The Failure of the New Economics

Hazlitt's critical analysis of The General Theory Hazlitt embarked on this project because, in his view, although general critiques of Keynes and The General Theory had been made, no critic had completed a detailed analysis of the work [1]

Editor John Chamberlain[2] reviewed The Failure of the "New Economics" in The Freeman, and in light of its controversial, heterodox nature titled his article, They’ll Never Hear the End of It, writing:[3]

Mr. Hazlitt takes up the General Theory line by line and paragraph by paragraph, discovering scores of errors on almost every page. Not only does he kill Keynes; he cuts the corpse up into little pieces and stamps each little piece into the earth. The performance is awe-inspiring, masterly, irrefutable — and a little grisly. At times one almost feels sorry for the victim. But, since Keynesian doctrines have created so much misery in the world, any sympathy is misplaced. Hazlitt’s job had to be done.

Economist Ludwig von Mises called it "a devastating criticism of the Keynesian doctrines."[4]

Reviewer Joseph McKenna comments that Hazlitt is "grossly unfair" in comparing Keynes' statements of facts to historical events more recent than the General Theory, and that Hazlitt rejects mathematical formulations and aggregation as imperfect, while the question is, "whether the approximation is sufficiently accurate to add anything to our understanding."[5]

Keynesian economist Abba P. Lerner in a review article accused Hazlitt of assuming a world characterized by full employment where wages could in large quantity and quickly change.

What Hazlitt fails to see is that to cure a general depression by a fall in wages, the fall in wages must be related not to the price of the product (since that will fall too, and it may fall more than wages just as it may fall less) but to the stock of money in the economy. Wages and prices must fall to the degree that would make the stock of money great enough in real terms (i.e., at the lower money wages and prices) to bring about the required increases in real demand.
A clue to this is to be found in an aside in a footnote on page 397 (apropos of a discussion of the charge that Keynes in the end repented of his sins - from which final insult, I am glad to say, Hazlitt refrains). Here Hazlitt says, "All that is necessary to cure unemployment due to excessive wage rates is individual (not necessarily general or uniform) wage rate cuts just large enough to destroy the conviction or fear that there may have to be still more cuts to come." (Hazlitt's italics.) It may come as a surprise to Hazlitt that Keynesian economists, and even Keynes himself, would agree that if the italicized conditions were met - that if wages would quickly fall far enough to make prices fall low enough to make total demand great enough with the existing money stock enough to provide full employment - Keynesian economics would be quite unnecessary. In order for lesson two to take, Hazlitt must make the effort (much easier than the heavily handicapped safari through the Keynesian jungle reported in his book) of supposing that it is not realistic in a general depression to expect wages and prices to fall quickly to the level that would destroy the expectation of further cuts, so that waiting for the laissez faire equilibrium would entail suffering a long and severe depression. He might then see some sanity in increasing real demand by increasing the nominal money flow instead of by suffering the depression necessary to enforce the fall in money wages and prices required to bring about the same increase in real demand.[6]

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