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

The Contributions of W. H. Hutt

John B. Egger*

illiam Harold Hutt (1899-1988) was a courageous and
independent maverick whose work has long been respected
by those who work in the Austrian tradition. His scope was
broad, encompassing the study of labor and the relationship between
government and the economy, but he is probably best known for his
monetary economics.

Those who know Hutt’s scholarship are likely to consider it
“underappreciated,” either because his principal work was a criticism
of Keynes published at the height of Keynes’s influence (Hutt 1963)
or specifically because its catallactic, individualistic method was
hardly in keeping with the methodological spirit of the 1960s. It is
also true, though, that Hutt’s writings are difficult to follow and
sometimes reflect a utilitarianism that is inconsistent with thorough-
going subjectivism. Nonetheless, as I hope this survey will indicate,
there is much in Hutt’s work—particularly his monetary economics—
that will delight anyone who is sympathetic to the approach of the
Austrian school.

~ Born in 1899 to a working-class family in London (Seldon 1988),
Hutt studied at the London School of Economics and taught from 1928
to 1965 at the University of Cape Town. He then moved to the United
States and taught at several universities. From 1972 to 1982 he taught
at the University of Dallas, and was an emeritus professor there at
the time of his death (Ebeling 1988).!

Monetary and labor economics were Hutt’s chief interests.
His best-known work in monetary theory is Keynesianism—Ret-
rospect and Prospect (1963); others in this field include The Theory

*John B. Egger is associate professor of economics at Towson State University.

An earlier version of this paper was presented at the History of Economics Society
meeting in Richmond, Virginia, June 1989.

Ifor an excellent brief summary of Hutt’s life and work, see Salerno (1991).
The Review of Austrian Economics Vol.7, No. 1 (1994): 107-138
ISSN 0889-3047

107


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108 The Review of Austrian Economics Vol. 7, No. 1

of Idle Resources (1939, second edition 1977), A Rehabilitation of Say’s
Law (1974), and The Keynesian Episode (a 1979 revision of Keynesian-
ism). His rich appreciation of the market as a catallaxy explains
his most important contribution: a superior analysis, Austrian in
spirit, of money and its relationship to economic activity. Like
Marget, Hayek, Hazlitt, and others of his generation, much of
Hutt’s monetary work was understandably associated with criti-
cism of Keynes.

Hutt’s principal work in labor economics is The Strike-Threat
System (1973), but his first book was The Theory of Collective Bar-
gaining (1930, 1980).

Throughout his life Hutt expressed great concern—perhaps re-
flecting his background—for persons of lower incomes. Their best
friend was the market, he told us often; their major enemy was
private groups’ use of government to plunder them, a concern that led
him into extensive work on the political process. Contributions to this
literature include Economists and the Public (1936)—which one of his
scholars and recent colleagues identified as “probably, Hutt’s finest
work” (Formaini 1989, p. 2)* and Politically Impossible. . .? (1971).
His long-time friend Arthur Seldon wrote: “If Hutt had not been
dismayed and distracted by the cul-de-sac of Keynesianism, I think
he would have complemented James M. Buchanan and Gordon
Tullock and now others in the US and Europe who are developing
the fundamental economics of politics, democracy, and bureauc-
racy.”

Professor Hutt® knew that his works were not easy to read. He
saw that as a regrettable necessity.” He respected language and used it
with great skill, understanding that it shapes and is shaped by ideas.
Although Hutt is often criticized for his use of unique terminology
(“Huttite” has been coined to describe it), it was precisely his respect for
the power of language, combined with his disapproval of trends that
swept economics during his gareer, that produced his strong sense

Each of us has his own interests and I certainly respect Bob Formaini’s judgment,
but I consider Hutt’s Keynesianism books (and Say’s Law) considerably better and more
important.

Seldon 1988, p. 34. See also Hutt’s review essay on Buchanan and Tullock’s The
Calculus of Concent (Hutt 1966). Several other essays reprinted in Pejovich and
Klingaman (1975) deal with the politics of South Africa. The Pejovich-Klingaman
collection also contains the best published bibliography of Hutt’s work of which I am
aware, though it obviously omits the work of the last decade of his life.

“He preferred to be called “Professor,” and often corrected those who called him
“Doctor.” He never received that degree.

5«[NJew definitions are irritating things,” he wrote in 1939, “and the mere process
of multiplying terms may appear to be both pretentious and barren” (Hutt 1977, p. 45).


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Egger: The Contributions of W. H. Hutt 109

of obligation to resist certain popular economic terminology. A re-
peated theme is one expressed in Keynesianism: “There are some
kinds of language the habitual use of which hinders the perception of
certain things as well as the saying of them” (Hutt 1963, p. ix; italics his).
Hutt’s terminology places demands on the reader, who must not only
follow his new and curious—though usually somewhat self-explana-
tory—terms (like “contrived incidental plenitude”) but must also exer-
cise caution with conventional terms, for sometimes his meaning subtly
differs from that of works that now constitute orthodoxy.

Freedom, Government, and the Market

Morgan Reynolds, in his fine “Tribute to W. H. Hutt,” insightfully
identified William Hutt as a “classical political economist” (Reynolds
1989, p. xii). Hutt himself wrote: “A contemporary trend towards a
return of economic science to what could be more appropriately
" described by the too long disused term ‘political economy,’ in which
the function of vote-gathering is formally treated as an economic
factor, may turn out to be one of the most promising developments of
this age” (Hutt 1971, p. 23). From the catallactic perspective of Adam
Smith and an underlying utilitarianism to his concern with matters
of “public choice,” Reynolds’s term fits. Hutt knew that the individual
initiative that liberates us from poverty thrives only under particular
kinds of rules, and that these rules may only resemble the legislation
that emerges from the political processes of a constitutional democ-
racy. Hutt’s lifelong concern for human welfare led him to a study of
those processes. He properly considered the likelihood that private
groups might wrest control and twist legislation to their own advan-
tage, to be the greatest threat to the human condition.

He wrote courageously about the apartheid policy of his adopted
home country, identifying it as a device by which the white unions
had seized upon the government as a means to suppress competition
from the non-whites.® Arelated and highly regressive policy was “rate
for the job” legislation (like our “comparable worth”). Hutt fervently
argued that outlawing the ability of the unskilled and inexperi-
enced—or those discriminated against—to acquire the benefits of
employment and demonstrate their worth by underbidding other
applicants was terribly regressive, unfair, and anti-competitive.

For all of its potential danger, Hutt considered government to
have great power to promote well-being, claiming in 1936 that “[wle
may regard the democratic State as the institution that is supposed

See The Economics of the Colour Bar (1964). Earlier writings had resulted in the
temporary withdrawal of his South African passport (Rothbard 1988, p. 33).


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110 The Review of Austrian Economics Vol. 7, No. 1

to interpret and make effective the will of the aggregate of citizens
as electors” (Hutt 1936, p. 257). He acknowledged the need for some
public welfare, but was convinced that a government enforcing the
rules that give maximum range for individual initiative and enter-
prise permits the market to achieve the most for humanity that can
be done, constrained only by “natural scarcities.”

Hutt did not explicitly set forth a description of the source and
nature of the individual rights that underlie his conception of liberty
and government. Indeed, he described in 1930 a belief, so common
today, that economics offers a superior alternative: “Economists are
all clearly conscious of the desirability of a more equal distribution
of wealth; indeed, they base their case for it upon the firm foundation
that it will lead to a maximization of economic welfare, and not upon
abstractions such as ‘natural right’ or §ustice’” (Hutt 1980, pp. 73-4).
This crude-utilitarian perspective is so prevalent even sixty years
later that few economists consider the examination of “natural
rights” necessary or advisable. Murray Rothbard, who takes a Lock-
ean approach based on self-ownership, is an outstanding exception
(Rothbard 1970, pp. 77-80). Hutt seems to take the utilitarian de-
fense of freedom: it works.

In 1930, for example, he had argued that the economic defense of
private property depends on the presumption that “the price deter-
mined under private enterprise is the one which best serves the
common good” (Hutt 1980, p. 54, n. 29). He also admits (Hutt 1971,
p. 46) to having “uncritically accepted” (in 1930) Edwin Cannan’s
defense of progressive taxation on the basis of diminishing marginal
utility. His early thinking, he noted in 1971, “was founded on the
fallacious belief that the utilities of income to different persons can
be compared” (Hutt 1971, p. 46).

