Filed Under: Columns
Keynesianism in a Nutshell
Henry Hazlitt, a frequent contributor to The Freeman, has a long and distinguished career as an economist, journalist, editor, and literary critic. Best known of his numerous books is Economics in One Lesson, originally published in 1946 and since translated into eight languages with sales of more than 700,000 copies. The recently revised edition is once more available in inexpensive paperback.
John Maynard Keynes was, basically, an inflationist. This has not been clearly recognized because he never spelled out, step by step, the consequences of his proposed remedy for unemployment and depression. That remedy was deficit spending by the government. He recognized that increased government spending paid for by equally increased taxation would not “add purchasing power.” The increased taxation would offset any “stimulus” that the increased government spending would provide. What counted, he confessed, was the government deficit. But he failed to take his readers beyond this step. How would that deficit be financed? Either the money would have to be borrowed, or new (paper) money or credit would have to be created. But if the money were borrowed, then the previous spending stimulus would be reversed by a deflation when the borrowing was repaid. The only thing to prevent this reversal would be to allow the new spending to remain outstanding. In other words, the Keynesian solution to every slowdown in business or rise in unemployment was still another dose of inflation.
I may point out (if that is still deemed necessary in this inflationary era) that no inflation of which we have historical knowledge resulted in sound and continued business expansion but only in currency depreciation, a wanton redistribution of profits and losses, disorganized output, and economic demoralization. This has been true whether we begin with the coinage debasement of ancient Rome or the paper money scheme of John Law in 1716.
The lessons of inflation are soon forgotten. They apparently must be relearned in every generation.
Comment by Dudley Horscroft on 11 March 2009:
No one has ever put it better than the Right Hon. James Callaghan:
\"We used to think that you could spend your way out of a recession and increase employment by cutting taxes and boosting government spending. I tell you in all candour that that option no longer exists, and in so far as it ever did exist, it only worked on each occasion since the war by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step.\"
Source – Labour Party Annual Conference Report 1976, page 188.
Speech at the Labour Party Conference, 28 September 1976. This part of his speech was written by his son-in-law, future BBC Economics correspondent Peter Jay.
See URL <http://en.wikiquote.org/wiki/James_Callaghan>
Comment by Matt Silb on 11 March 2009:
Keynes did say how to finance thing: in good times the government should tax and run surpluses. That no government has the foresight and courage to do this does not mean Keynes was wrong. Keynes said that governments should act as a counter-weight. In good times the government takes in money and puts it away. This helps prevent the bubble. When the bubble does form and bursts the government spends to get things going again.
Comment by Doug Barbieri on 11 March 2009:
Matt, Keynes is about a relevant as Marx was. The problem with that theory is that governments *won’t* run surpluses. They will continue to inflate and spend. Look at Zimbabwe today, for example.
And what Hazlit is saying is that you don’t *need* to engage is this central control anyway, The free market regulates itself and we wouldn’t have these massive booms and busts. The booms and busts are *engineered* by a central bank.
Keynes was wrong. And its about time the government face that fact.
Comment by Bill on 11 March 2009:
It is fairly obvious that Mr. Hazlitt never read any of Keynes’s writings. His analysis is of the American Keynesians. After a meeting with them, Keynes remarked “I was the only non-Keynesian there.” It should be some kind of crime to attribute to a deceased author something derogatory that the author never uttered. Mr. Hazlitt should be in jail.
bye
BB
Comment by David S. McQueen on 11 March 2009:
Bill, where do you think Hazlitt was wrong about Keynes? Keynes admitted he didn’t advocate continuous budget deficits, only in recessions/depressions. The result of budget deficits is inflation.
I think Hazlitt was correct about Keynes (unless you think Keynes’ math in “The General Theory” should have been addressed by Hazlitt).
Comment by Dave on 11 March 2009:
“Mr. Hazlitt should be in jail.”
I’m guessing Bill is another freedom-loving Democrat. ‘Dissent will not be tolerated.’
Comment by Al E. on 12 March 2009:
Hey, Bill, you might want to check out Hazlitt’s, _The_Failure_of_the_New_Economics. It’s a nearly line-by-line demolition of Keynes’ _General_Theory.
Comment by John H. on 15 March 2009:
As Al E. said, Hazlitt wrote a book on the writings of Keynes, meaning he most certainly did read the work of Keynes.
“It should be some kind of crime to attribute to a deceased author something derogatory that the author never uttered. Mr. Hazlitt should be in jail.”
Henry Hazlitt (November 28, 1894 – July 8, 1993) did no such thing. You, on the other hand, did.
I appreciate irony – I’ll send you some soap on a rope.
Comment by jj on 15 March 2009:
Matt, so when the economy is efficient and humming along the government should take capital out of the system…sounds like typical government inefficiency. Also, Bill, you must be a Democrat (I’m not Republican) since anyone who disagrees with your Socialist agenda should be in jail. Stalin would be proud of you!!!