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Sixtieth Anniversary of Hazlitt's The Failure of the 'New Economics'

  • Failure of the New Economics by Henry Hazlitt

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[The Christian Science Monitor on 11 September 1959 ran a "Symposium on Keynes" prompted by the publication of Henry Hazlitt's book The Failure of the "New Economics" earlier that year. The invited contributors are an illustrious list of economists from the most prestigious universities of the day: Ludwig von Mises; Arthur F. Burns; Seymour E. Harris; Calvin B. Hoover; Adolf A. Berle, Jr.; Neil H. Jacoby; Sumner H. Slichter; Friedrich August von Hayek; and John Kenneth Galbraith. The contributions of Mises, Hayek, Burns, and Galbraith appear below. It is notable that Ludwig von Mises is the only non-academic to be invited to contribute to the symposium, and, for whatever reason, is the first contribution to appear in the article.]

Just mention the name Keynes in almost any circle of economists and in most circle of informed businessmen in the United States or Great Britain and Europe today and then sit back and watch the sparks fly. It has been 13 years since Lord Keynes (John Maynard Keynes) passed on, yet careful authors spend years in research on his work either to praise him or to argue the soundness of his theories.

This year [1959] Henry Hazlitt, business editor of Newsweek magazine, stirred up the old embers smoldering on Keynesian economics with the publication of his book, The Failure of the "New Economics," published in New York by Van Nostrand, $7.50.

The Hazlitt book proposes to end the debate on Keynes by arguing down closely and finally the validity of the Briton's theories. Mr. Hazlitt's position is not middle of the road. He takes off from a totally right-of-center point.

He never liked Keynes's theories. He has long criticized them in his writings, and his book develops this thesis thoroughly and well. For those who never saw any good in the Franklin Roosevelt New Deal, for the concepts of pump priming, of spending to win recovery, of using monetary policy to combat depression, of lowering interest rates to encourage spending, the Hazlitt thesis is a final proof that there was and is no good in Keynes.


Yet, somehow one doesn't dispose of the provocative Briton's work so easily, even in such an exhaustively researched book as Henry Hazlitt's.

Most folks today agree that Lord Keynes was an expedientist, that he attempted to deal contemporaneously with special problems — mainly depression — and that if he were here today he would have completely abandoned his own views for new ones for the problems of today. The danger, according to Mr. Hazlitt, in such a work is that it might become accepted as final dogma.

Keynes early startled the world arguing that it was desperately wrong for the Allies to seek to exact reparations from Germany after World War I, at a time when many wanted to hang the Kaiser. He was concerned during the 1920s with the boom in the United States and approved Federal Reserve Board actions to try to dampen it.

During the 1930s, when the world was flattened by economic chaos, Keynes was constantly searching for ways to help his own country, Great Britain, get out of the morass. Most of his ideas were provocative Some were new, some old but reworked. Because Britain and the United States were so linked economically he worked hard at ideas to help the United States lift itself out of depression.

Keynes was a good writer and an excellent publicist for his ideas. Many of his ideas are considered today to have been warmed up or rehashed theories with a special twist to meet depression problems. Whenever Keynes wrote or said something, the government leaders of the 1930s took notice.

Keynes visited the United States, talked over some of his ideas with President Roosevelt. The New Deal's fiery Secretary of the Interior, Harold L. Ickes, advanced government spending programs, especially in reclamation and power projects to counteract depression. Was it Ickes or Keynes?

But Keynes was not simply an advocate of government spending to end depression. He first of all wanted businesses themselves to plan needed capital expenditures to combat depression. He wanted consumers to buy. This is economic policy which was urged by the Eisenhower administration only last year. There isn't anything very spectacular about it, but the fact that Keynes urged it steadily and consistently won him credit which probably could be claimed by many another less-publicized economist. When business and consumer did not respond, Keynes urged governments to spend.


Newspapers' musty files are filled with the thunder from the busy Cambridge University economist. But the clippings, when fitted together today, show that Keynes was always seeking to get a temporary solution to a given problem. He was an experimenter. Many times he did not know how a proposal would work out. He was ready to risk failure and condemnation. But the one thing he would not risk during the dark days of depression was inaction.

Today when a body of doctrine is labeled Keynesian, it is difficult to pinpoint just what is meant. Usually it means government action of some sort to prevent a depression or to slow down a boom. The term Keynesian is almost without real meaning, because of the temporary nature of Keynes's efforts to find ways to end the 1930s depression. …


Most of Keynes's severest critics today credit him with having stirred human thinking to a change of base. Keynes would probably be pleased but not content with having done this, even if many of his ideas went wild.

