It makes me mad to see the way some keynesians try to discard Hazlitt's book. They make a justification for not reading the book, on the grounds that Hazlitt is a journalist, not an economist. So I take some of my time to re-read the book.
Here's some of Keynes' jewels. There are too much of it, so I selected the most laughable ones.
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Wide variations are experienced in the volume of employment without any apparent change either in the minimum real demands of labor or in its productivity. Labor is not more truculent in the depression than in the boom — far from it. Nor is its physical productivity less. These facts from experience are a prima facie ground for questioning the adequacy of the classical analysis (p. 9).
Men are involuntarily unemployed if, in the event of a small rise in the price of wage-goods relatively to the money-wage, both the aggregate supply of labor willing to work for the current money-wage and the aggregate demand for it at that wage would be greater than the existing volume of employment. (His italics, p. 15.)
Though an individual whose transactions are small in relation to the market can safely neglect the fact that demand is not a one-sided transaction, it makes nonsense to neglect it when we come to aggregate demand. This is the vital difference between the theory of the economic behavior of the aggregate and the theory of the behavior of the individual unit, in which we assume that changes in the individual's own demand do not affect his income (p. 85).
In the aggregate the excess of income over consumption, which we call saving, cannot differ from the addition to capital equipment which we call investment. . . . Saving, in fact, is a mere residual. The decisions to consume and the decisions to invest between them determine incomes. (My italics, p. 64.)
The influence of changes in the rate of interest on the amount actually saved is of paramount importance, but is in the opposite direction to that usually supposed. For even if the attraction of the larger future income to be earned from a higher rate of interest has the effect of diminishing the propensity to consume, nevertheless we can be certain that a rise in the rate of interest will have the effect of reducing the amount actually saved. For aggregate saving is governed by aggregate investment; a rise in the rate of interest (unless it is offset by a corresponding change in the demand-schedule for investment) will diminish investment; hence a rise in the rate of interest must have the effect of reducing incomes to a level at which saving is decreased in the same measure as investment (p. 110). [And Keynes goes on to conclude further that therefore] saving and spending will both decrease (p. 111).
The stimulating effect of the expectation of higher prices is due, not to its raising the rate of interest (that would be a paradoxical way of stimulating output — insofar as the rate of interest rises, the stimulating effect is to that extent offset), but to its raising the marginal efficiency of a given stock of capital. If the rate of interest were to rise pari passu with the marginal efficiency of capital, here would be no stimulating effect from the expectation of rising prices. For the stimulus to output depends on the marginal efficiency of a given stock of capital rising relatively to the rate of interest. (His italics, p. 143.)
Now the first type of risk is, in a sense, a real social cost. . . The second, however, is a pure addition to the cost of investment which would not exist if the borrower and lender were the same person. [My italics.] Moreover, it involves in part a duplication of a proportion of the entrepreneur's risk, which is added twice to the pure rate of interest to give the minimum prospective yield which will induce the investment (pp. 144-145).
The schedule of the marginal efficiency of capital is of fundamental importance because it is mainly through this factor (much more than through the rate of interest) that the expectation of the future influences the present. The mistake of regarding the marginal efficiency of capital primarily in terms of the current yield of capital equipment, which would be correct only in the static state where there is no changing future to influence the present, has had the result of breaking the theoretical link between today and tomorrow. Even the rate of interest is, virtually, a current phenomenon; and if we reduce the marginal efficiency of capital to the same status, we cut ourselves off from taking any direct account of the influence of the future in our analysis of the existing equilibrium. The fact that the assumptions of the static state often underlie present-day economic theory, imports into it a large element of unreality (pp. 145-146).
Moreover [Keynes continues], the expectation of future consumption is so largely based on current experience of present consumption that a reduction in the latter is likely to depress the former, with the result that the act of saving will not merely depress the price of consumption-goods and leave the marginal efficiency of existing capital unaffected, but may actually tend to depress the latter also. In this event it may reduce present investment-demand as well as present consumption-demand (p. 210).
Moreover, in order that an individual saver may attain his desired goal of the ownership of wealth, it is not necessary that a new capital-asset should be produced wherewith to satisfy him. The mere act of saving by one individual, being two-sided as we have shown above, forces some other individual to transfer to him some article of wealth old or new. Every act of saving involves a "forced" inevitable transfer of wealth to him who saves, though he in turn may suffer from the saving of others. These transfers of wealth do not require the creation of new wealth — indeed, as we have seen, they may be actively inimical to it. (His italics, p. 212.)
