The Failure of the "New Economics"

The Failure of the "New Economics": An Analysis of the Keynesian Fallacies by Henry Hazlitt, Ludwig von Mises Institute, 2007 (originally published in 1959). 

Great Depression

This book of Henry Hazlitt, published in 1959, is a criticism of John Maynard Keynes’ earlier book The General Theory of Employment, Interest, and Money, published in 1936. In his book, Keynes tried to disprove the traditional economic belief that free-market capitalism will have only a small amount of unemployment. Keynes book was published during the Great Depression, when there was widespread unemployment. Keynes used his blame-capitalism theory to justify massive government intervention in the economy. Keynes has made popular the mistaken idea that the Great Depression was caused by flaws inherent in capitalism. 

Keynes’ Attack on Classical Economics

As part of his attack on the classical economists, in particular, on Jean Baptiste Say, Keynes misrepresented Say’s ideas. Keynes asserted that Say said that there is no unemployment under free market capitalism. What Say actually said was that it takes time for knowledge of changes in supply and demand to travel through the market, so that there may be temporary, small pockets of unemployment here and there, but with time these pockets will shrink. Keynes also accused classical economists of devising a theory that was true only in idealized situations. Keynes claimed that his theory was more general and more realistic. That is the significance of Keynes’ use of the word “general” in the title of his book. But the theory Keynes described that applies only in idealized situations is not classical economics, but rather Keynes’ simple-minded misrepresentation of it. This is called putting up a straw man. 

Additional Flaws in Keynes’ Book

Keynes introduced unnecessary new terms. Keynes shifted his definitions of terms during the course of his book. Keynes disparaged saving and praises consumption. Keynes contradicted himself by praising investment but disparaging saving (which is required for there to be money to invest). Keynes often considered the effect of a transaction on only one of the parties, and ignored the effect on the other party. In particular, he ignored the effect of interest rates on lenders, and he ignored the effect of wage rates on employers. Keynes sometimes dismissed the arguments of his opponents, rather than providing evidence or rational arguments against them. For example, Keynes dismissed the assertion that unjustifiably high wages are a cause of unemployment by calling it “not very plausible”, without showing why it is implausible