===== PAGE 1 =====

This is the third in a series of articles dealing with the Keyne-
sian influence on Economics. The first two, by Wallace Peterson
and John Hotson, appeared in the Spring and Autumn, 1967, issues.

END OF THE ERA OF KEYNES?
(Translation of article by L. Albert Hahn, published in Kyklos,
Vol. XX, 1967, Fasc. 1, pp. 270-286)

Translation by W. E. Kuhn, Department of Economics,
University of Nebraska

A famous Norwegian dramatist has said: a theory lasts for thirty
years. If this is true, then the year 1966 would be not only the
thirtieth year since the birth of Keynes’ General Theory of Employ-
ment, Interest and Money! but also the year of its death. It could
then be shown that what is generally understood by “Keynesianism”
does not involve a change in the evolutionary trend of economic
doctrines, especially of monetary theories. Doctrinally, “Keynesian-
ism” would have to be regarded merely as a recent, one-way swing
of the pendulum such as the world has often experienced before—
this time in the direction of distinct overvaluation of the possi-
bilities and effects of monetary manipulations and alterations.

Such a characterization can only appear as blasphemous to a
generation brought up in quasi-religious veneration of Keynes’
work. Two autobiographical remarks, however, might make the
blasphemy appear in a somewhat more subdued light.

Professor Edgar Salin, to whom this volume of Kyklos is dedi-
cated, refers in his History of Economics? to a “theory of credit
inflation co-founded by him” (Hahn). Indeed—owing to my Eco-
nomic Theory of Bank Credit®*—I am, as it were, an orthodox
Keynesian. It is well known, however, that orthodox believers view
their religion more objectively than converts, who are inclined to
overlook the questionable aspects of the newly discovered religion.
In the United States it is precisely those who until the year 1936
reasoned in “classical” terms who, like Professor Alvin Hansen, in
turn attached themselves with especial enthusiasm—and uncritically
—to the novel theory.

It lies in human nature to assume that a development which
one has experienced personally will repeat itself with others. In
the first (1920) edition of my Economic Theory of Bank Credit 1
anticipated, as can be easily proved, the essential results of Keynes’

1 New York, 1936.

®t Published by A. Francke, Berne, 4th ed., 1951, pp. 169-70.

! Published by J. C. B. Mohr (Paul Siebeck), Tuebingen, Ist ed., 1920; 2nd ed.
1924; 3rd ed., 1930.

[ 49


===== PAGE 2 =====

General Theory. In the third (1930) edition, however, I threw over-
board exaggerations that were untenable in my judgment. I groped
for a balance between overrating and underrating of monetary inter-
ventions. Since then I have combatted views which I regard as
the sin of my youth.# I am convinced that if Keynes had not died
prematurely he would in a later edition of the General Theory also
have moved away from his earlier views. He would have become an
anti-Keynesian—in recent years at the latest.

Incidentally, the publication of the various versions of my
Economic Theory was badly timed. The first edition, a typical soft
money book, should not have been permitted to appear in 1920,
during the big German inflation. But in 1930 it could have been
useful in the battle against deflationism of the Bruening-Luther
vintage. By the same token the third edition, in which inflationary
measures were viewed much more skeptically, should not have
appeared during a period of deflation but only later—say, in 1936—
when the propensity to inflate already stood out clearly. I find com-
fort, however, in the fact that the timing of the General Theory was
not propitious either. If it had been published in 1930 it would
have helped those who sought to combat the “big deflation.” In
1936 the enemy already stood to the left, on the side of inflation,
and as a result the General Theory had rather a harmful effect.
Nevertheless, during the last thirty years it has exerted a no less
than overwhelming influence on economists of the growing-up
generation. In what follows 1 will attempt to demonstrate that the
pendulum is now about to swing back. The “era of Keynes” seems
to approach its end.

