BOOK REVIEW

The Failure of the New Economics

Hazlitt Devastates Keynes's Argument

MAY 01, 1996 by WILLIAM H. PETERSON

Dr. Peterson is Distinguished Lundy Professor of Business Philosophy Emeritus at Campbell University, North Carolina.

In the beginning was Say’s Law—supply creates demand. But that was the “old economics.” Now, glory be, we’re blessed with the “New Economics”—demand creates supply—thanks to the “new” dazzling 1936 paradigm of The General Theory of Employment, Interest and Money by John Maynard Keynes. Lord Keynes stood Say’s Law on its head, and so the business cycle has been mercifully repealed once and for all, of course.

Imagine, jobs for virtually everybody all the time. All central governments everywhere have to do is maintain “national income” at the level of “full employment.” No big deal. Fine-tuners merely have to apply Keynes’ equation (Y = C + I + G) and make sure macrodemand sustains adequate macrosupply through the magical “G” in the formula. G stands for government outlays, for economic—and political—paradise. So as Marx was a god in the nineteenth century, Keynes became a god in the twentieth.

Hazlitt devastates the “New Economics.” G, says Hazlitt in a backcast and forecast of persistent inflation and recurrent recessions, leads but to “a constant race between the money supply and the demands of the trade unions—but it does not lead to long-run full employment.”

Hazlitt warns the Keynesians against their forgetting that everybody’s income is somebody else’s cost, against their cavalier downplaying of excessive wage rates as a key cause of unemployment, against their temptation of deploying cheap money and deficit spending to even out the business cycle. But do the Keynesians and their friends in high places listen, even at this late date?