Freeman

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William H. Hutt: A Centenary Appreciation

Hutt Was a Courageous Voice for Free-Market Economics

AUGUST 01, 1999 by RICHARD EBELING

Filed Under : Coercion

In the mid-1980s I had the good fortune to be teaching at the University of Dallas with Professor William H. Hutt as a colleague. By that time he was already in his mid-80s and held the title of “emeritus.” Though stricken with an increasingly debilitating case of arthritis, Professor Hutt would be in his office most days of the week working on some article or reading the latest literature on economic theory and policy.

I would ask him to deliver one or two guest lectures in some of my classes each semester, and he almost always graciously consented. In one class I recall Hutt’s starting his remarks, in a slightly stammering voice, “Most economists have their works forgotten after they’re dead. I’ve the unique distinction in having had all my works forgotten while I’m still alive.”

When Professor Hutt passed away on June 19, 1988, at the age of 88 he left behind a legacy of a dozen books and more than 50 articles.[1] During an academic writing career that began in 1926 he had been a courageous voice for free-market economics at a time when Keynesian economics and interventionist policies dominated both the economics profession and the arena of public policy.

August 3, 1999, marks the 100th birthday of William Harold Hutt, and it seems an appropriate occasion for an appreciation of some of his contributions to twentieth-century economic thought.

Hutt was born in London to a middle-class family. He joined the Royal Flying Corps in 1916, during the First World War. He would reminisce that he had mastered the art of taking off, but he couldn’t quite get the hang of landing; he said his superiors accused him of crashing more planes than the Germans were shooting down.

After the war he enrolled at the University of London and studied with the famous English economist Edwin Cannan. Lionel Robbins, who also studied with Cannan during the same years, recalled that “Cannan was a great teacher. He was a fine economist; he gave one a sense of the sweep and the power of the subject and its relevance to human happiness. . . . I do not know anyone who sat under Cannan in those years who was not powerfully affected by his teaching.”[2] What Cannan instilled in Hutt and others who studied with him was a deep appreciation of the miracle of the market economy, which integrated a multitude of global participants in a spontaneous process of coordination.

On to Cape Town

After graduating he worked for four years for Sir Ernest Benn, one of the leading British advocates of laissez-faire economics in the first half of the twentieth century and operator of the Benn publishing house. For part of this time Hutt served as manager of Benn’s Individualist Book Club. In 1928 Hutt received a teaching appointment at the University of Cape Town in South Africa, a position he held until the 1970s, when he moved to the United States, holding visiting positions at several prestigious institutions of higher learning until his appointment at the University of Dallas.

His first published work was an essay on “The Factory System of the Early Nineteenth Century,” which appeared in Economica (March 1926) and was later reprinted in Capitalism and the Historians, edited by F. A. Hayek.[3] He argued that the standard interpretations of early factory life in England during the industrial revolution had often been misrepresentations or exaggerations. He demonstrated that work in the developing manufacturing centers of England had created rising standards of living and improved opportunities for children and women compared to earlier rural life.

His first major contribution was the 1930 book The Theory of Collective Bargaining. Hutt challenged one of the most fundamental assumptions underlying interventionist theory: that the individual worker was at an inherent disadvantage in labor negotiations, a disadvantage that could be redressed only through collective bargaining over wages. It was a theme he came back to four decades later in his 1973 work, The Strike-Threat System: The Economic Consequences of Collective Bargaining. He explained that supply and demand set wages in the marketplace just as they set all other prices. Wages formed on an open, competitive market assure that no worker is or can be exploited. What determines any worker’s worth is the training, experience, and productive capabilities he brings to the marketplace and the value that prospective employers see in those talents and abilities. No employer will offer the worker more than the extra value he is expected to bring to the enterprise. And competition among employers assures that the wage reflects the most highly valued use of his abilities.

Coercive Bargaining

Collective bargaining, Hutt argued, can force wages above market-determined levels only through the use of coercion. Although trade unions threaten to (and do) shut down enterprises through strikes to force employers to acquiesce in their wage demands, wages pushed above market-clearing levels cause some workers who would have found employment to be priced out of the market.

