The Critics of Keynesian Economics

I've finally completed reading this excellent and comprehensive book exposing the key Keynesian fallacies, first compiled by Henry Hazlitt in 1960, and as relevant as ever today.

To be honest, the author didn't have to write anything new. He simply researched and dug up roughly "some two dozen important critiques by eminent economists" and published them in one volume.

Each critique forms a chapter of this book, and I found that each economist would attack Keynes from a different angle. Some would remain very mathematical and duplicate his model, but by adjusting his narrow assumptions, found conclusions that were completely opposite to Keynesian remedies.

Jean Baptiste Say, the originator of Say's Law, (that you cannot consume that which you have not yet produced) which lies at the heart of the dispute between classical and Keynesian economists, has his full statement reproduced to prove that Keynes did not accomplish any such feat as proving Say's Law to be incorrect.

As Hazlitt explains, "It will be observed that Say's Law itself was intended as an answer to pre-existing Keynesian fallacies."

Another economist who made his contribution long before Keynes, was John Stuart Mill who elaborated and defended Say's Law.

Hazlitt helps do the subject justice by reproducing in full, John Stuart Mill's full writing under "Of the Influence of Consumption on Production" which Keynes had misinterpreted and truncated.

At this early stage in the book, I was left feeling as though Keynes had not addressed his rivals and he had simply constructed an elaborate model based on narrow assumptions, and tried to pass it off as a general theory of employment and business cycles.

One thing is for sure, by reading this book, you will get a clearer understanding of Keynesian ideas than actually reading Keynes himself, who seems to be very obscure and sometimes contradictory in his style of writing. Basically, Keynes ideas boil down to the following:

• When an economy is left to the free market, it reaches a natural equilibrium where the employment level is below "full employment"
• There exists a deficiency of demand in this equilibrium
• Savings are a waste of capital
• Deflation is a problem because wages just can't move downwards, even if the price level moves down.
  

The Keynesian cures:

• Inflation to force real wage rates down
• A central bank to lower interest rates, which reduces savings.
  
• Governments using fiscal stimulus, even running deficits, to stimulate current consumption.
  

Every other critic in the book seems to land a solid blow against Keynes and his assumptions.

• Jacob Viner attacks his definition of involuntary unemployment and the rigidity of wages
• Etienne Mantoux does an excellent job of demolishing the idea of a multiplier as follows:

  "Given the definition of the multiplier, the propensity to consume therefore becomes equal to (1 - 1/k), which amounts to saying that as the propensity to consume approaches unity, the secondary effects of a primary investment would approach infinity. Remarkable !"

• Franco Modigliani reproduces the Keynesian model as a set of simultaneous equations, but adopts the classical theory of the supply of labour function where wages are no longer downward-rigid... the conclusions and outcomes from this are very un-Keynesian -

  "The liquidity preference theory is not necessary to explain under-employment equilibrium; it is sufficient only in a limiting case: the "Keynesian case". In the general case it is neither necessary nor sufficient; it can explain this phenomenon only with the additional assumption of rigid wages.

Many other critics nail the point home, some of them short and easily understood, like Mises and Hayek, others doing a lengthy methodical deconstruction of Keynesian assumptions and claims.

Keynes seems to be the biggest source of all economic fallacies in the modern era.

You cannot spend your way to prosperity. You cannot turn a stone into bread. You cannot pump-prime an economy perpetually, stimulate consumption, and not suffer any negative consequences. Inflation is not costless. Deflation is not an eternal spiral. Prices can indeed adjust to balance the supply and demand of labour and savings.

If only the wider public, or at least the economics profession and political advisors, would consider reading this book.