Fortuitously, I recently stumbled on a copy of Henry Hazlitt’s “The Failure of the ‘New Economics’”, 1959, reprinted 1973.
The ‘New Economics’ referred to by the esteemed Mr. Hazlitt — who replaced H.L. Mencken as editor of The American Mercury in 1933 and joined the New York Times in 1934, writing financial and economic editorials there and later a bylined weekly financial column well into the 1960s — is Keynesianism, the economic doctrines of the Briton John Maynard Keynes which are still widely taught in American college economics courses.
The top blurb on the back dust jacket panel caught my eye:
“A great book, the best and most thorough exercise in economic demolition since Boehm-Bawerk exploded Marx’s labor theory of value,” wrote my late friend Murray Rothbard, in the National Review. “It is no exaggeration to say that this is by far the best book on economics published since Mises’ great ‘Human Action’ ten years ago … It will be read, and it will destroy the Keynesian system.”
“This book is the final, total, irrefutable dissection and destruction of Keynesianism,” added Melchior Palyi in The Chicago Tribune.
And finally, writing in the Christian Science Monitor, Ludwig von Mises himself said of this book “Hazlitt has entirely demolished the Keynesian misconceptions.”
These reviewers’ summations of the effectiveness of Hazlitt’s demolition of Keynesianism are not overstated. The book does precisely what they say it does.
In brief, Keynesianism — as set forth by John Maynard Keynes 73 years ago in his “General Theory of Employment, Interest and Money” — holds that the twin answers to unemployment and economic downturns are massive government deficit spending and “cheap money” — the artificial driving down of interest rates to “free up more credit.”
This is relevant because this precisely describes the massive and inherently inflationary market interventions that have been brewed up in Washington since the middle of last year, sponsored as enthusiastically by Republicrats as Demopublicans — despite the fact that Mr. Hazlitt, way back in 1959, demonstrated not only that these Keynesian remedies did not work, but that they often had precisely the OPPOSITE effect of that intended!
To “remedy” high unemployment, business failures and other symptoms of economic maladjustment, Keynes prescribed massive government deficit spending designed to keep wages and prices high, and the propping up of enterprises that would otherwise collapse in a heap of dust.
Is there any doubt this is what the Bush administration started in the past several years, and what Barack Obama and the Reid-Pelosi Congress are now continuing?
IT’S NEVER WORKED
Look at the bank bailouts. Look at the desperate efforts to stop the foreclosures of bad mortgages, preventing young folks with more savings from buying those houses at far lower prices.
Look at the taxpayer cash bailouts to two of the “Big 3” auto makers. What’s the justification for that? We’re told that otherwise they might go bankrupt in short order.
So? “Bankrupt” does not mean their factories would be dynamited. A bankruptcy court would review these firms’ unsustainable debts and obligations, ordering creditors to accept nickels on the dollar so management — whether new or old — could make a fresh start.
The first thing to be considered would likely be the excessively costly union contracts into which these firms were pressured by pro-union government policies (and, to some extent, management complacency) over the past 60 years, especially obligations to pay lavish retiree pensions and health benefits.
If the unions or the retirees received some fraction of what they’ve been promised, at which point those obligations were declared “discharged,” Detroit could go back to selling cars profitably at a lower cost. Wages and prices would both fall — the real “adjustment” needed to find a new “bottom” from which to launch a sustainable recovery.
Yet Washington today is moving heaven and earth to PREVENT this natural correction.
(I will note in passing that if Washington wanted to get the economy back on its feet, it would immediately repeal — or at least suspend for a biblical seven years — all its heavy-handed and ridiculously anti-free-choice “gasoline mileage” mandates, along with the Endangered Species Act and any other “environmental” regulations that block the immediate construction of thousands of new oil refineries, coal and nuclear energy plants, etc. The failure of the current Washington gang to consider any of these things even as they uselessly bankrupt the nation, squawking “But it’s a crisis! What else can we do?!” would be hilarious, if we didn’t have to live with the consequences.)
Mr. Hazlitt’s book — with its charts correlating deficits spending to unemployment, year-by-year — is readily available on the used market for 20 bucks. I urge you to get your own copy. But at the risk of causing a readership long since convinced that exposure to even the most conversational snatches of “economic theory” is about as pleasant as dental surgery, I will plead with the reader not to cover your ears and chant “La-la-la-la-la, I can’t hear you” as we cite here just the most succinct of Mr. Hazlitt’s conclusions:
“In Keynesian policy, unemployment is never to be corrected by any reduction of money-wage-rates,” Mr. Hazlitt summarizes. “Keynes recommends two main remedies. One is deficit spending (sometimes euphemistically called government ‘investment’). How good is this remedy? It was tried in the United States (partly because of Keynes’ recommendations) for a full decade. What were the results? Here are the deficit in the Federal budget, the numbers of unemployed, and the percentage of unemployed to the total labor force, year by year in that decade. All the figures are from official sources:” (Chart follows.) …
“The central and decisive fact is that heavy deficits were accompanied by mass unemployment. …
“The other main Keynesian remedy for unemployment is low interest rates, artificially produced by ‘the Monetary Authority.’ Keynes incidentally admits … that such artificially low interest rates can only be produced by printing more money, i.e. by deliberate inflation. But we may let this pass for a moment. The question immediately before us is: Did low interest rates prevent mass unemployment? …” (Another chart, measuring the commercial paper rate against the unemployment rate for the years 1920 through 1940, follows.)