THE CHARACTERISTICS OF ECONOMIC SOCIETY

How does Keynes’ theory differ from classical theory? Keynes
himself gave the answer in his polemic against the classicists: The
“characteristics [assumed by the classicists] happen not to be those
of the economic society in which we actually live, with the result
that its teaching is misleading and disastrous if we attempt to apply
it to the facts of experience.” It follows that classical characteristics
would be present only under exceptional and accidental circum-
stances, in Keynes’ view, whereas his own assumptions would apply
to “the general case” and “as a rule.””

* A collection of my anti-Keynes articles may be found in The Economics
of Illusion, Squier Publishing Co., Inc, New York, 1949; a German summary
appeared in “Ordo, Jahrbuch fuer die Ordnung von Wirtschaft und Gesellschaft,”
2nd volume, 1949, pp. 170 ff.

® As is well known, hints of such a veering away may be found in his article,
published posthumously, “The Balance of Payments of the United States,”
Liconomic Journal, June, 1946, p. 186.

® General Theory, p. 3.

"1bid., p. 3 and p. 13.

[43]


===== PAGE 3 =====

Thus the difference between classical and Keynesian economics
does not lie at all in a changed or amended logic. As I put it on
an earlier occasion:

The miracles the Keynesian system works can be attributed to the data
taken as dependent and independent variables and as fixed, plus certain
assumptions concerning the shape of important functions, especially the
consumption, money supply, and investment functions. Change these
assumptions to what non-Keynesians consider more realistic terms and
the classical or neoclassical theory reappears like an old picture when the
layers of paint laid on by successive gencrations arc removed.®

The most important differences, however, between the Keyne-
sian and the classical assumptions are the following:

First, according to Keynes, the demand for investment goods
appears as low, constant, or at least so interest-inelastic that even
at an interest-rate level near zero percent the supply of savings
cannot be absorbed by it. In the classical system, the demand for
investment goods is never constant but always interest-elastic and
variable.

Second, Keynes regards wages as inflexible downward—and
largely also upward—and treats them as a constant of the system.
In the classical system they are variable.

KEYNES WORLD

The preceding remarks imply the further characteristics of the
Keynesian world which contrast it so sharply from the classical
one. This Keynesian world is deflationary “in the general case.”
The demand for investment goods is declining because of dwindling
investment opportunities. On the other hand, the supply of “capi-
tal” is growing because with increasing wealth the savings rate
is growing in accordance with a “psychological law.”? There arises
the so-called “investment gap,”'” leading necessarily to a lack of
“effective demand,” producing deflation. Even in the general case,
however, the Keynesian world is one of underemployment. In a
deflationary milieu wages would have to drop. But since, with
downward rigidity of wages, their lowering is out of the question,
the result is permanent underemployment.

Unemployment in this world is thus, as it were, of the frictional
kind. It arises through failure of supply and demand to become
equilibrated: on the capital market because demand is so rigidly
limited that no new equilibrium can come about; on the labor
market because of the rigidity of the oftering price of labor.

8 The Economics of Illusion, p. 185.

* Keynes, 0p. cit., p. 96.

10 For a detailed refutation of the investment-gap theory I refer to my essay
in Schweizerische Zeitschrift fur Volkswirtschaft und Statistik, 1948, no. 4.

[44]


===== PAGE 4 =====

It follows, as already shown in my first critique of the General
Theory! that Keynes out of the “vice” of wagesrigid-downward
made the virtue of an inflation theory of unemployment: since the
offering price of labor does not fall, the demand must be inflated.

Friction type theories of unemployment, based on a lag of
downward adjustment of wages during the downswing, are not new,
of course. They are an essential ingredient of all monetary cycle
theories of the Wicksellian type. But these theories are cycle
theories, not theories attempting to explain extra-cyclical pheno-
mena. Nevertheless—and despite repeated objections to this usage—
Keynes called his theory general, although in reality it is of a very
special kind. It is, as I put it on one occasion, a “business cycle
theory gone wild.”12

