Commentary (The Times)

Monetary policy: "The Hayek cure: bigger and better bankruptcies" (Hayek interview) ["my hopes of Britain saving herself have shrunk a little"]

Document type: Press
Source: The Times , 12 Nov 1980, p12
Journalist: Ian Bradley
Editorial comments:
Importance ranking: Major
Word count: 786
Themes: Conservatism, Monetary policy, Trade union law reform

The Hayek cure: bigger and better bankruptcies

[Photo omitted. Caption reads: Professor Hayek: time for drastic action.

Ian Bradley hears a Nobel prizewinner's view of the ailing national economy

Professor Friedrich von Hayek, the economist and Nobel prize-winner, is disappointed by the slowness of the British Government's progress towards reducing the money supply and curbing the power of the trade unions. Ironically, he attributes it to the influence of the man whose name has been linked with his own in the public mind as a fellow high-priest of monetarism, Professor Milton Friedman.

Professor Hayek, who was described by Mr Michael Foot two years ago as a "mad professor" who had Mrs Thatcher in his clutches, said that since the Conservatives had come to power, "my hopes of Britain saving herself have shrunk a little. I'm not hopeless, but I'm becoming apprehensive".

He said: "I still get the impression that Mrs Thatcher herself is aiming in the right direction, but there is clearly opposition from half her Cabinet who have the Conservative inclination to do everything gently.

"It is not gentle action that is needed now, but drastic action. Mrs Thatcher must escape from the advice she is being given by Mr Prior and Sir Ian Gilmour."

On the economy, Professor Hayek reaffirmed his call, made in a letter to The Times on June 13, for an even tighter monetary policy with the Government aiming to balance its next budget with no further borrowing from the banks. He said: "I'm afraid Mrs Thatcher is following the advice of Milton Friedman. He is a dear friend of mine and we agree on almost everything except monetary policy. He thinks in terms of statistics, aggregates and the average price level and does not really see that inflation leads to unemployment because of the distortion of the structure of relative prices.

"If you have a long period of inflation in which much misdirection of effort has taken place as a result of the distortion of the price structure extensive unemployment becomes inevitable.

"You can cure inflation suddenly or gradually. Politically, it is impossible to do it gradually. To put it crudely, I would say that it is possible to cause 20 per cent unemployment for six months if you can hold out a hope that things will be better after that. You cannot have 10 per cent unemployment for three years. Yet that is what the Government's present course asks for and I don't think it can hold out."

Professor Hayek also, sees Professor Friedman's influence as a major factor in the Government's failure to curb the power of trade unions, which he regards as an essential precursor to monetary reform. He would like to go farther than referendum in the country which he believes would give the Government the authority to prohibit the closed shop, tighten up further the law on picketing and remove other legal immunities still enjoyed by unions.

As with monetary policy, he senses that Mrs Thatcher would like to go further than the Government so far has on the trade unions - "but what are officially called the wets, and what I call the descendants of the muddle of the middle, are the obstacle to her doing what she would like to do."

He would like to see the Conservative wets separating themselves from Mrs Thatcher, whom he regards as "a true Whig", but he is pessimistic that it will come about.

Professor Hayek has no sympathy with industrialists' protests about the level of interest rates. He says: "If you calculate it in real terms, the rate of interest is about two per cent. Industry cannot complain that borrowing is expensive so long as the present rate of inflation lasts."

He is even more scathing about industrialists' fears of bankruptcies. He says: "All that bankruptcy does is to remove an inefficient management and give someone else the chance to take over. Britain would have been much better, in fact, if it had had bigger and better bankruptcies."

Professor Hayek feels that, unless drastic action is taken very soon, Britain will return to "price control and incomes policy, which lead straight to the planned economy. If that happens, I see no hope for the rest of this century".

Despite his strong feelings on the need for an immediate toughening of policy, he has no intention of trying to see Mrs Thatcher or any other members of the Government while he is in London next week. He is devoting all his time and energies to a major philosophical work, The Fatal Conceit, which he describes as "a frontal attack on socialism".