Economic Conclusions vs. Economic Thinking
The Politics and Philosophy of Economics, by T.W. Hutchison, New York: New York University Press, 1981, 310 pp., $25.00.
The Politics and Philosophy of Economics shocked me into thinking about my discipline. For that reason I highly recommend it to economists and to anyone else interested in economics. In a series of nine essays, British economist T. W. Hutchison covers subject matter ranging from Marxist economist Friedrich Engels, to John Maynard Keynes versus the Keynesians, to the postwar German economic miracle, to the Austrian school of economic thought, to the limitations of general theories in macroeconomics. If there is a unifying theme, it is that hewing to a "party line" can cause intelligent people to ignore reality.
Hutchison makes his point very effectively by drawing on issues involving many of the great economists of the last 100 years. In an essay on Engels, he notes that Engels and Marx foresaw 40 revolutions in 30 years, none of which took place, but that they were undaunted in their faith that there would be a revolution of the proletariat in an advanced industrial country. He also quotes at length from an Engels criticism of a fellow socialist for not understanding that a price mechanism is necessary for allocating resources efficiently. Engels's criticism reads very much like F.A. Hayek's statement of the same argument 50 years later, but Engels apparently ignored his own criticism completely.
In his essay on the German postwar economic miracle, Hutchison quotes from British and American economists' assertions in 1948 that free-market policies would not lead to German recovery. In fact, it was adoption of such policies that brought Germany to prosperity within a few years. In an essay on the Cambridge school economists, Hutchison quotes Maurice Dobb's assertion in 1941 that the forced collectivization of Soviet agriculture that starved literally millions "resulted in something approaching famine conditions in certain areas."
Two of the most interesting essays deal with the thought of John Maynard Keynes. I had never known how to reconcile the Keynes who called for massive government spending during the Depression with the Keynes who enthusiastically reviewed The Road to Serfdom, Friedrich Hayek's critique of central economic planning. Hutchison's essay, "Keynes versus the Keynesians," resolves the paradox. Keynes advocated massive public spending as a temporary solution to an unemployment rate in Britain of 22 percent, but not as a general cure for unemployment. In 1937, Keynes opposed increases in general government spending as a solution to Britain's 11–12 percent unemployment rate.
Moreover, Keynes was an ardent opponent of rationing. In 1940, with Hitler threatening Britain's survival, Keynes wrote:
If the community's aggregate rate of spending can be regulated, the way in which personal incomes are spent and the means by which demand is satisfied can be safely left free and individual,…This is the only way to avoid the destruction of choice, and initiative, whether by consumers or producers, through the complex tyranny of allround rationing.
Why then do we get such a distorted view of his ideas today? Hutchison says that the "Keynesians" did not really agree with Keynes on a wide range of issues but used his name to push their own agenda. Many of the Keynesians discounted his opposition to government control. Keynesian economist Joan Robinson claimed that some of Keynes's clear statements against centralized economic planning were "ill-considered" and "quite contrary to his main argument." In describing Keynes's last writings advocating only a limited role for government in international balance-of-payments policy, Lord Kahn, another famous British Keynesian, called Keynes "a sick man" who had made his recommendations "against his better judgment." Robinson even went so far as to say that some Keynesians "sometimes had some trouble getting Maynard to see what the point of his revolution really was." As Hutchison points out, it is no wonder that Keynes is reported to have said, "I am not a Keynesian."
The moral of the Keynes story is the danger of following a party line and of confusing a system of conclusions with a system of thought. Many of the Keynesians embraced Keynes's advocacy of government spending as a solution for unemployment. But they were not really believers in a system of thought. Instead, they became slaves to certain policy conclusions and never really did much thinking after that. Britain's sad economic state, attributable to its economic policymakers' following Keynesian advice, illustrates the harm that can come from being attached to conclusions rather than thought.
Having seen the consequences of being tied to a set of conclusions, I could hardly resist looking more objectively at my own views. Hutchison's essay on the Austrian school forced me to do so. I had not realized that there are two Friedrich Hayeks, one before 1937 and one after. Hutchison points out that before 1937, Hayek believed that an economy reaches equilibrium. But that is true only if people have full knowledge, or what Hutchison calls "Allwissenheit." After 1937, Hayek argued that it is impossible to have full knowledge.
The implications of imperfect knowledge are enormous. We can't be sure that the economy will reach equilibrium. It is possible for a free-market economy to sink into a depression. It is also not certain that government intervention in people's economic decisions will make things worse, since people without full knowledge might not have made the right decisions anyway.
To say all this is not to deny that government intervention is usually harmful. But after reading Hutchison's book, I realize that I hold that view less as a theoretical necessity than as a conviction based on experiences and morality.
David Henderson is an economist in Washington, D.C. He received his Ph.D. in economics from the University of California, Los Angeles.