THE REAL WORLD

Events took a different course than had been anticipated by
Keynes in 1936. The factual assumptions of his General Theory
proved to be invalid. The world was not deflationary. There arose
no structural “investment gap,” just as before 1936 there had been
none. Seldom before, if ever, has the demand for investment goods
been greater than it has been in the last thirty years. On the other
hand, there has never in this period been a question of an oversup-
ply of savings. The famous “psychological law,” according to which
the rich save more than the poor, is applicable—it should be remem-
bered—only to the case of a redistribution of wealth within an
economy. When on an average all people become wealthier, the
savings rate remains rather constant, as has been shown. In histori-
cal reality, there can be found no more of a counterpart for the
oversaving theory than for the underinvestment theory, which is
not a novel theory either. In the course of economic history it
emerges whenever, in the eyes of impatient observers, cyclical de-
pressions seem to be of infinite duration. Thus Professor Adolf
Weber, who died a few years ago, branded as a bad joke the assump-
tion of an excessive capital supply.’® In retrospect, it appears that
the Keynesian deflation jitters are weakly founded, indeed. In terms
of doctrinal history, there is a certain irony in the fact that around
the year 1936 there began a period of seemingly secular inflation.
He who rereads the General Theory today believes therefore that
he 1s confronted with a purely fictitious world, rather than the real
world. Rarely has somebody been so subject to “faulty vision” as
was Keynes in 1936.

11 “The new business cycle theory of Keynes,” Neue Zuercher Zeitung (trade
section), November 19 and 20, 1936.

2 “Eine wildgewordene Konjunkturtheorie” (original). Cp. “Wirtschaftswissen-
schaft des gesunden Menschenverstandes,” publ. by Fritz Knapp, Frankfurt/M.,
Ist ed. 1954, 2nd ed. 1955, p. 221 and p. 251.

'* Der Wirtschaftsspiegel, Wiesbaden, October 1, 1947, p. 365.

[45]


===== PAGE 5 =====

The fear of chronic unemployment, which permeates the General
Theory, has also proved to be unfounded—outside the United
States. It is true that in the United States until 1964—i.e., during
almost the entire period in question—unemployment rarely fell
below 5 percent.'* But certainly it was not a result of deflationary
policies: a glance at the evolution of the money supply's and the
price series'® shows that the milieu was not deflationary but pro-
nouncedly inflationary. Consequently, existing unemployment was
not caused by a lack of “effective demand,” as is assumed by the
adherents of the “New Economics.” There was thus no reason to
train cyclical canons on structural sparrows*—and thereby to endan-
ger both the internal and external value of money.

A recognition that the Keynesian world does not exhibit the
characteristics of the economy in which we actually live is gradually,
but firmly, gaining ground. The huge “stagnation literature” which
mushroomed in the United States during and after the war has
long been gathering dust. The front line of the enemies of saving—
those who fear the deflationary effect of saving—has become quiet.
On the other hand, the deflation theory of unemployment has held
fast for a relatively long time. In the most widely used textbook
in the United States, only in the last few editions was the level of
wages mentioned at all as a determinant of the employment level.
This is not surprising in view of the fact that a “wage theory of
unemployment” is damaging to strong vested interests, political and
economic. Only recently—much too late and in the main unsuc-
cessfully—have measures been taken which aim at keeping wage
increases in check. Guidelines, income policy, and other expedients
attempt now to solve a problem which cannot be mastered without
a substantial weakening of the power of labor unions.

A GOAL-ORIENTED AND ILLUSIONARY THEORY

Perhaps an injustice is done to Keynes by examining his theory,
qua theory, too closely. Indeed, one sometimes gains the impression
that it may not have been meant too seriously. It is known that
at the end of his life Keynes went so far as to ridicule the Keynes-
ans. To non-Keynesians, his General Theory has always appeared
to be one which is purely goal-oriented. Keynes wanted to unburden
the conscience of those who were anxious to combat unemployment

Cp. Historical Federal Reserve Chartbook, p. 78. (Translators note: This
page reference seems to be in error.)

15 Ibid. p. 11.

1% Ibid., pp. 98-99.

*Translator’s note: The passage in question reads, “Es bestand demnach keine
Veranlassung, mit Konjunkturellen Kanonen auf strukturelle Spatzen zu schies-
sen..." p. 275.

