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Keynesism Crippled by Facts

  • Daily article february 12 2015
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Tags SocialismTaxes and Spending

05/11/2018

[Newsweek column from May 7, 1956, and reprinted in Business Tides: The Newsweek Era of Henry Hazlitt.]

Keynesism—the philosophy of big government spending, deficit financing, and continuous inflation—today dominates the policy of nearly every government in the world. Yet developments in the last few years have destroyed its central prop.

The disciples of Keynes disagree among themselves about what the chief contribution of the master really was. Yet most of them would probably agree with his leading American disciple, Prof. Alvin H. Hansen, that “Keynes’s most notable contribution . . . was his consumption function.” In 1936 in his famous General Theory of Employment, Interest, and Money, Keynes declared that there is a “fundamental psychological law, upon which we are entitled to depend with great confidence . . . that men are disposed, as a rule and on the average, to increase their consumption as their income increases, but not by as much as the increase in their income.” He went on to call this “law,” rather pretentiously, the consumption “function.” Keynes’s great “discovery,” in short, was that if we knew what national income was going to be we could tell from a curve or a mathematical formula what consumption was going to be.

Of course, from time immemorial it has been a truism that most families spend most of their income. Official statistics for the last eight years, for example, show that on the average in that period Americans spent about 93 percent of their annual income on personal consumption and save only about 7 percent of it. So if you knew what personal disposable income were going to be next year, it would be hard to make too great a percentage error in predicting what consumption expenditures were going to be. It would be much easier, however, to make a substantial percentage error in predicting what saving was going to be, because saving is comparatively such a small figure.

I append at the bottom of this article a table showing (in billions of dollars) the nation’s disposable personal income for the last twelve years, the amount of personal savings, and saving as a percentage of disposable income. Now Keynes’s great “law” is that consumption does not increase in proportion to income, and therefore savings increase proportionately more than income increases. The events of 1955 were in themselves a crushing contradiction of this “law”. Disposable income increased by $14.6 billion, but savings fell by $1.2 billion. The total percentage of saving to disposable income fell from 7.2 to 6.3. The same thing happened between 1953 and 1954. Disposable income went up, $4.4 billion, savings down, $1.5 billion. Out of the last eleven years, in sum, Keynes’s “law” worked in four and was reversed in seven.

Business Tides The Newsweek Era of Henry Hazlitt_2 478.jpg

I may be accused of unfairness for including the enormous savings in 1944 and showing their decline in 1945, 1946, and 1947 in spite of substantial rises in disposable income in each year. It will be said that savings were heavy in 1944 and 1945 because they were war years and consumer goods were not available. Precisely. But this only underlines the fact that Keynes’s “law” is no law, and that the relationship of spending and saving does not depend solely on total income changes but on innumerable factors. Savings may depend less on what people earn today than on what they expect to earn tomorrow. Their spending this year may depend to a large extent on whether they expect the prices of the things they want to buy to be higher or lower next year. People may buy on impulse, or refrain from loss of confidence. In short, experience and statistics fail to support the main Keynesian tenet; and the Keynesian logic is a rope of sand.

Henry Hazlitt (1894-1993) was a well-known journalist who wrote on economic affairs for the New York Times, the Wall Street Journal, and Newsweek, among many other publications. He is perhaps best known as the author of the classic, Economics in One Lesson (1946).

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