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
important role,’ even with the elimination of their power to coerce
individuals. Unions could take part in collective negotiations to
settle compensation issues, such as choosing among alternative
benefits, setting differences in remuneration for different jobs,
and deciding on rules of promotion. Unions could help to determine
rules governing the conditions of work, including grievance
procedures and some degree of employee self-government.
Finally, unions could return to the original model of ‘friendly societies,’
helping members to protect themselves against the risks
of their trade. Unions would be excluded, however, from participating
in the conduct of business (276–7). Hayek rests his hopes
for reform on the possibility that the public, along with ‘farsighted
union leaders,’ will recognise the dangers inherent in coercive
unionism and agree to re-establish the Rule of Law in the workplace
(284).
13 PREVENTING INFLATION (Chapter 21)
In the mid-1970s, looking back on a long career, Hayek would
write that ‘the task of preventing inflation has always seemed to
me to be of the greatest importance’ (2009: 128). Certainly this
concern is evident in The Constitution of Liberty, which warns
repeatedly of inflation’s grave consequences. Chapter 21, entitled
‘The Monetary Framework’, addresses the problem of inflation
in three ways: it summarises the inflationary effects of welfare
state policies; it demonstrates that monetary policy is central to
the problem at hand; and it considers how best to arrange the
monetary system so as to prevent inflation. In reading this present
chapter, one should keep in mind that Hayek will later reject
the monetary arrangement proposed here and embrace a quite
different one.
Inflation and the welfare state
Hayek has identified several reasons why welfare state policies
are inflationary. Inflation helps to extricate governments from
the heavy financial burden of social security programmes, especially
old-age pensions. Inflation expands government revenues,
under systems of progressive taxation, by moving taxpayers into
higher tax brackets, so that their taxable income goes up without
a proportional increase in their disposable income. Government’s
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