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
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
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.
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.”
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.