Mises Daily

The Essence of Hutt

William H. Hutt’s outstanding accomplishment is his pathbreaking reconstruction of the macroeconomic analysis of price and resource allocation, the long-established core of neoclassical economics. He demonstrates its indisputable and abiding relevance to the macroeconomic problems of inflation, unemployment, and depression. In the course of this undertaking, Hutt presented a theory of unemployment and depression that, while completely consistent with the important macroeconomic truths embodied in a rehabilitated Say’s Law of markets, is fully capable of explaining observed macroeconomic fluctuations, including the puzzling and seemingly intractable contemporary problem of stagflation.

Hutt’s contribution takes on added significance when it is recognized that it came during an era, roughly from the late 1930s to the late 1960s, when all but a tiny handful among the economics profession had abandoned such grueling enterprises for the facile, aggregative analysis propounded by John Maynard Keynes. In that epoch of virtually unchallenged Keynesian ascendancy, Hutt’s work served as a beacon for those who refused to renounce the truth that an adequate explanation of economic phenomena must refer to the choices and actions of the individual participants in the economic process. More recently, some of Hutt’s insights have been rediscovered by mainstream macroeconomists, such as supply-siders and new classicists, who have sought to devise microeconomic foundations for their macroeconomic analyses.

Hutt, born of a working-class family in the East End of London and educated at the London School of Economics, began his academic career in 1928 at the University of Cape Town in South Africa. After a career of remarkable scholarly productivity, including six books and over thirty professional journal articles,1  Hutt retired from Cape Town in 1965 and emigrated to the United States. Here, he held the position of distinguished visiting professor at a number of colleges and universities, including the University of Virginia, Texas A&M, and the University of Dallas.

As an American academic, Hutt’s scholarly output did not flag, and, while a septuagenarian, he authored three major works2  and published substantially lengthened editions of two others.3  Nonetheless, because he labored most of his career in the academic backwater of South Africa, Hutt’s contributions have not yet received in the United States the recognition that they merit, even among free-market economists and others.

In economic theory, Hutt drew his basic orientation from the great British economists Phillip H. Wicksteed and Edwin Cannan, the latter being Hutt’s teacher at the London School of Economics. As Hutt himself has noted, his postwar writings were also heavily influenced by the Austrian approach to economics, especially as expounded in Ludwig von Mises’s magnum opus, Human Action.4

While building on the contributions of the best of his predecessors and contemporaries, whom he graciously and frequently acknowledged, Hutt achieved what only a handful of economists have: he constructed a broad and unified vision of the overall economic process that is original without being idiosyncratic or cranky. Hutt’s achievement is all the more noteworthy because he elaborated his vision in a series of books and articles that were addressed to the educated public as well as to an academic readership.

In the great tradition of his mentor, Cannan, and other economists associated with the prewar London School of Economics, Hutt’s overriding concern throughout his long and productive career was to demonstrate the practical implications of sound economic theory for enhancing the material and other benefits of a market society, and to do so in language readily intelligible to the educated citizen. The fact that Hutt’s writings are occasionally peppered with quirky and unconventional usages and terminology does not detract from the resounding success of this endeavor.

The theme that characterizes and unifies all of Hutt’s works is the explication, defense, and application of the proposition that rivalrous competition among profit-seeking entrepreneurs operating in a free-market economy, where all prices, including wage rates, are competitively and noncoercively determined, insures the full utilization of scarce resources in a manner that is continually and strictly in accord with anticipated consumer preferences.

In the 1930s, Hutt coined the term “consumer sovereignty” to denote the concept according to which, in the market economy, the production decisions of entrepreneurs are rigidly governed by the freely expressed spending decisions of consumers.5  The term “price coordination” Hutt applied to identifying the outcome of the market process by which the prices of scarce resources, including labor, are ultimately determined by the competitive bidding of entrepreneurs on the basis of their forecasts of the future prices of consumer goods.6

When the prices of productive inputs are thus coordinated with prices of entrepreneurially planned outputs, the result is “full employment” of available resources and the allocation of each resource among the most value productive of its prospective uses. With respect to the labor market, this means that everyone who is willing to work at prevailing wage rates can more or less readily find a job that maximizes the monetary value of his or her labor services.

Hutt utilized this analysis of market pricing and resource allocation to explain the consequences of various interventions into competitive labor markets by governments and labor unions. In a classic work originally published in 1930, Hutt demolished two long-standing myths about the labor market that were tirelessly propagated by late-19th-century socialists and trade unionists, and accepted even by market-oriented economists.7  These involved the assertion that “collective bargaining,” compelled by law or induced by the threat of legally sanctioned union coercion, was necessary in the case of labor, because the competitive market process placed the laborer at a disadvantage vis-à-vis the capitalist employer and/or generated a wide margin of indeterminacy for the price of labor.

