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Hutt's Crushing Blow to Keynes

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07/22/2011Hunter Lewis

[Introduction to The Theory of Idle Resources (1939; 2011)]

The Theory of Idle Resources

Genius does not always announce itself. This was especially true of William H. Hutt. There was nothing about him to attract attention. He was born in London of working class parents, earned a bachelor's degree in economics from The London School of Economics in 1924, worked for a London publishing firm, and migrated to South Africa where he lectured obscurely in economics, before eventually retiring and moving to the United States in 1965. He was slight in frame and modest in manner, never pushing, always delighted to see the triumphs of others. He identified himself as a classical economist, not a member of any contemporary group or movement — how easy indeed to overlook him, but what a mistake to do so.

Hutt's mind was made for logic. It could see a logical problem from every side, draw every distinction and nuance, then penetrate right to the bottom of it. No fallacy was safe from him, and, without being the least combative, he never flinched from telling the unvarnished truth.

The history of modern economics is full of destructive fallacies, beginning with the mercantilists, continuing through Karl Marx, and culminating with John Maynard Keynes. These false ideas have impoverished billions of people and caused no end of needless suffering. When Keynes published his magnum opus, The General Theory of Employment, Interest, and Money in 1936, a potpourri of fallacies supported by obscurity, shifting definitions, and other rhetorical tricks, many economists criticized it privately, but very few did so publicly. Why? Because Keynes was an intimidating figure, the best known economist in the world, a master publicist and polemicist, the editor of The Economic Journal, an essential venue for English-speaking economists.

In the preface to The Theory of Idle Resources, completed a year after Keynes's General Theory appeared, and published two years later in 1939, Hutt says forthrightly: "I have been wisely advised not to touch on any of the major controversies which his contribution [Keynes's General Theory] has aroused."[1] But, then, with laser-like logic, he proceeds to demolish some of the most important intellectual props for Keynes's Theory. Moreover, he does so, as he says, "as far as possible, in a nontechnical way" so that "the reader who is unacquainted with the economic textbooks may follow my reasoning from point to point and himself decide on it's validity."[2]

Keynes's argument may be simplified as follows. Full employment should be our goal. The market system will not get us there; it requires government help as well as guidance. This means, in practice, that government will continually print money, in order to reduce interest rates, ultimately to zero[3], and also borrow and spend as needed. Booms are good, even economic bubbles are acceptable. Recession and bust must be avoided at all cost. As Keynes wrote: "The right remedy for the trade cycle is not to be found in abolishing booms and thus keeping us permanently in a semi-slump; but in abolishing slumps and thus keeping us permanently in a quasi-boom."[4]

In a variety of books and articles, Hutt pointed out the absurdity of this. One cannot create wealth simply by printing more money or by borrowing and spending funds which can never be repaid. Moreover, the real source of unemployment is some disturbance in the price-and-profit system. Government cannot possibly help matters by intervening in ways that further distort and disturb that system.

In his Theory of Idle Resources, Hutt deconstructs even the initial premise of Keynes's thinking, that we should want a permanent condition of full employment. Not only is full employment not definable; it is not even desirable. A moment's thought will show this to be true. To grow, an economy must change. To change, assets and workers must be shifted from where they are less needed (less productive) to where they are more needed (more productive). These shifts will inevitably produce temporary unemployment. If there had never been unemployment, and thus no economic change, we would all still be living in caves, and there would be far fewer of us, because hunting and gathering would only support a small fraction of the present population.

This insight is not original to Hutt. The economic writer Henry Hazlitt, a friend of Hutt's, found similar observations in a paper written by John Stuart Mill during 1829–30 when he was age 24, and collected in his Essays on Some Unsettled Questions of Political Economy. Mill's paper completely refutes Keynes's false contention that "classical" economists simply assumed that there would always be "full employment." But Hutt takes the examination of unemployment much further than the pioneering Mill. Indeed, he does not just examine unemployment. He examines unemployment as part of the larger phenomenon of unused or idle productive resources, including land, plant, equipment, and money as well as workers.

Hutt's careful reasoning demonstrates, through a variety of illustration, that we cannot just lump together (and falsely quantify) all the complexities of human choice and action working within a closely coordinated price-and-profit system. What looks like nonproductive idleness may actually be very productive, indeed essential to the smooth working of the system. Is it more productive for a highly trained but unemployed engineer to bag groceries for pay or to invest time without pay in looking for an engineering job? If he or she took the grocery-bagging job, Keynes would presumably be satisfied; we would be closer to full employment. But the economy would clearly not be more productive, which it must be to create new jobs. We should also keep in mind that an employment-agency employee job searching for the engineer would be considered gainfully "employed," while the engineer doing the same work would still be "unemployed."

