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Failure of the New Economics

Failure of the New Economics

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11/28/2012

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But the chapter on wages is crammed with confusions
and fallacies. One of the most incredible is Keynes's argu-
ment against permitting flexibility of wage rates. This flies
in the face of everything that has been learned about eco-
nomics, and the advantages of a free economy, in the last
two centuries:

To suppose that a flexible wage policy is a right and proper
adjunct of a system which on the whole is one of laissez-faire,
is the opposite of the truth. It is only in a highly authori·

UNEMPLOYMENT AND WAGE-RATES

277

tarian society, where sudden, substantial, all-around changes
could be decreed that a flexible wage-policy could function
with success. One can imagine it in operation in Italy, Ger-
many or Russia, but not in France, the United States or
Great Britain (p. 269).

Such a statement fairly takes one's breath away. Laissez
faire
means non-adjustment! Laissez faire means inflexi-
bility! Authoritarianism means flexibility! Flexibility
means rigidity! One thinks of George Orwell's Nineteen
Eighty-Four,
where war is peace, ignorance is strength, and
freedom is slavery.
Nor is the implied approval in the foregoing quotation
of totalitarian economic controls to be dismissed as a mere
momentary fancy. In the preface that Keynes wrote in
September, 1936, to the German edition of his General
Theory,
he tried to "sell" his system to Nazi Germany by
writing:

The theory of aggregate production that is the goal of the
following book can be much more easily applied to the con-
ditions of a totalitarian state than the theory of the produc-
tion and distribution of a given output turned out under the
conditions of free competition and of a considerable degree

of laissez-faire.6

Keynes, in brief, does not believe in a free market, does
not believe in a free and flexible economy. In his eyes the
very virtues of a free economy become its vices:

Except in a socialized community where wage-policy is
settled by decree, there is no means of securing uniform wage
reductions for every class of labor. The result can only be
brought about by a series of gradual, irregular changes, justi-
fiable on no criterion of social justice or economic expediency
(p. 267). If important classes are to have their remuneration

6 The German text reads: "Trotzdem kann die Theorie der Produktion als
Ganzes, die den Zweck des folgenden Buches bildet, viel leichter den Verhältnis-
sen eines totalen Staates angepasst werden als die Theorie der Erzeugung and
Verteilung einer gegebenen, unter Bedingungen des freien Wettbewerbes und
eines grossen Masses von laissez-faire erstellten Produktion."

278 THE FAILURE OF THE "NEW ECONOMICS"

fixed in terms of money in any case, social justice and social
expediency are best served if the remuneration of all factors
are somewhat inflexible in terms of money (p. 268).

Now in a free (non-statist, non-socialist, non-totalitarian)
economy, wages do not and cannot adjust themselves en
bloc,
as a unit, by some neat, fixed, round, uniform per-
centage. Nor do prices adjust themselves en bloc, by a uni-
form percentage or as a unit. Nor does production adjust
itself en bloc or as a unit. In a free economy there are liter-
ally millions of different prices,7

millions of individual
wage-rates, thousands of classes of wage-rates, prices of hun-
dreds of thousands of different commodities of different
grades and at different points. In a free economy there are
millions of daily adjustments of one wage-rate to another,
of one price to another, of this wage-rate to that price, of
that price to this wage-rate. There is constantly going on
in a free economy, in brief, an almost infinite number of
mutual adjustments. This is how the economy works. This
is how its keeps in dynamic equilibrium. This is how the
balance of production is maintained among thousands of
different goods and services to meet the changing needs and
desires of millions of different consumers.
But all this conflicts with the simplistic theories of
Keynes. He thinks in aggregates, in averages, in abstractions
which are mental constructs that have lost touch with real-
ity. He thinks, in short, in lumps. He deals only in his
own lump-concepts like average-"level"-of-wages, average-
' level''-of-prices, aggregate demand, aggregate supply. Pro-
duction itself is regarded as being divided only into a few
big lumps called "industries." Sometimes production is
even regarded as one big homogeneous lump. Keynes can-
not understand a free economy precisely because it does not
consist of such lumps. Having reduced everything to aver-

7 One price controller found, for example, that there were actually 350,000
separate prices in the United States for coal alone. (Testimony of Dan H.
Wheeler, director of the Bituminous Coal Division. Hearings on extension of
the Bituminous Coal Act of 1937.)

UNEMPLOYMENT AND WAGE-RATES

279

ages, he cannot understand any adjustment, he is even
against any adjustment, that is not a uniform adjustment
of each of these averages, blocks, lumps, to the other.
In denouncing such a free and flexible adjustment of in-
dividual prices and wage-rates and outputs as "unjust" and
"inexpedient," Keynes does not seem to realize that he is
by implication accepting as both economically and ethically
"right" the previous interrelationship of prices and wage-
rates. If only "a simultaneous and equal reduction of
money-wages in all industries" (p. 264) is to be tolerated, if
"a series of gradual, irregular" changes in wages is "justi-
fiable on no criterion of social justice or economic ex-
pediency" (p. 267), then it must be because the previous
relationship of wage-rate to wage-rate was precisely what
it ought to have been. This is defending the status quo
with a vengeance!
In brief, Keynes forms a ridiculously oversimplified
theory of how a free enterprise economy ought to work,
and because it does not work that way, he denounces it.
Then he goes on to self-contradictory arguments to prove
that reducing wage-rates to bring them more into line with
economic realities would reduce or "violently" disturb
prices and production, and that the way to stabilize the
economy is to refuse to allow free or piecemeal adjustments
to take place (p. 269).

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