How the Keynesians Won . . . And Will Lose

Reality Check

A site member asked this question:

Why has Keynesianism prevailed? Dr. North, In the 1950’s Henry Hazlett wrote The Failure of the New Economics which demolished The General Theory line by line with clear, irrefutable arguments. I can’t imagine another field of study in which a theory can be dominant after such complete debunking. Is it the triumph of propaganda over fact? Is it that 99% of all econ professors are either spineless or fools? People blame Hayek for not challenging Keynes but Hazlett certainly did the work (though somewhat later). Is the fed funding 90% of econ research so only Keynesians get funded? How do you explain this baffling situation?

I’m glad he asked.

Let us begin with the fundamental principle that undergirds modern economics, and which has undergirded it ever since Adam Smith published the wealth of nations in 1776. This principle is called enlightened self-interest. Economics teaches that individuals make decisions in terms of self-interest. This principle was not challenged by Ludwig von Mises, who said that individuals act in order to reduce discontent. Human action is based on a principle of self-interest.

With this as the background, let me discuss the history of Keynesian economics.


Let me begin with the site member’s question: Why didn’t Henry Hazlitt’s book succeed?

Henry Hazlitt was not a Ph.D. He was not a college graduate. By the time that he wrote The Failure of the “New Economics” (1959), he was no longer a New York Times columnist. He did have a column in Newsweek, but Newsweek is not a professional journal. It used to be a popular magazine, so it was not cited by professional economists. (It is no longer cited by anyone.) Hazlitt’s Newsweek articles are available in a collection, Business Tides.

Hazlitt followed this book with Critics of Keynesian Economics (1960). He collected the main journal articles that had been critical of Keynes’s position. This had never been done before.[amazon asin=1493700480&template=*lrc ad (right)]

The book was published 23 years after the publication of The General Theory. More important, it was published 11 years after the publication of Paul Samuelson’s college textbook, Economics, which has been by far the most widely read textbook on economics ever published.

The book was published by Van Nostrand. This was a small publisher located in Princeton, New Jersey. It was not an academic publisher. While I do not know the background of the arrangement, I am fairly certain that the book was subsidized. It was the same publisher that the Volker Fund used in those years to publish a series of free market books, including the first edition of Rothbard’s Man, Economy, and State (1962). It also published, in 1963, Rothbard’s book, America’s Great Depression. None of these books had any impact academically. None was ever assigned to students studying in an institution of higher education that granted a Ph.D. degree in economics. (Twenty years after its publication, historian Paul Johnson used America’s Great Depression to analyze the Great Depression. This was published in Modern Times in 1983, over 30 years ago. No other major historian has mentioned Rothbard’s book. It is still in the memory hole.)[amazon asin=1933550279&template=*lrc ad (right)]

It is highly unlikely that Van Nostrand put any money into marketing. The Volker Fund at that time was directed by F. A. Harper. He was a nice man, but he knew nothing about marketing. The Volker Fund never did much with respect to advertising. It published books, but it did not actively market them. It never marketed books within the academic community. No one in academia ever heard about any of the Volker Fund books. With the exception of Rothbard’s Man, Economy, and State, they were not very good books. They were collections of essays written mainly by obscure professors at obscure institutions. The best of them was Israel Kirzner’s The Economic Point of View (1960), but as he later admitted, he did not put Mises’ theory of entrepreneurship front and center. Beginning in 1973, he spent the rest of his career trying to rectify this mistake.

Hazlitt took apart The General Theory, point by point. It is a masterful presentation. But you have to understand this fundamental fact: almost nobody has ever read The General Theory. Virtually nobody in the academic world in 1959 had ever read The General Theory, nor has it been read since then. It has always been in print, but it has never been assigned to students. Read any modern economics book or journal article. Rare is a footnote to The General Theory. Rarer still does the footnote try to prove a point, other than this: “Yes, Keynes taught this.” The General Theory is ignored. It always has been.[amazon asin=146793481X&template=*lrc ad (right)]


Academic guilds are like all guilds in history. They are based on initiation. They are based on screening. They are based on years of apprenticeship — the days prior to the granting of tenure — lifetime employment, irrespective of market demand. They are based on governments’ restrictions on entry into a market — in this case, accreditation.

