The Failure of the "New Economics"
DECEMBER 01, 1977 by RONALD J. BERKHIMER
Mr. Berkhimer is a retired chemical engineer who is now engaged in volunteer work with nonprofit, nonpartisan organizations.
Back in 1959 there came into print a book which might have changed our world. In painstaking detail, it refuted all the premises of the most influential book on economics since Marx, John Maynard Keynes‘ General Theory of Employment, Interest and Money, first published in 1936. Other well-known free market economists had attacked Keynes, but this was the first full length analysis, almost sentence by sentence, of Keynes‘ chief work.
Yet Van Nostrand’s original edition of Henry Hazlitt’s The Failure of the "New Economics" sold no more than 5,000 copies and a 1973 edition by Arlington has added only 7,000 more. In a world largely controlled by words, why has an apparently monumental work been so completely ignored?
To answer this question we must first look at what Keynesian economics is all about.
Although the writing of Keynes (pronounced "Kanes") is complicated and contradictory, Hazlitt has reduced it to something quite simple. He finds it largely a rehash of mercantilism, a centuries old theory that when business is bad it is due to (1) a scarcity of money, and (2) general overproduction. The first of these is one of the old, populist easy-money theories which still persists to some extent in Congress 200 years after it was first destroyed by Adam Smith. If it were valid, the underdeveloped nations would only need to print large quantities of paper money in order to have instant prosperity.
Keynes is unsuccessful in his attempt to deny the most strongly established principle in economics-that if the price of any commodity or service is kept too high (i.e., above the point of equilibrium) some of that commodity or service will remain unused or unsold. When wage-rates are too high there will be unemployment.
Adjusting the myriad wage-rates to their respective equilibrium points may not always be in itself a sufficient step to the restoration of full employment, but it is an absolutely necessary step. Keynes tried to substitute general monetary inflation for piecemeal wage-and-price adjustmentl But without proper wage-price coordination, inflation cannot bring full employment.
Jean Baptiste Say, the French economist, disproved the overproduction fallacy with his Law of the Markets in 1803. He pointed out that supply creates demand, if not for itself, then for something else. Nobody produces anything except to consume it or exchange it for something else to consume. Therefore, since demand is essentially unlimited, there can never be more than a temporary oversupply of some commodities. This is logical, though few of us non-economists would have thought of it in this way.
Yet, 130 years after Say, Keynes came out with his essentially mercantile theories as if they were something new, and he became famous, as Hazlitt puts it, by "refuting" Say’s Law by simply saying it was untrue.
Another feature of Keynes‘ General Theory is his consistent refusal to attribute any blame for unemployment to inflated wage rates. In so doing, Hazlitt says, Keynes is unsuccessfully attempting "to deny the most strongly established principle in economics-that if the price of any commodity or service is kept too high (i.e. above the point of equilibrium) some of that commodity or service will remain unused or unsold. When wage rates are too high there will be unemployment." How could a man so obviously erroneous in his theories have been so influential, be made a lord, and convert to Keynesianism, among others, Presidents Franklin Roosevelt and Richard Nixon and some of President Carter’s current advisers?
Let us look at the political and economic climate of the times the General Theory appeared and the years since. On a world in the darkness of a general depression, the book burst like a skyrocket (with just about as much permanent light). Keynes had an easy way to bring back prosperity. Just have the government spend more money, putting it in the hands of people who would immediately put it into circulation, thus "greasing the wheels of industry." No matter that the government didn’t have the money to spend-just borrow it, or print it. So this deficit spending creates inflation? Better that than to fail to "do something."
Keynes did not originate deficit spending; the U.S. had already been doing it for several years. But, as a supposedly brilliant economist, he legitimized it and has insulated it against reality for many years up to and including the present.
Since Keynesianism has the unreasoning support of the big spenders among the politicians and bureaucrats, the higher-wage advocates of the unions, and the left-leaning media, one can easily see why Hazlitt’s book, which undermined some of their most basic beliefs, got the silent treatment. In the old days, they would have burned it. Now, with their power over the communication channels, they have simply ignored it.
An awakening to the fact of The Failure of the "New Economics" might revolutionize our society. We might get unionized labor back in the free market and solve the unemployment problem at the same time. We might balance the Federal budget in short order and set an example for the rest of the world in the control of inflation.
Is it too late for this to happen? True, we are far down the road to socialism. But there are hopeful signs. More and more frequently we read of growing doubts about Keynesianism.
Was it Shakespeare who said, "Truth will out"?
Let it be soon!
Editor’s Note: Arlington House recently has brought forth a new printing of The Failure of the "New Economics" ($11.95), as well as the companion volume compiled and edited by Mr. Hazlitt, The Critics of Keynesian Economics ($9.95).
Either book is available and may be ordered from The Foundation for Economic Education, Inc., Irvington-on-Hudson, N.Y. 10533.