46]


===== PAGE 6 =====

by methods which until then had been largely tabooed as pure
monetary manipulation and as an all too primitive “easy way out”
of all difficulties.

In this he succeeded—one may say, only too well. The General
Theory, or what was eventually read out of it by the Keynesians,
for one thing served to rationalize an irresponsibly long continued
easy money policy, a policy of lasting budget deficits, and of almost
unintermittently rising public debt. For another, it served the
policy interests of labor unions, not only by acknowledging as a
fact of life the downward inflexibility of wages, but also by legiti-
mizing every wage increase, as capable of increasing effective de-
mand. An increase in wages was said to imply an increase in
demand, thus not aggravating but alleviating unemployment.

Things developed as they had to. Not as an exclusive result of
Keynes’ theory, but helped a great deal by it, the value of money
declined in the United States and eventually—via the export of
inflation—it also declined in all countries, notably including the
German Federal Republic, tied to the dollar by fixed exchange
rates. It has turned out to be an illusion to assume that economic
maladjustments can be eliminated through inflation without endan-
gering the value of money. Keynes’ theory has therefore been
dubbed an “economics of illusion.”

His economic teachings are illusional, though, in yet another
and particular sense: in their therapeutic recommendations they
presuppose that the populace continue to be blinded by Irving
Fisher's so-called “money illusion,” and this even in those cases
where inflation is programmed at the outset as a means to augment
employment. As a matter of fact, however, there are bound to
occur, with little delay, compensating reactions on the part of the
disillusioned populace.

COMPENSATING REACTIONS BY MONEYHOLDERS AND CREDITORS

First place among the means recommended by Keynes in order
to stimulate investment demand—and thus “effective demand’—is
occupied by an “easy money policy.” The same as any reduction
of the rate of interest below the “natural rate” in the Wicksellian
sense, it can be brought about only by an inflation of the money
supply. For this reason an “easy money policy” causes price rises
“in the general case.” As was prophesied by the antagonists of such
a policy, the purchasing power of the dollar, as expressed in con-
sumer goods prices, has shrunk a great deal. It is customary now
to talk about a “45-cent dollar.”

The inflationary increase of the supply of funds obviously can
add to the willingness to invest only if the noninflationary supply
of funds remains the same. Such will be the case, however, only
if savers, still blinded by “money illusion,” ignore the reverse side

[47]


===== PAGE 7 =====

of the “unnaturally” cheap supply of funds, namely, upward pres-
sure on prices. For short spans of time, and for some time after a
recession, this condition will be met. But in the longer run, and
especially after an easy money policy—and thus inflation—have
become official policy, reaction of the savers will in all likelihood
become compensating. They will insist on an interest premium to
compensate for the loss in the value of money.

The extent to which rising interest rates during the last decade
should be attributed to such compensating reactions of savers can-
not, of course, be indicated statistically. According to inquiries
among them, however, savers are quite conscious of the progressive
erosion of the value of money. Their interest-demands discount
future losses of the value of money. Thus one talks of net interest
as the nominal rate of interest, minus the estimated future loss of
the purchasing power of money. There are other phenomena that
confirm the collapse of “money illusion” among fund-supplying
groups: the advance of institutional sources of supply as contrasted
with the supply by individual savers, and the utterly characteristic
so-called negative spread between share yields and bond yields.
Whereas in earlier times the yield of shares of stock, because of
inherent industrial risks, moved notably above the yield of bonds,
bond yields now—on account of the money risk—are notably higher
than yields on stocks. Moreover, there is a suspicious stirring of
inclination to insert loss-of-purchasing-power clauses not only in
employment contracts but also in long-term money loan contracts.
Thus what the classicists predicted would happen as a result of an
artificially low interest rate has actually occurred. Creditors adjust
their interest-demands to the dwindling value of money, with the
result that the stimulating effect of an easy-money policy is being
weakened or offset—unless a cumulatively growing, inflationary
money supply continues to keep interest rates at an unnaturally low
level.

