The Critics of Keynesian Economics

XXI

MELCHIOR PALYI was born in Hungary and educated in Switzerland and Germany. He has combined business activities in Continental countries, Great Britain, and the United States with academic work in leading universities both here and abroad. Since 1933 Dr. Palyi has lived in America, where he has been active as a research economist and as visiting professor at the Universities of Chicago, Northwestern, Wisconsin, and Southern California. The following short excerpt is from pages 28-30 of his book, The Dollar Dilemma: Perpetual Aid to Europe? published by Henry Regnery Company in 1954.

THE KEYNESIAN MYTHOLOGY

MELCHIOR PALYI

Lord Keynes taught, and “put over” on both sides of the Atlantic, the age-old doctrine of money cranks that the chief objective of public policy is to combat depressions in order to maintain a perpetual boom, now called Full Employment. It breaks, he claimed, when people do not keep up their spending; in other words, whatever things are being produced, however large the output and high its cost, consumers ought to buy them at given prices and like them. Otherwise, unemployment raises its ugly head and snowballs into a depression. Which is what happens: as people’s incomes rise, consumer spending grows, but at a declining rate. A growing percentage of incomes is being saved, and less and less of the liquid savings turned into investments.

Savers are the villains in the Keynesian economic mythology; the desire to hold liquidity is the great curse on humanity. The problem is, therefore, to make people either buy consumer goods or spend on investments in plants and equipment. The solution is, in academic language, “a controlled allocation of income to consumption and investment, together with an increasing proportion of socialized investment.” Every trick will do to incite more spending of one kind or another: artificially low interest rates—eternal Cheap Money is the prime law of Keynesianism—to punish the rentier, that rascal who lives on collecting interest on bonds and savings accounts; ample credit fostered by government guarantees; outright devaluing of the currency (raising the price of gold); public works which run the national budget into the red and inflate the money volume. Coincidentally, foreign competition should be kept out, the home market protected against foreign depressions; domestic competition in depressed industries should be regulated by compulsory cartels.

Full employment is always the objective. Its spokesmen ignore elementary economics: that full employment of a durable nature can be arrived at only if prices and costs adjust themselves to the market. That may take temporary unemployment; but the mere threat of such adjustments evokes near-hysterical expressions of anguish from the Keynesian bosoms. Keynes himself assumed naively that real wages would not rise under full employment; labor does not mind, he argued, if its real income declines, provided the jobs are secure. If that were true, prices could be inflated without raising costs. Before he died, he had to learn a lesson in fundamentals.

Stripped of crypto-scientific semantics, the Keynesians’ medicine is Inflation—to cure the last depression and to avoid the next. This is their over-riding problem; what the future consequences may be, is no worry to them. “In the long run we all are dead,” was the motto of their Master. Short-term-minded as he was, and opportunistic like the proverbial politician, Keynes changed his theories without hesitation, usually in the direction of greatest popular éclat. As one of his innumerable English admirers phrased it: “You never could be sure . . . whether Keynes’ utterances expressed deep convictions or extemporized combinations of a fertile fancy. . . .” The Great Depression upset his brilliant but unstable mind. It inspired his prompting of public spending and nationalistic isolation for the sake of full employment. He turned from “classical” economics to unrestrained intervention and nationalistic isolation. “The decadent international but individualistic capitalism,” he stated in 1933,

. . . is not a success. It is not intelligent, it is not beautiful, it is not just, it is not virtuous—and it doesn’t deliver the goods. In short, we dislike it, and we are beginning to despise it. . . . It is my central contention that there is no prospect for the next generation of a uniformity of economic system throughout the world, such as existed, broadly speaking, during the nineteenth century; that we all need to be as free as possible of interference from economic changes elsewhere, in order to make our favorite experiments towards the ideal social republic of the future; and that a deliberate movement towards greater national self-sufficiency and economic isolation will make our task easier . . ..

By 1945, he tried to back out of his own spiritual mousetrap by admitting that American mobility, venturesomeness and resilience must be emulated; that the proper line of policy is to “marry the use of necessary expedients to the wholesome (classical) long run doctrine.” But it was too late and too little. His revolutionary doctrines of the 1930’s had met with an instantaneous and tremendous acceptance—thanks to their affinity to Marxism. In Europe, they were combined with big slices of the panacea imported from Moscow: public ownership of the essential means of production, social security “from womb to tomb,” vital consumer services to be provided at nominal cost or none at all.