The British Austrian economist W.H. Hutt was a great critic of Keynes’s economic theories. However, his speculations on why the New Economics revolution happened are even more fascinating. Hutt shows it to be a fundamentally dishonest undertaking. Keynes held a long-standing belief in inflation and public spending. His General Theory was the culmination of his search for an intellectual foundation on which to support his belief. Yet it was an unstable foundation. Had he stated his thesis in clear terms, it would have been seen as noncontroversial in some parts and in the rest untrue. The staggering complexity, deliberate obscurantism and “dialectical tricks” of The General Theory were part of a necessary stratagem of disguise. 1
At the time of publication of Keynes’s General Theory, the economy of the United Kingdom was in deep stagnation. Britain had been suffering from chronic levels of mass unemployment. Hutt diagnosed the situation as a pricing problem. Many wages were fixed above market-clearing levels. This came about because a deliberate monetary deflation had been instituted to compensate for the wartime inflation. This was done in order to maintain gold convertibility of the British pound at the prewar gold backing. However, some segments of the labor market had fixed wages at higher nominal levels which perhaps were above market clearance before and were surely much more so after the rollback. Wage rigidity was primarily the doing of labor unions through strike threats and organized coercion. Generous welfare incentive payments, which encouraged the idle to remain unemployed, were a contributing factor.
Depressed conditions made labor less valuable to business firms. Unemployed workers could have worked at some wage. A fair-value offer would be lower in bad times than in good times, but productive labor always has some value to the employer. Yet the price rigidities and disincentives made idleness (perhaps supplemented by off-the-books side hustles) more attractive than regular employment.
Reading between the lines, contemporary British economists were aware that there was no fundamental reason that a free market in labor could not put people back to work. Prices above market clearance result in a surplus. Profit motivation by business firms, and competition in labor markets among workers would push wages down until the labor surplus was no more. Markets can and will clear—at higher quantities and lower prices. Understanding this point did not require an entirely new theory of economics.
British economists were also aware that the main barriers to wages that would clear labor markets were political. The unions were a formidable foe. Hutt described “the belief of some economists that any policy which aims at the removal of man-made barriers … to the pricing of outputs at market-clearing levels, is politically impossible.” 2 F.A. Hayek on the same issue wrote that Keynes assumed that “a direct lowering of money wages could be brought about only by a struggle so painful and prolonged that it could not be contemplated.”
The cure for the British disease was, then, a political one. Had economists and politicians attempted to marshal public opinion in favor of full-on confrontation against the institutional barriers preventing the price system from working, then the economy could have recovered. The inflexible wages preventing the full participation of labor in productive activity would have flexed.
Hutt hoped for the emergence of “a really great statesman, with wise and courageous advisers” who would tell the public the truth: that stagnation was caused by the monopolistic behavior of labor unions; that unemployment benefits discouraged production; and that market pricing—even if some prices were lower—would bring better days ahead for all. 3 If influencers had told the hard truth, then public opinion might have responded.
Yet it was not so. Those in position to speak out were unwilling to do so, for fear of losing votes and ending careers. And due to a British common law tradition of respect for labor unions, such criticism would not have gone down well. The loss of dole would be equally unwelcome. The cancel culture of the day had its way.
Hutt laid the blame equally on the economics profession for knowing—but not telling—the truth. 4 Hutt gives the example of Pigou, whose published work demonstrated that he understood the issue. However, “he still conspicuously refrained from recommending the only remaining non-inflationary solution, that of pricing labour’s inputs lower so that they would be within reach of final consumers’ pockets.” 5
Political and economic elites began to look for an easier way out. Having ruled out the truth, “they groped for other diagnoses.” 6 The problem was how to avoid the pain of confronting the real issue. The solution was inflation. In proper doses, and if precisely targeted, it was thought, inflation could break the logjam. If consumer goods prices rose against rigid nominal wages, real wages would fall until they reached labor’s marginal product. Businesses could then hire. And labor could hold its head high, and proudly pretend that it had not taken a pay cut. All gain, no pain.