The policy of easy money obviously rests upon an attempt to
exploit the savers’ “money illusion.” As in the case of any other
such deceptive maneuvers, it is self-defeating in the long run.

COMPENSATING REACTIONS VIS-A-VIS DEFICIT SPENDING

If it should happen that a lowering to near zero of the interest
rate does not stimulate the propensity to invest, Keynes, as is well
known, recommends government intervention: “... the State which
is in a position to calculate the marginal efficiency of capital-goods
on long views and on the basis of the general social advantage...
(has to take) an ever greater responsibility for directly organizing
investment,”’!7 and this, apparently, can be effected only by way
of a budget deficit.

7 Kevnes, op. cit., p. 164.
[48]


===== PAGE 8 =====

The suggestion that the government should step in whenever
private investors—fearing losses—get out, rests on the idea that the
government can create the requisite means out of thin air, so to
speak, i.e., that nobody has to back up the repayment of loan issues
and of interest payments thereon. In reality, each and every govern-
ment debt is a debt of the individual members of society. Deficit
spending can add to total investment spending only so long as
each individual believes that somebody else will foot the bill. As
soon as this illusion collapses—and this may happen only after a
considerable lapse of time—it will be recognized that by dint
of increasing taxation, government expenditures will reduce the
income of the factors of production. The latter will correspondingly
raise the supply prices of their services, which can have only a
negative influence on the propensity to invest. How large in practice
this influence may be can be seen from certain movements of the
stock exchange. When it is anticipated, e.g., that, as a result of grow-
ing expenditures for war and a consequently rising level of taxation,
net profits of corporations will be reduced, share prices will drop
and the launching of new firms will be handicapped. A reaction in
the private sector will offset the expansion of the public sector as
soon as it becomes a matter of paying the bill.

COMPENSATING REACTIONS OF LABOR

The point of departure of Keynes’ employment theory is entirely
classical. Unemployment arises to the extent that wages exceed the
profits expected to result from the use of marginal workers. The
conclusions which Keynes draws, however, are anything but classi-
cal: wages are not to be lowered but “effective demand” is to be
increased by expansion of the money supply. This “effective demand
spends itself partly in affecting output and partly in affecting
price.”'s Thus additional workers can be suddenly employed use-
tully in spite of lower productivity. The reason is that “the decreas-
ing return from applying more labor to a given capital equipment
has been oftset by the acquiescence of labor in a diminishing real
wage.”’19 And the workers accept the reduction in real wages caused
by the rise in prices because “the supply of labor is not a function
of real wages,”2° for “it is not their [the workers’] practice to with-
draw their labor whenever there is a rise in the price of wage
goods.”’21

It follows that the Keynesian recipe obviously works only when
workers succumb to “money illusion,” and if in wage bargaining,

18 Ibid., p. 285, and in slightly changed phrasing, p. 296.

1 Ibid., p. 289, and in slightly changed phrasing, p. 284.

20 Ibid., p. 8.
21 Ibid., p. 9.

[49]


===== PAGE 9 =====

3

as maintained by Keynes,*® it were a question of nominal rather
than real wages. At a time, however, when just about everybody—
and certainly every union leader—seems to carry with him a chart
showing changes in the purchasing power of money, such an assump-
tion 1s, of course, entirely unrealistic. Incidentally. it was already
unrealistic in 1936.

Of course, Keynes recognizes that workers cannot be fooled
for the duration. For “a point comes at which there is no surplus
of labor available at the then existing real wage.”?® From this point
on “the crude quantity theory of money” will operate again. “Out-
put does not alter and prices rise in exact proportion to [the quan-
tity of money].”%

The unpleasant truth is, however, that wages begin to rise
not only at the attainment of full employment; they are long
before that being autonomously forced up by the labor unions.
During the last thirty years, wages in the United States, especially
the legally fixed minimum wages, have risen although the unem-
ployed were still counted by the millions. They even kept rising
in periods of outright recession. Consistently, wages rose more than
did prices, in most cases also if productivity increases are taken into
account, so that one could rightfully speak of “cost push inflation”
and “wage price spiral.” At any rate, there was never any question
of a lowering of real wages in the Keynesian sense, nor was there
a question, at least before 1961, of a substantial reduction of
unemployment.