In his 1936 Economists and the Public, Hutt expressed most
explicitly his sympathy with the utilitarian perspective. His warning
of the philosophy’s “truly unfortunate effect” (Hutt 1936, p. 300) on
economics refers only to the misrepresentation of “economic man” as
a short-run hedonist. By this time Hutt seemed to reject the explicit
maximization of an aggregative concept of social welfare, explaining
that the term “maximizing welfare” is acceptable “if we regard the
term as having a purely subjective meaning and do not attempt to
extend it to cover any summation of individual welfares into a broader
objective unity as ‘social welfare’ ” (Hutt 1936, p. 265, n. 2).

"When I cite “Hutt 1980” as evidence for what he said in 1930, I refer to those
sections of the second edition of The Theory of Collective Bargaining that he left
unchanged.


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Egger: The Contributions of W. H. Hutt 111

There is no doubt that utilitarianism can do immense damage
when wielded by the untutored. Its “most unfortunate effect” today
is the tendency of economists who are infatuated with technique and
disdainful of philosophy to back into objective utility and interper-
sonal comparison without realizing it.

Yet these attractions of crude utilitarianism can be resisted by a
strong sense of subjectivism and of the spontaneous coordinating
forces of an unhampered market. Prominent economists of the Aus-
trian school have joined Hutt in praise of a more carefully crafted
position. Ludwig von Mises (1957, pp. 55, 58) has spoken approvingly
of utilitarianism, referring to economics as “its finest product” and
calling it a “philosophy of individualism.” Much of F. A. Hayek’s work
reflects a strong utilitarian position. The example of Henry Hazlitt
(1972) also shows that a utilitarian foundation can co-exist with a
thorough appreciation of the nature of a catallaxy and the rules that
it requires. An excellent informal discussion of a utilitarianism that
requires and supports individual rights is offered in a 1991 interview
with Leland B. Yeager, who notes that he occasionally feels that
“Hazlitt has already said everything” (Yeager 1991, p. 6).

“What are the proper limits to the right of association?,” John
Stuart Mill asked, and in his 1936 book Hutt reported that he “can
hardly imagine any problem which is more directly relevant to politi-
cal economy.” He found Mill’s advocacy of “freedom to unite for any
purpose not involving harm to others” to be unsatisfactory because it
raised “the rights of combination” above “the free action of individu-
als” (Hutt 1936, pp. 194-95), and wrote approvingly that Mill’s
“principle of expediency” justifies “the suppression of economic coer-
cion and private monopoly” (Hutt 1936, p. 196).

In Hutt’s perspective, some “combinations” are inconsistent with
freedom. He knew that an unhampered market was of great benefit
to the relatively disadvantaged. But exactly what activities consti-
tute an “unhampered” market?

To some writers a free market means the absence of legislative
violations of individuals’ natural rights to life and property. Hutt
would duplicate most of their policy advice, say on matters of mini-
mum-wage laws and producer subsidies. But a rights theorist is likely
to interpret the formation of a combination as part of the functioning
of a free market. Utilitarians make much of the deadweight losses
and reductions in consumers’ surplus that would result, but these are
not consumers’ rightful property. Unless government violates rights
by enforcing a cartel, its success will probably be temporary. But its
existence is fully consistent with a market that, in the natural-rights
sense, is free.


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112 The Review of Austrian Economics Vol. 7, No. 1

This is not a perspective that would command Hutt’s agreement.
Combinations like industrial cartels and labor unions, even if unsup-
ported by restrictive legislation, reduce the welfare—relative to a
state of open competition—of the ordinary citizen. Throughout his
life, Hutt shared the position of Henry Simons and many modern
economists that the enforcement of antitrust laws is essential to a
market system.

In 1971, for example, he appended to his phrase “provided the
appropriate governmental agencies are carrying out their essential
role in the functioning of the free market” a footnote explaining that
“this role covers primarily the prevention of ‘restrictive practices’ —or the
role of what in the United States is called ‘anti-trust’. . . Emphasis on this
role meets the common objection, ‘Yes, but markets do not always
work’ “(Hutt 1971, pp. 95, 99). “If business,” Hutt wrote, “including big
business, is in any measure responsible for pricing output beyond the
reach of income (subject to any degree of inflation) the remedy lies in
anti-trust initiatives” (Hutt 1971, p. 78). He referred to resale price
maintenance as “one of the most burdensome forms of restrictive prac-
tice” (Hutt 1971, p. 86).

Hutt disagreed that “in its complete form [competition] would be
ruinous,” (1935, p. 184) because he considered “aggressive selling”
tactics that he thought might be ruinous (like predatory pricing) not
in fact to be competitive. In his view, a legislative structure support-
ing the market system would outlaw such practices. His terminology
(unfortunately) appears to have something in common with modern
structure-oriented theorists of industrial organization: Competition
could not produce monopoly, it seems, but a system in which the
bargains among resource owners were limited only by natural rights
could. According to this view—which I believe to be Hutt’s—the
preservation of the competitive order requires legislation that is not
confined by the limitations of individual rights.’

The somewhat uneasy (to me, at least) combination of Hutt’s
powerful understanding of the benevolent forces of the catallaxy and
his deep concern for the welfare of the common citizen is seldom more
apparent than in his concept of competition. It is “the substitution for
consumers’ benefit of the least-cost method of producing and market-
ing any commodity (or of achieving any other objective involving

He addressed some criticisms in 1977: “despite weighty arguments against anti-
trust which libertarian economists have been advancing in recent years, we adhere to
the conclusion that a legal framework to create or protect incentives to substitute lower
cost methods or preferred products is a necessary condition for market freedom to exist.
This does not imply, however, that antitrust in its present form cannot be validly judged
as more deleterious than nonintervention” (Hutt 1977, p. 223).


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Egger: The Contributions of W. H. Hutt 113

scarce means), irrespective of the institutional arrangements neces-
sary for the realization of that result” (Hutt 1971, p. 99, n. 4).

It is significant that Hutt defined competition as a process, not
as a structure. The modern economist is likely to visualize graphs
depicting a perfectly-competitive outcome, a monopolistic outcome
(smaller quantity, higher price), and a deadweight-loss triangle.
Hutt would identify the entry and imitation by which the monop-
olistic position is moved toward the perfectly-competitive one as a
competitive process. Even the creation of a deadweight loss trian-
gle can be competitive if its cause is an entrepreneur’s discovery
and implementation of a lower-cost technique. As the competitive
process continues, the price will be driven down, eliminating the
deadweight loss and transferring surplus from producer to con-
sumer.

Hutt’s concept of “consumers’ sovereignty,” a phrase he originated
in 1936, reflects some of the difficulties readers may find with his
terminology. It is, to be sure, a healthy antidote to those who write
as if producers can inflict their will upon consumers. By exercising
their powers of choice, consumers in a market system provide both
the incentive and the financing for producers to use resources as the
consumers prefer.

Demonstrating the weakness of the substitution of a non-rights
utilitarianism for a theory of natural rights, Hutt built his concept
on an analogy between the market and government. “Regarded as an
ideal,” he asserted, “consumers’ sovereignty rests on the same as-
sumptions as does the ideal of representative government” (Hutt
1936, p. 262). In a semantic puzzle that reminds one, at times, of
Marx, Hutt explained that an individual is sovereign in his role as
consumer, and subject in his role as producer. He tells the story of an
artist who eschews commercial assignments, at which he could earn
incomparably more money, warning that “we cannot refer to pro-
ducer’s freedom as ‘producers’ sovereignty’. When he ignores society’s
demands, the producer and consumer aspects of the individual are
merged in him. He exercises his sovereignty over the disposal of his
own powers and property” (Hutt 1936, p. 263).

It is a perplexing notion, not clarified much by his assurance that
he means “ sovereignty’ in the sense of ‘ultimate power’, as opposed
to ‘source of authority’” (Hutt 1936, pp. 258-59). Hutt’s concept of the
free market is a society in which consumers’ sovereignty is violated
by neither government nor private groups. A producer’s decision to
take a vacation, or to produce a lesser-valued good for his own
personal reasons, would be reckoned as his own exercise of his sover-
eignty as a consumer. His decision to collude with other producers would


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114 The Review of Austrian Economics Vol. 7, No. 1

not. The act of collusion is not his own act of consumption, but it does
reduce the ability of others to consume.

Although one must develop some facility with “ideal types” in
economics—the Kirznerian entrepreneur who neither labors nor
owns property, for example—the notion that producers are slaves and
only consumers have rights seems a little difficult to keep straight.
Every individual plays each role, in Hutt’s taxonomy, but his rights
adhere only to his role as consumer; in either his role as producer or
as resource owner, he is a slave to other consumers. Hutt expressed
it this way: “Applying this standard, we must regard property-owners
as the custodians of the community’s scarce resources. The powers
they possess in dealing with these resources must be regarded as
delegated to them by society in its consumer aspect” (Hutt 1942,
p. 157). The position is not nonsensical, but it appears to me to
exemplify precisely the “kinds of language the habitual use of which
hinders the perception of certain things as well as the saying of them”
against which he warned us in 1963. Individuals have rights (or
“sovereignty”), and to identify these rights with only one of the
individual’s many roles is confusing and dangerous.’

