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The Failure of the "New Economics" Paperback – 1994
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Top Customer Reviews
Certainly worth the money! it is difficult to go wrong with Hazlitt.
Perhaps Hazlitt's most important contribution is the rehabilitation of Say's Law (which, despite Keynes' claims to the contrary, was never so much as dented) and the corresponding rehabilitation of the concept (actually conceded by Keynes at the outset - he admitted embarrassment about this confusion on his part in his "Treatise on Money" and then adopts the same fallacy in "The General Theory") that savings = investment (S=I). This is true in all cases where the market is permitted to approach equilibrium, even, as in the example cited in the book, when a bank issues a new loan, so long as the market is permitted to return to an equilibrium reserve percentage. This is only altered by the special case of a permanent (that is, extra-market) change in the supply of money.
The fallacy of Keynes' position, as clearly demonstrated by Hazlitt, is one that requires no calculus at all to comprehend. At this point, Hazlitt's admonitions regarding "mathematical economists" are particularly valid. There is no difference between the classical assertion that, in a market permitted to seek equilibrium, the real wage is equal to the marginal productivity of labor - expressed as w/p=mpl - and Keynes' attempt to qualify it with the sum of the marginal propensity to consume and the marginal propensity to invest - expressed as w/p=mpl/(mpc+mpi). This is because, as Hazlitt makes clear to the unbiased reader, Keynes' attempt to distinguish between savings and investment (or between savings specifically invested in "investment goods") is completely invalid. "Savings" can be alternatively stated as "non-consumption" and it remains savings (and investment) if it is placed in a bank or simply invested in future consumption by being stuffed into a mattress.
There is no such thing as "dead capital". Thus, by definition, mpc+mpi=1 and it takes no calculus to conclude that w/p=mpl means the same thing as w/p=(mpl)/1. Once this point is made clear, delving into the mathematical gyrations in chapters 19-21 and related appendix is a waste of time, because they proceed from the clearly false assumptions that mpi (excluding held savings) is a valid distinction from mps, or that mpc+mps can be anything but one. Nearly all of the defenses of Keynesian economics begin and end with the assumption that there is some legitimate reason why cash reserves (investment in future consumption) are not really investment. Without this distinction, all discussion of the "gap" and related multiplier analysis is invalid, by definition (which, of course, is the case). Even if the cash is set afire (certainly another special case), it can be regarded as consumption (literally) AND a reduction, albeit miniscule, in the total supply of money.
The "special case" is not an economy permitted to function without interference - in which Say's Law holds true - but where the deliberate and permanent alteration of the money supply is undertaken by government in precisely the way Keynes endorses. In fact, Keynes simply embraces long discredited inflationary theories involving governmental expenditure as an economic stimulus, primarily (as has led to such crises as the Great Depression and the current economic crisis) the manipulation of interest rates by the state. In fact, as Hazlitt points out, Keynes praises governmental involvement in the economy, particularly with regard to maintenance of national wealth and the achievement of full employment via interest rate manipulation, repeatedly in his work. It is hard to find an economist this side of Karl Marx that is so completely at odds with the views of Adam Smith who roundly criticized such action by the mercantilists and advocated "perfect liberty" in the complete absence of such intervention.
Hazlitt concludes, as have an increasing percentage of economists because it is consistent with the real world evidence, that the primary cause of involuntary unemployment is a wage rate in excess of the equilibrium rate. It cannot be solved by artificial changes in the supply of capital (which obviously cannot be made "abundant" by magic or government fiat) that merely create other economic distortions.
Overall, Hazlitt's deconstruction of Keynes' theories is thorough, explicit and logically based and criticism of his mathematical abilities (as demonstrated above) are completely without merit. While not the best source of positive theories of money, credit and interest (for that see the works of Mises, Hayek and Rothbard many of which are available online), it achieves its purpose - a sequential evaluation of the Keynesian theories - brilliantly.