In the beginning of modern economics was Say’s Law — the law (first formulated by the Frenchman J. B. Say) which dem­onstrates that production creates its own purchasing power. It seemed quite obvious to our fathers, who were used to such things as the gold standard and a stable money system, that funds handed out by a producer for raw materials, wages, interest, divi­dends, repair of wear-and-tear, and the purchase of new capital equipment, must all turn up in the system somewhere as possible con­sumption funds. Given no political distortion of the money supply, the purchasing power thus released would be sufficient to "clear the market."

 
This simple explanation — John Stuart Mill phrased it another way by saying "the means of payment for commodities is simply com­modities" — has been swamped in recent years by the so-called Key­nesian revolution. During the de­pression years of the thirties it became fashionable to argue that Say’s Law belonged to Robinson Crusoe and his island where modern debts and credits were unknown. The United States in the thirties had a President — Frank­lin D. Roosevelt — who publicly disbelieved in the Say formulation (see Daniel Fusfield’s revealing The Economic Thought of Frank­lin D. Roosevelt and the Origins of the New Deal published by the Columbia University Press). Far from "clearing the market," goods in the thirties seemed intermin­ably stuck in transit. People with purchasing power refused to buy; employers, therefore, ceased to employ; and the interest rate seemed to hang in air as a regulator of investment.

A host of lesser prophets —Major Douglas, the "stamped scrip" addicts, the Marxian be­lievers in sterilized "surplus value," the technocrats — tried to explain the "leak" in Say’s Law. But nobody really succeeded in accounting for the fact that mar­kets were not being cleared until John Maynard Keynes published his famous General Theory of Em­ployment, Interest and Money in 1936.

This is the book which has hung heavy over our heads for a full generation. It is a most plausible book — for the short run (and Keynes was fond of saying that in the long run we’re all dead). How to deal with it? Ludwig von Mises has dismissed it by calling it "the Santa Claus fable raised… to the dignity of an economic doctrine." And there is no doubt that Mises is right — for the long run.

Say’s Law, it should be noted, doesn’t work all at once; mani­festly it doesn’t take hold immedi­ately for overbuilt and overde­veloped sectors of the economy. An enterpriser can make a serious mistake in estimating just what types of goods will clear the mar­ket. Under classical theory the en­terpriser’s error will serve as a warning signal for investors to deploy their capital elsewhere. The unwanted goods will eventually clear the market at a sacrifice, and the wounded enterpriser must either cut his costs or take up some other line. But in the meantime, Say’s Law, working on what might be called a staggered shift, has re­sulted in some temporary unem­ployment.

To put the unemployed back to work again, either a flexible wage policy is required or real wages must be adjusted by inflation. But to cut wages has always been hard politics, whether considered as the politics of the factory, the indus­try, or of society as a whole. Infla­tion, so the Sumner Schlicters of this world tell us, is preferable to wage cuts. This is a decision in politics, psychology, and sociology, not a decision motivated by pure economics.

A One-Way Street

The problem, then, is not so much to assail the long-run rele­vance of Keynes’s economics but to tackle the master on the score of politics and sociology, even morality. Keynes is an embarrassing­ly slippery customer if you try to deal with him on economic grounds alone, for his works abound in pas­sages that can be quoted against other passages.

When pressed during his life­time, Keynes willingly admitted that a failure in demand provoked by bad entrepreneurial decisions, or a discrepancy between savings and investment, or a period of over-stimulated expectations of profit, would, in time, tend to cor­rect itself. He was no advocate of perpetual inflation as the cure for the short-term failures of Say’s Law. In fact, he thought in terms of a reversible system of counter-cyclical measures — a jolt of infla­tion for a depression period, a corresponding measure of forced sav­ing (via taxation and debt-extinc­tion) in periods of overfull employment and general economic eu­phoria.

Unfortunately for his hopes, however, Keynes had no savvy when it came to understanding the nature of political man. In a searching little book, Welfare, Freedom and Inflation (London : Pall Mall Press, 70 pp., 59¢, intro­duction by Graham Hutton) , Wilhelm Röpke, a German econo­mist now resident in Geneva, goes straight to the heart of Keynes’s deficiencies as a political scientist. He has tackled Keynesianism where it is at its weakest: in its failure to understand that reversi­ble counter-cyclical action is vir­tually impossible in a democratic political system. A dictator can cancel inflation, yes. (Nobody dared complain in Russia when the Kremlin wiped out the savings of thousands of Soviet citizens by suspending interest on govern­ment bonds.) But in a democracy, politics tends to work by ratchet-action. What has been granted can­not easily be retracted. Inflation, barring heroic forebearance by a majority of the electorate, can only be corrected by more inflation.

Keynes thought that govern­ment spending — or "investment" — designed to take up the slack in employment would be "neutral" in­sofar as its effect on the basic structure of capitalism is con­cerned. It would merely be "some­thing extra," a flywheel which, running concurrently with other wheels, would keep the whole machine spinning merrily. Govern­ment "investment" would have a "multiplier" effect. Part of it would go to swell the "propensity to consume." Part of it would go into savings — and, by way of the banking and insurance system, into new investment which would ray out into more consumption and still more investment.

