too high to allow of full employment, the supply of
money must be so increased as to raise prices to a level where the
real value of the prevailing money wages is no longer greater than
the productivity of the workers seeking employment’ (280).
A full employment policy requires the monetary authorities
to ‘provide enough money to secure full employment at any
given wage level.’ Such a monetary policy creates expectations of
rising inflation. If the money supply is tightened to stop inflation,
substantial unemployment will quickly result, bringing about ‘a
renewed and irresistible pressure for more inflation’ (281). Eventually
the public, alarmed by spiralling inflation, will demand the
drastic actions mentioned above – wage-fixing by government
and even the abolition of unions. While opposing the goal of full
employment, Hayek does hold that it is possible to secure ‘a high
and stable level of employment’ while aiming at the stability of
some comprehensive price level (337).
Hayek is no fatalist. He holds out hope that the dangers he
foresees from coercive unionism can be averted. This would
require that unions conform to the Rule of Law, which in practice
means that government would prevent unions from using
coercion to attain their goals. Hayek does not wish to eliminate
unions, for this would violate their freedom of association. In fact,
he emphasises that unions would continue to have ‘a useful and
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