This brings us to Hutt's crucial concept of suboptimal employment, not fully worked out in this book, but a crucial contribution to economic thought. Government intervention to stimulate the economy and increase employment not only reduces employment over the long run. It also creates an enormous amount of "suboptimal employment," which means that it leaves people unable to find the work for which they are best suited.

A simple example of this may be drawn from the US housing bubble that burst in 2007–2008. For the period 2002–2008, out-of-control Federal Reserve money printing and a host of other government policies and programs blew up the bubble. Millions of people not especially suited for construction were pulled into this sector and put to work building homes that, in the end, no one wanted. When the bubble burst, even the most highly trained construction workers suddenly found themselves unable to get any construction work at all.

The underlying problem here is that, contra Keynes, we do not want employment for its own sake. It is a means, not an end. What we want is a productive economy, and government stimulus gives us, as Henry Hazlitt has said, "unbalanced production, misdirected production, production of the wrong things … [all of which lead inexorably] to unemployment and mal-employment."[5]

In speaking of optimal versus suboptimal employment, Hutt, the master logician, was drawing a logical distinction between quality and quantity. This is an inconvenient distinction for Keynesian-derived macroeconomists; there is no way to fit quality into their equations. But in economics, as in life as a whole, quality is even more important than quantity.

This is especially true in investment. Keynes said that any investment is better than no investment.[6] Indeed, in the absence of his indefinable state of full employment, he thought that any spending, whether consumption or investment, was better than no spending. This is why government must keep printing money: the resulting reduction in interest rates should encourage more and more investment and spending.

There are many reasons why this is nonsense, but it suffices to recall that interest rates are a price. Like currencies, they are "big prices," which affect the entire economy. The chief purpose of prices in a market system is to send signals about what consumers want and about the relative availability or scarcity of resources. When government intervenes to reduce interest rates, it therefore disables the price-signaling system, which in turn leads investors to make decisions that, in the long run, turn out to be bad decisions, like the overdoing of technology in the 1990s bubble or the overdoing of housing in the 2000s — bad decisions which eventually lead, not to employment, but to massive unemployment.

Hutt's concept of suboptimal employment applies to productive assets as well as people. Contra Keynes, it is generally better for productive resources to remain idle for a time than to be misused. Savers, whether in cash or gold, are not "hoarding," as Keynes charged, when they hold their investment capital out of an economic bubble. On the contrary, they are providing an immense economic service by ensuring that there will still be capital to invest after the bubble has burst. As Hutt says, the "availability" of a resource, whether plant, equipment, workers, or money can in itself represent a service. Another reason that investing in gold is not hoarding, again contrary to Keynes, is that the buyer and seller of the gold simply exchange cash for precious metal, which is to say, one form of money for another. No cash is actually withdrawn from the economy.

Hutt was an economist's economist. Unlike Keynes, he did not aspire to the world of politics or big business. He counted himself among "those … who are not selling policies in return for power,"[7] and took pleasure in correcting logical errors, large or small, wherever he found them. He is best known for reestablishing Say's law after Keynes's distortion and attempted demolition of it; but much of his best work is on unemployment, and much of that is in The Theory of Idle Resources.

Despite being an economist's economist, Hutt appreciates how the world actually works. For example, Keynes spoke of "the proceeds which entrepreneurs expect to receive from the employment of N [fill in the number] men."[8] Entrepreneurs of course do not think this way. They think of products, prices, and costs, of which employees are one, all summed up in the computation of profit. The word profit is one that Keynes avoids wherever possible in his General Theory, though in earlier writings he acknowledged its central role in driving the economy. Hutt rightly looks askance at this.

Hutt further notes that "We cannot add together, say, the number of hours of utilization of a locomotive, of the track, and of the signals. Similarly, we cannot aggregate the employment of the engine driver, the fireman, the guard, and the signalman."[9] Keynes tries to circumvent the difficulty of aggregating labor in a quantifiable series by regarding "individuals as contributing to the supply of labor in proportion to their remuneration."[10] Hutt retorts that

Such a definition of employment must lead to the most absurd results. Thus, if the workers in a trade can organize and drive 10 percent of their number into inferior occupations, reduce by 10 percent the amount of labor supplied, and in so doing increase the aggregate earnings of that trade by, say, 20 percent, then the proportion of all employment enjoyed by them and the proportion of the total labor supplied by them must be regarded as increased![11]

