The Medicine Still Isn't Working: Hayek's Economics Exposed – Black Flag

Article on the neoliberalism of New Labour and the folly of Hayek from Black Flag #218 1999.

Submitted by Fozzie on September 6, 2020

Given that Tony Blair's government seems intent on extending the legacy of Thatcherism into the new millennium, it is useful to remember some of the claims made by Thatcher's ideological heavyweights from the past. Is the success of Thatcherism all it is claimed to be? What lessons can we draw to resist Blair now? One of the major 'improvements' claimed by Thatcher was trade union 'reform'. The idea that social struggle and working class organisation are harmful was expressed throughout the 1970s. If we look at the arguments of the right during this period, we find evidence that the claim that 'Thatcherism' was a great success is decidedly wrong — as is the notion that 'trade union reform' aided working class people.

With the post-war Keynesian consensus crumbling, the 'New Right' argued that trade unions (and strikes) hampered growth and that wealth redistribution hindered 'wealth creation'. In February this year, the Trade & Industry Secretary, Stephen Byers argued that "wealth creation is now more important than wealth redistribution," echoing the claims of Thatcher and her cronies. Do not struggle over income, the 'New Right' argued, let the market decide and everyone will be better off. Twenty years later, 'New Labour' is repeating the same argument.

Unsurprisingly, this argument was dressed up in populist clothes. Thus we find the right-wing guru FA von Hayek arguing that the "legalised powers of the unions have become the biggest obstacle to raising the standards of the working class as a whole. They are the chief cause of the unnecessarily big differences between the best- and worse-paid workers." He maintained that "the elite of the British working class... derive their relative advantages by keeping workers who are worse off from improving their position." Moreover, he "predict[ed] that the average worker's income would rise fastest in a country where relative wages are flexible, and where the exploitation of workers by monopolistic trade union organisations of specialised workers are effectively outlawed."1

Now, if Hayek's claims were true we could expect that in the aftermath of Thatcher's trade union reforms we would have seen the following:
1) a rise in economic growth
2) a decrease in the differences between high and low paid workers
3) a reduction in the number of low paid workers as they are freed from union 'exploitation' and
4) wages rising fastest in countries with the highest wage flexibility.

Unfortunately for Hayek, the actual trajectory of the British economy exposes his claims as nonsense. Looking at each of Hayek's claims in turn we discover that rather than 'exploit' other workers, trade unions are an essential means to shift income from capital to labour (which is why capital fights labour organisers and agitators tooth and nail). And, equally important, labour militancy aids all workers by providing a floor under which wages cannot drop (non-unionised/militant firms in the same industry or area have to offer similar programs to prevent unionisation and be able to hire workers) and by maintaining aggregate demand. This positive role of unions/militancy in aiding all workers can be seen by comparing Britain before and after Thatcher's trade union and labour market reforms.

As far as economic growth goes, there has been a steady fall since the trade union reforms. In the 'bad old days' of the 1970s, with its strikes and 'militant unions', growth was 2.4% in Britain. It fell to 2% in the 1980s and to 1.2% in the 1990s.2 Falling growth means that the living standards of the working class as a whole do not rise as fast as they did under the 'exploitation' of the 'monopolistic' trade unions. If we look at the differences between the highest and lowest paid workers, we find Hayek again proved wrong. Rather than decreasing, they have in fact shown "a dramatic widening out of the distribution with the best-workers doing much better" since Thatcher was elected in 1979.3

Given that inequality has also increased, the condition of the average worker must have suffered. For example, Ian Gilmore states that "in the 1980s, for the first time for fifty years... the poorer half of the population saw its share of total national income shrink."4 According to Noam Chomsky, "during the Thatcher decade, the income share of the bottom half of the population fell from one-third to one-fourth" and between 1979 and 1992, the share of total income of the top 20% grew from 35% to 40% while that of the bottom 20% fell from 10% to 5%. In addition, the number of UK employees with weekly pay below the Council of Europe's "decency threshold" increased from 28.3% in 1979 to 37% in 1994.5 "Overall," notes Takis Fotopoulos, "average incomes increased by 36 per cent during this period (1979-1991/2], but 70 per cent of the population had a below average increase in their income."6

Looking at the claim that trade union members gained their "relative advantage by keeping workers who are worse off from improving their position" it would be fair to ask whether the percentage of workers in low-paid jobs decreased in Britain after the trade union reforms. In fact, the percentage of workers below the Low Pay Unit's definition of low pay (namely two-thirds of men's median earnings) increased — from 16.8% in 1984 to 26.2% in 1991 for men, from 44.8% to 44.9% for women. For manual workers it rose by 15% to 38.4%.7 If unions were gaining at the expense of the worse off, you would expect a decrease in the number in low pay, not an increase. An OECD study concluded that "Typically, countries with high rates of collective bargaining and trade unionisation tend to have low incidence of low paid employment."8

