Hutt's Crushing Blow to Keynes
by Hunter Lewis
Hutt's mind was made for logic. It could see a logical problem from every side, draw every distinction and nuance, then penetrate right to the bottom of it. No fallacy was safe from him, and, without being the least combative, he never flinched from telling the unvarnished truth.
The history of modern economics is full of destructive fallacies, beginning with the mercantilists, continuing through Karl Marx, and culminating with John Maynard Keynes. These false ideas have impoverished billions of people and caused no end of needless suffering. When Keynes published his magnum opus, The General Theory of Employment, Interest, and Money in 1936, a potpourri of fallacies supported by obscurity, shifting definitions, and other rhetorical tricks, many economists criticized it privately, but very few did so publicly. Why? Because Keynes was an intimidating figure, the best known economist in the world, a master publicist and polemicist, the editor of The Economic Journal, an essential venue for English-speaking economists.
In the preface to The Theory of Idle Resources, completed a year after Keynes's General Theoryappeared, and published two years later in 1939, Hutt says forthrightly: "I have been wisely advised not to touch on any of the major controversies which his contribution [Keynes's General Theory] has aroused."[1] But, then, with laser-like logic, he proceeds to demolish some of the most important intellectual props for Keynes's Theory. Moreover, he does so, as he says, "as far as possible, in a nontechnical way" so that "the reader who is unacquainted with the economic textbooks may follow my reasoning from point to point and himself decide on it's validity."[2]
Keynes's argument may be simplified as follows. Full employment should be our goal. The market system will not get us there; it requires government help as well as guidance. This means, in practice, that government will continually print money, in order to reduce interest rates, ultimately to zero[3], and also borrow and spend as needed. Booms are good, even economic bubbles are acceptable. Recession and bust must be avoided at all cost. As Keynes wrote: "The right remedy for the trade cycle is not to be found in abolishing booms and thus keeping us permanently in a semi-slump; but in abolishing slumps and thus keeping us permanently in a quasi-boom."[4]
In a variety of books and articles, Hutt pointed out the absurdity of this. One cannot create wealth simply by printing more money or by borrowing and spending funds which can never be repaid. Moreover, the real source of unemployment is some disturbance in the price-and-profit system. Government cannot possibly help matters by intervening in ways that further distort and disturb that system.
In his Theory of Idle Resources, Hutt deconstructs even the initial premise of Keynes's thinking, that we should want a permanent condition of full employment. Not only is full employment not definable; it is not even desirable. A moment's thought will show this to be true. To grow, an economy must change. To change, assets and workers must be shifted from where they are less needed (less productive) to where they are more needed (more productive). These shifts will inevitably produce temporary unemployment. If there had never been unemployment, and thus no economic change, we would all still be living in caves, and there would be far fewer of us, because hunting and gathering would only support a small fraction of the present population.
This insight is not original to Hutt. The economic writer Henry Hazlitt, a friend of Hutt's, found similar observations in a paper written by John Stuart Mill during 1829–30 when he was age 24, and collected in his Essays on Some Unsettled Questions of Political Economy. Mill's paper completely refutes Keynes's false contention that "classical" economists simply assumed that there would always be "full employment." But Hutt takes the examination of unemployment much further than the pioneering Mill. Indeed, he does not just examine unemployment. He examines unemployment as part of the larger phenomenon of unused or idle productive resources, including land, plant, equipment, and money as well as workers.
Hutt's careful reasoning demonstrates, through a variety of illustration, that we cannot just lump together (and falsely quantify) all the complexities of human choice and action working within a closely coordinated price-and-profit system. What looks like nonproductive idleness may actually be very productive, indeed essential to the smooth working of the system. Is it more productive for a highly trained but unemployed engineer to bag groceries for pay or to invest time without pay in looking for an engineering job? If he or she took the grocery-bagging job, Keynes would presumably be satisfied; we would be closer to full employment. But the economy would clearly not be more productive, which it must be to create new jobs. We should also keep in mind that an employment-agency employee job searching for the engineer would be considered gainfully "employed," while the engineer doing the same work would still be "unemployed."