A Reviewer's Notebook - 1959/5

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 Appalachia or the Ozarks are struggling along at the same time that rich farmers in Ne­braska aren’t making quite what they would like to make, why, the way to a maximized GNP is to pour “lump” money into agricul­ture.

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 (Chicago: University of Chicago Press. 436 pp. $7.00.)

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 Columbia University, filled with zeal for the new doc­trine that men’s attitudes are sim­ple reflections of their economic in­terests, tried to account in those terms for the framing of our Con­stitution. The resulting shock was so great that it led eventually to his departure from the faculty of Columbia and his adopting the role of free-lance historian for the re­mainder of his life. Beard lived to reverse his views on the matter in his Basic History of the United States (1944), and now Professor McDonald provides unassailable proof that Beard’s original posi­tion is untenable.

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 Phila­delphia as the Convention opened, the proceeds would have been suf­ficient to buy all the securities owned by forty-five of the remain­ing fifty delegates."

Delaware was the first state to ratify, the vote being 30-0. Its con­vention was largely made up of small farmers, of whom sixteen had annual incomes between $40 and $267. Only five of the thirty held public securities.

New Jersey was the next to ratify, and it also voted unani­mously. “The convention was a fairly representative cross section of the economy of the state.” About twenty-five of its thirty-eight members were farmers and land­owners.

Pennsylvania was one of the states in which there was sharp conflict over ratification. The in­vestigation showed that the dele­gates on both sides of the issue held about the same amounts of he same kinds of property. The slight difference was that the anti-Federalists were a little better en­dowed with personalty, especially public securities, than proponents of the Constitution. That is, of course, the exact opposite of what Beard would have had us believe.

The conflict in the critical state of Virginia was a fierce one. But here, too, the author’s data tell the same tale. For in this state “the property holdings of ratifica­tionists and antiratificationists were virtually identical, except that more small farmers from the interior supported ratification than opposed it.” To this he adds the telling item that “if there was a debtors’ faction in Virginia, it was largely identical in personnel with the proratificationist group."

The great state of New York came as near as anything to re­jecting the Constitution, the final vote being 30-27. There, the strug­gle over ratification was a compli­cated and bitter affair between two distinct parties, one led by Gov­ernor George Clinton and the other by Hamilton and John Jay. But their respective positions cannot be explained in terms of the Beard thesis of economic cleavage. “In the showdown over ratification neither party to the conflict had a monopoly of economic interest of any kind…. The ranks of both parties included approximately equal numbers of large and small landholders and speculators in var­ious forms of property.” Beard had argued that in New York the struggle was a clear one between security holders (Federalists) and advocates of paper money (anti-Federalists). But Professor Mc-Donald’s research shows that in this state “security holders” and “paper money advocates” are but two names for the same group of people.

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 (Delaware, New Jer­sey, Georgia, Connecticut, and Maryland), those divided over the Constitution (Pennsylvania, Mas­sachusetts, South Carolina, and New Hampshire), and those more or less opposed to the Constitution (New York, Virginia, North Caro­lina, and Rhode Island).

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. Delaware felt that she was simply too small to go it alone. Georgia felt unable to cope with the Indian menace on her frontier. New York might have gone it alone had not the City of New York threatened to secede. North Carolina, economically and cul­turally the most isolated of the thirteen, seems to have proceeded out of a general indifference.

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.