Academic guilds are based on textbooks. Here is where the screening process begins: first-year economics. Of those who survive, the next state is economics 101: intermediate economics. This is also based on a textbook. Only then do textbooks end, with monographs replacing them. There has only been one Austrian School textbook for economics 101: Kirzner’s Market Theory and the Price System (Van Nostrand, 1963). It never went into a second printing. Kirzner never revised it.[amazon asin=0865977348&template=*lrc ad (right)]

Therefore, what is known as Keynesian economics is the textbook version of Keynes, which essentially is Paul Samuelson’s version, and has been ever since 1948. It is presented in a completely different form from the way in which Keynes presented the theory. This is why Samuelson’s presentation is called neo-Keynesianism. It is rather like Darwin’s Origin of Species and The Descent of Man. Nobody actually reads those books. They never did. As late as 1876, only 16,000 copies of Origin of Species had been sold. While there have been refutations of Darwin’s two books, they have no effect in academia. The only thing that matters is what the textbooks say, because the textbooks establish the framework in which the original author’s ideas are presented.

Nobody has ever written a systematic critique of Paul Samuelson’s economics. Yet that was needed from 1949 onward. Somebody in the free market camp should have put up the money to take that book apart, chapter by chapter. But in 1948, the only Austrian think tank was the Foundation for Economic Education (FEE), and it had been operating for only two years. Leonard Read was not a college graduate. He had never read a textbook of any kind. There was no Austrian school economist with a Ph.D. in the United States, other than Ludwig von Mises, who did not write textbooks, and F. A. Hayek, who also never wrote a textbook. They did not believe in textbooks.[amazon asin=1467934925&template=*lrc ad (right)]

The only college-level introductory economics textbook that contains Austrian concepts is Mark Skousen’s Economic Logic. It is published by a small publisher that does not normally publish textbooks. The first edition appeared in 2000. The content contains nonsense from modern neoclassical economics, discussed as if were not nonsense, such as “elasticity” and “measuring elasticity.” An openly Austrian textbook would say “price sensitivity,” not “elasticity,” and it would dismiss the idea of measuring price sensitivity as incompatible with subjective value theory. The student is not warned: “The following idea is an error of neoclassical economics.” The written content is presented in in the form of a standard textbook, but it is not marketed as a textbook. It does not cost $150. It does not include a CD-ROM for students. It does not offer a teacher’s edition, with lecture outlines, examination questions and answers, and PowerPoint slides. It is a paperback. Clearly, it is not designed to be assigned by a department of economics. know of no Ph.D.-awarding economics department that assigns it.

Textbooks are not allowed to discuss the Federal Reserve System as a government-created cartel of the banking industry. Skousen’s textbook is no exception. It does not begin with Murray Rothbard’a presentation in What [amazon asin=0442044836&template=*lrc ad (right)]Has the Government Done to Our Money? (1964). It does not analyze fractional reserve banking in terms of Rothbard’s The Mystery of Banking (1983), which shows that fractional reserves are a system of wealth-redistribution by fraud. He presents the case for the gold standard, but then he presents the case against the gold standard. It’s the traditional economist’s strategy: “On the one hand; on the other hand.” But this “he said, she said” inability to decide is not about economic forecasts. Rather, it is at the heart of the matter: monetary theory. Of course, had he come out openly in favor of the gold standard, the book would have been automatically rejected by 99% of all economics departments. But that happened anyway. I ask: “Why pull your punches?” The collegiate system is rigged. It’s better to take off the kid gloves.

Economics departments choose textbooks, and the departments are overwhelmingly controlled by Keynesians. There is no way that a college-level textbook that is openly anti-Keynesian will be accepted by any major university today. So, the personal financial motivation of writing an openly anti-Keynesian textbook is weak. Skousen’s textbook may be used in a few colleges, but it is not used in any major university, because it was not published by one of the New York publishing houses that specialize in textbook publication. Economics departments, controlled by Keynesians, would reject it.

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