No Boom Lasts Forever

March 4, 1957

The English-language edition has just appeared here of an important and illuminating book—Common Sense Economics by L. Albert Hahn (Abelard-Schuman, $4.50). In addition to being a brilliant refutation of some of the chief fallacies of Keynesian economics, it includes one of the most persuasive discussions of the business cycle, as well as the shrewdest theoretical analysis of price formation on the stock markets, that I have ever read.

But the reader should be warned that the book is not, as its author seems to imagine, a simple introductory text—“a sort of minimum economics for the businessman.” For an introductory work Hahn’s exposition is much too technical, condensed, and abstract. And though Hahn’s style is studded with incisive epigrams, his book is not on the whole easy to read, because his sentences are often involved and “Germanic.”

Yet readers who come to the book with an adequate theoretical background will value it highly. Its correctives are particularly needed at the present time, when nearly every government in the world, most notably including our own, is looking at events through Keynes-colored glasses, and assuming that the present inflationary boom can be continued forever, provided only that the government will continue to spend and spend, inflate and inflate.

PROPENSITY TO WORK

Hahn shows what is wrong with this theory and policy. “The propensity to work,” he insists, “and not the propensity to spend, is the foundation of national income and wealth.” No inflation, he points out, can be continued forever. The stimulus of any dose of inflation, no matter how large, must ultimately exhaust itself.

The government is then faced with a dilemma—or rather a trilemma. If it tries to deflate the money and credit supply back to where it was, it will bring on price collapse, unemployment, bankruptcies, and perhaps prolonged depression. Even if it decides merely to prevent the inflation from going farther, it may find itself in trouble. For during any prolonged inflation more and more people begin to act on the assumption that the inflation will continue. Many security prices and commodity prices, many wage rates, many ambitious building and other capital-investment projects, are based not merely on the existing inflation but on the belief in a still further inflation. When it is clear that an inflation has been stopped, these anticipatory prices fall. Overambitious investment plans are scaled down or abandoned. This creates what European economists call “the stabilization crisis.”

INFLATION A SWINDLE

If, unwilling to take the risk even of a stabilization crisis, the government continues to inflate (by cheap-money policies, housing subsidies, mortgage guarantees, farm subsidies, and even bigger spending), the boom may indeed be kept going longer. But it can be kept going only at an ever-increasing risk, not merely of a greater economic crisis at the end, but of a collapse of the nation’s currency and credit.

And there is no assurance, even so, that continued inflation can keep a boom going up to this point, much less that it can guarantee continued “full employment.” It can keep prices rising, but it cannot assure continuance of volume prosperity. The supposed magic of inflation, in fact, consists entirely in the maintenance of “the money illusion.” Once that is seen through by all major groups, the boom collapses. Inflation is essentially a swindle and cannot be openly planned. Creditors increase the interest rates they demand to compensate for the expected further depreciation of the currency. Labor unions demand wage increases that outrun both price and productivity increases. Inflation can “work” only as long as prices keep ahead of costs and maintain profit margins. The moment costs run ahead of prices, the joys of the spree are over, and only the headache remains.

And the sad part is that the whole binge is seen to have been unnecessary. Reasonably full employment could have been maintained all along without inflation, by a sufficiently free and fluid adjustment of wage rates to prices and of prices to each other.