Thus began a subtle shift in elite opinion, which had up to that time considered inflation a shameful thing. While openly advocating monetary debasement was not (quite) yet respectable in British policy circles, “the notion that ‘cheap money’ could bring prosperity and mitigate unemployment without serious contra-effects was growing in industrial and business circles in both continents,” wrote Hutt. 7
The notion began to catch on that, if aggregate purchasing power was deficient because aggregate supply was deficient (owing to input prices and output prices having been forced—by trade union or other monopolistic pressures—above full employment levels) this deficiency might be remedied in some manner by the stimulation of aggregate demand. 8
The obstacle to this path was Say’s law. This is the name we now give to a truth articulated by Ricardo, Mill, and Say during the general glut debate. This was an eighteenth-century controversy between Malthus and the three classical economists on the proposition that depressions were caused by an oversupply of goods in general. Looked at differently this could be described as a deficiency of demand in general. Ricardo, Mill, and Say observed that the supply of one good constitutes a demand for some other good, supplied by another producer. If every demand constitutes a supply and vice versa, then demand in general and supply in general are identical. They are only different aspects of the same phenomenon. While there can be a glut of a particular good, demand in general can never be excess or deficient relative to supply.
Say’s law and price flexibility formed Hutt’s two-pronged critique of the policy of inflation. Hutt argued that demand in Britain was indeed deficient, but only because supply was deficient. And supply was deficient, because the services of some workers’ labor were not priced for market clearance. Those workers were idle, because employers were not willing or able to raise their bids.
Hutt writes that Keynesianism before Keynes (stimulation of demand through inflation) was “widespread” in Britain and the US. Keynes was known to have drawn inspiration from the monetary cranks—a term applied to a collection of historical thinkers who have advanced schemes for printing the way to prosperity. 9 Hayek’s article on Foster and Catchings deals with an American version of Keynes’s paradox of thrift ten years before.
Hutt (citing Keynes’s biographer, Roy Harrod) states that Keynes had spent at least a dozen years prior to the publication of his General Theory fixated on his lifetime goal. He badly wanted to be the advocate of inflation and public spending. He intuitively felt that this was what the country needed. Finding defensible economic reasoning was another thing. A century of sound economic theory stood in his way. And there was that pesky Say’s law. Inflation was still disreputable, even “suicidal.” 10 He could not see a clear path forward.
Keynes spent the 1920s and ’30s “searching for arguments to support a conviction.”11 Hutt explains,
His “hunch” throughout was that control of expenditure through monetary and fiscal policy could solve the problems of maladjustment expressed in unemployment. And he seems originally to have believed that this could be done without the disastrous sociological consequences of [inflation]. His intellectual speculations consisted, I think, of a groping around—with great ingenuity—for ways of thinking which appeared to support his “hunch,” selecting and eagerly clutching those which appeared to do so, and inhibiting those which did not. The process was unconscious. 11
Because the conclusion was fixed, only the means of reaching it needed to change:
Supremely confident, conscious of his reputation and rhetorical skill, he appears to have been self-critical only when his previous speculations had tended to lead him away from instead of toward conclusions to which he was intuitively attached. When he discarded concepts and apparatus which he had earlier introduced, it was because he had found more convincing ways, although sometimes quite different and inconsistent ways, of stating a case which, in its essence, he had not modified…. while his convictions about policy seem indeed to have been unshakable, he constantly changed the arguments, assumptions, terminology, and formulas which could be used to justify those convictions. In other words, his fundamental ideas were subject to change only in respect of the particular concepts, formulas, or jargon in which he dressed them. 12
Proving that markets don’t clear without violating the laws of economics was roughly as difficult as proving 1+1 =3. This task required an extraordinary degree of rhetoric to paper over the flagrant violations of logic. An initial attempt in 1930, Keynes’s A Treatise on Money, failed when Hayek tore it to shreds in a devastating review. 13 The goal remained, but a different route was needed.
