The Failure of the "New Economics": An Analysis of the Keynesian Fallacies
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The Failure of the "New Economics": An Analysis of the Keynesian Fallacies

Henry Hazlitt

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The Failure of the "New Economics": An Analysis of the Keynesian Fallacies

Henry Hazlitt

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First published in 1959, this is a line-by-line commentary and refutation of one of the most destructive, fallacious, and convoluted books of the century: John Maynard Keynes's General Theory, published in 1936.In economic science, Keynes changed everything. He supposedly demonstrated that prices don't work, that private investment is unstable, that sound money is intolerable, and that government was needed to shore up the system and save it. It was simply astonishing how economists the world over put up with this, but it happened. He converted a whole generation in the late period of the Great Depression. By the 1950s, almost everyone was Keynesian.However, Hazlitt, the nation's economics teacher, would have none of it. And he did the hard work of actually going through the book to evaluate its logic according to Austrian-style logical reasoning."Hazlitt's fine critique of Keynes is a worthy complement to Mises' Human Action. Henry Hazlitt, a renowned economic journalist, is a better economist than a whole host of sterile academicians, and, in contrast to many of them, he is distinguished by courage: the courage to remain an "Austrian" in the teeth of the Keynesian holocaust, alongside Mises and F. A. Hayek. On its merits, this book should conquer the economics profession as rapidly as did Keynes. But whether the currently fashionable economists read and digest The Failure of the "New Economics" or not is, in the long run, immaterial: it will be read and it will destroy the Keynesian System."—Murray Rothbard

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1. Canonization

The most famous economist of the twentieth century is John Maynard Keynes; and the most influential economic book of the present era, both on theory and on economic policy, is his General Theory of Employment, Interest, and Money, published in 1936.
The fact is recognized not only by his admirers and disciples, but even by his sharpest critics. Open any issue of almost any of the scholarly economic journals, and you will find his name and the phrases that he coined or popularized sprinkled generously through its pages. Open the newspaper, and you will find interpretations of current economic events, or proposals for economic and monetary policies, that owe at least their ubiquity, if not their origin, to his writings.
To illustrate the unique place that Keynes’s reputation occupies, I select a few quotations almost at random.
On his death the London Times{1} called him “a very great Englishman...a man of genius, who as a political economist had a world-wide influence on the thinking both of specialists and of the general public....To find an economist of comparable influence one would have to go back to Adam Smith.”
G. D. H. Cole, the Socialist economist, calls the General Theory:
“The most important theoretical economic writing since Marx’s “Capital,” or, if only classical economics is to be considered as comparable, since Ricardo’s “Principles.”...What he has done, triumphantly and conclusively, is to demonstrate the falsity, even from a capitalist standpoint, of the most cherished practical “morals” of the orthodox economists and to construct an alternative theory of the working of capitalist enterprise so clearly nearer to the facts that it will be impossible for it to be ignored or set aside.”
Professor Alvin H. Hansen of Harvard, usually regarded as Keynes’s leading American disciple, writes of the General Theory:
“There are few who would deny, as of now, seventeen years later, that the book has had a greater impact on economic analysis and policy even in this short time than any book since Ricardo’s Political Economy. It may be a little too early to claim that, along with Darwin’s Origin of Species and Karl Marx’s Das Capital, the General Theory is one of the most significant books which have appeared in the last hundred continues to gain in importance.”{2}
In the starry eyes of some admirers, even the book’s faults seem somehow to add to its greatness. Professor Paul A. Samuelson, of the Massachusetts Institute of Technology, author of the most widely used college textbook in economics at the present time, writes of the General Theory:
“It is a badly written book, poorly organized; any layman who, beguiled by the author’s previous reputation, bought the book was cheated of his 5 shillings. It is not well suited for classroom use. It is arrogant, bad-tempered, polemical, and not overly generous in its acknowledgments. It abounds in mares’ nests and confusions....In short, it is a work of genius.”{3}
Even stranger is Samuelson’s implication that the very obscurity of the book is an embarrassment, not to the disciples of Keynes, but chiefly to his critics: “It bears repeating that the General Theory is an obscure book so that would-be anti-Keynesians must assume their position largely on credit.”{4}
It is of course not surprising to find an extravagant judgment by R. F. Harrod, Keynes’s biographer:
“To put the matter quite bluntly, I believe that the future historian of economic thought will regard the assistance rendered by Keynes on the road of progress as far more important than that of his revered master, Alfred Marshall. He seems, to my judgment, to stand rather in the same class as Adam Smith and Ricardo. In logical penetration he was much superior to Adam Smith, in lucidity of writing to Ricardo.”{5}
Professor Dudley Dillard of the University of Maryland, in his book The Economics of John Maynard Keynes writes:
“By any test, Keynes ranks as one of the great economists of all time and as the most influential economic thinker the twentieth century has so far produced....
“Within the first dozen years following its publication, John Maynard Keynes’ The General Theory of Employment, Interest, and Money (1936) has had more influence upon the thinking of professional economists and public policy makers than any other book in the whole history of economic thought in a comparable number of years. Like Adam Smith’s Wealth of Nations in the eighteenth century and Karl Marx’s Capital in the nineteenth century, Keynes’ General Theory has been the center of controversy among both professional and nonprofessional writers. Smith’s book is a ringing challenge to mercantilism, Marx’s book is a searching criticism of capitalism, Keynes’ book is a repudiation of the foundations of laissez-faire. Many economists acknowledge a heavy debt to the stimulating thought of Lord Keynes.
If the influence of Lord Keynes were limited to the field of technical economic doctrine, it would be of little interest to the world at large. However, practical economic policy bears even more deeply than economic theory the imprint of Keynes’ thought.{6}
Quotations like this could be continued indefinitely, but they already grow repetitive. Even the most hostile critics of Keynes’s theories do not question the extent of his influence. I cite but one: “[Keynes’s] influence in the Roosevelt Administration was very great. His influence upon most of the economists in the employ of the Government is incredibly great. There has arisen a volume of theoretical literature regarding Keynes almost equal to that which has arisen around Karl Marx.”{7}