Union apologists have often argued that through collective bargaining and strike threats, organized labor can capture a greater portion of the total revenues earned in an industry at the expense of employers. Hutt demonstrated that at most this tactic can only work in the short run. In the longer run, as profits in an industry fall owing to union wage increases, entrepreneurs will shift to industries where profits are higher. Thus fewer employers will remain in union-dominated industries, potentially reducing total employment opportunities there.

This led Hutt to make the useful distinction between what he called “natural” and “contrived” scarcities.[4] The fundamental problem in society is that means are scarcer than ends. This scarcity is “natural”—an inescapable part of the human condition. The task of the market, through the competitive forces of supply and demand, is to determine how the scarce means of production (including labor) are to be allocated among their alternative productive uses. Scarcities become “contrived,” however, when owners of means attempt to withhold part of their supply by politically restricting entry and competition. A special-interest group might do this to boost its income.

Contrived scarcities frustrate what Hutt was the first to call “consumers’ sovereignty.”[5] In a free market the demands of consumers determine what gets produced and therefore, indirectly, the allocation of naturally scarce resources among their competing uses. When the allocation of resources reflects consumer demand, they can be said to have been fully and properly applied to serve the interests of consumers. The wishes of consumers have been made “sovereign.” Politically contrived scarcities frustrate consumers either by withholding some of a resource or by allocating it to a less highly valued use.

Colliding with Keynes

Hutt’s criticisms of collective bargaining, strike threats, and the dangers from contrived scarcities meant that beginning in the 1930s he was on a collision course with the emerging Keynesian Revolution in economic thinking. In 1936, Cambridge economist John Maynard Keynes published The General Theory of Employment, Interest and Money. He argued that the Great Depression had demonstrated that the market economy could not always employ everyone willing to work at prevailing wages because aggregate demand could be too low. Government would have to fill the gap by increasing its own demand for what the economy produced.

Hutt’s first challenge to Keynes came with his 1939 book, The Theory of Idle Resources, in which he asked the most obvious question: why would a resource or a worker be unemployed? He responded that workers might be unemployed when: (a) no one has any use for their services; (b) employment opportunities are seasonal and it pays for workers to be idle part of the year; (c) workers won’t move to where jobs are, or won’t accept the prevailing wages for their skills, or prefer leisure, or have their idleness subsidized; (d) a union pushes wages above market levels and a barrier or incentive prevents the unemployed workers from moving to other jobs; or (e) workers withhold their labor because they are unwilling to accept pay cuts when the demand for their services has fallen.

The crux of the unemployment problem during the Great Depression, Hutt argued, was labor unions’ often aggressive resistance to pay cuts in the face of declining demand for various goods and services. The massive unemployment of the 1930s, therefore, was the result of “contrived” scarcities created by government and special-interest groups.

Despite criticisms such as Hutt’s, Keynes-ian economics dominated both economic theory and policy for the four decades after the Second World War. Yet even during the zenith of Keynesianism, William Hutt continued to challenge what was then known as the “New Economics.” In a series of articles, such as “The Significance of Price Flexibility,”[6] and in several books, Keynesianism: Retrospect and Prospect (1963), A Rehabilitation of Say’s Law (1974), and The Keynesian Episode: A Reassessment (1979), he attacked the fundamental premises of the Keynesian approach.

He argued that Keynes was wrong when he asserted that the classical and free-market economists who preceded him had no theory to explain massive and prolonged unemployment. Hutt said that the economists before Keynes had never claimed that unemployment was impossible or unexplainable. They clearly understood that the selling of goods and labor depended on prices that would find willing buyers. He quoted his old teacher, Edwin Cannan, who had pointed out in 1933 that “General unemployment appears when asking too much is a general phenomenon.”[7]

This led Hutt to restate and defend Say’s Law. He argued that Keynes’s definition, “supply creates its own demand,”[8] is a distortion of its actual meaning. Jean-Baptiste Say and other nineteenth-century classical economists pointed out that people produce only because they wish to consume. What they don’t consume they trade for what others have produced. Every offer of supply therefore indicates a demand. Goods of course are typically bought with and sold for money. Unless individuals offer their goods at prices that others are willing to pay and that earn the money they desire, they will be unable to demand what others are selling.