“In sum, over this period of a dozen years low interest rates did NOT eliminate unemployment. On the contrary, unemployment actually INCREASED as interest rates went down. In the seven-year period from 1934 to 1940, when the cheap money policy was pushed to an average infra-low rate below 1 percent (.77 of 1 per cent) an average of more than 17 in every 100 persons in the labor force were unemployed.”
Hazlitt proceeds to demonstrate that from 1949 to 1958, when the same policy of artificially pushing down interest rates was tried, “the relationship of unemployment to interest rates is almost the exact opposite of that suggested by Keynesian theory.”
How could Keynes have gotten it so wrong?
Easy. Hazlitt shows again and again that Keynes pronounced his theories “ex cathedra,” without substantial statistics to back them up. Then, if actual statistics were produced that seemed to show results opposite to what his theories had predicted, he simply challenged the statistics!
But why are Keynes’ thoroughly debunked notions still in vogue? Why was the usually brilliant Murray Rothbard so wrong when he predicted this 1959 book would mark the death knell of the economic nonsense preached by John Maynard Keynes?
This question appears at first a lot harder to answer. Henry Hazlitt, after all, was not some obscure gadfly. He was arguably the nation’s best-known and best respected financial writer and commentator, regularly holding forth in the mainstream — even left-of-center — New York Times and (from 1946 to 1966) every week in Newsweek.
MEET THE NEW BOSS …
I believe there are two answers. First, a dumbed-down American populace, trained to believe that economic theory is deadly dull and of no practical use, tends to cover their ears and chant “La-la-la-la-la, I can’t hear you” when such stuff is discussed. Ron Paul tried to talk about the Federal Reserve Board and its inflationary fiat money system during the late campaign. Only in substantially libertarian Nevada did he even place as high as second in the GOP primaries, barely breaking into double-digit percentages. Nationwide, he might as well have been that little midget from Cleveland.
Point out that America had zero inflation from 1787 to 1912 — that private investments with returns as low as 2 percent would actually increase your wealth and buying power (a far cry from today), because the Congress was doing its job as stipulated in the Constitution, “To coin Money (and) regulate the Value thereof,” fixing the dollar at a set weight of silver or gold, instead of turning over the whole show to a private banking consortium which now prints “dollar notes” redeemable in precisely nothing — and most Americans react with the same level of discomfort and embarrassment as if you’d just expounded some laughable conspiracy theory involving space aliens and Freemasons performing weird rituals in the basement of the Vatican.
But the second reason is far more obvious. Imagine any of our egotistical and money- and power-hungry members of congress or chief executives (of either party) today announcing, “Gee, this economic downturn sure is a misery. Too bad there’s nothing the central government can do but to slash spending till our budget is in surplus so Washington is no longer crowding out private borrowers, meantime putting us back on the silver standard and shutting down the Federal Reserve. So all you lobbyists here to plead for special favors might as well go home; store’s closed.”
What? Give up the greatest excuse since Hitler and Tojo for enacting every pork barrel spending spree they can imagine? Are you crazy?!
“Change” — a campaign slogan used not long ago by a certain well-known national politician, I believe — would be appointing Ron Paul or any bold and articulate economist of the Austrian school as Secretary of the Treasury, announcing the federal government will immediately go back to minting legal tender gold and silver coin, severing any and all ties or charters or authorization for the existence of any “Federal Reserve Board.”
Instead, what passes for “change” in Washington today are a chief executive and a Congress so desperate to place the heir-apparent to the guys who got us into this mess — Timothy Geithner, head of the Federal Reserve Bank of New York — in charge of government monetary policy, that they avert their eyes and imitate Sergeant Schultz (“I see Nuh-think!”) when it turns out their guy failed to pay tens of thousands of dollars in personal income taxes, even after accepting excess payments in the amounts due from his former employer the World Bank, signing a form saying he understood those payments were so he could USE THE MONEY TO PAY THE INCOME TAX!
If that’s an “oversight,” Mohamed Atta’s only offense was forgetting to file a proper flight plan with the FAA, indicating he planned to divert a couple of airliners for a scenic overflight of picturesque lower Manhattan on September 11th.
Other cabinet nominees get tossed to the roadside for neglecting to pay a few hundred bucks to a baby-sitter, but THAT’s how desperate this gang are to keep the same desperate, crooked — Keynesian — crew in charge of our sinking economic ship, rather than bring in some outsider who might run an audit, throw open the door to the empty vault, and spill the beans.
And they call it “change.”