Summary: Friedrich A. Hayek, “Can We Still Avoid Inflation?”

Hayek’s lecture-essay treats inflation as a problem of political economy rather than a mere technical defect in monetary management. The title question is deliberately provocative: governments and central banks possess the instruments needed to stop inflation, but modern democratic pressures, full-employment commitments, and wage-setting institutions make them reluctant to use those instruments.

My main aim tonight is to bring out clearly why we must stop inflation if we are to preserve a viable society of free men.

The core of Hayek’s case is Austrian rather than simply anti-price-rise. Inflation is damaging not only because money loses purchasing power, but because new money enters the economy at particular points, changes relative prices unevenly, and misleads entrepreneurs, workers, and investors. Production becomes organized around signals that exist only because monetary expenditure is expanding. Once firms and jobs depend on those distorted signals, stopping inflation exposes the malinvestments it had concealed.

Hayek therefore rejects the comforting belief that inflation can be managed indefinitely at a stable, moderate rate. Its temporary stimulus depends on surprise: if everyone expects prices to rise, interest rates, contracts, wages, and business calculations adjust. To obtain the same employment or output effects, authorities must accelerate the process. The apparent cure thus becomes cumulative addiction, and disinflation becomes politically painful because it reveals the unemployment and losses previously hidden by monetary expansion.

Technically, Hayek insists, the power to halt inflation is not mysterious. The monetary authorities can refuse to validate further credit expansion if they are willing to endure the consequences.

They fully control the base of the pyramid of credit, and a credible announcement that they will not increase the quantity of bank notes in circulation and bank deposits, and, if necessary, even decrease them, will do the trick.

But this technical possibility is not the same as political feasibility. Hayek’s central anxiety is that governments have accepted responsibility for maintaining full employment while tolerating institutions that push money wages above market-clearing levels. If unions secure wage increases and the state is then blamed for the unemployment that would result, monetary expansion becomes the path of least resistance. Inflation is therefore sustained by the interaction of wage rigidity, electoral pressure, and central-bank accommodation.

I know in fact of no serious attempt to show how we can overcome these obstacles which lie not in the monetary but in the political field.

Hayek also emphasizes the less visible institutional damage caused by inflation. It corrupts accounting, taxation, and capital maintenance by making nominal gains appear as real profits. Businesses may seem profitable while consuming their own capital; taxes on illusory profits intensify the process. In this respect inflation weakens the informational foundations of enterprise.

It is that it upsets the reliability of all accounting practices and is bound to show spurious profits much in excess of true gains.

The lecture’s wider warning is that open inflation, once politically intolerable, invites price controls, wage controls, rationing, and administrative allocation. Hayek sees this as a route from monetary disorder to the erosion of the market economy itself. The issue is thus constitutional and civilizational: whether a free society can preserve monetary rules strong enough to resist short-term political demands.

The essay closes by linking domestic inflation to the international monetary order. Hayek is critical of arrangements that remove external discipline from national monetary authorities, but he does not present international reform as sufficient on its own. Stable money requires domestic institutions that do not force governments to choose between unemployment and renewed monetary expansion. His answer to the title is therefore conditional: inflation can still be avoided in principle, but only if societies confront the political incentives and wage-setting powers that repeatedly make inflation appear unavoidable.