For almost a full quarter of a century John Maynard Keynes’s famous General Theory of Employment, Interest and Money has hung heavy over our heads. The “Bible” of people who have certainly never plowed their way through some of its more oppressive chapters, it has bemused the subject of economics with a whole new vocabulary: “failure of demand," “marginal efficiency of capital," “propensity to consume," “liquidity preference," “the multiplier," “aggregate demand," “euthanasia of the rentier.” These terms rocket through our economic literature, throwing off dense clouds of inky blackness.
It is not that the terms cannot be defined; the trouble is, as Henry Hazlitt demonstrates with great clarity in his The Failure of the “New Economics": An Analysis of the Keynesian Fallacies (Van Nostrand, 457 pp., $7.50. To be published May 10), that the great Lord Keynes fought shy of giving them any precision. He let most of them do duty for a variety of things, some of them highly contradictory. But when he came to putting his words into the algebraic formulae that have become so fashionable in economics since the time of Stanley Jevons, he assumed they could be translated into precise entities. Like the “expert” who figured in the late Benjamin Stolberg’s comic story, Keynes had a habit of never pausing on his way as he swept forward with inexorable logic from the initial error to the grand fallacy of the conclusion.
To review in small space Mr. Hazlitt’s demolition of the whole Keynesian structure is a physical impossibility. Mr. Hazlitt takes up the General Theory line by line and paragraph by paragraph, discovering scores of errors on almost every page. Not only does he kill Keynes; he cuts the corpse up into little pieces and stamps each little piece into the earth. The performance is awe-inspiring, masterly, irrefutable—and a little grisly. At times one almost feels sorry for the victim. But, since Keynesian doctrines have created so much misery in the world, any sympathy is misplaced. Hazlitt’s job had to be done.
As Hazlitt indicates, Keynes considered that Say’s Law of Markets—the law or theory that production creates its own purchasing power—did not hold true, especially in a complex modern society. But, again as Hazlitt says, the Law is in itself merely a truism. If goods exchange for goods, it is obvious on the face of things that the creation of a good puts something into circulation that can be traded for something else. The creation of the good does not necessarily guarantee its creator a profit. But, unless the good is burned or dumped into the sea or seized by the government or stored away in a cave to rot, it is and must be purchasing power.
So what was Keynes talking about when he made “failure of demand” the keystone of the “new economics"? As Hazlitt makes plain, Keynes had to assume his conclusions despite the evidence of his own senses. In parts of the General Theory, Keynes accepts the classical truth that savings and investment are two faces of the same coin. But, to arrive at his “failure of demand” postulate, Keynes had in other parts of the General Theory to assume that savings did not flow into investment when “liquidity preference” was rampant. The limited amount of truth in the Keynesian formulations is that the time lags that are attendant upon the swings of the business cycle create momentary imbalances. But, when the economic system is free, the imbalances give way to new swings toward equilibrium. With his bias toward authoritarianism, Keynes did not like to watch people working their way out of temporary difficulties by use of their own wills, brains, and emotional drives. An aristocrat at heart, he wanted to assign the common people—Veblen’s “underlying population"—their duties and tasks as well as their pleasures.
The Autocratic Nature of Keynes
Again and again Hazlitt pauses amid his purely technical refutations of Keynes to observe the hand of the autocrat in the General Theory. Keynes proposed to correct the “failure of demand” by artificial stimulation of the “propensity to consume.” Capital must be put to work by edict, even when it had no “marginal efficiency.” Demand and consumption must be “multiplied” by “government investment”(a high-toned phrase for inflation or for tax-and-spend give-aways), until” aggregate demand” had created “full employment.” It would not matter if private ownership were snuffed out by the continuation of such policies—the “rentier” could be left quietly to die as his capital and its concomitant income disappeared.
Keynes, says Hazlitt, is the Karl Marx of the twentieth century. His economics is demagogic—it gets its vast influence, its “dynamism,” from its sly incitement to the mob to snuff out all creditors. In Keynes the money lender has replaced the capitalist as the villain.
The Keynesian appeal to demagogic passions chimes in with the contentions of certain labor leaders, that high wages are necessary to sustain “purchasing power” regardless of their relation to man-machine productivity. The Keynesian system makes no allowance for wage cuts in industries which have seen their markets shrink because of the cost-price squeeze on the customer. Although Keynes knew very well that almost all costs, in the last analysis, are labor costs, he never dared mention the possibility that a downward revision of wages in certain industries might result in an increase in the real purchasing power of labor and in a forward movement toward the full employment of all available labor. Any such admission would have left Keynes without political influence on the Left. And it was such influence, rather than a reputation for scientific accuracy, that Keynes most prized.
"Aggregates” vs. Individuals
A basic trouble with Keynes, says Hazlitt, is that he had reverted to “block” or “lump” thinking. Despite his assumed modernity, his habit of considering himself part of le dernier cri among the fashionable Bohemians of Bloomsbury, he was a man of the seventeenth century, a mercantilist, in all of his preconceptions. When he wrote of wages, he forgot that wage payments are individual before they are parts of an average or a “level.” He could not conceive of a situation in which the wages in one industry might be too high at the same time that wages in another industry, or sector of the economy, might be too low or too mixed. Because of his accent on “aggregates,” he thought of national purchasing power as a lump.