Hutt’s unhampered market would be ruled by “natural scarcity,”
under which “given consumers’ preferences, the sole factor determin-
ing the price of consumers’ commodities will be the relative amounts
of different kinds of productive resources and services available”
(Hutt 1936, p. 260). Like many utilitarians, he seems to sidestep the
fact that property rights may have something to do with what is
“available,” and at what terms. But “there are many deliberately
created barriers to the most complete utilization of productive power”
(Hutt 1936, p. 261), which he called “contrived scarcities.” Although
he attempted to explain that a producer’s “sovereignty over the
disposal of his own powers and property” (Hutt 1936, p. 263) could
not contrive a scarcity, he identified collusive agreements and other
“restrictive practices” like resale price maintenance as contrived
scarcities that thwart the principle of consumers’ sovereignty. To
prevent this “private coercion,” the firm enforcement of antitrust
statutes was required on the behavior of both business and labor.
Then—and only then—would resources be allocated according to

“natural scarcities.”

The best discussion of “the metaphorical shibboleth of ‘consumers’ sovereignty’”
1s in Rothbard (1970, p. 560 et passim). On “the community” and “society” as the
ultimate owners of scarce resources, see Ayn Rand's discussion of “the tribal premise”
(Rand 1965, p. 7).


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

Egger: The Contributions of W. H. Hutt 115

A Staunch Opponent—not of Unions,
but of the Strike Threat

Hutt is often identified as a critic of unions. But he noted numerous
ways in which a union may properly assist the worker in dealing with
the employer, maintaining “that a labor union may provide the
required knowledge of employment opportunities, supply the exper-
tise and the finance to assist an individual to take advantage of those
opportunities, and protect an individuals rights before the law re-
garding the wage contract as well as facilitate his recourse to the
courts when necessary” (Hutt 1973, pp. 12-13).

In fact he opposed only their strike activity. His position was a
simple extension of his opposition to private collusion, to the contriv-
ance of scarcity. He fought what he considered to be the private
exercise of coercive power, whether by collusion among labor or
business. Since government should assure that competition is free to
perform its function, economists must oppose this poverty-creating
coercion. That means opposing much of government’s direct interven-
tion into the economy (e.g., comparable-worth legislation), of course,
but it also requires that governments break up private collusion and
restrictive practices, eliminating contrived scarcities whether caused
by business or unions of laborers.

He believed that the public and policymakers were already con-
vinced of the necessity of addressing business collusion and “restric-
tive practices.” But labor monopoly had long been blessed and/or
feared by both the public and the politicians. There can be no doubting
Hutt’s courage in attacking what he considered to be the most pow-
erful of legalized vandals, who stomp about the country seizing
wealth primarily from those who can least afford it—usually with
their naive acquiescence.

The Theory of Collective Bargaining (1930) examined the history
and theory of two claims: labor’s supposed “disadvantage” in bargain-
ing over wages, and the “indeterminateness” of the wage rate. His
history notes that unions had been the elite, aloof from and superior
to the masses of working men and not caring much about them (see
also, Hutt 1973, p. 26). A union’s concerted activity raises members’
wages only by excluding nonmembers from the particular labor mar-
ket. Whether this raises or lowers the total wage payment depends
on the elasticity of demand for this type of labor—which Hutt noted
depends, in turn, on a welter of other elasticities. But the quantity of
product will fall and its price rise: “The evil in labor monopolies lies
not only in their driving the less fortunate to relatively badly paid
occupations but also in their raising the cost of living to them as well”


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116 The Review of Austrian Economics Vol. 7, No. 1

(Hutt 1980, p. 13). The principal “exploitation” is through higher
prices of consumer goods, and “the greater part of the demand for
consumers’ goods is exercised by relatively poor people” (Hutt 1980,
p. 73).

The belief that unionized labor can exploit capital dies hard. Hutt
noted that surely capital can be exploited in the short run. Indeed,
there is no more “sitting duck” than a producer who has sunk huge
sums into highly specific capital goods. But using an argument like
that of “rational expectations,” Hutt reasoned in 1930 that “if it were
really normal for labor to exploit capital invested in [a particular]
class of undertaking, the result would be that less would be invested
in this class” (Hutt 1980, p. 62). Investors will look for risk-adjusted
returns, and among the risks will be that of the strike. Pre-risk yields
on capital invested in different ways will correspond in a direct
relationship, and quantities invested in an indirect fashion, to the ex
ante risk and seriousness of strike. In 1973 he applied the same
argument to human capital: “The volume of labor which will come
forward to be trained for or otherwise become attached to any occu-
pation in which (in the light of past experience) labor appears liable
to ‘exploitation,’ will be reduced to the level at which the prospective
long-term benefits are equated with the prospective benefits from
training and employment in other occupations” (Hutt 1973, p. 5; all
italicized in the original).

Arguing that the “fear of strikes inflicts far greater damage on
the economic system than actual strikes” (Hutt 1973, p. vii, 1980, p.
xviii), Hutt maintained that the result of the political acceptability
of the strike is that the strike-threat is an ever-present “contrived”
cost of doing business.

The harm that the strike-threat wreaks is often not evident in
the unemployment statistics, but results from a pattern of resource
use that is not optimal at dealing with “natural scarcity.” This
problem of “diverted resources” (perhaps better known as disguised
unemployment) affects both capital and labor. The existence of this
type of unemployment is not obvious, but the welfare of all of us,
perhaps especially the poor, is lower than it could be. Hutt’s
position reflects an appreciation of the Austrian concept of the
capital structure and the significance of patterns and types of
capital good and labor. Comparing the second and first editions of The
Theory of Collective Bargaining, Hutt identified as a “major improve-
ment” “the emphasis I now place on the composition of the assets
stock and the composition of the stock of complementary assimilated
knowledge and skills (in reaction to prospective strike-threat depreda-
tions” [Hutt 1980, p. xviii]).


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

Egger: The Contributions of W. H. Hutt 117

Hutt’s analysis of the effects on standards of living of “wage-mul-
tiplying assets” and their increasing specificity are superb. His case
that the strike-threat reduces welfare, despite the impossibility of
quantifying it, is well made. But his conclusion that this warrants
outlawing the threat is utilitarian. Without some form of contract,
the agreeing among a group of skilled workers to withhold their labor
unless paid nearly the whole value of the product violates neither
capitalists’ nor consumers’ rights. A carefully prepared contract can,
in principle, reduce the risk of becoming dependent on one employer
or employee; without it, the risk is a cost of the increased productivity
of specificity.

The enforcement of the antitrust laws is the only major issue on
which I—as I believe most other Austrians—disagree with Hutt. To
advocate the use of government to prevent actions that violate no
rights opens a Pandora’s Box.'” Hutt’s heartfelt concern for those of
middle and lower incomes may, unfortunately, have made him a
victim of “power-thought,” an enemy of “rational-thought” of which
he warns us in 1936 (Hutt 1936, p. 52 et passim).

Money, Macroeconomics,
and the Influence of Keynes

Most economists who began their careers around 1930 were pro-
foundly affected by the profession’s spectacular embracing of John
Maynard Keynes's General Theory. Like Hayek, Marget, and Henry
Hazlitt, Hutt had read widely and had developed a respect for the
monetary economics that had been developed by Hume, Say, Thorn-
ton, Wicksell, Mises, and others. “In my judgment,” he wrote, “ever
since the remarkable contributions of Locke and Hume, monetary
theory has been one of the least unsatisfactory branches of economics”
(Hutt 1963, p. 87)."" A brief study of Hutt’s interpretation of pre-
Keynesian monetary theory will help us to understand his reaction
to the General Theory.

Pre-Keynesian monetary theory, as Hutt saw it, recognized that
the preferences of individuals in an economy are linked by their
understanding that the use of money and markets can further their
ends. Presupposing that individuals know something about physical
reality, markets produce money prices, quantities, and production

104s I recall some of our conversations during the mid 1970s, Hutt also supported
legislation against libel and slander, largely out of sympathy for the victim. Since one’s
reputation consists of others’ attitudes, it is doubtful that such legislation can find
support in natural rights. See Rothbard 1978, pp. 95-96.

IlThe text has “even” rather than “ever,” which apparently was a typographical
error. It was corrected in Hutt 1979, p. 56.


