31. Professor Hutt on Keynesianism

The Keynesian doctrine as developed by 1936 in The General Theory of Unemployment, Interest, and Money, tries to prove the soundness of the two most popular but least tenable components of contemporary economic policies: inflationism and labor unionism. At the time of its publication the spectacular failure of these two methods of interfering with the market phenomena could no longer be concealed. Yet the governments and the political parties were firmly resolved not to abandon “deficit spending” and the support of labor union violence and intimidation. Their official wisdom explained the progressive rise in prices?which they misnamed inflation?as caused by machinations on the part of bad people, the profiteers, and they considered that unemployment was one of the unavoidable shortcomings of a “free,” i.e., not regimented, economy.

But from day to day it became more obvious that it was not enough to find a lame excuse for the current policies. What the noncommunist West seemed to need was a comprehensive doctrine that could be adopted as the economic philosophy of these governments that, while ostensibly proclaiming their anticommunism, step by step approached a system of all-round government control of business. The General Theory’s success was due to the fact that it tried to provide such a justification of the American New Deal and the devaluation practices of the various European nations.

The enthusiastic praise that Keynes’ doctrine received on the part of professors and authors propagating government omnipotence could for a while divert attention from the fact that from the beginning all discriminating economists rejected it and unmasked its inherent fallacies. Some of the most important of these critical essays were collected and republished by Henry Hazlitt under the title The Critics of Keynesian Economics (Van Nostrand, 1960). Hazlitt himself has in a voluminous brilliantly written study, The Failure of the “New Economics” (Van Nostrand, 1959), clearly demonstrated the shortcomings, contradictions, and other failings of Keynesianism.

To Clear the Air

As an economic doctrine, Keynesianism is now dead. But the serious errors and misunderstandings of fundamental issues of economics that made its emergence and its fleeting success possible still prevail. There remain with us many empty slogans and illusory concepts that easily mislead those seeking a satisfactory interpretation of phenomena. It is necessary to clear away the debris of the Keynesian structure in order to open the way for a correct grasp of the principles of the market and the functioning of price flexibility.

This is the task that the new book of Professor W. H. Hutt, Keynesianism?Retrospect and Prospect (Chicago: Regnery, 1963, 447 pp.), wants to accomplish. Hutt calls his work A Critical Restatement of Basic Economic Principles. Such a restatement was badly needed indeed. The main failure of Keynes and all his disciples and admirers is to be seen in the fact that they simply do not know what prices are, how they originate, and what they bring about.

Prices come into existence by the eagerness of people to exchange one commodity or service against another commodity or service. They are the outcome of various individuals’ readiness to buy or to sell. Every price is the outgrowth of a definite constellation of demand and supply. No price could ever be different from what it really was, because people failed to appear on the market at that time who were ready to bid a higher price, or who were ready to ask a lower price. The structure of prices reflects the state of the material conditions determining people’s existence and the success of the endeavors made to satisfy the most urgent needs, as far as these material conditions make it feasible.

Prices cannot be manipulated ad libitum [at will] by the social apparatus of coercion and compulsion, the police power. All the government?or a labor union to which the government has virtually delegated its power of enforcing orders by violent action?can achieve is to substitute coercion for voluntary action. Where there is coercion, the market economy no longer functions; disorder results in the production and the marketing of the articles subject to the governmental decree. Then the spokesmen of the authorities point to the inefficiency of the market system and ask for more government meddling with the price system.

The Market Economy

Professor Hutt analyzes point by point all the alleged shortcomings of the free market about which people complain. He presents a comprehensive analysis of all aspects of the Keynesian interpretation of the market economy. Most of the rising generation of economists were taught Keynesianism and therefore ignore all that economic theory has brought forward for an elucidation of what is going on in production and in the marketing of the products. A careful study of Professor Hutt’s new volume will lead them back to a correct grasp of the problems of the market economy.

Professor Hutt’s contributions to economic science were long since highly appreciated by all serious students of social problems. His rank among the outstanding economists of our age is not contested by any competent critic. Yet, what he has written up to now has appealed only to those specializing in the study of economics. This new volume on Keynesianism is addressed not only to specialists, but to all those who want to form a well-grounded opinion concerning the most burning problems of social policies. It is not only a refutation of erroneous doctrines. It is also an exposition of the fundamental principles and ideas of up-to-date economic theory. It is not merely a treatise for the specialist. It is also a book for all those eager to learn what sound economic doctrine has to say about the great problems of our age.

Reprinted from The Freeman, January 1964.