2. Uses of Refutation

Yet about the General Theory there is a strange paradox. The Keynesian literature has perhaps grown to hundreds of books and thousands of articles. There are books wholly devoted to expounding the General Theory in simpler and more intelligible terms. But on the critical side there is a great dearth. The non-Keynesians and anti-Keynesians have contented themselves either with short articles, a few parenthetic pages, or a curt dismissal on the theory that his work will crumble from its own contradictions and will soon be forgotten. I know of no single work that devotes itself to a critical chapter-by-chapter or theorem-by-theorem analysis of the book. It is this task that I am undertaking here.
In view of the quotations I have just made, such an under-taking should require no apology. But there are two possible objections that I should like to consider. The first is the claim that Keynes’s theories have been rapidly losing their influence in recent years, that they have been refuted by the actual course of events, and require no further answer. The second is the contention that we need only present true theories in a positive form; that it is of little value to analyze error because the possibilities of error are infinite and the mere statement of the truth is itself a refutation of error.
Concerning the first of these possible objections, I may reply that though there has been some diminution of Keynes’s influence, and though several of his theories have been given a decent burial, his influence both on academic thought and on practical policy is still tremendous. It would in any case be a poor service to clear thinking simply to allow his theories to be forgotten, even if we assume that this is what may occur. “One of the peculiarities of recent speculation, especially in America,” once wrote Santayana, “is that ideas are abandoned in virtue of a mere change of feeling, without any new evidence or new arguments. We do not nowadays refute our predecessors, we pleasantly bid them good-bye.”{8}
Simply to bid our predecessors good-bye does not further clarity or progress of thought. Unless we know not only that some past doctrine was wrong, but precisely why it was wrong, we have not learned all the lessons that the error has to teach us, and there is real danger that it may make its appearance in another form.
In the history of thought great new contributions have often been made as a sort of by-product of what were originally intended to be merely refutations. Adam Smith’s Wealth of Nations grew in large part out of a refutation of the errors of the mercantilists. Malthus’s famous Essay on Population grew out of an attempt to refute the optimistic doctrines of Godwin. Kant’s Critique of Pure Reason began as an effort to refute the theories of Hume. John Stuart Mill’s Examination of Sir William Hamilton’s Philosophy became more famous than any of the writings of the philosopher he attacked.
I hope I shall not be regarded as presumptuous enough to be comparing the present modest work with any of the great books just mentioned. I cite them merely to show that refutation of error is far from a futile occupation. It is an important method, not only of defending, expounding, and clarifying known truths, but of advancing to new truths and greater insight. As logic and mathematics sufficiently prove, the more we understand the implications of any theorem, the better we understand the theorem itself.
Nor, in examining the views put forward by a single man (or his disciples), do we necessarily confine ourselves to those views. Their analysis becomes a way of gaining a clearer and wider grasp of the problems with which that writer dealt. In the first chapter of his Examination of Sir William Hamilton’s Philosophy (1865), Mill wrote: “My subject, therefore, is not Sir W. Hamilton, but the questions which Sir W. Hamilton discussed. It is, however, impossible to write on those questions in our own country and in our own time, without incessant reference, express or tacit, to his treatment of them.”
The subject of this book, likewise, is not John Maynard Keynes but the problems he discussed. And we cannot discuss these problems at the present day without discussing his treatment of them.

3. A Path-Breaking Pioneer?

Now though I have analyzed Keynes’s General Theory in the following pages theorem by theorem, chapter by chapter, and sometimes even sentence by sentence, to what to some readers may appear a tedious length, I have been unable to find in it a single important doctrine that is both true and original. What is original in the book is not true; and what is true is not original. In fact, as we shall find, even much that is fallacious in the book is not original, but can be found in a score of previous writers.
Frankly, when I began this task I did not think I would arrive at so sweeping a conclusion. My first thought was that I might do a short work, analyzing Keynes’s chief doctrines so that the reader who wished a critical analysis would be able to find one in a brief and readable form. But when I actually embarked upon a line-by-line analysis, my experience was strangely like the one John Stuart Mill describes in his Autobiography regarding his analysis of Sir William Hamilton: “As I advanced in my task, the damage to Sir W. Hamilton’s reputation became greater than I at first expected, through the almost incredible multitude of inconsistencies which showed themselves on comparing different passages with one another.”{9} So I have found in Keynes’s General Theory an incredible number of fallacies, inconsistencies, vaguenesses, shifting definitions and usages of words, and plain errors of fact. My desire for thoroughness in pointing these out has carried the length of this book m...

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