In any case, the debate over Keynes, revived so vigorously this year by Mr. Hazlitt, seems certain to continue for some time.

To Mr. Hazlitt, there is no middle ground on Keynes, and to those who oppose the Roosevelt New Deal, there was no middle ground. The Hazlitt challenge, thrown down in his book, is summarized as follows:

The Keynesian literature has perhaps grown to hundreds of books and thousands of articles. There are books wholly devoted to expounding the General Theory in simpler and more intelligible terms. But on the critical side there is a great dearth. The non-Keynesians and anti-Keynesians have contented themselves either with short articles, a few parenthetic pages, or a curt dismissal on the theory that his work will crumble from its own contradictions and will soon be forgotten. I know of no single work that devotes itself to a critical chapter-by-chapter or theorem-by-theorem analysis of the book. It is this task that I am undertaking here. …

Now though I have analyzed Keynes's General Theory in the following pages theorem by theorem, chapter by chapter, and sometimes even sentence by sentence, to what to some readers may appear a tedious length, I have been unable to find in it a single important doctrine that is both true and original. What is original in the book is not true; and what is true is not original. In fact, as we shall find, even much that is fallacious in the book is not original, but can be found in a score of previous writers.

In view of many of the present accepted uses of government power to control inflation or curb depression, ideas which were either publicized or advanced by Lord Keynes, it seems certain that the Hazlitt book will not end the debate on Keynes.

In commenting upon Keynes's contribution at the time of his passing in 1946, the Monitor editorialized:

His contributions to economic thought will be violently mooted for some time to come. As a writer in Fortune magazine has observed in the 30s "a profound gap … had been growing between the precepts of classical economics and the observable fact of chronic unemployment." To the question of "What?" and "Why?" raised at that time, John Maynard Keynes gave "the most provocative answer."

And the New York Times took Keynes's own words in his book, which had stirred so much dissent, General Theory of Employment, Interest, and Money, for its editorial tribute:

Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air are distilling their frenzy from some academic scribbler of a few years back.

I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas. … Soon or late, it is ideas, not vested interests, which are dangerous for good or evil.

Ludwig von Mises
Economist, New York City

Lord Keynes was not an innovator and not a harbinger of new methods of managing economic affairs. He merely revived old, a-hundred-times-refuted errors in order to provide an apparent justification for popular policies, the disastrous effects of which became more and more perceptible.

While it is obvious that higher productivity and a resulting improvement in the average standard of living can be achieved only be increasing the per-head quota of capital invested, he disparaged saving and capital formation. There is no other means to raise the marginal productivity of labor and thereby wage rates for all those eager to find a job than to accelerate the accumulation of capital as against population.


Keynes failed to realize that the free unhampered labor market tends to determine wage rates for each kind of labor at a height that makes it possible for every job seeker to find employment. He did not see that the phenomenon of lasting unemployment is the inevitable consequence of the attempts of governments and labor unions to fix wage rates above the potential market rates. He advocated credit expansion and inflation and did not notice the fact that these policies cannot be continued endlessly and that the artificial boom created by them necessarily must bring about an economic crisis.

Keynes labored under the illusion that there prevails a shortage of investment opportunities. However, as long as we have not converted the earth into a Garden of Eden, there always will be people whose wants have not been fully satisfied and who are anxious to acquire more and better goods. Nothing but additional investment can supply what these indigent masses are asking for.


Keynes's paradoxical teachings were enthusiastically acclaimed by governments and political parties that by reckless spending strive for popularity. The unbalanced budget is the pith of Keynesianism. But one ought not to overate the sinister influence of Keynes.

His precepts had been adopted and practiced by demagogues long before Keynes undertook to vindicate them. The methods that his adepts call the "new economics" or the "Keynesian revolution" were already in full swing when Keynes published his doctrine.

Its great publicity success is precisely due to the fact that he was not a pioneer of new policies, but the apologist of schemes that — unfortunately — had already been extremely popular for a long time.

The late Benjamin M. Anderson and many other authors have successfully unmasked the fallacies of Keynes's economic philosophy. But its most devastating criticism was given by Henry Hazlitt in his brilliant book The Failure of the "New Economics." Hazlitt has entirely demolished the Keynesian misconceptions.

Arthur F. Burns
Professor of economics, Columbia University; president, National Bureau of Economic Research; former chairman, President Eisenhower's Council of Economic Advisors

Keynes is and will remain a controversial figure. One may question his originality, condemn his love of paradox, criticize his tendency to draw sweeping generalizations, question his attachment to capitalism. But one cannot deny his being a towering figure in the history of economic thought.

