Hazlitt and the Great Depression

[This memorial for Henry Hazlitt originally appeared in The Free Market, September 1993, Volume 11, Number 9.]

Old Right journalist Garet Garrett described the New Deal as a revolution against America’s tradition of private property, limited government, and the rule of law. Indeed, it had all the earmarks. President Roosevelt ran against government spending and deficits but, once in office, acted like a dictator.

Roosevelt overthrew the traditional limits on government’s role and instituted central planning and welfarism in every sector of the economy.

Then the statist juggernaut couldn’t be stopped: next came FDR’s war socialism, Truman’s unionism, Johnson’s Great Society, Nixon’s price controls, Carter’s inflation, Reagan’s deficit spending, Bush’s regulation, and Clinton’s Fabianism.

Because ideas matter as much as the lust for power, the New Deal couldn’t have happened without a public intellectual justification. That entailed theories on the causes of the stock-market crash and the economic downturn that followed. In order for socialism to prevail in the United States, the academy and the public had to be convinced that capitalism had failed.

Henry Hazlitt was at the center of that debate, holding forth in the pages of The Nation, a sophisticated and trendy fortnightly. He was hired as literary editor, a relatively nonpolitical position. But as the politics of the day became more contentious, he was afforded more editorial latitude. He began to write against federal encroachment on private enterprise.

Once Roosevelt reversed his campaign rhetoric and embraced the total state, The Nation editors knew they had to take a stand. As Hazlitt’s criticisms of FDR grew, so did the internal complaints about Hazlitt’s philosophy. Rather than simply fire their editor of two years, they scheduled a knockdown, drag-out fight between those who said capitalism had failed (thereby making socialism the answer) and those who said interventionism had failed and that capitalism was the answer.

In one corner was Hazlitt, literary critic and financial journalist. In the other was Louis Fischer, Russian émigré, journalist, and socialist. The exchange, “Depression and the Profit System,” ran in the May 24, 1933, issue, in the midst of FDR’s monetary and fiscal revolution.

Fischer adopted a Marxian explanation of the Depression. Citing data from the Bureau of Labor Statistics, he argued that as productivity increased since the turn of the century, wages had declined relative to output. Laborers then were able to purchase less and less of their product because capitalists were skimming their surplus value. What triggered the crisis?

Fischer explained it was a combination of Marxian crisis theory and Keynesian underconsumption theory: “People who wanted to consume all did not have the means, and the people who had the means could not consume all. Hence our reduced purchasing power.”

What needs to be done? “Divide and redivide profits,” he said. “That is the way out.” There should be “provision for a perfectly equal division of surplus value in years to come”; we should eliminate “the profit of the capital owner” and create “socialism.”

Hazlitt responded by showing Fischer’s figures on surplus value to be based on a “fallacy of selection.” Fischer had picked base years (1899 and 1929) with a purpose in mind and then confused anomalies with a general trend. Two could play that game; Hazlitt showed that labor’s product could be said to have been increasing relative to output by picking other years (1869 and 1921).

Moreover, Hazlitt asked, if labor’s decreasing share of profits is the cause, how do we explain economic recoveries during the same period in question? How can we explain, using this reasoning, why the crisis did not come sooner?

As Hazlitt said, Marx’s theory “makes it difficult to explain why we are not always in a crisis, and impossible to explain how we ever surmount one.” On that basis, he dismissed the broader implication that the 1929 crash represented anything like a long-running trend in the structural basis of the economy.

But what if Fischer was right, that labor really was earning a smaller return relative to capital? Hazlitt noted this would not necessarily mean that people were being exploited. It could just mean that the volume of capital in industry was increasing at a greater rate than that of labor, which indicates increasingly efficient technology. If so, that might lend weight to the expectations of the classical economists that labor would own more capital as productivity increased. For example, the number of stockholders increased dramatically during the 1920s.

Having dispensed with Fischer’s sweeping Marxian theory, he argued that the best period to examine from an economic point of view was the time “between the last crisis and the present one—the period, say, from 1922 to 1929.” In this period, one notices that the prices and output of capital and labor in the industrial sector were growing out of proportion to the agricultural sector. That may not have any significance to the cause of the crisis, but it brings into question the idea of economywide exploitation of labor.

Having exploded Fischer’s data and economic theory, he went on to speculate on an alternative. There was no visible free-market theory on why the United States was in crisis. But Hazlitt knew from his reading of history about the trouble that comes with an overactive and indebted government. He knew the secret to the Crash resided with these problems.

A stable market order, he said, requires an atmosphere free of shocks—or at least a government that allows the economy to correct once those shocks had occurred. The war had artificially inflated the prices of commodities and they needed to correct downward to a more realistic level. He argued that the crisis of 1929 was that downward correction.

“But the focus of this collapse,” he wrote, “was aggravated enormously by the whole series of post-war policies.” Among these he listed the “vicious Treaty of Versailles,” the “disorganization caused by reparations and war debts,” the “preposterous tariff barriers thrown up everywhere,” the abandonment of the gold standard and the adoption of the “gold-exchange standard,” and “reckless lending to foreign countries.”

