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The Failure of the New Economics

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Henry Hazlitt's "The Failure of the New Economics" is an excellent discussion on the many Keynesian fallacies. Hazlitt clearly explains that the "The General Theory" by John Maynard Keynes is perhaps the most destructive book ever written and that Keynesian economics inevitably leads to socialism. Like Marx, Keynes attributes the business cycle to the market economy. Throughout "The General Theory", Keynes emphasizes the superiority of government and the inadequacy of individuals operating in free markets.

Hazlitt begins by reasserting the validity of Say's Law. He shows the Keynes didn't understand that Say's Law was a refutation of the popular belief that business downturns are a result of general overproduction. Of course, there can be no general overproduction, only relative overproduction. Say's Law is the economic truth that demand in the market place is derived from that which has been produced, that purchasing power grows out of production, and that people produce not for the sake of production but for the sake of consumption. Hazlitt reminds us that we must affirm the validity of Say's Law when anybody is foolish enough to reject it.[...]

Hazlitt illustrates Keynes's utter confusion on the Savings = Investment issue. Keynes foolishly argued that Savings did not equal Investment in "A Treatise on Money." Keynes was embarrassed to admit his confusion in the General Theory and states that Savings does equal Investment. Of course the whole Keynesian theory of unemployment rests upon Savings being unequal to Investment, so Keynes contradicts himself and returns to his older concepts in the latter part of "The General Theory".

Hazlitt points out that the Propensity to Consume is littered with fallacy. In short, The Consumption Function declares that consumption, extravagance, and improvidence are virtuous while savings, frugality, and financial prudence are society's great plagues. Hazlitt shows that the whole concept of the Propensity to Consume is meaningless if Savings=Investment. Hazlitt continues by showing that the spending Multiplier (1/MPS) would be infinity if the MPS was zero. Translation: if individuals chose not to save any portion of their income, a small expenditure on public works by government would increase income without limit. This proposition is obviously ridiculous.

Hazlitt turns to the liquidity preference, the Keynesian theory of interest. Hazlitt demonstrates that if the Liquidity Preference were valid, short term interest rates would be highest at the bottom of the depression. Experience shows just the opposite, short term interest rates are lowest near the bottom of the depression. Clearly, as Hazlitt explains, the Keynesian interest rate theory is illogical.

This review is only the tip of the iceberg. Henry Hazlitt reminds us that business cycles are not caused by the inadequacy of the free market economy, but are the result of expansionary bank credit made possible by fractional reserve banking. Of course, government control of money makes fractional reserve banking possible. Hence government is the problem, not the solution. "The Failure of the New Economics" is an outstanding critique of the Keynes's magnum opus and it will destroy the Keynesian system.

Also recommend: "Man, Economy, and State" by Rothbard, "Human Action" by Mises, "A Guide to Keynes" By Hansen, and "The Mystery of Banking" by Rothbard

Henry Hazlitt critiqued Keynes at a time when Keynesian ideas dominated professional opinion (1959). Hazlitt lacked credentials as an economist, but he still weighed in with an effective critique of Keynes. First of all, Hazlitt makes the historical point that the ideas attributed to Keynes were largely not original to Keynes. While it is true that Keynes was involved in the development and popularization of what came to be known as Keynesian economics, the fact of the matter is that other economists published similar ideas years before Keynes, and aggregate demand type explanations of The Great Depression were already widely known and well on the way to broad acceptance.

Hazlitt also defends the idea that excessively high wages are the primary cause of unemployment, and rightly so. A recent study by two UCLA economists confirms that Great Depression unemployment was driven by excessively high wages. Hazlitt also picks apart the details of Keynes theoretical arguments, and defends Say's Law of Markets. Hazlitt further points out the absurdity of Keynes' contention that capital can be made abundant, so the marginal efficiency of capital can go to zero. Hazlitt also notes that Keynes advocated ultimate policies that would result in socialism (i.e. the euthanasia of the rentier and the socialization of investment).

Hazlitt pointed to serious deficiencies in Keynes' so called General Theory. In doing so he was ahead of the trend among professional economists, who rejected Keynesian economics in the late sixties and early seventies. Nowadays there is less need for a critique of Keynes actual writings, because his "General" theory is seldom read, even by professional economists. Consequently, Hazlitt's book may fall into obscurity. Yet it is important to note that Hazlitt was able to critique Keynesian ideas simply from having familiarized himself with proper economic concepts (i.e. by reading Mises and Hayek). The Failure of the New Economics is at this point primarily for those interested in history.

I don't get a lot of pleasure out of reading about disasters, but Hazlitt simply destroys Keynes' thought process and ideas. It's interesting, is it better to read the "General Theory" first or read this book? I believe reading this book first will make reading the "General Theory" much more rewarding. Although, my guess would be Hazlitt will recommend that you don't even waste a moment of time reading Keynes' work. Hazlitt makes so many incredible strikes to the work, it's hard to find anything worth taking from Keynes. This book is most interesting in how society labels books as "classics" yet they don't seem to makes any sense. In summary, if you are a student of Keynes, you will be surprised and probably upset at this book. If you are a student of neoclassical economics, you will enjoy this book.

Hazlitt probably did not have fun writing this book. After all a chapter by chapter refutation of the General Theory means that one has to actually read the General Theory first...

Since only a part of the General Theory has been adapted to modern mainstream thinking, Hazlitt goes through a lot of nonsense that hasn't been relevant for decades. But there are some really juicy parts in this book that make it worth the read. Whether it's the magic of the multiplier, how Say owns Keynes or when it's just so ridiculous it's almost funny.

Obviously there's nothing funny here, since to many Keynes is still the ultimate maestro of macro. These people should read this book, because this book documents almost every Keynesian fallacy that there is, and certainly the most relevant ones.

A must read if you study economics. It explains fallacies contained within todays economy theories and their failures.

An excellent critique of the time honored tenets of Keynesian economic principles. A very good look at economics from another angle which, is always a good thing.