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118 The Review of Austrian Economics Vol. 7, No. 1

techniques that are determined by individuals’ preferences for differ-
ent goods, leisure, time, and liquidity. Anyone who cares to can use
these simple money prices to compute relative prices, rates of inter-
est, and a price level. But these constructs are all derivative from
particular money prices.

Neither he nor other pre-Keynesian writers considered prices to
be “perfectly flexible” (Hutt 1979, p. 77)."* If that phrase requires
traders instantly to identify the equilibria implicit in a new set of
preferences, and to reprice just as instantly, it verges on the nonsen-
sical. When a trader is still unconvinced that preferences have turned
against him, he may prefer some combination of adjustment in
quantity and in price. This quantity adjustment is the conventional
explanation of unemployment. Hutt properly identified it as a natural
part of the search for information, and called it “pseudo-idleness”
(Hutt 1977, p. 83). The combination of changes in price and the
disutility of “pseudo-idleness” provides the entrepreneurial incentive
and information required for the redirection of resources. Although
significant changes in either time or liquidity preferences might
produce periods of unusually high “pseudo-idleness” (now called
frictional or structural unemployment), Hutt repeatedly emphasized
that no particular set of preferences —no level of time or liquidity
preference—was inconsistent with full employment: “there are no
economic ends, and no entrepreneurially chosen means which are
incompatible with ‘full employment’” (Hutt 1963, p. 79 [italics Hutt’s];
also, pp. 24, 231, and elsewhere).

Hutt respected the gold standard for achieving a stable level of
prices, and considered it the obligation of a monetary authority under
more “modern” systems to maintain general price stability. Monetary
expansion more rapid than the required rate could, of course, affect
the market rate of interest and, by falsifying the information provided
by the “uninflated” pattern of prices, increase employment and real
output. Hutt noted that this had been understood as long ago as
Hume; certainly Thornton and Wicksell made much of it. But it had
been considered a very poor and costly—socially impoverishing—way
of dealing with discoordination in the pattern of prices. Better to
address institutional rigidities directly—say, by applying anti-trust
legislation vigorously to both business and labor and outlawing the
strike-threat.

2Hutt used the phrase “perfect price flexibility” as “the absence of money illusion”
(Hutt 1979, p. 147), a meaning different from that below.


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

Egger: The Contributions of W. H. Hutt 119

Idle Resources and Unemployment

Apart from a few comments quickly inserted into Economists and the
Public (Hutt 1936, pp. 245-47) as both it and The General Theory
were In press, Hutt’s first direct response to Keynes was in the
remarkable The Theory of Idle Resources ([1939] 1977).

The work’s principal point was that we must be cautious in the
conclusions that we draw from the observation that some resource
is—or is not—apparently engaged in some kind of productive activ-
ity."® Hutt reasoned that by examining the process that determines
whether a machine or person is either “working” or “sitting,” one can
evaluate the economic function of the activity in which the resource
is engaged. Only by exploring the causal process behind the apparent
“idleness” or production, he insisted, can one judge whether it is a
sign of the market’s proper functioning or whether it poses a problem
that deliberate government policy might help to resolve.

This is not the place for a full-scale analysis of Idle Resources, but
a brief description of Hutt’s system of classifications of idleness will
convey some of its flavor. It reflects those aspects of Hutt’s work with
which most Austrians would agree, as well as a few with which many
would differ.

Although Hutt’s first chapter is entitled “Definition of Idleness,”
and its Section 3 is “The necessity of definition,” I can find no clearly
stated expression of the meaning of “idleness.” The chapter is, in-
stead, a plea for consideration of different causes or types of idleness,
and a fine (though brief) argument that it cannot be quantified
(Hutt 1977, pp. 49-50). One must infer a general meaning from
Hutt’s detailed classification and from a knowledge of the rest of
his works.

A resource is “valueless” if the sum of the competitive prices of
its complementary inputs exceeds the price of the product. (If the sum
exceeds the product price only because the other inputs are “monop-
olistically” priced, then Hutt would probably classify the resource as
“enforced idleness.” He was, as we have noted above, a supporter of
the general goal of antitrust as applied to both business and labor.)
As one might expect, most of the book deals with valuable resources.

The important category of “pseudo-idleness” embraces humans who
are engaged in job search, education, or “productive consumption,” and

13 Arnold Plant’s review noted the importance of the book: “For there is a widespread
and growing determination to seek out the idle resources in our economic system and
to set them to work; a determination which is surely praiseworthy so long as we
recognize idleness when we see it, and in our anxiety to abolish it do not confuse with
it many other things which it is even more vital to preserve” (Plant 1940, p. 199).


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

120 The Review of Austrian Economics Vol. 7, No. 1

physical capital goods that are unused for certain reasons." “Pre-
ferred idleness” includes humans who, though excluded from certain
occupations by legislation and/or union activity that seeks monopoly
rent, elect not to work elsewhere. “Participating idleness” is Hutt’s
general term for resources that are idle to gain monopoly rent; if they
have no value in other employments, they constitute “pure withheld
capacity” or (if enforced by legislation and/or union activity) “pure
enforced idleness.”

In this and later works, Hutt properly assigned great significance
to the problem of “diverted resources,” normally called “disguised
unemployment” when applied to labor. Although these resources
appear to be productively engaged, their employment is clearly
“suboptimal” if it is the result of some kind of distortion or deviation
from a free and competitive system. Hutt discussed, also, “aggressive
idleness” (resources held back for the purpose of “predatory pricing”),
“strike idleness,” and a few other subsidiary classifications.

It is difficult to follow all of the qualifications and interconnec-
tions involved in Hutt’s system of “at least six” (according to him) or
ten (according to me) classifications of “idleness.”® What is signifi-
cant about the work is not the disagreement that one might have
about Hutt’s interpretation of a “free” market (see above, “Freedom,
Government, and the Market”), but rather the delightfully insightful
analysis of process that characterizes Idle Resources (particularly
with its 1977 addenda).

The ability of unanticipated monetary expansion to reduce some
measure of observable unemployment has been acknowledged for
centuries. To Hutt, however, its primary effect was to draw resources
out of productive “pseudo-idleness” by cutting short the process of
search for employment that best satisfied “uninflated” demands.
Perhaps acknowledging the popular belief that the word “unemploy-
ment” implies some kind of failure or problem, he suggested that we
change the way we think about an individual who (in modern terms)
is “frictionally” or “structurally” unemployed. His situation has “been
mistaken for unemployment,” Hutt wrote. “When actively searching
for work, the situation is that he is really investing in himself by
working on his own account without immediate remuneration. He is
prospecting” (Hutt 1977, p. 83). Later he explained that he feels “that

MHutt applied this concept of “pseudo-idleness” to cash balances, refuting those
who associated the term “idle” with cash balances, in his respected “The Yield from
Money Held” (Hutt 1956).

5 once prepared a flow chart, with boxes and circles and connecting arrows in the
style of a computer programmer’s layout, of Hutt’s definitional system. It seems to be
of some help in keeping the linkages straight (Egger 1980, p. 17).


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

Egger: The Contributions of W. H. Hutt 121

the process [of job search] is productive employment rather than ‘a
productive way in which to use leisure’” (Hutt 1977, p. 126), as it had
been described elsewhere.

Even readers who prefer to resist Hutt’s implicit advice to
redefine frictional and structural unemployment as “employment”
can accept his point that-—given the perennial change of a dynamic
free market and the “imperfections” of information—there is a clear
sense in which these resources are, indeed, being used “optimally.”
Hutt had an abiding confidence in the process of free-market pricing
to discover and promote patterns of resource use that best satisfy
consumer demands. The power of deliberate policy to bring about this
pattern of resource use (human and physical) was limited by the
central planner’s inability to obtain, and lack of incentive to act upon,
the specific knowledge of individual preferences that would emerge
from the market process.’

What the use of stimulative monetary policy could achieve, along
with its immediate goal of a reduction in observable measures of
unemployment, was “diverted resources”—the channeling of human
and physical resources out of the search process and into occupations
different from those in which it would have culminated. Warning of
this problem, Hutt wrote:

Superficially, manifestation of the disease in ‘sub-optimal employ-
ment’ seems to be the least harmful form. In reality, we are about to
suggest, it is a symptom of the most malignant consequence of
impoverishing discoordination. (Hutt 1977, p. 30)

and that:

But we propose to argue further that the third, relatively inconspicu-
ous and ultimate manifestation of the disease, namely, the employ-
ment of men and assets in sub-optimal activities, is even more
detrimental to society; for it mitigates the pains of inflation as well
as reduces the conspicuous idleness of human and physical resources.
(Hutt 1977, p. 32)

The great detriment of the Keynesian emphasis on aggregate demand,
and “employment” (or unemployment) conceived as an aggregate, was

6There is a clear possibility, here, of what Leland Yeager has called “the ‘Austrian
vice’—disposing of substantive issues or reaching ostensibly substantive conclusions
by mere verbal maneuvering” (Yeager 1988, p. 209).

