The Classical Medicine

A former editor of Barron’s and of Fortune, Mr. Davenport is author of The U.S. Economy and a frequent lecturer on political economy.

This article is reprinted by permission from Human Events of October 4, 1975.

It is a fact of experience, no less than a law of optics, that in per­ceiving an object everything de­pends on the angle of vision. For over a quarter century now under the influence of the late John May­nard Keynes, most economists have been looking at the pheno­mena of employment and unem­ployment from the angle or point of view of overall demand for goods and services, and have been em­phasizing that where resources are unemployed the cure lies in pump­ing up demand by easy credit, mon­etary manipulation, and govern­ment spending.

Yet the net result of this kind of analysis and this kind of pre­scription has now proven to be, to least, disappointing. Em­phasis on so-called “aggregate de­mand” has not resulted in that condition of full or at least high employment promised by the Em­ployment Act of 1946. It has pro­duced virulent world-wide infla­tion, and in 1974-75 the worst of all worlds : — a high rate of infla­tion with unemployment, or stag­flation, which the Ford Adminis­tration is now trying to cure by enormous Federal deficits of the kind which got us into trouble in the first place. In view of the re­cord and the current disarray of the neo-Keynesians, it is time for a change — a change in our angle of vision.

In this context the most impor­tant economist writing today is as­suredly not Walter Heller, the Louis XIV of so-called “fiscal stim­ulus” (and après moi le déluge), nor even the redoubtable Milton Friedman, the acknowledged dean of free enterprisers. He is rather a spry seventy-four-year-old Englishman by the name of Wi1liam H. Hutt, now visiting professor at the University of Dallas and before that dean of the business school of the University of Capetown, who recently brought out a little-noticed book titled A Rehabilitation of Say’s Law (Ohio University Press, Athens, Ohio 45701 ; 150 pages, $8.00).

Its bare-boned thesis is that the early French economist, Jean Bap­tiste Say, was on the right track when he held that it is the supply of goods and services which in ef­fect constitutes demand for goods and services. (It is the shoes which the shoemaker makes which gives him buying power for wheat in the form of bread which the farmer produces.) It follows from this proposition, known as Say’s Law of Markets, that if economic activ­ity slackens it is probably not due to lack of monetary stimulus but to the fact that producers, be they businessmen or workers, have mis­priced their products. The remedy is not wild efforts to pump up de­mand by government deficit spend­ing, but to restore flexibility in the whole cost-price-profit struc­ture.

Hutt came to this position as early as 1930 when he brought out his little classic, The Theory of Collective Bargaining, which warned that the great danger of this growing practice was that union pressures would price many workers out of the market entirely into wholly unnecessary unemployment. He has since enlarged on this theme in such scholarly works as Keynesianism: Retrospect and Prospect (1963) and in his monumental Strike Threat System (1973) which held that the coercive strike is in effect a form of social warfare and that the golden rule of labor relations should be simply that any man can go to work at any wage he chooses, no matter how low, as long as he feels the job offered will better his condition.

But Hutt is much more than a critic of present union practices, and his latest book on Say’s Law shows it. It is, to borrow a phrase from the late Justice Holmes, a further gallop or canter of a determined fighter for common sense in our economic thinking, as against the Keynesian orthodoxy which now holds so many of our economists and politicians in thrall.

Keynesian ideas

That orthodoxy, it should be recalled, stems from Keynes’ contention that while production may well create its own demand in a primitive or barter economy, where goods are exchanged for goods, this nexus does not hold in a complex modern money economy where goods and work are sold and bought for cash or credit. In such an economy, Keynes argued, earn­ers of income may choose to squir­rel it away in idle savings or cash balances instead of spending it on consumption or investment goods, thus breaking the normal flow of production and distribution. From this initial attack on Say’s Law of Markets, Keynes reared his imposing edifice of over-saving, under-investment, and the need for government spending to fill the gap.

Quite aside from its dubious re­sults, this whole line of Keynesian reasoning today looks pretty shop­worn. For what with government taxes and rampant inflation, it is hard to find a man in our society who saves much of anything in any meaningful sense of the word; and meanwhile the world’s obvious need is for more private capital formation, not less.

But Hutt does not rely on such historical and empirical evidence to turn economics right side up again. The mistake of Keynes and the neo-Keynesians is their over­stress on the importance of money in final economic activity. “Money,” he writes, “is as incidental (and as important) as cash registers and cashiers in the demanding and supplying process.” We need good cash registers and honest cashiers but they will never make a successful business.

Before men decide whether to spend, save or invest their money they must earn it, and earnings (and jobs) are dependent on supplying goods and services which other people want at prices and wages they can afford. It is the free flow of production and supply which is critical for maintaining and increasing effective demand.

Government’s Limited Role

Abstract as all this may sound, it nevertheless has enormous con­sequences for public policy. Governments, of course, have a duty to help provide the public with a reliable medium of exchange (and hopefully a store of value). But they fatally compromise this duty if, following Keynes, they come to believe that they can usher in permanent prosperity by manipulating the money supply to “cover up” distortions in cost-price relationships. “A forger,” writes Hutt, “does not contribute to the source of demands.” The “classic” function of government, on his view, is something quite different. It is to prevent pressure groups, be they business or labor, from building monopolies that will prevent prices and wages from “clearing the market.”

In the U.S. this means unraveling a whole skein of labor legislation which positively encourages unions to force wages above where the market would put them, thus causing the very unemployment which government officials say they want to cure. It also means cutting down on over-generous unemployment and relief payments which make it more profitable for men and women to rely on government largess than to seek job opportunities.

A harsh doctrine? No doubt. But is it any harsher than the position in which we now find ourselves wherein the productive sector of the economy is increasingly taxed through inflation and the I.R.S. to support a growing pool of potentially productive citizens, many of whom now live in idleness and penury?

Hutt thinks not. The Keynesian revolution, he writes, was distinguished by its “political acceptability.” Therein, of course, lies its danger. By contrast, classical economics, of which Say’s Law of Markets is but one expression, never promised an easy way out. Its overriding objective, however, was in Adam Smith’s phrase to provide “a plentiful subsistence for the people.” That, too, is Hutt’s objective, and in a world plagued by oil cartels, high prices, and unemployment, the “classical medicine” would seem to be precisely what is called for.