It may be noted in passing that the stimulating effect on output
of an increase in “effective demand” was not at all unknown to
the much slandered classicists. But, in this context, they were care-
ful to guard against “generalizations” and exaggerations. Read, for
example, what David Hume?® had to say on this point.

A DECEPTIVE INTERLUDE

Unemployment in the United States began to decline only with
the inauguration of President Kennedy, when, influenced by his
extremely expansionist advisers, money and credit policies were
swept into a current of inflation.?® A glance at the money supply?
curves clearly reveals the change. One perceives how the (total)
money supply curve, and especially the “currency in circulation”®

22 Ibid., p. 8.

23 Ibid., p. 289.

24 Ibid.

25 Cp. “A Select Collection of Scarce and Valuable ‘Tracts and Other Publica-
tions on Paper Currency and Banking,” edited by J. R. McCulloch, 1862.

26 Federal Reserve Chartbook, 1966, p. 53.

27 Ibid., p. 10.

= Ibid. p. 10.

50]


===== PAGE 10 =====

curve (which between the end of the war and 1960 ran rather flat),
after Kennedy's inauguration changed direction and moved up
steeply. The same is true for the curve showing demand deposits,
or checkbook money, and even more so for that of total deposits,
including time deposits,2? which in the correct view have to be
considered as part of the money supply.

The referred-to recent evolution of unemployment, however, has
certainly not been the result of the Keynesian therapy of lowering
real wages. It is true that prices of consumer goods rose, especially
those in the construction sector. The index of the cost of living—
much better suited than the wholesale price index for a comparison
of total money supply and total output, i.e., for any analysis in terms
of the quantity theory—rose by about 10 percent, incidentally only a
weak reflection of the “dearness” which every regular visitor to the
country will note even in the absence of any knowledge of the
statistical series. But wages rose more strongly still—by some 22 per-
cent.3® Hence real wages rose—they did not fall. To what, then,
may the improvement in the employment situation be attributed?

It is obvious that the profitability of employing labor may be
enhanced for two reasons: one, because of a lag of money wages
behind prices a la Keynes, and second, because of their lag behind
increases in the productivity of labor. According to a generally held
view, this latter happened during the last five years: while nominal
wages rose 22 percent, but real wages only 12 percent, the produc-
tivity of labor rose by about 15 percent for the period as a whole.
Consequently, one is tempted to modify the Keynesian statement
that it is not “the workers practice . . . to withdraw their labor when-
ever there is a rise in the price of wage goods,” by saying that it is
not “the workers practice...to withdraw their labor whenever
there is a rise of productivity.”

Times of rapidly rising productivity, when real wages are cap-
able of rising (i.e., money wages increase much more than the value
of money decreases), apparently create a favorable atmosphere for
a certain “moderation” in wage demands. Although full compensa-
tion for the loss in the value of money is being demanded, there is
no demand for full participation in the productivity increase.

THE PENDULUM SWINGS BACK

It is well known that the honeymoon period of “moderation”
ended during the year 1966. The so-called “guidelines,” coupling
wage increases with productivity improvements, were exceeded
everywhere, in some cases considerably so. The whole “guidelines”
policy has collapsed—not for lack of responsibility of the so-called

* Ibid., p. 7.
5 Ibid., p. 55.

[51]


===== PAGE 11 =====

“social partners,” but because after the attainment of full employ-
ment the labor market situation was altered in favor of employees
who believe they have the power to claim for themselves the entire
productivity gain, or even more than this. However, wholesale prices
finally have started to move upward. By the way, they had remained
stable only because, in full harmony with classical foreign trade
theory, stability had been “imported” from the world market.?!
At any rate, the stated objective of the government since the begin-
ning of 1966 has no longer been stimulation of demand but its
dampening.