Taking off from the Keynesian concept of “aggregative” economics, the political disciples of the Great Man have fallen into the error of supposing that anything which stimulates “aggregate demand” must add something of value to the Gross National Product. Accordingly, the manipulators of the GNP and the “national income” propose to subsidize all sorts of moribund or marginal industries and regions on the theory that this constitutes economic progress. If the construction industry is in the doldrums, why, the way to a sumptuous “national income” is to pour government money into cheap housing. If the farms of
It does not matter to Keynesian “block” thinkers that this is primarily a way of subsidizing backwardness and, at the same time, of choking off the possible emergence of new “ladder” industries, such as the automobile industry once was. If there had been Keynesians around in Henry Ford’s day, they would have poured “lump” money into the carriage business and they would have subsidized the blacksmiths. Quite probably they would have choked off much of the experimentation that has resulted in the modern automobile and the modern highway system.
Hazlitt’s book is a joyful paradox in that it successfully combines a number of ways of looking at Keynes and Keynesianism. It exposes Keynes’s fallacies in broad stroke, as though Hazlitt were looking at a mountain range through a telescope. But it also exposes the fallacies microscopically. As a by-product of his inquest, Hazlitt provides us with a beautiful series of essays on the uses, the abuses, and the limitations of mathematical economics. The book is ponderous in its scope, but it is witty in its detail. Because of its technical nature it will probably never sell in the hundreds of thousands. But the Keynesians will never hear the end of it.
We the People: The Economic Origins of the Constitution by Forrest McDonald (
Reviewed by Richard M. Weaver
This book could be described simply as a scholarly evaluation of Charles Beard’s famous thesis of the economic origin of the Constitution. But viewed in its broad implications, it may be regarded as a refutation, deserving to be cited often, of the general concept of economic determinism.
The publication in 1913 of Beard’s An Economic Interpretation of the Constitution of the United States touched off a cause célèbre in American education. The author, an associate professor of politics in
Beard’s argument was, in brief outline, that the movement for the Constitution and the ensuing battles over its ratification were an economic class struggle. As it came to be written, then, the Constitution was “an economic document drawn with superb skill by men whose property interests were immediately at stake; and as such it appealed directly and unerringly to identical interests in the country at large.” The impulse behind its adoption was the fact that “important groups of economic interests were adversely affected by the system of government under the Articles of Confederation, namely those of public securities, shipping and manufacturing, money at interest, in short, capital as opposed to land."
Accordingly, the entire campaign for the Constitution was begun and pushed forward by “a small and active group of men immediately interested through their personal possessions in the outcome of their labors…. The propertyless masses were…excluded at the outset from participation (through representatives) in the work of framing the Constitution. The members of the Philadelphia Convention which drafted the Constitution were, with a few exceptions, immediately, directly, and personally interested in, and derived economic advantage from, the establishment of the new system."
The amount of labor which Professor McDonald performed in order to determine whether these assertions have any basis in fact was evidently enormous. First, he analyzed the delegates elected to the Philadelphia Convention with reference to the areas from which they came and the political factions with which they were identified in their home states. Next, he investigated the economic circumstances of every one of the fifty-five delegates who actually attended to determine whether, and in what sense, they were men of property. Next, he analyzed their conduct in the Convention to see whether there was any correlation between their economic interests and their attitude toward the new system of government which was being drawn up. Finally, he studied the battle over ratification in every one of the thirteen states to determine whether any inferences can be drawn regarding the economic status of those elements opposing and those favoring ratification.
His conclusion is what every man of sense would have anticipated. There is hardly a shred of evidence for Beard’s thesis to rest upon; it was all spun out of a theoretical prejudice in favor of economic determinism. But let Professor McDonald announce the finding in his own words: “Beard’s thesis—that the line of cleavage as regards the Constitution was between substantial personalty interests on the one hand and small farmer and debtor interests on the other—is entirely incompatible with the facts."
Here is a sampling of the facts which his research uncovered. Let us bear in mind that Beard had represented the Constitution as a kind of capitalist “plot” against farmers and debtors. “Five of the men who either refused to sign the finished Constitution or who walked out of the Convention (Gerry, Randolph, Mercer, Lansing, and Luther Martin) were among the largest holders of securities in the Convention. Had they sold their securities in
The conflict in the critical state of
The great state of
There remains the general question of whether the American people at this time can be grouped into any significant categories with reference to their enthusiasm for or against the Constitution.
In attempting to answer this, Professor McDonald divides the states themselves into three groups: those favorable to the Constitution (
The only thing that can be deduced from this comparison is that those states which wanted the Constitution were states which were not able to cope with their own problems, those which were divided on the issue were states which felt somewhat more able to do so, and those which opposed it were states which felt that they were getting along well enough as sovereign entities.
But these feelings themselves depended on a great variety of factors.
So it comes down to this: the states were eager to ratify according to whether or not they felt a need for national union. The role of economic interests remains indefinite, indecisive, and unpredictable.
It is to be hoped that this painstaking piece of scholarship will contribute much toward exploding the theory that human beings act and vote merely according to their anticipations of economic gain. The sensible part of mankind has never embraced anything so narrow and unrealistic. Historians can thus provide important help to philosophers and others in re-educating people to know that “economic man” really doesn’t exist. Man acts sometimes selfishly, sometimes unselfishly, but more often out of varying combinations of these motives. This means that man is a free agent in a sense no economic determinist would allow, and in that fact lie our challenge and our hope.