How the Keynesians Won . . . And Will Lose

Gary North - February 17, 2014

Reality Check

A site member asked this question:

Why has Keynesianism prevailed? Dr. North, In the 1950's Henry Hazlett wrote The Failure of the New Economics which demolished The General Theory line by line with clear, irrefutable arguments. I can't imagine another field of study in which a theory can be dominant after such complete debunking. Is it the triumph of propaganda over fact? Is it that 99% of all econ professors are either spineless or fools? People blame Hayek for not challenging Keynes but Hazlett certainly did the work (though somewhat later). Is the fed funding 90% of econ research so only Keynesians get funded? How do you explain this baffling situation?

I'm glad he asked.

Let us begin with the fundamental principle that undergirds modern economics, and which has undergirded it ever since Adam Smith published the wealth of nations in 1776. This principle is called enlightened self-interest. Economics teaches that individuals make decisions in terms of self-interest. This principle was not challenged by Ludwig von Mises, who said that individuals act in order to reduce discontent. Human action is based on a principle of self-interest.

With this as the background, let me discuss the history of Keynesian economics.

HAZLITT VS. KEYNES

Let me begin with the site member's question: Why didn't Henry Hazlitt's book succeed?

Henry Hazlitt was not a Ph.D. He was not a college graduate. By the time that he wrote The Failure of the "New Economics" (1959), he was no longer a New York Times columnist. He did have a column in Newsweek, but Newsweek is not a professional journal. It used to be a popular magazine, so it was not cited by professional economists. (It is no longer cited by anyone.) Hazlitt's Newsweek articles are available in a collection, Business Tides.

Hazlitt followed this book with Critics of Keynesian Economics (1960). He collected the main journal articles that had been critical of Keynes's position. This had never been done before.

The book was published 23 years after the publication of The General Theory. More important, it was published 11 years after the publication of Paul Samuelson's college textbook, Economics, which has been by far the most widely read textbook on economics ever published.

The book was published by Van Nostrand. This was a small publisher located in Princeton, New Jersey. It was not an academic publisher. While I do not know the background of the arrangement, I am fairly certain that the book was subsidized. It was the same publisher that the Volker Fund used in those years to publish a series of free market books, including the first edition of Rothbard's Man, Economy, and State (1962). It also published, in 1963, Rothbard's book, America's Great Depression. None of these books had any impact academically. None was ever assigned to students studying in an institution of higher education that granted a Ph.D. degree in economics. (Twenty years after its publication, historian Paul Johnson used America's Great Depression to analyze the Great Depression. This was published in Modern Times in 1983, over 30 years ago. No other major historian has mentioned Rothbard's book. It is still in the memory hole.)

It is highly unlikely that Van Nostrand put any money into marketing. The Volker Fund at that time was directed by F. A. Harper. He was a nice man, but he knew nothing about marketing. The Volker Fund never did much with respect to advertising. It published books, but it did not actively market them. It never marketed books within the academic community. No one in academia ever heard about any of the Volker Fund books. With the exception of Rothbard's Man, Economy, and State, they were not very good books. They were collections of essays written mainly by obscure professors at obscure institutions. The best of them was Israel Kirzner's The Economic Point of View (1960), but as he later admitted, he did not put Mises' theory of entrepreneurship front and center. Beginning in 1973, he spent the rest of his career trying to rectify this mistake.

Hazlitt took apart The General Theory, point by point. It is a masterful presentation. But you have to understand this fundamental fact: almost nobody has ever read The General Theory. Virtually nobody in the academic world in 1959 had ever read The General Theory, nor has it been read since then. It has always been in print, but it has never been assigned to students. Read any modern economics book or journal article. Rare is a footnote to The General Theory. Rarer still does the footnote try to prove a point, other than this: "Yes, Keynes taught this." The General Theory is ignored. It always has been.

TEXTBOOKS AND INITIATION

Academic guilds are like all guilds in history. They are based on initiation. They are based on screening. They are based on years of apprenticeship -- the days prior to the granting of tenure -- lifetime employment, irrespective of market demand. They are based on governments' restrictions on entry into a market -- in this case, accreditation.

Academic guilds are based on textbooks. Here is where the screening process begins: first-year economics. Of those who survive, the next state is economics 101: intermediate economics. This is also based on a textbook. Only then do textbooks end, with monographs replacing them. There has only been one Austrian School textbook for economics 101: Kirzner's Market Theory and the Price System (Van Nostrand, 1963). It never went into a second printing. Kirzner never revised it.

Therefore, what is known as Keynesian economics is the textbook version of Keynes, which essentially is Paul Samuelson's version, and has been ever since 1948. It is presented in a completely different form from the way in which Keynes presented the theory. This is why Samuelson's presentation is called neo-Keynesianism. It is rather like Darwin's Origin of Species (1859) and The Descent of Man (1871). Nobody actually reads those books. They never did. As late as 1876, only 16,000 copies of Origin of Species had been sold. While there have been refutations of Darwin's two books, they have no effect in academia. The only thing that matters is what the textbooks say, because the textbooks establish the framework in which the original author's ideas are presented.

