Correction, Please!; M. Skousen

What's even more strange is that every theoretical tenet of Keynesianism has now been disproven. The process took decades. Arthur Pigou first refuted the "liquidity trap" hypothesis by demonstrating that de flation increases the real value of cash hold ings, thus boosting potential demand durMark Skousen is editor of Forecasts & Strate gies, one of the nation's largest financial news letters, and an economist at Rollins College in Winter Park, Florida. His book, Dissent on Keynes, is available from Laissez Faire Books, 800-326-0996. ing a depression. Friedrich Hayek showed that Keynesian economics is based on a "critical error," namely, that economic ac tivity is solely a function of final aggregate demand, when the truth is that employment and production are based on a delicate balance between investment and consump tion, where interest rates and entrepreneur ship playa vital role. W. H. Hutt offered a devastating attack on the accelerator prin ciple and also demonstrated that a govern ment-induced high-wage policy generates significantjoblessness. 2 Henry Hazlitt proved that cutting wages during a slump, a Keynesian bugaboo, could actually increase wage income and end the recession if, as a result of a wage cut, more workers are hired or employees work more hours. Murray Rothbard criticized the mul tiplier, the stagnation thesis, and demon strated the inherent instability of inflation ary measures by government.

Milton Friedman effectively destroyed the Keynesian argument that monetary pol icy is not effective during a slump. With painstaking research, he showed that the Federal Reserve allowed the money supply to decline by a third during 1929-32, proving conclusively that government, not the free market, was largely responsible for the Great Depression. Friedman also demol ished Keynes's "consumption function," which gave theoretical support for progres sive taxation, and raised serious doubts about the Phillips curve. Robert Higgs, in a brilliantly researched 209 210 THE FREEMAN • APRIL 1994 study of the American economy during World War II, showed that deficit spending did not have the beneficial effects commonly believed, and that it was only after the war that genuine prosperity returned. 3 A Persistent Virus Yet, despite all these attempts to dislodge the "New Economics," Keynesianism sur vives. Today in academia there are post Keynesians, neo-Keynesians, and New Keynesians. Most economists and govern ment leaders in the West still maintain that deficit spending is necessary and beneficial during a recession. The media persists in its mistaken notion that consumer spending drives the economy and efforts to save can be debilitating. (The February 14, 1994, issue of Business Week contained this com ment on the proposed tax cuts in Japan: "The risk is that consumers, still hung over from the go-go-1980s, will just dump their new money into savings accounts and so torpedo a recovery.") The Old Guard, as represented by the statement made by Arthur Schlesinger, Jr., at the beginning of this article, continues to sway the public into believing that big government is essen tial to stabilize free-market capitalism. They believe that Keynesianism constitutes a "permanent revolution," as Mark Blaug calls it.

The Stability of the Free-Market Economy But Schlesinger-and Keynes-have been proven wrong. The best and the bright est of economists have demonstrated quite clearly that an economy can function, thrive, and progress without serious un employment, inflation, and recession if (a) monetary policy is stable and sound, (b) government's role is fiscally responsible and limited to being a referee, not a player, (c) taxes, controls, and regulations are kept to a minimum and (d) people are free to pursue their own self-interest. This free market counterrevolution has been most popular in emerging markets in Latin Amer ica, Asia, Africa, and Europe, where gov ernments are downsizing, privatizing, cut ting taxes, and adopting fiscal and monetary restraint. As a result, they are expanding like never before. Robert Lucas, Jr., sums it up neatly: "The central lesson of economic theory is the proposition that a competitive economy, left to its own devices, will do a good job of allocating resources.,,4 Unfortunately, the Keynesian mystique is an overwhelming temptation to the seekers of power and the politicians of envy. The foundations of the House That Keynes Built are crumbling, but workers are determined to fix it rather than demolish it and replace it with the House That Mises Built. There fore, I suspect that Keynesianism will be around for many years to come.

Nevertheless, let us not give up. In this new era of political freedom and global markets, there will never be a better oppor tunity to promote the virtues of free enter prise and to instruct the coming generation that free markets work and big government doesn't. We will know we have won when the Keynesian Cross is replaced with Hayekian Triangles in Econ 101. 0 1. Ludwig von Mises, "Stones into Bread, the Keynesian Miracle," Planning for Freedom, 4th ed. (Spring Mills, Pa.: Libertarian Press, 1980 [1952]), p. 62. 2. Out of Work, by Richard K. Vedder and Lowell E. Gallaway (New York: Holmes & Meier, 1993),confirms Hutt's thesis in the Great Depression and beyond: Minimum wages, legal privileges for unions, civil rights legislation, unemploy ment compensation, and welfare have all played significant roles in generating unemployment. See also Hans F. Sennholz, The Politics of Unemployment (Spring Mills, Pa.: Libertarian Press, 1987).

3. Robert Higgs, "Wartime Prosperity? A Reassessment of the U.S. Economy in the 1940s," The Journal of Economic History (March, 1992), pp. 41-60. For a review of all the anti-Keynesian arguments, see my edited volume, Dissent on Keynes: A Critical Appraisal of Keynesian Economics (New York: Praeger, 1992). 4. Robert E. Lucas, Jr., "The Death of Keynes," in Halistones, ed., Viewpoints on Supply-Side Economics (Rich mond: Robert F. Dames, 1982), p. 4.