The Critics of Keynesian Economics

Foreword

Nearly twenty years ago, in his 1977 Preface to the Second Edition, Henry Hazlitt joyfully reported that prevailing academic opinion had changed and that Keynesian doctrines no longer went unchallenged. But he also observed that “the vast majority of politicians and governments today are persistently applying the Keynesian remedies, even though they do not know that they are Keynesians.”

These words could have been written in 1995, two years after his journey’s end. Although the many limitations, defects, errors, and shortcomings of the Keynesian system have become apparent, its basic principles are still with us. Most academic economists continue to use the aggregative approach and to dwell on the macro factors that influence, and which are influenced by, the whole economy. To them, national income, national growth, levels of employment, savings, consumption, and fiscal policy are more important than the pricing of goods and services. Now, though, in contrast to their colleagues of the 1950s and ’60s, contemporary Keynesians no longer show any great missionary zeal for their cause. They humbly admit that they know precious little about the forces affecting economic events. After all, the mass unemployment which they meant to alleviate is still with us—and even tends to grow worse whenever they apply their Keynesian antidotes. It continues to plague most industrial countries despite the fact that their governments continue to cling to a policy of keeping expenditures at high levels and spend freely without fear of mounting deficits. Even the Keynesians now wonder how long this process can continue.

Henry Hazlitt clearly foresaw the calamity. He saw that “in the foreseeable future it [deficit spending] seems more likely to accelerate than to come to a stop.” In the 1980s and ’90s his fears were confirmed when, in most of the world’s industrial countries, soaring budget deficits depleted national savings as never before while government debt soared from some 40 percent of GDP in 1980 to more than 70 percent in 1994. Savings and investments declined spectacularly—especially in Canada, Great Britain, Sweden, Australia, and the United States—bringing economic stagnation and falling standards of living. Throughout the world the Keynesian legacy painfully manifested itself in the form of frequent borrowing binges to finance both public and private consumption.

Mr. Hazlitt summed it all up in a few terse words which may be quoted for as long as the world remembers the Keynesian cult. “In spite of the incredible reputation of the General Theory, I could not find in it a single important doctrine that was both true and original. What is original in the book is not true, and what is true is not original. In fact, even most of the major errors in the book are not original, but can be found in a score of previous writers.”

Having challenged every major Keynesian tenet in his 1959 volume, The Failure of the “New Economics,” and having thoroughly exploded its fallacies, Mr. Hazlitt added authoritative confutation by gathering some two dozen important critiques by eminent economists and publishing them in this volume. Out of isolated essays and journal articles he created an impressive and many-sided criticism of the Keynesian structure. He fashioned this companion volume which records the voices of its prominent critics.

HANS F. SENNHOLZ