Seen from this angle, Hutt argued that the massive unemployment of the 1930s was not the result of “aggregate demand” being too low, but of prices for goods and labor being too high. Furthermore, these prices created conditions for a cumulative contraction of production and employment. Whenever “inappropriate pricing” results in unsold supplies, Hutt said, the owners of those supplies are less able to demand goods from others. If this second group of suppliers also keeps their prices and wages too high, they also will experience unemployment. The process will repeat itself, widening the circle of unsold goods and unemployed workers.

Flexible Prices and Wages

At the same time, Hutt explained, any lowering of these prices and wages helps release withheld supplies and bring workers back to their jobs. The re-employed workers could then demand goods on the market. Thus flexible prices and wages, adjusting to changing market conditions, would always tend to assure full employment in the economy.

Written during the high watermark of Keynesian economics, Hutt’s arguments were often either ignored or rejected as being politically out of step with the times. Yet, this never dissuaded him from defending what he considered to be logically sound and true. In 1936 Hutt published a book titled Economists and the Public, in which he insisted that only by ignoring the politically fashionable and expedient could an economist claim to speak with objectivity. The economist’s task was to explain the workings of the market process and the consequences that would result from intervention, regulation, and control. Politicians may have to compromise, but not economists. The laws of supply and demand operate regardless of ideological whims and wishes. He defended this position again in Politically Impossible . . .? (1971).

As if to illustrate this principle of integrity, in 1964 Hutt published The Economics of the Colour Bar, a pro-capitalist challenge to apartheid in South Africa.[9] He showed that race-based government intervention in the economy was bad for both blacks and whites. The book caused a firestorm of controversy and even threatened Hutt’s position in South Africa for a time.

Since his death in 1988, traditional Keynesian economics has been eclipsed, union power is no longer viewed as sacrosanct, apartheid has ended in South Africa, and there has been a renewed appreciation and understanding of the free market. To no small extent this has been due to the ideas and principled stance of William H. Hutt. For those of us who had the privilege to know him, his greatest influence was through the wit and humor with which he made his case. Students loved him. In his last years he had to get around the University of Dallas campus in a wheelchair. Some of my students then came up with the following riddle: Why does Professor Hutt always use a wheelchair? Because he hates Keynes.

When told this, Hutt smiled and nodded his approval.


Notes

  1. See Richard M. Ebeling, “William H. Hutt, 1899–1988,” The Freeman, October 1988, pp. 400–401.
  2. 2.Lionel Robbins, Autobiography of an Economist (New York: St. Martin’s Press, 1971), pp. 85–86. Also see my review of Collected Works of Edwin Cannan in Freedom Daily, August 1998, pp. 41–44.

  3. F. A. Hayek, ed., Capitalism and the Historians (Chicago: University of Chicago Press, 1954), pp. 160–188; see also W. H. Hutt, “The Poor Who Were with Us,” Encounter, November 1972, pp. 84–90.
  4. W. H. Hutt, “Natural and Contrived Scarcities,” South African Journal of Economics, September 1935, pp. 345–353.
  5. W. H. Hutt, “Economic Method and the Concept of Competition,” South African Journal of Economics March 1934, pp. 3–23; Economists and the Public: A Study of Competition and Opinion (London: Jonathan Cape, 1936), pp. 257–72; “The Concept of Consumers’ Sovereignty,” Economic Journal, March 1940, pp. 66–77.
  6. W. H. Hutt, “The Significance of Price Flexibility” (1954), reprinted in Svetozar Pejovich and David Klingaman, eds., Individual Freedom: Selected Works of William H. Hutt (Westport, Conn.: Greenwood Press, 1975), pp. 130–46.
  7. Edwin Cannan, Economic Scares (1933), reprinted in Alan Ebenstein, ed., Collected Works of Edwin Cannan, vol. VII (London: Routledge/Thoemmes Press, 1997), p. 38.
  8. John Maynard Keynes, The General Theory of Employment, Interest and Money (New York: Macmillan, 1973 [1936]), p. 18. For a detailed criticism of Keynes’s misunderstanding of Say’s Law in the context of what the classical economists really said, see Steven Kates, Say’s Law and the Keynesian Revolution: How Macroeconomic Theory Lost Its Way (Northhampton, Mass.: Edward Elgar, 1998). Also see Mark Skousen’s column in this issue of The Freeman.
  9. The book is available once again through the Free Market Foundation, Johannesburg, South Africa.

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