Unions, Inflation and Profits

This single-author policy essay uses Walter Reuther’s 1958 United Automobile Workers demands as a test case for Hayek’s larger claim: union power, when supported by legal privilege and accommodated by full-employment monetary policy, threatens prices, investment, and the ownership structure of enterprise.

Unions have not achieved their present magnitude and power by merely achieving the right of association.

Hayek’s first distinction is between association and coercion. He does not deny workers’ right to organize; he argues that unions have been allowed to prevent others from working on different terms and have been exempted from ordinary restraints on coercive conduct. The issue is therefore constitutional as much as economic: a market order requires general rules limiting force, including force used in labor’s name.

The inflation argument follows from this legal premise. Wage pressure alone does not create inflation in Hayek’s account; it becomes inflationary when governments and monetary authorities feel bound to preserve full employment at whatever wage level unions obtain. Responsibility is then split: unions impose nominal costs, while monetary policy validates them through credit expansion. Hayek rejects the view that depression is cured by sustaining purchasing power through ever-rising money wages, because the resulting boom depends on accelerating inflation and distorted investment.

Inflation-born prosperity has never been and never will be lasting prosperity.

For Hayek, the downturn begins not simply with weak consumption but with damaged investment incentives. Rising costs, unstable prices, and uncertain profits discourage capital formation before the fall in final demand is fully visible. Thus a policy intended to protect employment may prolong the conditions that make stable employment impossible.

Reuther’s first proposal, to tie wages to rising output per worker, lets Hayek develop a central distinction between average output and marginal productivity. In capital-intensive industries, output per employee may rise because past investment has improved machinery, organization, and scale. Workers may share in productivity gains through market wages, but Hayek denies that they have a collective right to the whole average increase generated by capital.

The demand for a definite share in the increase in the average productivity of labour due to the investment of capital amounts, in fact, to nothing less than an attempt to expropriate that capital.

This point is dynamic. A powerful union may appropriate returns from already sunk capital, but once investors anticipate such appropriation, they reduce future investment. Hayek therefore treats the alleged “exhaustion” of investment opportunities as politically produced: profits disappear not because productive uses vanish, but because claims on future returns make risk-taking unattractive.

The second Reuther package, aimed at “excess profits,” sharpens the ownership issue. Hayek argues that forced price reductions by the largest automobile firms could punish efficiency and even create antitrust dilemmas if aggressive price cutting eliminated weaker competitors. Differential profits, in his view, are not automatically monopoly gains; they may signal superior organization and guide capital toward more productive uses.

His strongest objection is to compulsory profit-sharing through unions. Voluntary worker investment in a firm is unobjectionable, but a union claim on profits without corresponding capital contribution changes the meaning of ownership.

The recognition of the right of the worker of a firm, qua worker, to participate in a share of the profits, irrespective of any contribution he has made to its capital, establishes him as a part owner of this firm.

Hayek calls this tendency syndicalist: not social ownership by the public, but seizure of enterprise returns by closed groups of incumbent workers. The essay’s lasting significance lies in how it connects labor law, monetary stabilization, and corporate governance. Its recurring contrasts—association versus coercion, money wages versus real productivity, average output versus marginal contribution, and profit-sharing versus ownership—turn a specific UAW dispute into a general warning about inflationary capitalism under legally privileged group power.