In a later work, Hutt rigorously demonstrated that, contrary to prevailing belief, collective bargaining, or “the strike-threat system” as he labeled it, cannot succeed in increasing the aggregate income share of labor at the expense of the share of capital.8  Rather, as Hutt showed, the wage gains of unionized laborers come at the expense of nonunion workers and consumers in general.

Nonunion workers suffer a decrease in their incomes because some of the laborers who lose jobs in those industries where collective bargaining forces wage rates above market-clearing levels will swell labor supplies and drive wage rates down in nonunionized industries and occupations. Consumers, including union members, experience an erosion of their real incomes, as consumer goods become more scarce and expensive in response to the increased unemployment in unionized sectors of the economy, and to the diversion of labor to less-productive employments in nonunion industries.

Capital is misallocated, and consumer sovereignty and satisfaction further impaired, as investors seek to inure themselves against strike-threat exploitation by reducing their investment in unionized industries and changing the form of their remaining investments to less-productive assets that may be quickly and easily converted to uses outside unionized industries in the event of a strike-induced rise in costs.

In another important application of economic analysis, Hutt explained how the South African apartheid system developed as a system of legal privileges bestowed by an interventionist government on Communist-oriented, white labor unions, who wished to protect and augment their wage rates by restricting competition from lower-skilled, nonwhite workers.9  Hutt argued that, had laissez-faire capitalism prevailed and debarred government from coercively intervening on the side of the unions, competition among entrepreneurs seeking to cut costs and maximize profits would have integrated the South African labor force and generated a peaceful, multiracial society.

Hutt was a lifelong, insightful critic of Keynes and of Keynesian economics in all of its variations. To Hutt the fundamental and fatal flaw of Keynesianism was that it completely ignores the coordinating function of the market’s pricing process. In 1939, Hutt published a work in which he exhaustively identified and categorized the diverse kinds of resource idleness that could arise in a market economy.10

Hutt argued that persistent mass unemployment, such as that during the 1930s, is not a result of a failure of “aggregate demand” in the private sector, as Keynes had claimed in the General Theory in 1936, but of government and union disruption of the market’s price-coordination mechanism. Entrepreneurial incentives to employ labor and produce goods were seriously diminished by price rigidities introduced into the economy as a result of legislation mandating minimum wages, compulsory collective bargaining, unemployment insurance, and cartelization and price fixing in manufacturing and agriculture. By preventing the swift competitive adjustment of resource prices to product prices that had declined as a result of monetary deflation and the public’s scramble for liquidity, these legislated price rigidities were responsible for the unrelenting nature of the Great Depression.

Hutt explained that the apparent success of the Keynesian policy of stimulating a depressed economy via increasing “aggregate demand” through deficit spending financed by money creation is attributable solely to the fact that such a policy temporarily inflates product prices relative to incorrect and downwardly inflexible resource prices and brings about a crude type of price coordination.11  However, anticipating the modern rational-expectations position, Hutt argued that once labor unions and other legally privileged groups of resource owners come to anticipate the regular recurrence of such inflationary episodes and to adjust their selling prices accordingly, even the temporary coordinating effect of Keynesian fine tuning is lost and all that results is inflationary recession or stagflation.12

The coping stone of Hutt’s economic thought is his restatement of Say’s Law, a central doctrine of prewar macroeconomic theorizing, whose meaning and importance had been almost completely obscured by the Keynesian Revolution.13  In Hutt’s reformulation, Say’s Law refers to the truth that, when all inputs and outputs are coordinatively priced, the supply of any particular thing constitutes a demand for a noncompeting good. This implies that it is never an insufficiency of demand but a “withholding” of supply, due to pricing assets or services above market-clearing levels, that depresses economic activity.

Image Source: Getty
What is the Mises Institute?

The Mises Institute is a non-profit organization that exists to promote teaching and research in the Austrian School of economics, individual freedom, honest history, and international peace, in the tradition of Ludwig von Mises and Murray N. Rothbard. 

Non-political, non-partisan, and non-PC, we advocate a radical shift in the intellectual climate, away from statism and toward a private property order. We believe that our foundational ideas are of permanent value, and oppose all efforts at compromise, sellout, and amalgamation of these ideas with fashionable political, cultural, and social doctrines inimical to their spirit.

Become a Member
Mises Institute