Keynes's thinking has moved the world profoundly, as profoundly as Adam Smiths's Wealth of Nations did in his time. Some men and governments have doubtless been mislead by Keynes. By and large, however, everyone who has studied his writings carefully has gained, I think, a firmer grasp of economic principles in the process.

And as for the world we live in, I am inclined to think that it is a better place than it would have been if Keynes had not lived.

Friedrich August von Hayek
Economist, University of Chicago

It would be unfair to blame Lord Keynes too much for the undoubted harm his theories have done, for I am convinced from personal knowledge that had he lived he would have been one of the leaders in the fight against the postwar inflation. Yet he bears in a great measure the responsibility for it.

His great gifts have made it possible for his theories to exercise during the past 25 years an immediate and pervading influence which is unique in the history of economic thought.

Yet these gifts were not mainly those of an economic theorist, and, though his ideas seemed to constitute a revolution to the generation which they captivated, they will probably appear as no more than a passing phase in the history of economic thought.


The main reproach to which Keynes laid himself open was that he presented as a "General Theory" what was essentially a tract for the times.

It was the successful one of repeated attempts he made to justify his practical inclinations by theoretical argument. It succeeded partly because it provided a highly sophisticated support for demands which are always popular in times of depression and partly because it was expressed in a form congenial to the scientific fashions of the moment.

Yet it was based on assumptions even more unrealistic than those Keynes ascribed to what he called classical economics. If it was a defect of the latter that it assumed for a first approach that there existed no reserves of unused resources. Keynes was even more unrealistic in assuming that there existed always ample reserves of all resources.

In short he assumed away that scarcity of resources which is the root of all our economic problems. In consequence, while of doubtful application even in times of depression, his original theory is entirely inapplicable in times of prosperity.


Keynes's disciples have since succeeded in purging the original version of most of its unrealistic assumptions and internal inconsistencies and developed it into a formal apparatus of analysis which is largely neutral in policy applications.

It continues to enjoy popularity because it is more in accord with current methodological fashions than the classical approach. It is used by many who do not draw the conclusions Keynes drew from it. Yet I doubt whether even this will prove to be a permanent contribution to economics.

But apart from Keynes's peculiar factual assumptions it does not lead to conclusions essentially different from classical analysis. The most significant of those assumptions was that workers will resist a lowering of their money wages but will put up with a reduction of their real wages brought about by a fall in the value of money.


Indeed the ultimate motive of Keynes's efforts was to find a roundabout method of reducing wages too high to allow employment of all seeking jobs. We know now better than to believe that workers will long allow themselves to be deceived in this way. This, however, was the most distinctive element of the Keynesian views of the '30s.

It was this argument which broke down the intellectual resistance to ever-present tendencies toward progressive inflation. Yet this crucial element has by now lost all plausibility.

If one may judge from the first accounts of the latest programmatic document on British monetary policy, the recently published "Radcliffe Report," Keynesianism in its original sense seems to have lost its appeal even more in its country of origin than elsewhere.

John Kenneth Galbraith
Paul M. Warburg professor of economics, Harvard University

Of course Keynes's position in history is perfectly secure. And so, in contemporary practice are the policies he advocated. It was Keynes's central thesis that the modern economy does not, necessarily, find its equilibrium at full employment and that, as a result, it must be ready to intervene to overcome depression or prevent inflation. This is now accepted and even commonplace.

The Eisenhower administration dealt with the recent recession by running a record peacetime deficit. In the last fiscal year, cash outgo exceeded income by $13,200,000,000. The purchasing power poured into the economy by this deficit far exceeded the total peacetime spending of the federal government in any year under Roosevelt.

This was a straight Keynesian policy. Much of it was accomplished through the so-called stabilizers — unemployment compensation payments, farm price supports, other welfare payments, the reduction of effective tax rates as people move to lower income brackets with declining income — which come automatically to the support of private purchasing power as production and income decline in recession.

These measures were all inherited from the New Deal. They are the very essence of a Keynesian policy and not less so because they are now used by a Republican administration. It is worth noting, incidentally, that they appear to have worked.

What is really interesting is this curious effort to assert the unimportance of Keynes. It will pass and leave no mark as the effort to rewrite history to demote Roosevelt has passed. But it is a tribute to the nostalgia evoked perhaps not so much by Adam Smith as by Adam.


Nate White

Nathaniel ("Nate") Ridgway White was an award-winning journalist known for his business and financial reporting at The Christian Science Monitor. He received the second and third Gerald Loeb Awards for Newspapers, the most prestigious award for business journalism.

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