Yet officials not only cannot have the necessary detailed awareness which
market signals provide; but most important, they cannot be caused to lose property
through error nor be rewarded by the acquisition of property through success” (Hutt
1979, p. 76; italics Hutt).


===== PAGE 16 =====

122 The Review of Austrian Economics Vol. 7, No. 1

its simplistic promotion of policies directed only toward these aggre-
gates. Hutt’s point that the “demand” so stimulated'® was almost
certain to “divert resources” from the employments consistent with
individuals’ real (“uninflated”) preferences. His position is consistent
with, though broader than, the Austrian theory of the business
cycle.”

Price Flexibility as Recovery Policy

Hutt never wavered from his principle that the observed unemploy-
ment of labor and capital was due to the “mispricing” of particular
goods. According to this thoroughly Austrian, pre-Keynesian “classi-
cal,” Say’s Law position, “/t/he disease is discoordination of the eco-
nomic system caused through defects in the administration of the
pricing mechanism” (Hutt 1977, p. 29), and the only truly effective
remedy was for policymakers to eliminate every institutionalized
barrier to price flexibility. Hutt’s position is likely to be identified by
the “classical” or Austrian scholar as courageous and principled,
worthy of admiration and gratitude. No economist who is familiar
with the powerful forces against which Hutt stood could suggest that
this respect be even partially contingent upon complete agreement
with his interpretation of “defects.”

The Great Depression of the 1930s posed a severe test to a
position like Hutt’s. It is interesting to compare his position with the
policy advice of the better-known Ludwig Lachmann. Lachmann,
while justly respected as one of the great Austrian economists, always
perceived considerably more virtue in Keynes than did any other
Austrian. Since Hutt shared much with Lachmann and the Austrians,
but devoted most of his career to debunking Keynes, a comparison of
their stories about the early years of the Great Depression is intrigu-
ing. :
During the 1920s, Britain’s persistently high unemployment had
convinced Keynes that the institutionalized sources of nominal-wage
rigidity were invincible. He concluded, in opposition to the dominant
“Treasury View,” that only a forced increase in demand—in the form

181 believe he would have called it mere “money-spending power.” His Say’s Law
perspective led him to equate the demanding of one real good with the supplying of
another (though usually, of course, with the intermediary of money).

For a further discussion, substantially in the spirit of Hutt’s work, of unemployed
resources and the ability of macroeconomic policy to facilitate their use, see Egger
(1992).

For my own disagreement, see the discussion of antitrust and the voluntary
withholding of labor services in the section on “Freedom, Government, and Market,” of
this paper. Hutt also considered the monetary authorities’ failure to stabilize the level
of prices to be a “defect” in most cases; see below.


===== PAGE 17 =====

Egger: The Contributions of W. H. Hutt 123

of public works projects—could cure the malaise. Keynes’s argument,
however, left the “classical” theory intact. It was to prove the “classi-
cal” theory wrong, to prove that capitalism would be plagued by
persistent unemployment even if institutional price rigidities were
snapped and nominal prices and wages were freely flexible, that
Keynes began in the late 1920s to develop the argument of The
General Theory.

Not everyone was convinced. In a 1977 interview, Ludwig Lach-
mann recalled:

two different letters to the London Times . . . appeared in October,
1932. . . . In one of them, Keynes and some Cambridge economists
who were not, in general, his friends, like Pigou and Dennis Robert-
son, demanded that the government should take steps against unem-
ployment. And three days later, Hayek, Robbins and Arnold Plant
sent another letter saying that anything the government did by way
of public works or similar methods would only make things worse and
would not have the effect that Keynes claimed it would have. That is
to say, the “Austrians” seemed to be committed to a policy of continu-
ous deflation whatever happened. (Lachmann 1977, p. 2)

Arnold Plant had been one of Hutt’s professors, and Hutt’s later
writings—Ilike the 1939 Idle Resources—suggest his sympathy with
the letter of Hayek, Robbins, and Plant. It is a little tougher, though,
to identify Hutt with Lachmann’s interpretation about “deflation,”
because—as we shall see—Hutt believed that, in most cases, mone-
tary policy should stabilize the general level of prices. But he also was
convinced that if the British government had acted quickly to break
her economy’s severe and destabilizing institutionalized price rigidi-
ties, no such deflation would have occurred.?

Ludwig Lachmann admired much about the Austrian theory of
the business cycle (Egger 1986), and his 1956 work (Lachmann 1978)
is the most advanced discussion of the Austrian theory of capital that
is available. It is likely, however, that he disagreed with Hutt about
the ability of free-market repricing to deal satisfactorily with the
problems of the early 1930s.

I have been unable to draw a conclusion stronger than this,
because Lachmann respected pricing and Hutt advocated (in some

2141p my judgment, however, the political obstacles were not insurmountable in
Britain in 1931” (Hutt 1979, p. 45, n.17). “In my judgment there is not the slightest
doubt that, in the absence of ‘the sabotage of British industry’ which Beatrice Webb (in
those words) so deplored in 1931, Britain could have sailed to prosperity under free
market discipline and the pre-1914 gold parity” (Hutt 1979, p. 63; italics Hutt’s).


===== PAGE 18 =====

124 The Review of Austrian Economics Vol. 7, No. 1

cases) monetary or fiscal stimulus. While Lachmann’s recommenda-
tion for stimulus in the early ‘30s is relatively clear, the policy that
Hutt recommended is not.

Lachmann adopted Hicks’s terms, differentiating between “weak”
(consumption-led) booms amenable to Keynesian analysis, and
“strong” (investment-led) booms that fit the Austrian mold. He iden-
tified the American economy of the 1920s as a “weak” boom (Lach-
mann 1978, p. 113) and argued that “capital regrouping by itself [as
a rule will not] suffice to overcome the situation following the end of a
weak boom . . . and there may be much scope for the Keynesian
nostrums. No doubt such an underconsumption crisis, due to a flagging
‘effective demand’ can be at least mitigated by increasing this de-
mand” (Lachmann 1978, p. 119). “[T]here is danger,” he wrote further,
“that such an underconsumption crisis may degenerate into a cumula-
tive depression. If so, a budget deficit may help” (Lachmann 1978,
pp. 125-26). His principal concern, “capital regrouping,” was the way
in which capital goods were used; since they are reshuffled in
response to price changes, I interpret his statement as disputing
the efficacy of repricing as a cure for the collapse of a “weak” boom.

Price flexibility fared much better in Lachmann’s remedy for the
collapse of an investment-led “strong” boom, with which the Austrian
theory deals. He recommended, in particular, that no attempt be
made to hold the rate of interest down (Lachmann 1978, p. 124). But
his laissez-faire recommendation was sharply qualified. Correctly
noting that “[alny sudden and unexpected change in the ‘real situ-
ation’ will probably affect the demand for and the velocity of circula-
tion of money” (Lachmann 1978, 119), Lachmann observed that
“where the banks are involved . . . the danger of secondary deflation
is always present. When that happens the ‘recession’ which succeeded
the strong boom will turn into a ‘depression,’ a cumulative process of
income contraction, as has often happened in the past. Of course it
need not happen. But to avert the danger must always be the primary
aim of monetary policy in a recession” (Lachmann 1978, p. 120).%

According to this analysis, the situation in the United States in
the early 1930s would justify both fiscal (as the collapse of a “weak
boom”) and monetary (as a period of sharp drop in the money supply)
stimulus. Lachmann’s discussion of recovery policy left the flexibility

2p “secondary” deflation is a decrease in the velocity of circulation (an increase in
the demand to hold cash balances) that results from speculation that a fall in prices
initiated by a “primary” deflation will continue. It is the downward analog of the “flight
into real goods.” This “secondary inflation,” or sharp increase in velocity, is induced by
the expectation of a continuing “primary” monetary inflation.


===== PAGE 19 =====

Egger: The Contributions of W. H. Hutt 125

of prices as an adequate remedy only in the case in which a “strong
boom” ended with no attendant collapse of MV.

Other economists who share Lachmann’s generally deep respect
for the virtues of unhampered pricing agreed that the deflationary
early 1930s posed a test that price flexibility could not meet. Nominal
price fluctuations work well at providing information and incentive,
argued Leijonhufvud (1973), but only if they are sufficiently small
that prices remain within a “corridor” within which confidence in
effective demand is not shaken, and that was not the case in the early
‘30s. In a recent apparent attempt both to explain the appeal of
Keynesianism and rebut the “laissez-faire” (and Austrian) theory,
Tyler Cowen (1989) based his case on quantitative historical data
consisting of broad aggregates and averages.”

