Keynesian Fallacies
by Rothbardian

Henry Hazlitt's "The Failure of the New Economics" is an excellent discussion on the many Keynesian fallacies. Hazlitt clearly explains that the "The General Theory" by John Maynard Keynes is perhaps the most destructive book ever written and that Keynesian economics inevitably leads to socialism. Like Marx, Keynes attributes the business cycle to the market economy. Throughout "The General Theory", Keynes emphasizes the superiority of government and the inadequacy of individuals operating in free markets.

Hazlitt begins by reasserting the validity of Say's Law. He shows the Keynes didn't understand that Say's Law was a refutation of the popular belief that business downturns are a result of general overproduction. Of course, there can be no general overproduction, only relative overproduction. Say's Law is the economic truth that demand in the market place is derived from that which has been produced, that purchasing power grows out of production, and that people produce not for the sake of production but for the sake of consumption. Hazlitt reminds us that we must affirm the validity of Say's Law when anybody is foolish enough to reject it.[...]

Hazlitt illustrates Keynes's utter confusion on the Savings = Investment issue. Keynes foolishly argued that Savings did not equal Investment in "A Treatise on Money." Keynes was embarrassed to admit his confusion in the General Theory and states that Savings does equal Investment. Of course the whole Keynesian theory of unemployment rests upon Savings being unequal to Investment, so Keynes contradicts himself and returns to his older concepts in the latter part of "The General Theory".

Hazlitt points out that the Propensity to Consume is littered with fallacy. In short, The Consumption Function declares that consumption, extravagance, and improvidence are virtuous while savings, frugality, and financial prudence are society's great plagues. Hazlitt shows that the whole concept of the Propensity to Consume is meaningless if Savings=Investment. Hazlitt continues by showing that the spending Multiplier (1/MPS) would be infinity if the MPS was zero. Translation: if individuals chose not to save any portion of their income, a small expenditure on public works by government would increase income without limit. This proposition is obviously ridiculous.

Hazlitt turns to the liquidity preference, the Keynesian theory of interest. Hazlitt demonstrates that if the Liquidity Preference were valid, short term interest rates would be highest at the bottom of the depression. Experience shows just the opposite, short term interest rates are lowest near the bottom of the depression. Clearly, as Hazlitt explains, the Keynesian interest rate theory is illogical.

This review is only the tip of the iceberg. Henry Hazlitt reminds us that business cycles are not caused by the inadequacy of the free market economy, but are the result of expansionary bank credit made possible by fractional reserve banking. Of course, government control of money makes fractional reserve banking possible. Hence government is the problem, not the solution. "The Failure of the New Economics" is an outstanding critique of the Keynes's magnum opus and it will destroy the Keynesian system.

Also recommend: "Man, Economy, and State" by Rothbard, "Human Action" by Mises, "A Guide to Keynes" By Hansen, and "The Mystery of Banking" by Rothbard

09 August 2007

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