Friedrich August von Hayek, “Beating Inflation Key to Recovery”

Originally published as a letter to the editor of The Times on April 4, 1981, and supplied here in a 2022 republication, Hayek’s intervention defends the Thatcher government’s anti-inflationary policy against an open letter signed by 364 economists. Its central claim is that recovery requires ending inflation, even when doing so destroys existing jobs. Hayek treats unemployment during stabilization as the exposure of an unsustainable employment structure inherited from earlier policy, rather than as sufficient evidence that stabilization itself is mistaken.

The letter moves from an attack on Keynesian economists to an account of inflation-dependent employment, then to a defence of faster stabilization and a closing challenge to the signatories’ collective authority. Its opening is deliberately combative: Hayek describes the protesting economists as a “lost generation” whose advice produced the damage now becoming visible. He also challenges their ability to specify an alternative. The accompanying editorial note qualifies this rhetorical framing: Hayek’s quoted expression “other methods” does not occur in the economists’ letter, although it does refer to “alternative policies”. The note places their protest after the March 1981 budget, which increased taxation during a deep recession.

Hayek’s substantive argument turns on the distinction between jobs sustained by continuing inflation and jobs sustainable under monetary stability. Past policy, he argues, has directed employment into a pattern that requires inflation to accelerate. Reducing inflation therefore cannot preserve every existing position:

Nobody has ever claimed that so long as it is necessary to reduce inflation to get out of this vicious circle the effect can be anything but to destroy the particular employments created by past inflation.

The qualification “particular employments” matters: Hayek presents the problem as the composition of employment, not simply its aggregate level. Stabilization must enable workers to move into different jobs. His confidence in this adjustment rests on the market’s capacity to guide employment once inflation ceases:

Only after inflation has been brought to a full stop can the market be expected to guide workers to jobs which can be maintained without accelerating inflation.

This makes complete monetary stabilization a prerequisite of lasting recovery. Hayek rejects “mild” inflation as a compromise because, in his account, it perpetuates the same dependency and prepares a later depression. He criticizes the government for proceeding too slowly, while explicitly exempting its head, and maintains that even very high unemployment can be endured briefly if stability and recovery follow within months. That expectation is asserted rather than demonstrated in the letter.

All employment which can be maintained only by (even moderate) inflation is a waste of resources for which we shall have to pay later by renewed growth of unemployment.

The concluding appeal to the relatively small share of British Academy economist fellows among the signatories reinforces the letter’s challenge to numerical authority. Its lasting conceptual interest lies in Hayek’s insistence that preserving employment immediately and securing durable employment are different objectives. The short intervention states that distinction forcefully, while leaving the speed, social costs, and practical mechanisms of the proposed transition largely unexplored.