Friedrich August von Hayek, Addendum: Strigl’s Theory of Wages

Hayek’s short journal book review, originally published in 1929 and presented here in a 2013 English translation, assesses Richard Strigl’s Angewandte Lohntheorie as an exemplary application of economic theory to wage bargaining and social policy. Its central judgment is that Strigl’s achievement lies in extending general propositions to circumstances their usual assumptions leave unexplained. Hayek moves from praise of Strigl’s combination of theoretical knowledge and practical experience to collective bargaining, a criticism of his argument about artificially increased wages, and a concluding endorsement of his treatment of economic friction.

Strigl’s experience as secretary to the Vienna Industrial District Commission matters because it gave him a neutral observer’s perspective on wage negotiations across much of the economy. Hayek treats this experience as a resource for theoretical inquiry: it enables Strigl to confront the variety of actual wage-setting arrangements and answer practitioners’ objections without abandoning fundamental economic principles. Employers and trade union leaders can therefore benefit from the analysis, but accessibility is not its principal merit.

The special merit of Strigl's book does not in the least consist in its popularisation of theory but in its extending the assumptions underlying the general wage theory to phenomena hitherto excluded from fundamental principles because of the overly general character of the assumptions.

The distinction is methodological. Applied theory should make its assumptions sufficiently specific to explain concrete phenomena, rather than merely restating abstract conclusions in simpler language. Hayek singles out Strigl’s separation of collective bargaining from monopoly pricing. Trade unions and employers’ associations do not constitute homogeneous economic agents: changes in wages and employment distribute benefits and losses among different people. In particular, labour representatives cannot simply count higher earnings for some workers as compensation for unemployment suffered by others. Treating a bargaining association as an ordinary monopolist therefore obscures a decisive feature of its position.

Strigl’s examination of supply and demand also gives economic content to what is commonly called bargaining “power.” Hayek welcomes this analysis, but challenges the claim that an artificial wage increase need not cause lasting unemployment if production adjusts to it. In Hayek’s account, Strigl establishes the possibility only by assuming subsequent growth in the industry’s capital equipment, sufficient to raise labour’s marginal productivity to the previously imposed wage. The proposed adjustment thus depends on a further change in productive conditions; it does not independently establish that production can absorb the higher wage without permanent damage.

The review’s strongest methodological endorsement concerns departures from the simplified conditions of basic theory:

The fruitfulness of Strigl's research is based largely on its dealing with friction phenomena neglected by the basic theoretical propositions and the resulting deviations from the regularities expected from purely theoretical assumptions, precisely what any applied theory ought to do.

Hayek illustrates this with customary entrepreneurial profit treated as a “fictitious” cost. Increased wage demands may reduce that profit without necessarily producing further economic changes. Such a case allows bargaining power to influence wages even under static conditions. The example qualifies any mechanical inference from a wage increase to a change in production or employment: inherited expectations and friction can affect the distribution of returns. For Hayek, these complications are legitimate objects of economic explanation, not reasons to dispense with theory.

The final paragraph commends Strigl’s discussions of unemployment and social costs without reconstructing their arguments. Hayek calls them models for research into social policy and closes by linking the standing of economic theory to its practical explanatory success:

Economic theory has no surer way of acquiring new supporters than when it permits successful applications to practical questions, as exemplified at its best in this work.

The review’s relevance lies in this conception of applied economics: preserve fundamental principles while investigating institutional differences, heterogeneous interests, and friction that shape their concrete operation. Its praise remains discriminating, especially where an adjustment argument relies on a later increase in productivity.