What is more, the whole atmosphere has changed. The hitherto
prevailing notion of “prosperity-through-spending” appears to have
been thoroughly discredited, what with two illusions essential
to the applicability of the Keynesian recipes having been conclu-
sively shown up as such: the illusion that an easy money policy
adopted for reasons of promoting high employment and economic
growth can be maintained without any regard to its repercussions on
the value of money; and the illusion that the factors of production
do not react to changes in the value of money in a compensating
fashion. The Keynesian fear of deflation has vanished. The so-called
“classical” worries, maintaining currency stability and preserving
the credit of the government, have become prominent again. Bud-
getary deficits no longer appear as desirable but as harmful “in the
general case;” wage increases are no longer viewed one-sidedly as
supporting “effective demand,” but also as a “propping up” of costs.

Evidently the times are thus past in which all maladjustments,
particularly every excessive wage increase, could be made bearable
by an all-forgiving inflation tending to make people forget every-
thing. An epoch has begun when the economy has to cope with and
master its problems in “real” terms, i.e., without the possibilities
of a monetary escape hatch. But this can only mean that the sta-
bility-restoring crisis, or at least pause, which inescapably occurs at
the end of long periods of inflation, is due. Italy and France have
already gone through a period of stabilizing adjustment; the Ger-
man Federal Republic is in the midst of it. In England, Wilson is
using classical means, so far with uncertain success, in an attempt
to stabilize prices and wages. In the United States the spirit is at
long last beginning to be willing, but the political flesh is weak.
The government, however, should become clear on this point: in
view of the now widespread inflation-consciousness of the public,

11 See also my essay “Nationale und internationale Aspekte der amerika-
nischen Waehrungspolitik,” publ. by J. C. B. Mohr (Paul Siebeck), Tuebingen.
1966. p. 12.

[52]


===== PAGE 12 =====

the only alternative to stabilization is a galloping inflation—not, as
previously, a merely creeping inflation.3?

One may, of course, dispose of the depicted change in the
atmosphere surrounding monetary theory and policy with the
assertion that it represents essentially a cyclical phenomenon only,
i.e., the reaction to an overly long-endured boom. There are many
indications, though, that more is in question: specifically, the earlier
mentioned swinging back of the pendulum from a pronounced over-
rating of the possibilities and effects of monetary manipulations to
a more normal estimation of their potential-hopefully, not again
to their underrating.

Tae END oF A THEORY

Keynes’ theory is goal-oriented. It was its purpose to make infla-
tion intellectually respectable as a means of combatting what
appeared to be deflation unemployment. The attainment of this
objective, however, has become both unnecessary and impossible:
unnecessary because, unless all appearances are false, apart from
cyclical recessions, the battle of the foreseeable future will be one
against inflation, not one against deflation; and impossible because,
after the definitive collapse of “money illusion,” it will be possible
to fight unemployment through monetary expansion only quite
temporarily and never without the gravest consequences for the
value of money. But with the passing of the goal of a goal-oriented
theory, the theory itself will have to die, too.

If, then, the year 1966 has become the year of death for the
thirty-year-old General Theory, it must necessarily also have become
the year of birth, or rebirth, of a classical view of things. Imper-
ceptibly but surely, the quantity theorists will be reinstated in their
rightful place for “the general case” and “on the longer run,” as
will be, for the “cyclical case,” the traditional monetary cycle theo-
ries; thus, on the one hand, Ricardo, John Stuart Mill, and above all
David Hume, and, on the other, Wicksell and his students. They
will be studied increasingly more often, but the Keynesian litera-
ture, swollen to proportions beyond grasp, will be studied less often.
At least, such should be the case.

This is not to imply that economists will not continue to use
Keynesian categories in talking and writing, nor that they will
abandon his much-praised “conceptual apparatus.” The external
forms of a particular religion have always survived the faith going
with it. Faith in the Keynesian world is shaken, though. Therefore,
the scientific mode of expression will slowly change, too. The pride
in using finely elaborated functions, mathematical equations, and

** A detailed evaluation of the cyclical situation in the U.S. may be found
in the before-mentioned essay.

[53]


===== PAGE 13 =====

graphs to say something which can also be expressed simply and ver-
bally will decline with the insight that such pride only leads to
unrealistic premises.’