Professor Hutt discussed the “secondary depression” or “secon-
dary deflation,” like Lachmann’s, but he also described a “purpose-
less deflation.” I have not been able to discern clearly the relationship
between these two categories of deflation. “Purposeless” identifies
“deflation which is not a deliberately chosen means to an end,
such as rectifying injustices in the distribution of income, or a
determination to fulfill contractual convertibility obligations”
(Hutt 1979, p. 229; 1963, pp. 125-26). Among those deflations that
were not “purposeless,” he used the apparent synonyms “corrective”
(Hutt 1979, p. 70) and “rectifying” (Hutt 1979, p. 229, n. 24) to identify
the collapse of an inflationary “cheap-money” boom. This was the
bust or crash of Austrian and pre-Keynesian works, and it was
“purposeful” in the sense of serving the clear, socially advantageous
economic function of shaking out the distortions imposed by the
preceding inflation.

A “purposeless deflation” offered no such advantages, and in fact
imposed distortions of its own, and Hutt warranted that in “rare
circumstances . . . credit expansion may be justified”:

In the purely imaginary case in which an expansion of MV merely
reverses a former purposeless deflation, it may restore prices in the

23] am not sure what Cowen’s goal was. One can accept his piece as a partial
explanation for the popularity of Keynesianism. Cowen has a thorough knowledge of
Austrian literature and understanding of its method. It is difficult, therefore, to believe
that he had even the slightest intention that his comment might serve as a refutation
of the theory of the laissez-faire remedy. Gene Smiley (1991) offered an extended
critique of Cowen’s argument, and in his rejoinder Cowen (1991, p. 115) noted that his
“original essay was (deliberately) ambiguous on whether free-market economics had
not explained the Depression satisfactorily or whether free-market economics could not
explain the Depression.” Since the second subsumes the first, Cowen believes at least
that “free-market economics” has not yet “explained the Depression.”


===== PAGE 20 =====

126 The Review of Austrian Economics Vol. 7, No. 1

industries which did not withhold capacity and restore outputs in
industries which did withhold capacity. (Hutt 1979, p. 229)

He further claimed that “I cannot think of any non-Keynesian economist
who would deny the possibility that there have been times in which
deflations have been misconceived or ill-advised” (Hutt 1979, p. 229).

Hutt admitted of the possibility of “secondary deflation,” but
maintained that “as we have seen, speculative demand for money . . .
arises when current costs or prices are higher than anticipated costs
or prices, while the speculation assists correctly discerned policy”
(Hutt 1979, p. 277). He argued that the need for a “secondary”
deflation arises only from “the unstable rigidities” (Hutt 1979, p. 277)
that interfere with the smooth repricing process. “If speculative
demand for money accompanies the downward adjustment of wage
rates and it is not offset by credit expansion, a rectifying deflation
must be in progress” (Hutt 1979, pp. 277-78).

Was the 25 per cent drop in the M1 money supply of the United States,
between 1929 and 1932, responsible for what Hutt called a “purposeless”
deflation? Did it constitute a wild overshoot, going far beyond the correc-
tive, rectifying process to inflict positive damage of its own?

Lachmann, Marget, and many others believed so.>* As for Hutt,
most of his discussions focus on the British rather than the American
economy during the early 1930s, but he did concede that “[t]here are
several non-Keynesian economists (notably Milton Friedman and
Clark Warburton) who interpret the United States deflation of 1930
to 1933 in this light” (Hutt 1979, p. 229; also, p. 204). That was not
much of a concession, and he may not have agreed.

In his Keynesianism, Hutt maintained:

What “sound finance” did do in the pre-Keynesian era was to create
every incentive to reprice services and products the sale of which was
being held up, as well as to create a strong social motive to eradicate
practices which reduced the flow of uninflated income. In the private
sphere, the pressures were fairly successful, and had it not been for
contrary action by the State, they could, I believe, have rescued the
[British] economy—without inflation—from the great depression.
(Hutt 1963, p. 42)%5

»

24*Marget was one of the twenty-four signatories of the “Harris Lecture Telegram,
in January 1932, urging President Hoover to adopt a number of easier-money policies.
Others were Irving Fisher, Lloyd Mints, and Henry Simons. The Austrian economist
Gottfried Haberler, who delivered one of the Harris lectures, was not among those who
signed the telegram. See Wright (1932).

25This wording is repeated with “British” and capitalized “Great Depression”—in
Hutt 1979, pp. 124-25.


===== PAGE 21 =====

Egger: The Contributions of W. H. Hutt 127

After noting, a bit later, that the Macmillan Report identified the
great depression as “monetary” in nature “because monetary policy
had failed to solve the problems caused by ‘a conjunction of highly
intractable nonmonetary phenomena’” (Hutt 1963, p. 80; 1979,
p. 166), Hutt pointedly asked, in italics: “But why should monetary
policy be expected to solve such problems?” He noted that “[w]e are
abusing any monetary system if we try to use it to rectify nonmone-
tary discoordination” (Hutt 1963, p. 80).

This was a theme that remained strong in his writings through-
out his career. Monetary policy (which, as Hutt used the phrase,
included fiscal policy; he correctly saw no substantive difference?) is
ill-suited as a remedy for an incorrect, discoordinated, pattern of
relative prices, yet it is just such a pattern that particularly charac-
terizes a depression. There is never such a problem as “insufficient
aggregate demand,” Hutt argued, so “stimulating it” is always the
wrong answer.

Critics of a repricing policy—e.g., Cowen, cited above—associate it
with “deflation,” but a general reduction of prices and wages has never
been the point.” “[Plre-Keynesian policy did not rely on changes in
‘the general level’ of money wages and prices,” Hutt wrote (Hutt 1979,
p. 159). The issue, for him and for most Austrian economists, has been
a rearrangement of particular money wages and prices, changes in
the structure of relative wages and prices. It is hardly coincidence, of
course, that in a period of widespread unemployment most of the
adjustments of nominal prices and wages happen to be downward.

26414 is important to explain that the term ‘monetary policy,” as I use it, embraces
‘fiscal policy’; for virtually the only difference between the two is that the latter has a
certain political advantage—it puts what Keynesians sometimes call ‘newly created
money’ (that is, an addition to the number of money units) initially into the hands of
government instead of into the hands of . . . individual borrowers” (Hutt 1979, p. 184).

27See, for example, Hayek’s observations in Shenoy (1972, pp. 109-10). Discussing
one of the most entrenched cases of nominal rigidity, Britain of the 1920s, Hayek
concluded:

No doubt the situation then meant that full employment required that some
real wages, perhaps those of many groups of workers, would have to be reduced
from the position to which they had been raised by deflation. But nobody can
say whether this would necessarily have meant a fall in the general level of all
real wages. The adjustment of the structure of industry to the new condition
adjustments in wages would have induced might have made this unnecessary.
But, unfortunately, the fashionable macroeconomic emphasis on the average
level of wages prevented this possibility from being seriously considered at the
time.
Shenoy does not clearly date Hayek's comments but identifies them as from the draft
of a lecture (“Competition as a Discovery Procedure”) delivered in 1968 and later
reprinted in Hayek (1978).


===== PAGE 22 =====

128 The Review of Austrian Economics Vol. 7, No. 1

But the downward slide of levels or averages is incidental to the
Austrian adjustment, not the essence of it. The only defense of a
falling level of nominal prices that accompanies the reshuffling of
relative prices is that there is no way to prevent such a decline without
interfering with the process of the efficient restructuring of relative
prices and wages.

Despite the many respects in which Hutt’s perspective may ap-
peal to Austrians, for a couple of reasons one must be a bit cautious
before categorizing him.*®

The first reason is that his concept of a “free market” (and,
therefore, laissez faire) not only permitted but required government
action against collusion (of both business and labor). If it were clear
that the pattern of prices obtaining on the eve of a depression was
the result of the exercise of such “private coercion,” Hutt had no
qualms about using the force of government to help to break the
initial rigidities. “[O]Jne thing is clear,” he wrote. “There has never
been a case for a government fo overrule the market. Yet there is a
case for the collective overruling of a privately contrived overruling!”
(Hutt 1979, pp. 175, 176).

In his 1979 revision of Keynesianism, he specifically addressed
the question “What do you recommend should be done about the
restoration of ‘general activity’ in a depression” (Hutt 1979, p. 167)?
His 10-page discussion may puzzle and dismay those who seek to
identify him with laissez faire in its natural-rights sense, since it
describes a “Special Authority” (Hutt 1979, pp. 171-72) with—among
other things—the power to force wage reductions in industries where
it is apparent that prior collective bargaining had driven them above
market-clearing levels. (The reductions would stop when the affected
industries reported that further reductions would not permit them to
retain their workers.)