Where he had failed once, Keynes succeeded with The General Theory. Perhaps the most obscurantist work in the history of economic thought, the book was lipstick on the inflationary pig. Through a rehabilitation of the discarded monetary cranks, a fallacious attempt to refute Say’s law, a policy of spending and inflation, was derived. It was necessary to dress up the conclusion in a model of staggering complexity so as to have plausible deniability that it was, in reality, so simple a thing. Even Keynes supporters acknowledge that the book is poorly written and impenetrable. The impenetrable nature of the writing was a feature, not a bug.
Hutt explained, “an inspired insight enabled the Keynesians to perceive that, if inflation were called by another name, ‘the maintenance of effective demand’ for instance, [it could] become respectable and even respected” 14 Hutt’s commentary continues:
But Keynes, perceiving that it would be politically suicidal to mention the unmentionable, saw a way out through the most successful conjuring trick in history which, deceiving an audience that wished to be deceived, led to its being hailed as a great discovery, as revolutionary and important as Einstein’s theory of relativity. I am not accusing Keynes of intellectual dishonesty. He deceived himself with his “conjuring trick.” 15
The success of The General Theory came, in Hutt’s view, from three factors. First, it gave academic legitimacy to inflationism, which governments wanted to do anyway. They had only been prevented because it was widely considered to be an unsound policy. Second, it provided an escape hatch from what Hutt described as “the ‘political impossibility’ of persuading any government to protect or facilitate [market pricing of labor]. 16
The third and final component was as a theoretical bridge to the policies that Keynes had always wanted. Hutt explained Keynes’s joy over the success of The General Theory this way: “That Keynes was exhilarated is understandable. He had found arguments to support policies which he knew were bound to be extraordinarily popular and influential” and “[t]he thesis that underconsumption is the origin of recession is, of course, tailor-made for political acceptability. It meant an enormous advantage for the popularity of ‘the new economics’ against the old.” 17
Hayek famously decided not to write a critique of The General Theory. Had he done so, would the revolution have been stopped? Many since have said so, but perhaps not. In his magisterial The Keynesian Episode: A Reassessment, Hutt says that the success was largely a factor of Keynes’s personality, charisma, and immense influence within the academy and in the political sphere. So great was his reach that his opposition could be fatal to a career in public life.
It was almost as if Keynes had something akin to Jedi mind tricks. Hutt was befuddled that eminent economists—men who had demonstrated a sound grasp of the discipline—would inexplicably become brain dead in Keynes’s presence. He could win any argument in person, but when forced to defend his points in writing—giving opponents time to penetrate what Murray N. Rothbard called “a vast network of fallacy”—not so much. 18 Hutt documents a “retreat” by Keynes, and by his followers after he left the scene. The major original thesis of the work, unemployment equilibrium, was quickly seen to be a fallacy. From there the major propositions of his work fell one by one, either to friendly fire as his followers tactically retreated, or through hostile attack.
Yet The General Theory created an enduring structure that remains in place with no foundations. Hutt, in 1974, wrote:
Paradoxically [these economists] still seem to leave the impression that, after all, Say’s law does not work—at least not in the manner in which the old general equilibrium analysis suggested that it did; and they suggest that in some way the world must feel grateful to Keynes, not so much for his contributions to economic method as for the beneficial policy consequences of his General Theory up to some unspecified turning-point some years ago. 19
Like a tailored suit, the revolution was custom fit to the policy of inflation and debt. It succeeded due to its failures. On reading the book, Hutt though it would “have a quite unparalleled influence by reason of what [he] judged to be its demerits as a contribution to thought.” 20 He described the revolution as “a maze [that] gradually led the majority of economists … [in] which many are still lost.” 21 Keynes developed the theory to support his lifelong goal, only to see politicians and central bankers use his revolution to support their goals. The financial media and Fed economists seek to promote consumption, Congress is addicted to “stimulus,” and Fed economists believe that by printing money they are supporting production.
Hutt’s speculations go a long way toward answering the question of how we got here. Say’s law is often stated as “Supply creates its own demand.” The Keynesian revolution demonstrates the inverse in the realm of intellectual production: demand for economic fallacies creating its own supply.