Nobody has ever written a systematic critique of Paul Samuelson's economics. Yet that was needed from 1949 onward. Somebody in the free market camp should have put up the money to take that book apart, chapter by chapter. But in 1948, the only Austrian think tank was the Foundation for Economic Education (FEE), and it had been operating for only two years. Leonard Read was not a college graduate. He had never read a textbook of any kind. There was no Austrian School economist with a Ph.D. in the United States, other than Ludwig von Mises, who did not write textbooks, and F. A. Hayek (after 1949), who also never wrote a textbook. They did not believe in textbooks.

The only college-level introductory economics textbook that contains Austrian concepts is Mark Skousen'sEconomic Logic. It is published by a small publisher that does not normally publish textbooks. The first edition appeared in 2000. The content contains nonsense from modern neoclassical economics, discussed as if were not nonsense, such as "elasticity" and "measuring elasticity." An openly Austrian textbook would say "price sensitivity," not "elasticity," and it would dismiss the idea of measuring price sensitivity as incompatible with subjective value theory. The student is not warned: "The following idea is an error of neoclassical economics." The written content is presented in in the form of a standard textbook, but it is not marketed as a textbook. It does not cost $150. It does not include a CD-ROM for students. It does not offer a teacher's edition, with lecture outlines, examination questions and answers, and PowerPoint slides. It is a paperback. Clearly, it is not designed to be assigned by a department of economics. know of no Ph.D.-awarding economics department that assigns it.

Textbooks are not allowed to discuss the Federal Reserve System as a government-created cartel of the banking industry. Skousen's textbook is no exception. It does not begin with Murray Rothbard'a presentation in What Has the Government Done to Our Money? (1964). It does not analyze fractional reserve banking in terms of Rothbard's The Mystery of Banking (1983), which shows that fractional reserves are a system of wealth-redistribution by fraud. He presents the case for the gold standard, but then he presents the case against the gold standard. It's the traditional economist's strategy: "On the one hand; on the other hand." But this "he said, she said" inability to decide is not about economic forecasts. Rather, it is at the heart of the matter: monetary theory. Of course, had he come out openly in favor of the gold standard, the book would have been automatically rejected by 99% of all economics departments. But that happened anyway. I ask: "Why pull your punches?" The collegiate system is rigged. It's better to take off the kid gloves.

Economics departments choose textbooks, and the departments are overwhelmingly controlled by Keynesians. There is no way that a college-level textbook that is openly anti-Keynesian will be accepted by any major university today. So, the personal financial motivation of writing an openly anti-Keynesian textbook is weak. Skousen's textbook may be used in a few colleges, but it is not used in any major university, because it was not published by one of the New York publishing houses that specialize in textbook publication. Economics departments, controlled by Keynesians, would reject it.

THE KEYNES PROJECT

I know what must be done. It is what should have been done, beginning in 1949. There must be a full-scale refutation of The General Theory. This has never been done. It must involve all aspects of publishing. This is in preparation for a comprehensive refutation of the prevailing textbooks. Skousen did something like this inTextbooks on Trial, (1990), but it sank without a trace.

To read my plan, click here: http://www.garynorth.com/public/department135.cfm.

I announced this in 2009. I wanted just one economist to devote his career answering Keynes. I never got a taker.

I offered to pay $5,000 in 2008 to any Austrian School economist who would write a study guide for Hazlitt'sFailure the "New Economics." I wanted it for the 50th anniversary of the book. One man accepted, but within months, he backed out. He said he was just too busy. Yet he has never published anything. He teaches at an obscure private college. He teaches four courses a semester. That means 12 hours a week. Busy, busy, busy.

Why is it in the self-interest of a young economist to do something like this? It isn't. Colleges do not grant tenure very much these days. It's too expensive. The supply of cheap Ph.D. graduates of major universities is immense. Why ruin your academic career before it starts?

To put it concretely, why become a Rothbard? He spent most of his career teaching economics to engineering majors at Brooklyn Polytechnic. The school did not offer an economics major.

As for tenured professors, there is no reason why these people would want to work 20 to 30 hours a week for 20 years to produce the materials needed to refute The General Theory. They have lifetime employment. They teach 6 hours a week. Some get paid $175,000 a year. But even if one of them took the challenge, hardly anybody would read what they write. Undergraduates have no time or incentive. Neither do grad students. New professors are too busy trying to get published in some arcane journal. This is the tenure track.

Once again: academia is based on guilds. Guilds screen out doubters and critics.

The only reason for doing this is to position yourself in terms of your reputation prior to the breakdown of the economy, which will call Keynesianism into question. This positioning is entrepreneurial. It's an all-or-nothing decision. There is enormous uncertainty. Bureaucrats are rarely entrepreneurial. People screened by the university guild system are bureaucrats by training and usually by instinct. That is why they seek a Ph.D.