The critical reader must recognize that, to Hutt, the snapping of
collusively established prices is hardly different from, say, the re-
moval of a government-enforced price support on an agricultural
commodity or of a rent ceiling. Furthermore, the practical success of
collusive “withheld capacity” and above-competitive prices, over a
number of years, usually does require the intervention of legislation
that violates individuals’ rights. Hutt did not insist that we accept
his specific method of resolving this problem. But the reader should

%81 note (without further comment) that there is disagreement, among economists
usually identified with the Austrian school, about the nature of a proper monetary
system—the dominant contenders are of a gold (or other commodity) standard, and
“free banking.”


===== PAGE 23 =====

Egger: The Contributions of W. H. Hutt 129

be somewhat discomforted if he is inclined both to be harshly critical
of Hutt and to believe that voluntary collusion doesn’t work.

A second reason for caution about categorizing Hutt is his advo-
cacy of the policy goal of a stable level of prices. He apparently became
more convinced of the desirability of this goal between his 1963
Keynesianism and its 1979 revision, The Keynesian Episode; a page-
by-page comparison often shows the insertion of new paragraphs
emphasizing the stability of “M;,”, “the aggregate value of money in
‘real terms’” (Hutt 1979, p. 191), which seems to be simply M/P (or
its quantity-equation equivalent, T/V).?° He advocated a gold stand-
ard (e.g., Hutt 1979, p. 172), but as long as an institution like the
Federal Reserve System continues to exist he believed that its man-
date should be general price stability. “[I]f the value of the money unit
is to be maintained at a defined and constant value,” he wrote,
“monetary policy will have to be flexible and the nominal money
supply must rise in proportion to the flow of services” (Hutt 1979, p.
174).

Despite all of his emphasis on the snapping of institutionalized
price rigidities and the abilities of competitive repricing to achieve
coordination, Hutt was most distressed at Keynesianism reviewer
David McCord Wright's characterization of him:

Where I failed most seriously, however, was in leaving my critic with
the impression that I am “a hard-shell, sound money, and price-flexi-
bility man who would never increase M or certainly not MV’ (my
italics). Wright did perceive that some of my “qualifications” con-
flicted with any such judgment. But a large part of what I was trying
to communicate was exactly the opposite—to show that, whereas in
Keynes's equations M was a constant, I regarded it as a policy
variable. (Hutt 1979, p.17)

Bringing this policy goal to bear on the question of the “secondary
deflation,” Hutt noted that market-clearing repricing is associated
with deflation only “on the assumption that the increase in real
income is confronted with monetary rigidity. But why should we
always assume monetary rigidity” (Hutt 1979, p. 275)? He argued
that when monetary policy either consciously aims at, or simply
passively permits, a general rise or fall in the level of prices, “the
whole price system is immediately thrown out of coordination” (Hutt

294 1n Keynesianism] I regarded it [M, the nominal money supply] as a policy
variable. I hope that the changes that [ have made to parallel passages in the present
text demonstrate this beyond all possible doubt” (Hutt 1979, p. 17).


===== PAGE 24 =====

130 The Review of Austrian Economics Vol. 7, No. 1

1979, p. 278). Although a deflationary repricing process will eventu-
ally shuffle things around at a lower level of prices, he found that to
be “crude and wasteful”:

It is really superfluous, I feel, to have given as much attention as I
have to so crude and wasteful a method of curbing secondary inflation
[sic: deflation]; for a rectifying credit expansion is always possible. There
is never any good reason why central banks cannot control the magnitude
M so that MV is in constant relation to T. (Hutt 1979, p. 278)

The Austrian theory of the business cycle, with which Hutt was
thoroughly familiar, provides a reason (and maybe a “good” one): it is
impossible to increase M without affecting relative prices, a process
that necessarily interferes with the market's efficient rearrangement
of them. (Austrian business-cycle theory is built on the assumption
that monetary policy is conducted in such a way that the particular
relative prices whose work is systematically thwarted are those
involving the rate of interest.) Hutt was not an enthusiastic supporter
of the Austrian theory of the business cycle, although he appreciated
its general approach.*

Evidently he believed that monetary policy could be conducted to
minimize its effect on relative prices, while preventing the “crude and
wasteful” process of price deflation by stabilizing the general level of
prices. The benefits for long-range planning of a stable level of prices
may have more than offset, to Hutt, any incidental and essentially
random effects that a properly conducted monetary policy would have
on relative prices.

So what are we to make of Hutt’s stand on “secondary deflation,”
price flexibility, and monetary policy? What are the differences (once
we get beneath the anti-Keynesian vs. Keynesian terminology) be-
tween his position and Lachmann’s? As even those who deeply respect
his work have come to expect, he does not make the drawing of a clear
conclusion easy.

First and foremost, Hutt explicitly stated his conviction that a
sufficiently courageous government could have snapped the “unsta-
ble price rigidities” for which (in Britain, at least) coercive union

30gee Hutt (1936, p. 372) and (1979, pp. 148-49) for some comments. Considering
the scope of this work, there is very little about the Austrian theory of the business
cycle. He took a Wicksellian approach (or, more accurately, one of the several distinct
Wicksellian approaches) to the “natural rate,” identifying it with that rate of
interest that corresponded to a stable general level of prices. If an increase or
decrease in productivity produces a fall or rise in the price level, Hutt argues, unless

there is a change in M “market interest . . . will diverge from the natural level” (Hutt
1979, p. 197).


===== PAGE 25 =====

Egger: The Contributions of W. H. Hutt 131

activity was largely responsible, and that if this action had been
taken no significant decline in the general level of prices would have
occurred.’' His analysis of Say’s Law explains that a move toward
equilibrium of the price in one industry increases the output (and,
probably, employment) in that industry. This, in turn, stimulates the
demands—in a natural and healthy way—for other (“noncompeting”)
goods, reducing the size and ameliorating the effects of the price
adjustments necessary in their markets. Sufficiently early and vig-
orous repricing in just a couple of major industries might well have
clipped off any general deflationary pressures.

Second, however, is Hutt’s evident conviction that once a “secon-
dary deflation” (at least one that is “purposeless”) has begun, it is the
foremost task of the monetary authority to stop this “crude and
wasteful” process with a “rectifying credit expansion.” Such advice
seems to place him in the company of many, including Lachmann,
whose dictum that avoiding secondary deflation “must always be
the primary aim of monetary policy in a recession” (Lachmann 1978,
p. 120) could just as well have come from the pen of Hutt. Like the
Austrians, he identified its cause as the distortions produced by a
preceding inflation, and he appears to have allowed for (“purposeful”)
“corrective” deflations (some of which might even be “secondary”) that
he would not offset with monetary stimulus (Hutt 1979, pp. 277-78).
But when a deflation was “purposeless,” the humane prescription was
a “rectifying” monetary expansion.

Third, although he emphasized “price coordination” and wrote as
if “purposeless deflation” was very rare, his clearly and frequently
stated monetary goal of general price stability stirs up the issue a
little more. Hutt is properly respected for his work on the coordinat-
ing effect of the repricing of particular goods; this position is much
less radical if a stable price level is being taken for granted.

In summary of this section, I think the general reputation of
Professor Hutt as a courageous advocate of price flexibility is correct
and dominating, and it is largely that which will and should appeal
to Austrian economists. But it misstates Hutt’s position (and he
would not appreciate that) to infer that in an economy confronting a
sharp rise in the demand for cash balances, he would place the whole
burden of adjustment on individual repricing decisions. He shared
with others the belief that resource allocation through repricing
worked best in an environment of a stable price level.

81gee Hutt (1979, pp. 63, 64, 272-73).


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132 The Review of Austrian Economics Vol. 7, No. 1

A Few Observations on Keynes

Today we can only imagine the shock and dismay that monetary
scholars like Hutt and Marget experienced at the popularity of the
General Theory. Hutt wrote, “Keynes’s confidence, eloquence and
reputation—not his reasoning, which at first left me bewildered—
dealt the hardest blow to my own intellectual confidence which it has
ever received” (Hutt 1963, p. 4).* He worked hard on the General
Theory, but found it so fraught with confusion and error that he
hardly knew where to start. “Where he was right,” Hutt concluded,
“he was not original, and . . . where he was original he was wrong”
(Hutt 1963, p. 11).%

Like most interpreters of the General Theory, Hutt identified the
key element as the assumption of price rigidity. (Although Keynes
discussed nominal rigidity, his great effort was to demonstrate that
capitalism would be plagued by rigid relative prices even if nominal
prices were perfectly flexible (Egger 1989, pp. 446, 448-50).) Surely,
if something keeps relative prices from changing then only a specific
pattern of preferences will be consistent with full employment, and
a set of preferences (e.g., for time or liquidity) that is inconsistent
with these rigid relative prices will produce lasting unemployment.
The government can either force the expression of preferences that
are consistent with the rigid prices (through the taxation and spend-
ing that constitute fiscal policy) or render the price rigidities ineffec-
tive by the deliberate distortions resulting from inflationary mone-
tary policy.

