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The Failure of John Maynard Keynes

The Failure of John Maynard Keynes

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Published by Mises Fan
Keynes' General Theory is here riddled chapter by chapter, line by line, with due account taken of the latest theoretical developments. The complete refutation of a vast network of fallacy can only be accomplished by someone thoroughly grounded in a sound positive theory. Henry Hazlitt has that groundwork. -Murray Rothbard
Keynes' General Theory is here riddled chapter by chapter, line by line, with due account taken of the latest theoretical developments. The complete refutation of a vast network of fallacy can only be accomplished by someone thoroughly grounded in a sound positive theory. Henry Hazlitt has that groundwork. -Murray Rothbard

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Published by: Mises Fan on Jun 14, 2011
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While Keynes persistently refuses to acknowledge that
the rate of interest has anything to do with the real factors
that control it, such as investment opportunity and time-
preference, he just as persistently seeks to relate it (in Sect.
VI of Chap. 17 and elsewhere) to "the level of employ-
ment":

7 A Guide to Keynes, pp. 151-152.

"OWN RATES OF INTEREST"

251

I had, however [in the Treatise on Money], overlooked the
fact that in any given society there is, on this definition, a
different natural rate of interest for each hypothetical level of
employment. And, similarly, for every rate of interest there
is a level of employment for which that rate is the "natural"
rate, in the sense that the system will be in equilibrium with
that rate of interest and that level of employment. ... I had
not then understood that, in certain conditions, the system
could be in equilibrium with less than full employment (pp.
242-243).

This entire passage is pure nonsense. It is absurd, as I
have frequently pointed out before, to talk of "equilibrium
with less than full employment" because this is simply a
contradiction in terms. The absence of full employment
negates the very concept of equilibrium.
Perhaps an analogy will help to make clearer not only
why this concept is self-contradictory but why Keynesians
nonetheless persist in accepting it. Drop a cube of ice into
a bowl of water. The cube will cause a splash and other
disturbances in the water level. It will plunge toward the
bottom of the bowl, then rise to the top, and settle with
about nine-tenths of its bulk below the water level and the
remaining tenth above. When it has settled there, and the
water is once more calm, there is, true enough, something
resembling a position of "equilibrium"—or, shall we say,
partial equilibrium. But the reason part of the ice cube re-
mains above the water level for a time is because it is frozen.
Complete
equilibrium is not established until the ice cube
has melted, and the water is all at one level. Frozen wage-
rates cause frozen unemployment. When wage-rates become
fluid again, "full" employment is restored.
It is, perhaps, not too difficult to account for Keynes's
misuse of the term "equilibrium" and for the uncritical
acceptance of this misuse by so many writers. The older
economists thought of equilibrium as an actual state of
affairs. They contrasted "stability" with "disturbance," a
"period of equilibrium" with a "period of transition." But

252 THE FAILURE OF THE "NEW ECONOMICS"

any living economy is always in "transition"—and fortu-
nately so. An economy that had reached completely "stable
equilibrium" would be an economy that had not only
stopped growing but had stopped going.
The only kind of equilibrium worth trying for is the
dynamic equilibrium that is approached through competi-
tion and fluid prices and wage-rates. This must not be
conceived of as a position that is ever reached, but as ever-
changing positions that are approached or passed through
—as the pendulum of a clock constantly approaches or
passes through the vertical equilibrium position but never
rests there as long as the clock is running.
Paraphrasing and reversing Grover Cleveland's famous
aphorism, we may say regarding economic equilibrium that
it is a concept that confronts us, not a condition. Yet this
concept is not unrelated to reality. It is a limiting notion.
There is always a tendency toward equilibrium. An econ-
omy can get stuck for a long period at a point of unemploy-
ment, as a clock can get stuck if someone puts chewing gum
in the works. But in neither case should the result be called
"equilibrium."

There is, finally, no such functional relationship be-
tween the level of interest and the level of employment as
Keynes assumes. (He offers, in fact, neither statistical nor
plausible logical grounds for this assumption.) The really
significant relationship, which Keynes persistently ignores
or denies, is that between the level of wages and the level
of employment.

The rate of interest and the level of employment are re-
lated in any actual situation only in the sense that there is
some interconnection among all economic phenomena.

Chapter XVIII

THE GENERAL THEORY RESTATED

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