Hazlitt and the Great Depression
Old right journalist Garrett Garrett described the New Deal as a revolution against America's tradition of private property, limited government and the rule of law.
Indeed, it had all the earmarks. President Roosevelt ran against government spending and deficits, but once in office, acted like a dictator.
Roosevelt overthrew the traditional limits on government's role and instituted central
planning and welfareism in every sector of the economy.
Then the statist juggernaut couldn't be stopped.
Next came FDR's war socialism, Truman's unionism, Johnson's Great Society, Nixon's
price controls, Carter's inflation, Reagan's deficit spending, Bush's regulation and
Clinton's Fabianism.
Because ideas matter as much as the lust for power, the New Deal couldn't have happened
without a public intellectual justification.
That entailed theories on the causes of the stock market crash and the economic downturn
that followed.
In order for socialism to prevail in the United States, the Academy and the public had to
be convinced that capitalism had failed.
Henry Hazlitt was at the center of that debate, holding forth in the pages of The Nation,
a sophisticated and trendy fortnightly.
He was hired as literary editor, a relatively non-political position, but as the politics
of the day became more contentious, he was afforded more editorial latitude.
He began to write against federal encroachment on private enterprise.
Once Roosevelt reversed his campaign rhetoric and embraced the total state, the nation editors
knew they had to take a stand.
As Hazlitt's criticisms of FDR grew, so did the internal complaints about Hazlitt's philosophy.
Rather than simply fire their editor of two years, they scheduled a knockdown, drag-out
fight between those who said capitalism had failed, thereby making socialism the answer,
and those who said interventionism had failed, and that capitalism was the answer.
In one corner was Hazlitt, literary critic and financial journalist.
And the other was Louis Fisher, Russian émigré, journalist and socialist.
The exchange, depression and the profit system, ran in the May 24, 1933 issue, in the midst
of FDR's monetary and fiscal revolution.
Fisher adopted a Marxian explanation of the depression.
Citing data from the Bureau of Labor Statistics, he argued that as productivity increased since
Since the turn of the century, wages had declined relative to output.
Laborers then were able to purchase less and less of their product, because capitalists
were skimming their surplus value.
The concentration of America's wealth and America's national income in fewer and fewer
hands has gone on apace for many years.
What triggered the crisis?
Fischer explained it was a combination of Marxian crisis theory and Keynesian under-consumption
theory.
People who wanted to consume all did not have the means, and the people who had the means
could not consume all, hence a reduced purchasing power.
What needs to be done?
Divide and re-divide profits, he said.
That is the way out.
There should be provision for a perfectly equal division of surplus value in years to come.
We should eliminate the profit of the capital owner and create socialism.
Hazlitt responded by showing Fischer's figures on surplus value to be based on a fallacy
of selection.
Fischer had picked base years, 1899 and 1929, with a purpose in mind, and then confused
anomalies with a general trend.
To could play that game, Hazlitt showed that Labour's product could be said to have been
increasing relative to output by picking other years, 1869 and 1921.
Moreover, Hazlett asked, if labor's decreasing share of profits is the cause, how do we explain
economic recoveries during the same period in question?
How can we explain, using this reasoning, why the crisis did not come sooner?
As Hazlett said, Marx's theory makes it difficult to explain why we are not always
in a crisis and impossible to explain how we ever surmount one.
On that basis, he dismissed the broader implication that the 1929 crash represented anything
But what if Fisher was right that labour really was earning a smaller return relative to capital?
Hazlitt noted that this would not necessarily mean that people were being exploited – it
could just mean that the volume of capital in industry was increasing at a greater rate
than that of labour, which indicates increasingly efficient technology.
If so, that might lend weight to the expectations of the classical economists that labour would
to own more capital as productivity increased – for example, the number of stockholders
increased dramatically during the 1920s.
Having dispensed with Fischer's sweeping Marxian theory, he argued that the best period
to examine from an economic point of view was the time between the last crisis and the
present one – the period, say, from 1922 to 1929.
In this period, one notices that the prices and output of capital and labor in the industrial
A stable market order, he said, requires an atmosphere free of shocks, or at least a government
that allows the economy to correct once those shocks had occurred.
The war had artificially inflated the prices of commodities, and they needed to correct
downward to a more realistic level.
He argued that the crisis of 1929 was that downward correction.
But the focus of this collapse, he wrote, was aggravated enormously by the whole series
of post-war policies.
Among these, he listed the vicious Treaty of Versailles, the disorganization caused
by reparations and war debts, the preposterous tariff barriers thrown up everywhere, the
abandonment of the gold standard and the adoption of the gold exchange standard, and the reckless
First Lending to Foreign Countries
Most importantly, he blamed the artificial cheap money policy pursued both in England
and America, leading here to a colossal real estate and stock market speculation under
the benign encouragement of Mrs. Coolidge and Mellon.