OJBITUARY

In a year of death an obituary may well be appropriate. 1 will
not repeat here what since the publication of the General Theory
has been written pro and con this theory—the con also including my
own writings. But since at the end of a life, including the life of
a theory, one sees many things more clearly than during his life-
time, I may perhaps be permitted the following summary note.

There is no doubt that Keynes has influenced the thinking of
the young—from my vantage point—generation as much as the
classicists influenced mine. But was Keynes’ influence a blessing?
I doubt it.

As far as the alleged progress in economic thinking is concerned,
I would like to endorse the judgment of Hayek who at the end of
a remarkable article, “Personal Recollections of Keynes and the
‘Keynesian Revolution ,”3* remarks as follows: “I venture to pre-
dict that once this problem of method is settled, the ‘Keynesian
Revolution’ will appear as an episode during which erroneous
conceptions of the appropriate scientific method led to the tempo-
rary obliteration of many important insights which we had already
achieved and which we shall then painfully have to regain.” As an
example of an “insight which we shall painfully have to regain” |
would like to refer merely to the alleged multiplying effect of gov-
ernment spending which plays such a prominent role with Keynes
and his disciples. According to the multiplier theory, government
spending will increase spending and employment in the private
sector by a multiple. Under quite special monetary and real elasti-
city conditions this may have elements of truth.?> “In the general
case,” however, more government spending means less private
investment spending. The public sector displaces the private sector,
as a generation blinded by multiplier theory now—much too late—
cannot fail to recognize, to its sorrow. For these and many other
reasons I cannot help but repeat that what is being celebrated as
the “Keynesian Revolution” appears to me to be the “Keynesian
Confusion”—and this not least because of the disastrous medley of
business cycle theory and general theory.36

*8 This danger was already recognized bv Keynes; cp. his General Theory,
pp. 297-98.

#4 Cp. The Oriental Economist, January, 1966.

3 By the way, the multiplier is at best an “additioner.” Cp. Wirtschaftswis-
senschaft des gesunden Menschenverstandes, pp. 134 ff. and 160 ff.

3 The Economics of Illusion, p. 6.

[54]


===== PAGE 14 =====

With respect to the applicability of Keynesian theory to the
solution of the practical problems of our time, the late Professor
Slichter as early as 1947 remarked that “modern employment
theory sheds little light on the practical problems of today.”? It not
only has done no good, but has led to what I should like to call
the “Keynesian Demoralization,” because the atmosphere created
by Keynes is at least partly responsible for it.

Under the influence of Keynesian theory, the politicians are
demoralized because they have become used to satisfying, from
the apparently inexhaustible inflationary supply of funds, every
want in a welfare state.

Demoralized are the labor unions of the entire world to whom,
in an inflationary milieu, could be granted every wage demand.
It will be very difficult, indeed, to make them see again the self-
evident truth that the income of the masses cannot exceed the
amount that the masses produce. As a matter of fact, this income
must be somewhat less, for the factor capital, too, needs to be
remunerated for its productivity-increasing services.

Also demoralized became a whole generation of entrepreneurs
in industry and banking for whom doing business was made too easy
by an “easy money policy.” This generation so far has never exper-
ienced a crisis or a prolonged recession. It might suddenly be con-
fronted with “real” manager problems.

Finally, I also view as demoralized all national and international
organizations which are involved in the latest “modern craze,”
programming, forecasting, and forcing growth at any price—the
growth fanatics. From between their trees of intricate calculations
and formulas they are unable to see any longer the forest of sane
common sense, which suggests that growth is a function of labor and
of saving rather than of targets and of pious wishes.

“7 Sumner H. Slichter, Review of Economics and Statistics, 1947, p. 140.

[55]


===== PAGE 15 =====

Copyright © 2002 EBSCO Publishing