Keynesian Inflation

July 15, 1963

Four years ago the present writer published a book called The Failure of the ‘New Economies’. It was an analysis of the fallacies in Lord Keynes’s book The General Theory of Employment, Interest, and Money, which had been published in 1936. That book had become not only the dominant influence on the kind of “economics” taught in the colleges and universities, but the dominant influence on the economic policies being pursued by most Western governments. The Keynesian doctrines have encouraged a constant race between increasing wage demands by the labor unions and monetary inflation in order to make ever-higher wage rates payable.

It is amazing how long it has taken for a reaction against these doctrines to gather force and to find adequate expression. After the appearance of Keynes’s General Theory a score or more of brilliant attacks on his ideas appeared as articles or as chapters in books. I brought some of these together, in 1960, in a symposium, “The Critics of Keynesian Economics.” Among them was an article by W.H. Hutt, professor of commerce and dean of the Faculty of Commerce at the University of Cape Town, on “The Significance of Price Flexibility.” This had appeared in 1954.

DEMOLISHES TO BUILD

Hutt had, in fact, been troubled by the Keynesian obfuscations for many years, and as early as 1939 had published his Theory of Idle Resources, which brilliantly dissected one of them. But the practical unanimity with which his academic colleagues embraced the Keynesian revelation, and ignored or waved aside his privately communicated criticisms, caused him to lose his own intellectual confidence and to delay or withhold any major publication.

Now at last he has published a full-length book, Keynesianism—Retrospect and Prospect (Regnery, $7.50), which analyzes and demolishes not only the fallacies of Keynes himself but of the whole school of Keynesians and post-Keynesians. It is not merely destructive. Though, as Hutt himself puts it, “it sets out to restate some of the essentials of ‘orthodox’ or ‘classical’ economic teachings in a form . . . more appropriate for contemporary controversies,” it does much more than this. It throws new light on a score of unsettled economic problems. Hutt has made a major positive contribution. He has written, in fact, one of the most penetrating and important economic books of the last 25 years.

AN ACT OF GOVERNMENT

There is not space here to discuss adequately his exposures of Keynesian errors and misconceptions or his contributions to positive understanding—his discussion of the nature of economic coordination through the price system, of the nature of money, of income and how it is “generated,” of the consumption fallacy, the multiplier fallacy, the acceleration fallacy, the capital-saturation fallacy, and of the validity of “Say’s Law.” Nor is there room to discuss his final chapter on the amusing attempts of the “Keynesians of the Right” to grope their way back to orthodoxy while still trying to cling to the obfuscating Keynesian concepts and vocabulary.

I have space only to call attention to Hutt’s brilliant and powerful chapter on the chief practical consequence of Keynesianism—the almost universal policy of inflation. Since the appearance of the General Theory, “there has been a sort of race between inflation and the unions. . . . What a deterioration since the pre-1914 era Simply because no one ever doubted then that governments would honor convertibility obligations there were no balance of payments difficulties, no hot money flights, no devaluation scares, no complaints of world liquidity shortage, no restraints on international settlements, no blocking of foreign balances, and no quantitative trade restrictions for payment-balancing purposes. World discoordination is the product of the continuous misdirection of expectations which the Keynesian technique necessitates. . . . [Yet] people are very slowly awaking to the truth that inflation is an act of government, and that it is almost always (in these days) the consequence of calculated, even if reluctant action.”