Most importantly, he blamed the “artificial cheap-money policy pursued both in England and America, leading here to a colossal real-estate and stock-market speculation under the benign encouragement of Messrs. Coolidge and Mellon.” This malinvestment, caused by inflationary policies, created distortions in the capital stock that called for correction.

Later Hazlitt would conclude that malinvestment was the central problem, not only in the Great Depression, but in all business cycles. He did so under the influence of Ludwig von Mises, whom he met about a decade later. Together they advocated the gold standard and the “Austrian” theory of the business cycle. The theory, developed by Mises, points to the way markets coordinate plans over time and the way central-bank money and credit expansion disrupt those plans.

Hazlitt was inclined to the Austrian theory even before he knew it formally. It was most consistent with his manner of thinking. As a literary critic, his specialty was exploding the pretensions of ideologues. He loved picking up a fashionable academic text, dissecting its essential claims from overblown prose, and showing how patently absurd it was. He had a gift in short for finding the essence of an argument and testing it relentlessly against standards of reason. These are all traits the Austrian School carried with it since its birth in 19th-century Vienna — traits that had also been essential in the late Scholastic tradition of 16th-century Spain, which was indebted to Thomist and thus Aristotelian reasoning.

One patently absurd recommendation in Fischer’s essay, according to Hazlitt, was his call for high new taxes on capital. This measure “would violently aggravate the catastrophe,” Hazlitt said, by causing business to take another downturn that would make the 1929 crash look trivial. An increase in wages would be undesirable as well, Hazlitt said, because that would cause the cost to business to increase and lead to even more unemployment. In order to make the economy recover, he said, we need more private capital, not less, and that means letting markets work.

More than anything, said Hazlitt, we don’t need socialism, communism, or “that ambiguous thing called Planning.” Based on the type of people who would be in charge, and the nature of politics, he was sure the economy would be run by “economic illiterates,” people, he no doubt meant, like Louis Fischer.

Virtually everything Hazlitt wrote in this powerful essay—his analysis of cause, effect, and the solution—was later vindicated in the work of scholars like Murray Rothbard and Robert Higgs. In his book Modern Times, Paul Johnson sketches the same scenario that Hazlitt laid out in the thick of the New Deal onslaught itself. More recently, Richard Vedder and Lowell Gallaway presented essentially the same position in Out of Work.

Hazlitt might have been spared his job had his attack on the emerging consensus not been so complete and so devastating. If he had made a few more concessions, or possibly not totally smashed Fischer, he might have lasted. But it was not in Hazlitt’s nature to withhold the truth for the sake of expediency. He must have sensed the end was near for his prestigious job at The Nation and decided to go out with a bang.

The dramatic debate between Fischer and Hazlitt ended with an ominous note from the editor: “The discussion … will be commented upon editorially in a forthcoming issue.” Indeed, it was the next issue in which The Nation announced its devotion to the socialist cause. “Mr. Roosevelt is attempting to preserve capitalism,” said the editorial, echoing conventional wisdom of the day, “to save it from itself by robbing it temporarily of several of its most fundamentally capitalistic prerogatives.”

If the New Deal passes, said the editors with rare insight, “he will have the power to tell industry what and how much it may produce, what it may charge for its products, how much it shall pay to labor, what hours labor shall work.”

But this was not enough for The Nation. “We tend to agree” with Fischer, said the editors, “that a collective society offers the best hope for this desirable end.” They favored a “move toward collectivism” as rapidly as possible. Criticizing Roosevelt’s alleged timidity, they said the “country’s steps toward an integrated, socialized industrial society should be deliberate and purposeful.”

The pages of a magazine devoted largely to pushing progressive cultural reform had swung fully in favor of collectivism. The esoteric doctrine had been made explicit for the first time, and Hazlitt was pushed out and forced to find other outlets for his work.

After his death, socialist propagandist Irving Howe, editor of Dissent, was eulogized again and again in the popular media, even though (or possibly because) his antiproperty, antibourgeois ideas were utterly alien to the pre–New Deal American experience. This is even after the failure of socialism around the world.

Hazlitt was right many times over — about socialism, welfarism, inflation and the gold standard, popular culture, and much else. And unlike Howe, Hazlitt wrote as clearly as he thought.

He never used his position to spread disinformation in the service of ideology, as Howe did; Hazlitt had a profound faith in truth and let logic and facts speak for themselves. It’s a measure of the corruption of official culture that the death of Henry Hazlitt was hardly noticed.

In his death, I feel sure, his greatest hope was that this country would realize the errors of its history and rectify them. When our history is rewritten, and the Irving Howes are seen as the social menaces they were, Hazlitt will be remembered as a prophet who spoke truth to power. The Nation, in a stunning reversal of socialist editorial policies, will concede that Hazlitt was right all along.