The Classical Medicine; J. Davenport

Yet the net result of this kind of analysis and this kind of pre scription has now proven to be, to A former editor of Barron's and of Fortune, Mr. Davenport is author of The U.S. Economy and a frequent lecturer on political economy. This article is reprinted by permission from Human Events of October 4, 1975. say the least, disappointing. Em phasis on so-called "aggregate de mand" has not resulted in that condition of full or at least high employment promised by the Em ployment Act of 1946. It has pro duced virulent worldwide infla tion, and in 1974-75 the worst of all worlds: - a high rate of infla tion with unemployment, or stag flation, which the Ford Adminis tration is now trying to cure by enormous Federal deficits of the kind which got us into trouble in the first place. In view of the re cord and the current disarray of the neo-Keynesians, it is time for a change - a change in our angle of vision.

In this context the most impor tant economist writing today is as suredly not Walter lIeller, the Louis XIV of so-called "fiscal stim ulus" (and apres moi le deluge), nor even the redoubtable Milton 21 22 THE FREEMAN January Friedman, the acknowledged dean of free enterprisers. He is rather a spry seventy-four-year-old Eng glishman by the name of William H. Hutt, now visiting professor at the University of Dallas and before that dean of the business school of the University of Capetown, who recently brought out a little-noticed book titled A Rehabilitation of Say's Law (Ohio University Press, Athens, Ohio 45701; 150 pages, $8.00) . Its bare-boned thesis is that the early French economist, Jean Bap tiste Say, was on the right track when he held that it is the supply of goods ,and services which in ef feet constitutes demand for goods and services. (It is the shoes which the shoemaker makes which gives him buying power for wheat in the form of bread which the farmer produces.) It follows from this proposition, known as Say's Law of Markets, that if economic activ ity slackens it is probably not due to lack of monetary stimulus but to the fact that producers, be they businessmen or workers, have mis priced their products. The remedy is not wild efforts to pump up de mand by government deficit spend ing, but to restore flexibility in the whole cost-price-profit struc ture.

Hutt came to this position as early as 1930 when he brought out his little classic, The Theory of Collective Bargaining, which warn ed that the great danger of this growing practice was that union pressures would price many work ers out of the market entirely into wholly unnecessary unemployment. He has since enlarged on this theme in such scholarly works as K eynesianism: Retrospect and Pros pect (1963) and in his monumen tal Strike Threat System (1973) which held that the coercive strike is in effect a form of social war fare and that the golden rule of labor relations should be simply that any man can go to work at any wage he chooses, no matter how low, as long as he feels the job off ered will better his condition. But Hutt is much more than a critic of present union practices, and his latest book on Say's Law shows it. It is, to borrow a phrase from the late Justice Holmes, a further gallop or canter of a de termined fighter for common sense in our economic thinking, as against the Keynesian orthodoxy which now holds so many of our economists and politicians in thrall.

Keynesian Ideas That orthodoxy, it should be re called, stems from Keynes' con tention that while production may well create its own demand in a primitive or barter economy, where goods are exchanged for 1976 THE CLASSICAL MEDICINE 23 goods, this nexus does not hold in a complex modern money economy where goods and work are sold and bought for 'Cash or credit. In such an economy, Keynes argued, earn ers of income may choose to squir rel it away in idle savings or cash balances instead of spending it on consumption or investment goods, thus breaking the normal ft.ow of production and distribution. From this initial attack on Say's Law of Markets, Keynes reared his im posing edifice of over-saving, un der-investment, and the need for government spending to fill the gap. Quite aside from its dubious re sults, this whole line of Keynesian reasoning today looks pretty shop worn. For what with government taxes and rampant inft.ation, it is hard to find a man in our society who saves much of anything in any meaningful sense of the "vord ; and meanwhile the world's obvious need is for more private capital formation, not less.

But Hutt does not rely on such historical and empirical evidence to turn economics right side up again. The mistake of Keynes and the neo-Keynesians is their over stress on the importance of money in final economic activity'. "Money," he writes, "is as incidental (and as important) as cash registers and cashiers in the demanding and supplying process." We need good cash registers and honest cashiers but they will never make a suc cessful business. Before men decide whether to spend, save or invest their money they must earn it, and earnings (and jobs) are dependent on supplying goods and services which other people want at prices and wages they can afford. It is the free ft.ow of production and supply which is critical for maintaining and increasing effective demand. Government's Limited Role Abstract as all this may sound, it nevertheless has enormous con sequences for public policy. Gov ernments, of course, have a duty to help provide the public with a reliable medium of exchange (and hopefully a store of value). But they fatally compromise this duty if, following Keynes, they come to believe that they can usher in per manent prosperity by manipulat ing the money supply to "cover up"

distortions in cost-price relation ships. "A forger," writes Hutt, "does not contribute to the source of demands." The "classic" func tion of government, ,on his view, is something quite different. It is to prevent pressure groups, be they business or labor, from building monopolies that will prevent prices and wages from "clearing the market." In the U.S. this means unravel24 THE FREEMAN January ing a whole skein of labor legisla tion which positively encourages unions to force wages above w'here the market would put them, thus causing the very unemployment which government officials say they want to cure. It also means cutting down on over-generous un employment and relief payments which make it more profitable for men and women to rely on govern ment largess than to seek job op portunities. A harsh doctrine? No doubt. But is it any harsher than the position in which we now find ourselves wherein the productive sector of the economy is increasingly taxed through inflation and the I.R.S. to support a growing pool of potentially productive citizens, many of whom now live in idleness and penury?

Hutt thinks not. The Keynesian revolution, he writes, was distin guished by its "political accept ability." Therein, of course, lies its danger. By contrast, classical economics, of which Say's Law of Markets is but one expression, never promised an easy way out. Its overriding objective, however, was in Adam Smith's phrase to provide "a plentiful subsistence for the people." That, too, is Hutt's objective, and in a world plagued by oil cartels, high prices, and un employment, the "classical medi cine" would seem to be precisely what is called for. , IDEAS ON LIBERTY The Mainspring of Human Progress EVERY LIVING THING must struggle for existence, and human be ings are no exception. Men and women survive on this Earth only because their energies constantly convert other forms of energy to satisfy human needs, and constantly attack the nonhuman ener gies that are dangerous to human existence. But-only an indi vidual human being can generate human energy. And - only an individual human being can control the energy he generates. The failure to understand these two simple and basic truths has, for over 6,000 years, stagnated human progress and kept the vast majority of people underfed, poorly clothed, embroiled in wars, and dying from famine and pestilence.

HENRY GRADY WEAVER DEMOCRACY in AMERICAROBERT G. BEARCE I passionately love Ii~erty, legality, the respect for nghts, but not democracy . .. Iiberty is my foremostpassion. Alexis de Tocqueville As THE UNITED STATES approaches its Bicentennial date of July 4, 1976, attention is focused upon the meaning of the War for Inde pendence and the DecLaration of Independence. The Bicentennial period should be a time when we re-examine the ideals upon which the United States was founded. Hopefully, we will gain a renewed appreciation for the political, eco nomic, moral, and spiritual foun dations of freedom. W,e can better understand our heritage of freedom by considerMr. Bearce is a freelance writer in Houston, Texas. ing what a Frenchman wrote about America during the first half of the 19th century. Often we can obtain an accurate view of our selves by listening to what others say about us. In the case of Alexis de Tocqueville, a foreign observer has given Americans a perceptive, prophetic analysis of freedom.