Rothbard’s Criticism of Keynesianism

Man, Economy, and State, 2nd edition, Murray N. Rothbard.

Chapter 11 – Money and Its Purchasing Power

5. The Demand for Money


One of the most obvious influences on the demand for money is expectation of future changes in the exchange-value of money. Thus, suppose that, at a certain point in the future, the PPM [i.e., purchasing power of the monetary unit] of money is expected to drop rapidly. How the demand-for-money schedule now reacts depends on the number of people who hold this expectation and the strength with which they hold it. It also depends on the distance in the future at which the change is expected to take place. The further away in time any economic event, the more its impact will be discounted in the present by the interest rate. Whatever the degree of impact, however, an expected future fall in the PPM will tend to lower the PPM now. For an expected fall in the PPM means that present units of money are worth more than they will be in the future, in which case there will be a fall in the demand-for-money schedule as people tend to spend more money now than at the future date. A general expectation of an imminent fall in the PPM will lower the demand schedule for money now and thus tend to bring about the fall at the present moment.

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Reisman’s Criticism of Keynesianism

Capitalism: A Treatise on Economics

by George Reisman, 1996.


Application to the Critique of the Keynesian Multiplier Doctrine

As should now be clear, any rise in wages, in the demand for goods at wholesale, or in the demand for capital goods of any kind depends on what is not consumed, but saved and productively expended. This is because consumption expenditure is merely consumption expenditure. It does not incorporate productive expenditure. The demand for goods at wholesale, for materials and machinery, and for labor by business is possible only to the extent that people do not consume but save and productively expend. Yet the Keynesians regard saving as a “leakage”and as allegedly diminishing the amount of subsequent incomes.

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The Fatal Flaw of the Keynesian Multiplier Theory

The Failure of the New Economics, 1959, Henry Hazlitt.

Chapter XI


1. The Magic of It

Let us try to find in plainer language what it is that Keynes is saying here. He explains on the next page: “It follows, therefore, that, if the consumption psychology of the community is such that they will choose to consume, e.g. nine-tenths of an increment of income, then the multiplier k is 10; and the total employment caused by (e.g.) increased public works will be ten times the primary employment provided by the public works themselves” (pp. 116-117).

What Keynes is saying, among other things, is that the more a community spends of its income, and the less it saves, the faster will its real income grow! Nor do the implications of its own logic frighten him. If a community spends none of its additional income (from, say, the increased public works), but saves all of it, then the public works will give only the additional employment that they themselves provide, and that will be the end of it. But if a community spends all of the additional income provided by the public works, then the multiplier is infinity. This would mean that a small expenditure on public works would increase income without limit, provided only that the community was not poisoned by the presence of savers.

Keynes does not hesitate to accept this deduction, but he accepts it in a peculiar form. “If, on the other hand, they [the community] seek to consume the whole of any increment of income, there will be no point of stability and prices will rise without limit” … But just how did prices get into it? The “propensity to consume,” and “the multiplier,” we have been assured up to this point, are expressed in terms of “wage-units,” which, Keynes assures us, means “real” terms and not money terms. — (p. 137)

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The Failure of the New Economics, by Henry Hazlitt

The Failure of the “New Economics” (Henry Hazlitt, 1959)

Chapter II


2. Wage-Rates and Unemployment

In explanation of the passage I have just quoted, he goes on:

Wide variations are experienced in the volume of employment without any apparent change either in the minimum real demands of labor or in its productivity. Labor is not more truculent in the depression than in the boom — far from it. Nor is its physical productivity less. These facts from experience are a prima facie ground for questioning the adequacy of the classical analysis (p. 9).

Are they? Keynes has here tumbled into a glaring fallacy. The absence of change in physical productivity is completely irrelevant to money wage-rates. What counts in economics is only value productivity — and value productivity stated in this case, of course, in monetary terms. If the marginal productivity of a worker is a given unit of a commodity that previously sold for $10, and the price of that unit has now fallen to $5, then the marginal value productivity of that worker, even though he is turning out the same number of units, has fallen by half. If we assume that this fall in prices has been general, and that this represents the average fall, then the worker who insists on retaining his old money wage-rate is in effect insisting on a 100 per cent increase in his real wage-rate. Whether the worker is “truculent” or not is entirely beside the point. If prices fall by 50 per cent, and unions will accept a wage cut, but of no more than 25 per cent, then the unions are in effect demanding an increase in real wage-rates of 50 per cent. The only way they can get it, and retain full employment, is by an increase of 50 per cent in their physical (or “real” value) marginal productivity to make up for the drop in the price of the individual unit of the commodity they help to produce. [Hazlitt, 1959, p. 20-21]

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Politiques de relance et politiques d’austérité : France vs Suède vs Angleterre

Un récent débat opposant Robert Murphy à “Lord Keynes” a porté sur l’interprétation de la réussite de la Suède pour modérer la crise. Dans cet article, Murphy a exposé toute une série de chiffres pour montrer que la politique des Etats-Unis a été 1) plus expansionniste que la Suède en 2007-2009 et 2) moins liquidationniste que la Suède en 2009-2011 qui, pourtant, traverse mieux la crise que les Etats-Unis. C’est, dit-il, le contraire de ce que la théorie keynésienne prévoyait. Lord Keynes a immédiatement répliqué à Murphy :

… different countries had different economic conditions, and different crises; consequently, there is no reason why different levels of stimulus will have worked in some nations and not in others. Or why a stimulus of a certain level in Sweden was appropriate there, but not in America.

Mais Robert Murphy ne l’ignore certainement pas. D’ailleurs, il avait lui-même reconnu que ces données ne prouvent absolument rien :

Since Sweden handled the crisis much better than the US did, I would say the case of Sweden is prima facie evidence for the Austrian / austerian camp. As always in these matters, these particular data don’t prove anything; maybe there are confounding factors.

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