This malinvestment caused by inflationary policies created distortions in the capital
stock that called for correction.
Peter Haslett would conclude that malinvestment was the central problem not only in the Great
Depression, but in all business cycles.
He did so under the influence of Ludwig von Mises, whom he met about a decade later.
Together they advocated the gold standard and the Austrian theory of the business cycle.
The theory developed by Mises points to the way markets coordinate plans over time, and
and the way central bank money and credit expansion disrupt those plans.
Hazlitt was inclined to the Austrian theory even before he knew it formally.
It was most consistent with his manner of thinking.
As a literary critic, his specialty was exploding the pretensions of ideologues.
He loved picking up a fashionable academic text, dissecting its essential claims from
overblown prose and showing how patently absurd it was.
He had a gift, in short, for finding the essence of an argument and testing it relentlessly
against standards of reason.
These are all traits the Austrian School carried with it since its birth in 19th century Vienna,
traits that had also been essential in the late scholastic tradition of 16th century
to Spain, which was indebted to Thomist and thus Aristotelian reasoning.
One patently absurd recommendation in Fischer's essay, according to Hazlitt, was his call
for high new taxes on capital.
This measure would violently aggravate the catastrophe, Hazlitt said, by causing business
to take another downturn that would make the 1929 crash look trivial.
An increase in wages would be undesirable as well, Hazlitt said, because that would
cause the cost to business to increase and lead to even more unemployment.
In order to make the economy recover, he said, we need more private capital, not less.
And that means letting markets work.
More than anything, said Hazlitt, we don't need socialism, communism, or that ambiguous
thing called planning.
Based on the type of people who would be in charge, and the nature of politics, he was
sure the economy would be run by economic illiterates – people he no doubt meant,
like Louis Fisher.
Virtually everything Haslett wrote in this powerful essay, his analysis of cause, effect
and the solution, was later vindicated in the work of scholars like Murray Rothbard
and Robert Higgs.
In his book Modern Times, Paul Johnson sketches the same scenario that Hazlitt laid out in
the thick of the New Deal onslaught itself.
More recently, Richard Vedder and Lowell Galloway presented essentially the same position in
Out of Work.
Hazlitt might have been spared his job had his attack on the emerging consensus not been
so complete and so devastating.
If he had made a few more concessions, or possibly not totally smashed Fisher, he might
have lasted.
But it was not in Hazlitt's nature to withhold the truth for the sake of expediency.
He must have sensed the end was near for his prestigious job at The Nation, and decided
to go out with a bang.
The dramatic debate between Fisher and Hazlitt ended with an ominous note from the editor.
The discussion will be commented upon editorially in a forthcoming issue.
Indeed, it was the next issue in which the nation announced its devotion to the socialist
cause.
Mr. Roosevelt is attempting to preserve capitalism, said the editorial, echoing conventional wisdom
of the day, to save it from itself by robbing it temporarily of several of its most fundamentally
capitalistic prerogatives.
If the New Deal passes, said the editors with rare insight, he will have the power to tell
industry what and how much it may produce, what it may charge for its products, how much
it shall pay to labor, what hours labor shall work.
But this was not enough for the nation.
We tend to agree with Fisher, said the editors, that a collective society offers the best
hope for this desirable end.
and they favored a move toward collectivism as rapidly as possible.
Criticizing Roosevelt's alleged timidity, they said the country's steps towards an
integrated socialized industrial society should be deliberate and purposeful.
The pages of a magazine devoted largely to pushing progressive cultural reform had swung
fully in favor of collectivism.
The esoteric doctrine had been made explicit for the first time, and Hazlitt was pushed
out and forced to find other outlets for his work.
After his death, socialist propagandist Irving Howe, editor of Dissent, was eulogized again
and again in the popular media, even though – or possibly because – his anti-property,
anti-bourgeois ideas were utterly alien to the pre-New Deal American experience.
This is even after the failure of socialism around the world.
Hazlitt was right many times over about socialism, welfarism, inflation and the gold standard,
popular culture and much else.
And unlike Howe, Hazlitt wrote as clearly as he thought.
He never used his position to spread disinformation in the service of ideology as Howe did.
had a profound faith in truth and let logic and facts speak for themselves.
It's a measure of the corruption of official culture that the death of Henry Hazlitt was
hardly noticed.
In his death, I feel sure, his greatest hope was that this country would realize the errors
of its history and rectify them.
When our history is rewritten and the Irving Howes are seen as the social menaces they were,
Hazlitt will be remembered as a prophet who spoke truth to power.
The nation, in a stunning reversal of socialist editorial policies, will concede that Hazlitt
was right all along.