Hutt’s conclusion about the principal message of the General
Theory, hidden among new terminology about multipliers and things,
was that the effects of discoordinations caused by price rigidities
could be concealed by increasing the supply of, or reducing the
demand for, money. Hutt considered these insights to be among the
oldest in monetary theory, but the whole of the Keynesian system
seemed to be a contorted defense of their use.

The various spending “multipliers” functioned, Hutt demon-
strated, only if they were accompanied by reduced demand for, or

32The impact on the well-read Marget of Keynes's brash dismissal of virtually all
of his scholarly predecessors is evident in the Prefaces to the two volumes of Marget’s
The Theory of Prices (1938, 1942).

33utt noted that Henry Hazlitt wrote, about the same time, that “I could not find
in it a single important doctrine that was both true and original.” This judgment was
not unique to Hutt and Hazlitt. Colander (1981, p. 7) attributed this—without further
citation—to Frank Knight: “Keynes said some things that were new and some things
that were true. Unfortunately the things that were new weren't true and the things
that were true weren't new.”


===== PAGE 27 =====

Egger: The Contributions of W. H. Hutt 133

increased supply of, money. His brilliant chapter “The Acceleration
Fallacy” (Hutt 1963, pp. 289-339) showed that the “accelerator” rests
on a stock-flow confusion and an arbitrary specification of time
period.*

But the fundamental confusions in Keynes’s thinking, culminat-
ing in his false denial of Say’s Law, were deep and conceptual. The
modern student, imbued with the concepts of Keynes-inspired mac-
roeconomics, will find it almost impossible to follow Hutt here. The
Austrians—with their subjectivist, disaggregated approach and con-
cern about “essentials”—are best equipped to appreciate Hutt’s work.

Consumption, for example, is “the extermination of value (Say’s
definition)” (Hutt 1974, p. 13) and usually involves exchanging an
asset for services (say, eating a can of beans). In no sense is it
spending money, which is an exchange of one asset for another
(buying another can). One generates income not by spending money
but by creating productive services. These involve disutility, so they
will be created (supplied) only for the purpose of demanding some-
thing whose value exceeds the disutility. It is not a matter of “supply
creating demand” or vice versa; one can’t do one without the other.

Some of the services might be consumed immediately by their
creator (scratching one’s chin), but the rest—unconsumed income—is
at least temporarily saved. One cannot save in general, without those
savings taking some specific form. Choosing that form is investing,
the exchange of services for assets.

Rather than examine in detail Hutt’s (1974) “rehabilitation of
Say’s Law,” let us consider its principal effect on the typical under-
graduate presentation of Keynesian macroeconomics.

If saving without investing is impossible, the whole Keynesian
objection to Say’s Law evaporates. The typical Keynesian story relies
on different individuals doing the saving and investing, with some of
them deciding to save while the others decide not to invest. I recall
Hutt’s exclamation, “How hopelessly wrong it all is!”

The role of the rate of interest is a vital point on which Keynes
was thoroughly confused. Hutt joined other “natural rate” writers in
identifying it with individuals’ time preferences. An individual would
save, in the sense of increasing the relatively permanent level of his

34This chapter was dropped in the 1979 revision, because “the phenomenon plays
so unimportant a role in Keynes's own theoretical system” (Hutt 1979, p. 7). Hutt’s
argument provided the inspiration for Peterson (1956), Rothbard (1970, pp. 759-64),
and others.

35Hutt used this phrase occasionally; it appears, following a misinterpretation (by
an American Keynesian) of Say’s Law, in Hutt (1979, p. 154).


===== PAGE 28 =====

134 The Review of Austrian Economics Vol. 7, No. 1

assets, only if he perceived the rate of return on available assets to
exceed his own time preference. If nobody offered to borrow at a rate
above his own time preference, and no asset that he could purchase
himself (including additions to his own money balances) offered an
implicit return in excess of it either, he simply would not increase his
stock of assets. His preferred alternative would be to exchange his
income services, through the intermediary of money, for assets (like
the beans) whose services he would consume relatively quickly.

“There is always a ‘demand for savings.’ There are always ‘invest-
ment outlets’ or ‘investment opportunities,” Hutt wrote (Hutt 1963,
p. 240), and it is probably his single most telling point against the
general Keynesian system. There is no downsloping IS curve relating
the rate of interest to the amount of output and employment. The rate
of interest affects not the size but the composition of output, the time
pattern of achievable future consumption, according to individuals’
preferences.

Hutt pointed out that Keynes was able to develop an upsloping
LM curve—a set of (interest rate, income) pairs at which the demand
for and supply of money were equated—only because he confused
liquidity and time preferences.” “He claimed that the determinants
of the rate of interest are the supply of and demand for money
(liquidity). Now, the intelligent tyro in economics jumps quite natu-
rally to this kind of conclusion, which Keynes obviously thought he
could make the keystone of his system” (Hutt 1963, p. 29).

One of Hutt’s best known arguments is that “the demand for
money is not . . . a function of the absolute level of the rate of interest”
(Hutt 1963, p. 106). A market rate of interest is implicit in the
relationship between the price of assets and that of their services. A
pure rise in time preference requires that the prices of assets fall and
of their services rise. A pure rise in liquidity preference will reduce
both asset and service prices, leaving their relationship unaltered.

Of Keynes's “opportunity cost” argument, Hutt maintained: “The
extent to which people will sacrifice pecuniary interest in order to
hold money is completely uninfluenced by the absolute level [of the
rate of interest]; for a similar sacrifice has to be made in order to
acquire or retain all other assets” (Hutt 1963, p. 106). This is—in
part—a denial of the Keynesian dichotomization between the deci-
sion to save, and the decision to hold that savings in a particular form

36«[Clertain mercantilist, Keynes-like, fallacies . . . such things as the confusion of
saving-preference with liquidity-preference” (Hutt 1974, p. 7).

371n 1979, Keynes's position became that of “the intelligent novice” (Hutt 1979,
p. 111). :


===== PAGE 29 =====

Egger: The Contributions of W. H. Hutt 135

(bonds or money): while the dichotomizing Keynesian naturally in-
terprets explicit monetary interest as a cost of holding money, Hutt
reminds us that it is really the cost of holding anything except bonds.
Keynes's “speculative” reason for holding cash balances was more
acceptable to Hutt, but was just an example of a combination of
transaction costs and uncertainty about future prices—which itself
was likely to have had monetary causes and, in any case, bears no
necessary relation to the current level of interest.

All that was left of the Keynesian insights, after deleting these
errors, was the thoroughly pre-Keynesian conclusion that a market
system whose coordinating forces are hobbled by rigid prices would
likely not employ resources fully, but that some obvious effects of
those rigidities could be eliminated by monetary policy.

Late in Hutt’s life, he was excited that others—particularly
Clower, Leijonhufvud, and Yeager—seemed to express views that
were importantly like his. The term “unemployment equilibrium”
faded, to be replaced by the more satisfactory “unemployment dise-
quilibrium.” The problem became not that income services were not
demanded, but that they were neither supplied nor demanded be-
cause of discoordinations in the pattern of relative prices. These
advances seemed like an affirmation not only of his work, but of the
pre-Keynesian monetary tradition he had striven so hard to uphold.

Conclusions

We feel that we understand another when his points seem consistent
with our prior beliefs. The great difficulty that Hutt faced was that
the concepts comprising the macroeconomic superstructure, in
which—by now—so many have so much invested, are difficult to
integrate with an understanding of how a money-using catallaxy
functions. He believed that he had to go beneath them, to some kind
of foundation on which we could all agree, and then construct almost
a “parallel universe,” a new (which he always insisted was old)
conceptual structure adequate to the task.

His exposition is considerably less unfamiliar to those already
well acquainted with the subjectivist analysis of catallactic processes.
William Hutt was driven by his understanding that the market excels
at producing and equitably distributing wealth. Economists could
help, or at least not get in the way, only if they understood the
functioning of a monetary catallaxy. Developing and conveying that
understanding was Hutt’s life work, and in it there is much of value
that the well-read Austrian cannot afford to miss.


===== PAGE 30 =====

136 The Review of Austrian Economics Vol. 7, No. 1

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