As the above quote suggests, Hutt was not a fan of labor unions. He was, so far as this writer knows, the very first economist to explain why higher wages earned by unions actually come out of the pockets of other workers, not out of employers' profits, a point that is now well established but still little understood. This is true, in simple terms, because high wages reduce employment in unionized sectors, thereby increase labor supply in other sectors, which increased supply reduces nonunionized labor rates. In addition, workers are also consumers and may have to pay more for unionized-sector goods. As a general rule, Hutt noted, "the poorest must … suffer most as consumers."[12]

Although a foe of unions, Hutt regarded himself as a populist, in the sense of wanting what is best for ordinary and especially poor people. He even called himself, somewhat startlingly, an "equalitarian," a word that is usually associated with socialism. So, how indeed, could Hutt be both a free-market advocate and a self-described equalitarian? He could be both because, in his view, free markets, without aiming for equal outcomes, produce both more equal opportunity and more equal outcomes than any other system.

Hutt explains,

The clue to the understanding of the chief economic and sociological problems of today can be found, in my opinion, in a recognition of the struggle which is in progress against the disrupting equalitarian effects of competitive capitalism. Competition and capitalism are hated today because of their tendency to destroy poverty and privilege more rapidly than custom and the expectations established by protections can allow. We accordingly find private interests combining to curb this process and calling upon the State to step in to do the same; and unless the resistance is expressed through monetary policy, the curbing takes the form of restrictions on production. Hence there arises a clash between what I have called the "productive scheme" and the "distributive scheme"; and wasteful idleness, both in labor and in physical things, appears to be due to the consequent restraint of productive power — a restraint imposed immediately [by government] in defense of private interests, but [sugar coated with legal minimum wages and unemployment insurance that ultimately just lead to lower wages and more unemployment].[13]

Are some of the poor willing to accept government welfare rather than try to improve their prospects? If so, says Hutt, we should not necessarily regard them as either lazy or irrational. They may just realize that the crony-capitalist system that presently prevails is completely stacked against them.[14]

If we really want to alleviate unemployment and poverty, Hutt continues, we must do something about this crony capitalism, with its privileged government-business and government-labor partnership monopolies, and its supporting out-of-control government and fiscal monetary policies. All such monopoly systems create "contrived scarcity," "enforced waste," and other completely irrational outcomes. Unemployment and poverty are simply "indications of its presence,"[15] of the "triumph [of] … private interest … over social interest."[16]

Hutt also correctly predicted that this problem would get worse before it got better. In an especially acute passage, he explained why the medical system would increasingly be drawn into the monopolistic crony-capitalist framework.[17]

As the reader will shortly see, Hutt's work in The Theory of Idle Resources is truly timeless, and being timeless, it is just as fresh and relevant today as when first published in 1939.


[1] William H. Hutt, The Theory of Idle Resources, p. xiv.

[2] Ibid., p. XV.

[3] John Maynard Keynes, The General Theory of Employment, Interest, and Money (Amherst, N.Y.: Prometheus Books, 1997), p. 220.

[4] Ibid., p. 322.

[5] Henry Hazlitt, The Inflation Crisis (New Rochelle, N.Y.: Arlington House, 1978), p. 79.

[6] Keynes, The General Theory, p. 327.

[7] Hutt, Theory of Idle Resources, p. 92.

[8] Keynes, The General Theory, p. 25.

[9] Hutt, Theory of Idle Resources, p. 6.

[10] Keynes, The General Theory, p. 42.

[11] Hutt, Theory of Idle Resources, p. 6.

[12] Ibid., p. 64.

[13] Ibid., p. XVI.

[14] Ibid., p. 44.

[15] Ibid., p. 74.

[16] Ibid., p. 106.

[17] Ibid., pp. 61–62.


Hunter Lewis

Hunter Lewis is author of twelve books, including The Secular Saints: And Why Morals Are Not Just Subjective, Economics in Three Lessons & One Hundred Economic Laws, Where Keynes Went Wrong, and Crony Capitalism in America 2008-2012, and has contributed to the New York Times, the Washington Post, the Times of London, The Atlantic and many other magazines and web sites including Mises.org and LewRockwell.com. Lewis is also co-founder of Against Crony Capitalism, co-founder and CEO of investment firm Hunter Lewis LLC, and co-founder and former CEO of global investment firm  Cambridge Associates LLC. He has served on boards and committees of fifteen not-for-profit organizations, including environmental, teaching, research, and cultural organizations, as well as the World Bank.