The notion that the creation of credit by the banking system allows investment to take place to which 'no genuine saving' corresponds can only be the result of isolating one of the consequences of the increased bank-credit to the exclusion of the others. . . . The savings which result . . . are just as genuine as any other savings. No one can be compelled to own the additional money corresponding to the new bank-credit, unless he deliberately prefers to hold more money rather than some other form of wealth (pp. 82-83).
State action enters in . . . to provide that the growth of capital equipment shall be such as to approach saturation point at a rate which does not put a disproportionate burden on the standard of life of the present generation . . . I should guess that a properly run community equipped with modern technical resources, of which the population is not increasing rapidly, ought to be able to bring down the marginal efficiency of capital in equilibrium approximately to zero within a single generation (p. 220). [And, going further:] If I am right in supposing it to be comparatively easy to make capital-goods so abundant that the marginal efficiency of capital is zero, this may be the most sensible way of gradually getting rid of many of the objectionable features of capitalism (p. 221).
Keynes should have had some intimation that he was talking nonsense, one would suppose, when he was explaining "own-rates of interest" to the reader: "Let us suppose," he writes, "that the spot price of wheat is £100 per 100 quarters, that the price of the 'future' contract for wheat for delivery a year hence is £107 per hundred quarters, and that the money-rate of interest is 5 per cent; what is the wheat-rate of interest?" (p. 223). After a slight calculation he concludes that in this case "the wheat-rate of interest is minus 2 per cent per annum." And he adds, in a footnote, "This relationship was first pointed out by Mr. Sraffa, Economic Journal, March, 1932" (p. 223).
I had, however [in the Treatise on Money], overlooked the fact that in any given society there is, on this definition, a different natural rate of interest for each hypothetical level of employment. And, similarly, for every rate of interest there is a level of employment for which that rate is the "natural" rate, in the sense that the system will be in equilibrium with that rate of interest and that level of employment. . . . I had not then understood that, in certain conditions, the system could be in equilibrium with less than full employment (pp. 242-243).
To suppose that a flexible wage policy is a right and proper adjunct of a system which on the whole is one of laissez-faire, is the opposite of the truth. It is only in a highly authoritarian society, where sudden, substantial, all-around changes could be decreed that a flexible wage-policy could function with success. One can imagine it in operation in Italy, Germany or Russia, but not in France, the United States or Great Britain (p. 269).
It is of the nature of organized investment markets, under the influence of purchasers largely ignorant of what they are buying and of speculators who are more concerned with forecasting the next shift of market sentiment than with a reasonable estimate of the future yield of capital-assets, that, when disillusion falls upon an over-optimistic and over-bought market, it should fall with sudden and even catastrophic force (pp. 315-316). It is not so easy to revive the marginal efficiency of capital, determined, as it is, by the uncontrollable and disobedient psychology of the business world. It is the return of confidence, to speak in ordinary language, which is so insusceptible to control in an economy of individualistic capitalism. (My italics, p. 317.)
Thus the remedy for the boom is not a higher rate of interest but a lower rate of interest! For that may enable the so-called boom to last. 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 (p. 322).
[He goes on] Thus we might aim in practice (there being nothing in this which is unattainable) at an increase in the volume of capital until it ceases to be scarce, so that the functionless investor will no longer receive a bonus; and at a scheme of direct taxation which allows the intelligence and determination and executive skill of the financier, the entrepreneur et hoc genus omne (who are certainly so fond of their craft that their labor could be obtained much cheaper than at present), to be harnessed to the service of the community on reasonable terms of reward (pp. 376-377).
If we suppose the volume of output to be given, [Keynes continues] i.e., to be determined by forces outside the classical scheme of thought, then . . . private self-interest will determine what in particular is produced, in what proportions the factors of production will be combined to produce it, and how the value of the final product will be distributed between them (pp. 378-379).
I wish this forum allowed the ability to subscribe to members postings. You'd be on my list.
I just finished this book a week or so ago. I never really understood the concept of Keynesianism; I rather just regurgitated what I heard from the excerpts of other books and tried to piece it together. But, when I finally read Hazlitt’s book, I was flabbergasted! I could not believe someone so revered, and so influential, could also be so illogical and unrealistic. And reading all the comments by his disciples ALSO claiming his ambiguity and bad reasoning, I knew with certainty that Keynes was NOT a good economist, and that the world really is an effed up place.