Robbing Paul to Pay Paul

But Röpke cannily directs our attention to the fact that govern­ment "investment," which begins as a policy of robbing rich Peter to pay poor Paul, ends up by rob­bing Paul to pay Paul. The Key­nesian "multiplier" effect is paral­leled by something which might be called a "divisor" — or at least a "subtraction" — effect. For, while government spending undoubtedly stimulates demand — and more in­vestment in some areas to meet that demand — it also serves to scare free investors into hiding. With the "divisor" effect cancel­ing the "multiplier" effect, a gov­ernment under the spell of Key­nesianism must resort to more and more massive doses of taxation and/or inflation simply to stay in office.

As Röpke says, the point is eventually reached where taxation, far from bearing down exclusively on the rich, begins to rob the middle class of its potential sav­ings and even some of its "pro­pensity to consume." Even the masses come more and more under the tax collector’s gun. With all classes paying in taxation and/or inflation, "money is juggled from their right-hand into their left-hand pockets." This practice, says Röpke, is not only "nonsensical"; it means the death of society as an entity which is counterpoised to the State. "Quite apart from its dampening effect on individual ef­fort and responsibility," so Röpke writes, "it involves the expendi­ture of large sums on a vast public machine constantly growing in size and power."

The ultimate social price is a "dull, grey society, in which public spirit, voluntary service to the community, creative leisure, brotherliness, generosity, and the true sense of belonging to a human family are all smothered by re­sentment in the higher and envy in the lower income groups. What is left is the pumping system of Leviathan…." This "pumping system is an illusion for all, a pur­pose in itself." The operators of the pump acquire a vested interest in its gigantic back-and-forth movement. And the citizen runs the risk of being reduced "to the status of an obedient domesticated animal in the State’s big stables, crammed together with other similar animals."

Changing the metaphor, Röpke argues that the Welfare State pumping apparatus eventually de­grades human beings to "the sta­tus of minors." When a people reaches this stage, it is lucky to lose a total war totally. Then, at least, it can begin over again, as West Germany has done.

The Immorality of Intervention

The objection to Keynesianism is not that it won’t work economi­cally — after all, if it is a mere question of balancing input and output, any system can, theoreti­cally, do as well as any other. With force, "full employment" is always attainable. The Incas of Peru "balanced" their economy. And in Russia there is "full employment," even though the State had to mur­der three million kulaks at one point to get it.

The real objection to Keynesian­ism is, as Röpke notes, a matter of morality; it debases the nature of man. Since the ratchet-action of politics makes a return to the vol­untary society more and more un­likely, people become universally cynical. Bastiat’s definition of the State becomes all too true: the State is "the grand fiction by which everybody lives at the ex­pense of everybody." And, since nobody has an individual surplus to use for cultural expenditure, patronage of the arts, or buying time for creative leisure, all of these things must be taken over by government. Röpke’s final damning statement is "charity, honorary functions, liberality, conversation, leisure, everything that Burke included in the expression, ‘unbought graces of life,’ all these are strangled by the State."

Röpke has explored the alterna­tives to Keynesian manipulation in larger, more fundamental works than Welfare, Freedom and Infla­tion. A good longer introduction to his thought — which is moral, so­cial, and political even more than it is economic — is his Social Crisis of Our Time published by the Uni­versity of Chicago Press or Civitas Humana: A Humane Order of So­ciety published by William Hodge in London. But Welfare, Freedom and Inflation is a first-rate tract for the times. One hopes that it will be widely read on both sides of the Atlantic.        

“Bending the Twig-The Revolution in Education and Its Effects on our Children” by Augustin G. Rudd. (Chicago: Heritage Foundation, Inc., 1957. 291 pp.)

Reviewed By Frank B. Keith

As a graduate student student in educa­tion at a large Midwestern uni­versity, I was frequently assigned outside readings in books written by William H. Kilpatrick, Harold Rugg, George S. Counts, and other liberal-leftist educators. One class in curriculum construction had as its primary reference material Na­tional Education Association pub­lications. Augustin G. Rudd in his book, Bending the Twig, clearly points out the implications of such a program of teacher training and its effect on the public schools of the United States where the no­tions of Progressive or New Edu­cation have directly or indirectly influenced every level of our edu­cational system. Much of this ma­terial about the New Educators is not known to the general public.

Professional critics of New Education, Arthur Bestor, Alfred Lynd, and Paul Woodring, have analyzed the defects of the public system of education and its cost to the nation in respect to loss of skills and knowledges. Layman Rudd intelligently reviews these deficiencies in the light of the modern school program.

Part II of the book is especially valuable for its definition of the path the social educators are fol­lowing. He contrasts the concept of a free society based on the pri­macy of the individual with the concept of the statist order advo­cated by many of the New Educa­tors who choose to use the schools as an instrument for social change rather than an agency for instruc­tion in the skills, knowledges, and heritage necessary to maintain our culture.

It is interesting to know that the Russians experimented with progressive education until its bad results became evident. Then, using their centralized power, they eliminated it.

This return to the essentials of education may have aided Russia in making her recent technological advances.

After reading this book, one comes away with the feeling that as generation after generation of students graduate from our schools conditioned to the tenets of socialism, we will eventually lose our republican form of gov­ernment and individual liberty be­cause our citizens will lack even the basic knowledge of our herit­age.