Keynesianism Exploded

George Winder

[Originally appeared in the Henry George School Magazine, London, February, 1965.
Reprinted from the Henry George News, June, 1965]

A FEW years ago the doctrines of Lord Keynes were fashionable and a progressive was expected to embrace them, but today the old orthodoxies are returning like the tide sweeping up under London Bridge, bringing, one may hope, common sense. There have been many refutations of Lord Keynes's chief theories, notably Potemkin, McCord Wright and Henry Hazlitt, and now comes a devastating 450-page volume by Professor W. H. Hutt of the University of Cape Town, who was born in England and has long been regarded as one of the world's great economists.*

When I mentioned common sense I had in mind the idea that savings are a help in any economic predicament. It is remarkable that Lord Keynes convinced millions of people that this was not so. His theory was that if we saved we reduced someone else's income who in turn would be compelled to spend less and in consequence might throw men out of work. Professor Hutt restores our respect for the ancient precepts of our fathers by pointing out that saving simply means not consuming, so that when we save, the country's stock of assets is increased. From this stock we will consume tomorrow, or alternatively supply the capital resources of investment.

So saving can never result in unemployment and is in fact the basis of all progress. Without it the enterprise of our entrepreneurs is of no account and there will be no jobs for our children when they attempt to become self supporting. Professor Hutt thus restores provident living as a virtue and re-establishes our faith in common sense. Unlike the Keynesians, he does not think of income as a flow of money but as a flow of goods and services. This view makes a very great difference to many of our ideas. Governments can increase the flow of money easily, but can they easily increase the flow of real wealth?

Professor Hutt seems to live in a different world from those who venerate Lord Keynes. Keynes thinks of a depression as being caused by a lack of purchasing power. Hutt thinks of it as a lack of co-ordination between costs and prices. Keynes thinks of purchasing power as money; Hutt thinks of it as the power to produce goods that can be exchanged for other goods with the aid of money.

Keynes, although he once made eloquent speeches in favor of free trade, accepted protection, for without it no government could plan the economy he envisaged. Hutt considers that tariffs always reduce demand and he instances the American Hawley-Smoot Tariff. This prevented the sale of European goods to America and so the sale of American agricultural products and raw materials to Europe, thereby hindering recovery from the great depression. Keynes believed that demand can be increased by inflation; Hutt says it can be increased by cutting prices.

Keynes thought that an increase in money incomes can bring about equilibrium between costs and prices; Hutt thinks that an increase in both money and real incomes is the result of such equilibrium. Keynes believed that the aim of monetary policy should be that debts are repaid in units of the same value as those in which they were incurred.

Keynes believed that the rate of interest was determined by the supply of and demand for money and was kept above the rate that would equate savings and investment by liquidity preference. Hutt believes that the rate of interest is determined by the supply of and demand for the real assets that can be utilized in capital construction, and that if allowed to fluctuate freely it would, with the aid of bank loans, equate savings and investment.

Professor Hutt does not deny that inflation can sometimes cure unemployment, but, except in rare instances, it can do so only because the higher prices it causes, by increasing the entrepreneurs' profits, stimulate economic activity. The moment, however, that increased profits are followed by increased wages or other costs the bubble bursts and unemployment recurs. The only Keynesian remedy for this is to start the cycle all over again. This, of course, is the explanation of the present stop-go phenomena that characterizes our economy.

The trade unions believe that they can always defeat the consequences of inflation, as far as their own members are concerned, by keeping up the pressure for higher wages, but it is only the lag of wages behind price increases that enables inflation to stimulate the economy.

Our so-called economic science is in a sorry state, split completely into two opposing schools, and if one is right the other must be hopelessly wrong. The apologists for Keynes are doing a great deal of harm by attempting to minimize the difference between these two schools. It may be that Cambridge has brought into the world, under the mask of science, an unscientific ideology. If so, the world, with its new hosts of economic advisers, is treading the crust of a dangerous bog.

I believe that it will not be long before every economist who has not read Professor Hurt's great book must consider himself out of date.