Nor did unemployment fall after the trade union reforms. As Elliot and Atkinson point out [i]”by the time Blair came to power, unemployment in Britain was falling, although it still remained higher than it had been when the [the last Labour Government of] Callaghan left office in May 1979."[/b]9 Hayek did argue that falls in unemployment would be "a slow process" but over 10 years of higher unemployment is moving at a snail's pace! We must note that part of this fall in unemployment towards its 1970s level was due to Britain's labour force shrinking (and so, as the July 1997 Budget Statement correctly notes, "the lower 1990s peak [in unemployment] does not in itself provide convincing evidence of improved labour performance.")10 .

Hayek's prediction on wage flexibility leading to higher wages for the "average worker" has been proved totally wrong, Between 1967 and 1971, real wages grew (on average) by 2.95% per year.11 In comparison, in the 1990s real wages grew by 1.1 per cent. These are different eras so it would also be useful to compare the UK (often praised as a flexible economy after Thatcher's 'reforms') to France (considered far less flexible) in the 1990s. Here we find that the 'flexible' UK is behind 'inflexible' France. Wages and benefits per worker rose by almost 1.2 percent per year compared to 0.7% for the UK. France's GDP grew at a faster rate than Britain's, averaging 1.4 percent per year, compared with 1.2 percent. Worker productivity is also behind; since 1979 (Thatcher's arrival) Britain's worker productivity has been 1.9 percent per year compared to France's 2.2 percent.12 And as Seth Ackerman also notes, "while France's dismal record of job creation is on permanent exhibit, it is never mentioned that Britain's is even more dismal."13

Moving further afield, we find von Hayek's predictions disproved yet again. The USA is frequently claimed as a model economy in terms of wage flexibility and union weakness, yet we discover that the real wages of the average worker has decreased since 1973. The weekly and hourly earnings of US production and non-supervisory workers, which accounts for 80% of the US workforce, have fallen in real terms by 19.2% and 13.4% respectively.14 If we look at figures from US Bureau of the Census (Current Population Survey) we discover that increased flexibility has affected income adversely for the bottom 60% of the population. Between 1950 and 1978, when the labour market was more inflexible and had stronger unions, income growth grew by 138%, 98% and 106% respectively. Moreover, the growth of the US economy has also slowed down as wage flexibility and market reform has increased. Inequality since the 1960s has steadily increased, reaching extraordinary levels by the 1990s.

Flexible wages and weaker unions have resulted in the direct opposite of Hayek's predictions. Of course, being utterly wrong has not dented his reputation with the right nor stopped him being quoted in arguments in favour of flexibility and free market reforms. Nor has this utter lack of accuracy been reflected when Thatcher or Blair are being evaluated by the media for their performance on economic matters. Rather than look at the claims and predictions of the Thatcherites and how they measure up to what happened, a myth of economic success has been created, a myth which the Labour Party seeks to emulate. Why bother to document the utterly wrong predictions of an icon of the right? Partly, of course, it is fun to show up the massive errors of our enemies. More importantly, it is necessary to expose the hype and short-term memory of the media in order to fully counter the claims that the last 20 years have been anything but a disaster for working class people. In addition, it shows the way to improve our conditions. Militancy, direct action, solidarity and working class organisation work, they are effective and they get results. This is the message that is easily seen from comparing von Hayek's claims and predictions with reality. It also shows the necessity of creating a new working class movement based on these principles, the principles of anarchism.

  • 1“1980s Unemployment and the Unions” reproduced in “The Economic Decline of Modern Britain” p107, p108, p110
  • 2Larry Elliot & Dan Atkinson, “The Age of Insecurity”, p236
  • 3Andrew Glyn & David Miliband (eds.), “Paying For Inequality” p100
  • 4“Dancing With Dogma” p113
  • 5“World Orders, Old and New” p144, p145
  • 6“Towards an Inclusive Democracy” p113
  • 7“Paying For Inequality” p102
  • 8OECD Employment Outlook, 1996 p94
  • 9Op Cit p258
  • 10p77
  • 11P. Armstrong, A. Glyn & John Harrison “Capitalism Since World War II” p272
  • 12Seth Ackerman “The Media Vote For Austerity” Extra! September/October 1997
  • 13Ibid
  • 14“Economic Report of the President 1995” Table B-45