The Failure of the “New Economics”: An Analysis of the Keynesian Fallacies
Last weeks book was all atwitter over how great Keynesian economics are and the firm belief that if FDR had gone further down the road towards Keynesian socialism, then the Great Depression would have been stopped in 1933 when FDR took over. THIS weeks book,
Let me start by saying….Henry Hazlitt undertook an absolutely herculean effort to read through John Maynard Keynes’s book, The General Theory of Employment, Interest, and Money, and attempts to untangle….THIS mess. And it is a mess.
Hazlitt goes chapter by chapter through Keynes’s book, locating everything that Keynes got wrong, and some things that Keynes got right, and some things that Keyne’s ALMOST gets, if he would just understand some basic terms of economics.
Terms like Savings, which seems pretty straightforward, and Investing, maybe not as straightforward to the average American. But Keynes seems to simultaneously believe that they are the exact same thing AND that savings is bad while investing is good. Confused?
Yeah, me too. Just so we’re all clear, from Investopedia.com, Savings refers to the money that a person has left over after they subtract out their consumer spending from their disposable income over a given time period. Savings, therefore, represents a net surplus of funds for an individual or household after all expenses and obligations have been paid.
Investing, broadly, is putting money to work for a period of time in some sort of project or undertaking in order to generate positive returns (i.e., profits that exceed the amount of the initial investment). It is the act of allocating resources, usually capital (i.e., money), with the expectation of generating an income, profit, or gains.
They are clearly not the same thing, But Keynes treats them as interchangeable. He introduces terms that make no earthly sense. For example, here’s a quote from the book “according to Keynes, “classical” theory allows only for two possibilities—“frictional” unemployment and “voluntary” unemployment.” Keynes then introduces the idea of involuntary unemployment. Except, as Hazlitt points out, all unemployment is either voluntary or involuntary. Frictional can be voluntary or involuntary, examples of which are:
Involuntary: someone is terminated, or a business shuts down. Voluntary: loss of employment because your family is relocating. Keynes goes out of his way to muddy the waters as much as possible around what are really basic terms, and Hazlitt does everything he can to UNMUDDY the waters. It was herculean, and Hazlitt held nothing back. He says right at the beginning that he kind of feels bad writing this book after Keynes death, since Keynes gets not opportunity to rebut what Hazlitt provides. But after reading through Keynes’s works, he literally could not NOT write the refutation he did.
And chapter by chapter, he shuts down Keynes’s work, including citations and references from economists from John Locke through Ludwig von Mises, FA Hayek, L. Albert Hahn, Benjamin Anderson….I mean, basically any reputable economist has written articles refuting one aspect or another of Keynesian economic thought. Ok, Locke is the exception, having pre-dated Keynes by several centuries. And the only reason Locke comes in to play is a point on which he and Keynes seem to agree, but as Hazlitt points out, Locke when he was writing did not have the advantage of some of the great economic thinkers that came after him, that refuted the point he was making, which was that interest rates are purely a monetary phenomenon. There is a lot that goes into determining interest rates, and it is not all related to money, which Hazlitt refutes in the book.
One of the interesting points that stood out to me, and I tagged it specifically, is that in last weeks book, the author Robert S McElvaine made the declarative statement that the Great Depression started in America with the stock market crash.
“The condition of comparatively “stabilized unemployment” existed in the United States from about 1931 to 1939. It began sooner in Britain, from about 1925.”
And in both cases, the depression was exacerbated by frozen wages. Turns out Hoover placing a wage freeze on people was the worst possible thing. And the unions refusing to accept lower wages did not help. This was a two party fault here. The government for freezing the wages, and the unions for allowing the freeze to stand and not being willing to accept lower wages temporarily.
Additionally, and I did not know this and I do not know if this is still true. This book was written in 1958, so I do not know how union contracts have changed. But when this book was written, union contracts included a bit where union wages adjust with inflation. This encourages a perpetual state of inflation and prices never stabilize. Which we are seeing now. Perpetual inflation.
This book was a bit of a slog to get through, not because Hazlitt is unclear. He is crystal clear in his explanations. But because he has to include large tracts of Keynes’s original text, which are pure agony to try and read through.
I actually developed a theory of my own while reading this book. I think Jean Paul Sartre….the founding father of postmodernist thought….probably read Keynes and thought “That’s it! If I write a confusing amount of bullshit that says nothing but uses lots of words, people will think I’m super smart and canonize me!” And followed Keynes’s lead into writing a bunch of bullshit that would get his name immortalized for writing a bunch of confusing bullshit.
And the final puzzle piece, that made my eyes go big and my jaw hit the floor, is not so much that Keynesian thought has become the poster child for Marxist socialism. It’s that what Keynes is given credit for, his grand contribution to modern economics, is positively medieval. And I mean that in the literal sense. He advocates a return to mercantilism, which was the economic school of thought pre-Adam Smith. Who wrote about laissez faire, in the 18th century. Mercantilism ruled the day before that. All through the middle ages. Led to many of Europe’s wars. Like literally…almost all the wars from the fall of Rome up until America embraced Smith’s laissez faire…were the result of mercantilism.
So what is mercantilism? Ivestopedia.com provides Mercantilism was based on the principle that the world's wealth was static, and consequently, governments had to regulate trade to build their wealth and national power. Many European nations attempted to accumulate the largest possible share of that wealth by maximizing their exports and limiting their imports via tariffs.
So he advocates a return to a system that led to lots of war and death. Which flies in the face of another famous economist, Frederick Bastiat. “When goods cross borders, armies don’t.”
Now, before I close out, the reason for the Secret Satire cocktail. There is some debate if towards the end of Keynes’s life, did he recant his General Theory. Not quite. He made some noises like he maybe was going to, but died before he did. Throughout Failure of the “New Economics” Hazlitt says that he can’t tell if Keynes is joking or being intentionally obtuse. At the end of his discourse on Keynes’s book, Hazlitt says “Keynes was a brilliant man. Much of what he wrote he wrote with tongue-in-cheek, for the pleasure of paradox, to epater le bourgeois, in the spirit of Wilde, Shaw, and the Bloomsbury circle. Perhaps the whole of the General Theory was intended as a huge (400-page) joke, and Keynes was appalled to find disciples who took it all literally. Wit and satire are dangerous weapons when not used in the service of good sense.”
And I kind of do wonder about this. What if Keynes’s writing was intended purely as satire, a la the great Titania McGrath…and Oscar Wilde, and George Bernard Shaw…and Gad Saad. And the lemmings missed the joke, and took it all way too far. Hence the cocktail. Secret Satire. It’s secret. And I am choosing to believe that Keynes was satirical genius, and all the political lemmings and wanna be economists who worship the ground he walked on, just don’t get the joke. Because to believe otherwise is to cry.
