1980s Unemployment and the Unions: Essays on the Impotent Price Structure of Britain and Monopoly in the Labour Market

This second edition of Hobart Paper 87 gathers five linked Hayek essays on unemployment, inflation, price signals, and British trade-union power, framed by Arthur Seldon and followed by Charles G. Hanson’s legal postscript “From Taff Vale to Tebbit.” Its immediate target is 1980s unemployment, but its larger argument is Hayek’s mature account of markets as systems for transmitting knowledge. Britain’s problem, he argues, is not simply inadequate demand but a damaged structure of relative prices—especially wages—made rigid by inflationary policy and legally privileged union monopoly.

Hayek begins by rejecting the Keynesian habit of treating employment as an aggregate to be raised by spending. The decisive question is whether labour and capital are distributed in ways that match changing demand. The interwar British crisis, in his view, misled economists into generalising from an exceptional monetary disturbance. Once governments accepted responsibility for “full employment” through monetary expansion, wage bargains became detached from the discipline of adjustment.

This is a major problem even if we think only of the possible discrepancies of demand and supply of all the final products—or what the economists are in the habit of calling the ‘horizontal’ dimension of the structure of production.

This structural emphasis is the pamphlet’s core. Employment depends on coordination across sectors, skills, places, and stages of production. Inflation may conceal mismatches for a time by allowing nominal wages and prices to rise unevenly, but it cannot create the real pattern of relative prices needed to guide labour. Indeed, it worsens the later problem by encouraging producers and workers to adapt to false signals.

Surprising as it may seem, these after-effects of inflation have been much neglected by economists.

The second major theme is prices as communication. In a complex economy, no person or agency can directly know where each worker, machine, or material is most urgently wanted. Prices condense dispersed information and make it usable by strangers cooperating across the division of labour. Hayek’s objection to “job creation” follows from this: the point is not to maximise the number of people attached to existing employments, but to release resources from less valued uses into more valued ones.

This explains his hostility to administered prices and incomes policies. Price controls may appear to protect consumers or preserve employment, but for Hayek they suppress the very signals that reveal scarcity and redirect activity. They postpone adjustment while increasing the eventual dislocation.

The expedient which is likely to postpone this inevitable ultimate outcome for a long time at the price of even more damage done is widely thought to be price controls.

The later essays apply this theory to British trade unions. Hayek does not deny the legitimacy of voluntary association or collective bargaining under general law. His indictment concerns coercive privilege: closed shops, exclusion of non-members, intimidation, secondary pressure, and immunities that prevent outsiders from offering labour on different terms. Such powers allow employed insiders to maintain wages above market-clearing levels while excluding the unemployed from bidding for work.

The market is thereby deprived of the function of guiding labour to where it can be sold.

For Hayek, this is not merely a distributive injustice but a disabling of economic intelligence. If wages cannot move relatively, Britain cannot discover which industries can compete, which skills are scarce, or where labour should shift. The resulting unemployment is therefore not accidental; it is the predictable outcome of monopoly in the labour market combined with a political promise to preserve employment without restoring price flexibility.

Hanson’s postscript supplies the legal history behind Hayek’s economic argument. Beginning with the reaction to Taff Vale, it treats the Trade Disputes Act of 1906 as the decisive grant of union immunity and reads Thatcher-era reforms as partial attempts to restore ordinary legal accountability. The volume as a whole is thus both a tract of the 1980s and a compact statement of Hayek’s political economy: prosperity requires general rules, open entry, and flexible relative prices; decline begins when sectional power prevents prices from telling society what needs to be done.