Book: The Failure of the New Economics

Overview

Henry Hazlitt's "The Failure of the New Economics" is a pointed critique of Keynesian economics as represented by John Maynard Keynes's General Theory. Hazlitt argues that Keynes's prescriptions rest on misunderstood economic relationships and lead policymakers to pursue interventions that create more harm than good. The book aims to expose logical errors, faulty assumptions, and the practical consequences of adopting Keynesian fiscal and monetary policies.

Method and Style

Hazlitt employs clear, plain-language argumentation grounded in classical and Austrian economic principles. The analysis repeatedly returns to a methodological insistence on tracing both immediate and longer-term effects of policies, emphasizing the consequences for all groups rather than narrow beneficiaries. Rather than engaging in abstract modeling, the approach relies on elementary economic reasoning and examples meant to reveal fallacies that survive complex mathematical formalism.

Core Economic Critiques

A central contention is that Keynesian policy confuses temporary stimulation with genuine increases in production and wealth. Hazlitt rejects the notion that aggregate demand can be permanently boosted by government spending without corresponding sacrifices elsewhere. He resurrects the principle that resources diverted to government projects crowd out private investment and consumption, ultimately misallocating capital and reducing the economy's productive capacity. Hazlitt also attacks the Keynesian focus on "aggregate" outcomes at the expense of microeconomic realities, stressing that what benefits one group often imposes costs on another and that sound policy must consider both seen and unseen effects.

On Saving, Investment, and the Multiplier

Hazlitt disputes Keynes's treatment of saving and investment, arguing that saving is not a drag but a source of capital formation essential for long-term growth. He disputes the simplistic multiplier idea that every dollar of government spending creates a net gain in national income, showing how such effects ignore the income forgone by those taxed or crowded out by borrowing. By drawing attention to the reallocation of purchasing power and the timing of expenditures, he argues that supposed net gains from fiscal stimulus are illusory when secondary and tertiary effects are accounted for.

Interest, Money, and Price Signals

Hazlitt questions the Keynesian theory of interest and liquidity preference, arguing that interest rates are crucial price signals coordinating saving and investment. He warns that artificial manipulations of interest through monetary policy distort price signals, encourage speculative and malinvestment, and eventually produce cycles of boom and bust. Monetary expansion and low rates, while temporarily stimulating demand, are seen as paving the way to inflation and unsustainable capital structures.

Unemployment and Wages

On unemployment, Hazlitt rejects policies that aim to maintain employment on artificial terms. He contends that rigid wage floors, job guarantees, and excessive intervention prevent the market from reallocating labor to productive uses, prolonging unemployment and reducing productivity. Wage flexibility, he argues, is necessary for adjusting to changing economic conditions and for preventing inflationary pressures that erode real incomes.

Policy Consequences

Hazlitt foresees that embracing Keynesian remedies leads to chronic inflation, balance-of-payments strains, and fiscal burdens that constrain future policy options. He warns against the political economy of intervention, where short-term fixes become entrenched and public expectations adjust, making retreat politically costly. The net effect, in his view, is not the promised prosperity but a pattern of recurring instability and diminished real wealth.

Legacy and Relevance

The book stands as a vigorous defense of free-market and classical-liberal perspectives against mid-20th-century interventionist trends. It remains relevant for readers concerned with the long-run consequences of fiscal and monetary activism and for those skeptical of demand-management doctrines. Whether one accepts Hazlitt's full diagnosis or not, the work sharpens attention to opportunity costs, unintended consequences, and the need to evaluate policies across time and among all affected parties.