For as long as Keynesians run the federal government, the Federal Reserve System, the university system, and the commercial banking system, there will be no monetary reason for economists who want into these well-paid guilds to challenge that system. If they ever do challenge it, they become pariahs.

IDEAS RARELY HAVE CONSEQUENCES

Ideas have consequences, but only rarely. They have consequences only after the prevailing system has collapsed. This was why Keynes had intellectual and institutional success in 1936. The Great Depression was six years old. The old guard was vulnerable.

Keynes' publisher, Macmillan, had published a free market-based analysis of the Great Depression in 1934: Lionel Robbins' The Great Depression. A year after Keynes's book, Macmillan published an even better explanation by three economists, all forgotten: Banking and the Business Cycle (1937). These books had no influence. After World War II, Robbins publicly repudiated his book.

People adopt systems for reasons other than intellectual consistency. They do this as young men, while they are being screened by the guild. They defend this system for the rest of their careers. In the sciences, as in every other field, people hold positions in terms of how they were taught, who is now paying their salaries, and what is convenient. Only in the rarest of instances are entire worldviews overthrown. These usually take place in times of an economic or institutional crisis. In science, a new invention may force a change. The invention was said to be impossible by reigning experts who were committed to the old view. They are swept away. But this does not happen often in economics.

The only time it happened in economics was in 1871 to 1873: the marginalist revolution (subjective value theory). There was no economic crisis. But the marginalists immediately split into three regional camps: Austrian, English, and Continental Europe.

The Keynesian worldview is consistent with national governments' policies of deficit spending, as well as central bank policies of constant inflating. This is why John Maynard Keynes was successful in 1936. The book seemed to validate the policies that governments had been pursuing for half a decade.

Then came World War II. All Western governments at that point adopted massive deficits and massive monetary inflation. They also coupled these policies with price and wage controls. This lowered real wages, so those men who did not go off to war were then able to find employment. So were a lot of women. By the time the war was over, these policies had been universally adopted by governments. No government went back to the gold standard after 1933. No government went back to monetary stability. All governments continue to follow policies of deficit spending.

Fact: very few people ever make lifetime career decisions based on philosophical principles. They make their decisions based on personal self-interest, and economists have no personal self-interest in destroying their careers. So, since nobody pressures them to reconsider textbook economics, and since there is no such thing as an Austrian school economics textbook anyway, students are not going to be trained in anything except Keynesianism, neo-Keynesianism, neoclassical economics, public choice theory, monetarism, or any of the variations that are available in the marketplace.

[By the way, the phrase "ideas have consequences" comes from a book by Richard Weaver. The book never sold well. You never see it footnoted. I doubt that anyone who says "ideas have consequences" has ever heard about Weaver or his book, let alone has read it. But the title became famous.]

COURT ECONOMISTS

Every court needs its historians. Every court needs its economists. Every court needs its public relations people. Every court wants to find justification for its policies.

All government courts are Keynesian today, and this is accelerating. The deficits are larger than ever during peacetime periods. There is no possibility for anybody to get a foothold, or even a toehold, inside what is effectively and operationally the only established church in America, namely, the tax-funded school system, which includes most universities.

There are well-paid careers for those who defend the present order. There always are.

The career risks are low for those who defend the present order. They always are.

There is peace for those who defend the present order. There always is.

There can be fame for those who defend the present order. There always is.

There is the possibility of a Nobel Prize for mainstream economists in major universities. That is $1.4 million. Money talks.

As I wrote in a book published in 1988, "Murray Rothbard will never win the Nobel Prize." I was correct.

CONCLUSION

This, in short (or maybe not so short), is why Hazlitt's Failure of the "New Economics" failed to change opinions in academia or anywhere else inside the establishment. It was doomed to failure from the day it was published. But I am glad it was published. It saved me a lot of trouble in the early 1960's when I read it.

After the statistically inevitable breakdown of Medicare, Medicaid, and Social Security, Keynes will suffer the fate of those economists of the 1930's who failed to identify the sources of the Great Depression: central bank monetary policies, fractional reserve banking, government-imposed wage floors, deficit spending, and tariffs. The Keynesians are in charge today. When their policies at long last create disaster, they will argue that the world needed larger national deficits and greater monetary inflation. "We needed more of the same!"

The tenured autocrats will die or retire. A new generation of academic economists will write the textbooks. The guild's screening standards will change. There will be a replacement for The General Theory. There will be many replacements for Samuelson's Economics. Digital online education will break the academic cartels. Price competition will replace the guild's government-enforced program of accreditation, screening by textbooks, and the promise of tenure.

The Great Default will produce the Great Decentralization.

Let me end with Keynes' assessment. It appears at the end of The General Theory.

The ideas of economists and political philosophers, both when they are right and when they are wrong are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist.

This will eventually serve as his epitaph.


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