Henry Hazlitt and the Failure of Keynesian Economics

By Ebeling, Richard M. | Freeman, November 2004 | Go to article overview

Henry Hazlitt and the Failure of Keynesian Economics


Ebeling, Richard M., Freeman


For four decades, from the mid-1930s to the 1970s, Keynesian economics almost monopolized economic policy in the United States and around the world. The "new economics," as it was called, was going to assure mankind economic stability, full employment, and material prosperity-all through wise government management of monetary and fiscal policy. So dominant was this view that only in 1959 did the first book-length refutation of the ideas of John Maynard Keynes appear: Henry Hazlitt's The Failure of the "New Economics": An Analysis of the Keynesian Fallacies.1

Keynes (1883-1946)2 had a acquired an international reputation shortly after World War I, when he published The Economic Consequences of the Peace, a biting criticism of the Treaty of Versailles that formally ended the war.3 In the 1920s he was a leading critic of the gold standard and a vocal proponent of a government-managed currency to maintain full employment. In his 1924 book, A Tract on Monetary Reform, Keynes declared that gold was a "barbarous relic" and that governments should use their control over the money supply to maintain a stable domestic price level even if this required abandoning a stable foreign exchange rate between the British pound and the other currencies of the world.4

In 1930 Keynes published A Treatise on Money, a two-volume work that he expected would establish his reputation as the leading monetary theorist of his time.5 Instead, the book was savaged by reviewers, including many of the most prominent economists in Great Britain and the United States. The most devastating criticisms were made by a young Austrian economist named Friedrich A. Hayek, who in a lengthy two-part review demonstrated the logical confusions and theoretical misunderstandings that ran through the entire work.6

For the next five years Keynes devoted his time to devising a new theory for his argument that a free-market economy was inherently unstable and that only the guiding hand of government could assure full employment in the face of the economic disaster being experienced during the Great Depression of the early 1930s. This work finally appeared in February 1936 under the title The General Theory of Employment, Interest, and Money.7

Except for some of Keynes's young protégés at Cambridge University, most of the reviewers of the book were highly critical of many of its theoretical "innovations," as well as its inflationary prescriptions for unemployment.8 Even some economists who later became proponents of Keynes's "new economics" were initially highly critical of his work. For example, Alvin Hansen, who was one of the leading advocates of Keynesian economics in the United States in the 1950s and 1960s, wrote in late 1936 that The General Theory "is not a landmark in the sense that it lays the foundation for a 'new economics.' . . . The book is more a symptom of economic trends than a foundation stone upon which a science can he built. "9

Yet within a few years, and most certainly by the end of World War H, Keynes's ideas had virtually pushed aside every other explanation of the causes and cures of economic depressions.10 Keynes's book became the foundation stone for the new "macroeconomics." His face even appeared on the cover of the December 31, 1965, issue of Tmig magazine. The feature article, titled "We Are All Kcynesians Now," stated:

Today, some 20 years after his death, his theories are a prime influence on the world's free economies, especially America's. . . . Now Keyncs and his ideas, though they still make some people nervous, have been so widely accepted that they constitute both the new orthodoxy in the universities and the touchstone of economic management in Washington. . . . Now even businessmen, traditionally hostile to Government's role in the economy, have been won over. . . . They have begun to take for granted that the Government will intervene to head off recession or choke off inflation, [and] no longer think that deficit spending is immoral. …

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