The economics of illusion; a critical analysis of contemporary economic theory and policy

282 Pages·1949·12.51 MB·English

by  L Albert Hahn

The
ECONOMICS of
ILLUSION
A Critical Analysis
of Contemporary Economic Theory and Policy
by L. ALBERT HAHN
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For
SQUIER PUBLISHING CO., INC., NEW YORK
COPYRIGHT, 1949, BY
SQUIER PUBLISHING CO., INC.
20 BROAD STREET, NEW YORK 5, N. Y.
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PRINTED IN THE UNITED STATES OF AMERICA
Publisher's Foreword
The author of this volume is Dr. L. Albert Hahn, an inter-
nationally known economist, who came to this country in 1941
after having lived in Germany and Switzerland. He is the author
of the Volkswirtschaftliche Theorie des Bankkredits (Economic
Theory of Bank Credit) which appeared in three editions, and of
many pamphlets and contributions to scientific journals, as well as
innumerable articles in well-known dailies. These writings cov-
ered the economic events in Germany from the days of the Great
Inflation to the times of the Great Depression. He was one of the
first to criticize the ill-fated monetary policy which led to the
German inflation and he was one of the few who tried to fight the
deflation policy of the Luther and Briining era, which gave to the
deflation crisis in Germany its special feature and paved the way
for the subsequent Hitler movement.
Dr. Hahn's publications attracted wide attention in Europe, the
chief reason being that he was one of the few economists to unify
practice and theory; for he was the leading manager of one of
the largest and oldest provincial banks in Germany and, at the
same time, taught Monetary Theory and Policy as Honorary Pro-
fessor at the University of Frankfurt.
This book is published in the interest of making available to the
American statesman, teacher, student, business employer and em-
ployee Dr. Hahn's thoughts and observations on contemporary
economic theory and policy.
SQUIER PUBLISHING COMPANY
February, 1949
Acknowledgments
For permission to use quotations from The General Theory of
Employment, Interest, and Money by J. M. Keynes I am indebted
to Harcourt, Brace and Company, publishers, 383 Madison Avenue,
New York, N. Y.
For permission to reprint pages 327 to 334 of German Monetary
Theory, 1905-1933, by Howard S. Ellis I am indebted to Harvard
University Press, Cambridge, Mass.
For permission to reprint articles written by me and previously
published I am indebted to:
The Banking Law Journal, Cambridge, Mass.
Chamber of Commerce of the United States, Washington, D. C.
The Commercial and Financial Chronicle, New York, N. Y.
Social Research, New York, N. Y.
American Economic Review, Evanston, Illinois
The Journal of Marketing, New York, N. Y.
The American Journal of Economics and Sociology, New York,
N. Y.
Kyklos, International Review for Social Sciences, Berne,
Switzerland
Schweizerische Zeitschrift fur Volkswirtschaft und Statistik,
Basle, Switzerland
I wish to acknowledge my indebtedness to Dr. Hans Neisser for
his helpful suggestions for Chapters 10, 12 and 14.
I also acknowledge the assistance given by Miss Martha Ander-
son, Mr. Walter S. Morris and Miss G. Sanders in editing and pre-
paring this book.
L ALBERT
New York, N. Y.
February, 1949
Contents
PAGE
INTRODUCTION BY HENRY HAZLITT 1
CHAPTER
1. INTRODUCTORY: CYCLES IN MONETARY THEORY AND POLICY 3
2. SHOULD A GOVERNMENT DEBT, INTERNALLY HELD, BE
CALLED A DEBT AT ALL? 9
3. THE ILLUSION OF THE WAR BOOM 20
4. CAPITAL IS MADE AT HOME 26
5. DON'T PREDICT POSTWAR DEFLATION—PREVENT IT! . 42
6. COMPENSATING REACTIONS TO COMPENSATORY SPENDING . 49
7. INTEREST RATES AND INFLATION 63
8. EXCHANGE RATES RUN WILD 74
9. Is SAVING A VIRTUE OR A SIN? 92
10. MERCANTILISM AND KEYNESIANISM 106
11. WAGE FLEXIBILITY UPWARDS 119
12. THE PURCHASING POWER THEORY—SENSE AND NONSENSE 138
(Translation from German)
13. ANACHRONISM OF THE LIQUIDITY PREFERENCE CONCEPT . 146
14. THE ECONOMICS OF ILLUSION 166
(Translation from German)
15. THE INVESTMENT GAP 185
16. CONTINENTAL EUROPEAN PRE-KEYNESIANISM . . .213
vii
Vlll CONTENTS
CHAPTER PAGE
17. CONCLUDING REMARKS: KEYNESIANISM—PROGRESS OR RET-
ROGRESSION? 228
Appendices
I. EXCERPT FROM HOWARD S. ELLIS, "GERMAN MONETARY
THEORY, 1905-1933," CHAPTER XVIII . . .. 244
II. TRANSLATION OF GOTTFRIED HABERLER, ALBERT HAHN'S
"VOLKSWlRTSCHAFTLICHE THEORIE DES BANKKREDITS"
(ARCHIV FUR SOZIALWISSENSCHAFT UND SOZIALPOLITIK,
1927, VOL. 57, PP. 803 FF.) 253
III. THE GOLD EXCHANGE PARADOX 260
IV. TABLE OF CONTENTS OF "GELD UND KREDIT" . . 271
V. TABLE OF CONTENTS OF "GELD UND KREDIT, NEUE FOLGE,"
1929 272
VI. LIST OF ARTICLES AND PAMPHLETS PUBLISHED SINCE THE
APPEARANCE OF "GELD UND KREDIT, NEUE FOLGE,"
1929, BUT NOT INCLUDED IN THIS VOLUME . . . 273
Introduction
By HENRY HAZLITT
Dr. L. Albert Hahn has long enjoyed a high reputation in Europe,
as well as among German-speaking and German-reading economists
throughout the world. But linguistic barriers, unfortunately, are
still real. Economic thought is not yet an international unit. It is
still broken to a large extent into nationalistic or linguistic com-
partments, which tend to influence each other only sluggishly and
often with a deplorable time lag. That is the only reason why
Albert Hahn needs any introduction to American readers.
In the following pages some of his recent thinking is made avail-
able for the first time in book form in English. We owe this not
to a translator, but (as with other talented writers in the forced
exile of recent years) to Dr. Hahn's own acquisition of the skill to
compose in a second language since he has made his home in
New York.
It is unnecessary for me to give here any exposition of Dr. Hahn's
contributions to economic thought, or even a biographical sketch.
Both tasks have been done adequately by others. It is enough to
point out that Dr. Hahn enjoys an enormous advantage as an
analyst of Keynesian fallacies. As he has reminded us himself:
"all that is wrong and exaggerated in Keynes I said much earlier
and more clearly." This intellectual head start enables him to ap-
proach and dissect the errors of the Keynesians on their own
ground and on some of their own premises.
Dr. Hahn got his education in a hard school. He lived through
the dreadful inflation in Germany. He witnessed other European
inflations at first hand. He saw the breakdown in practice of the
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2 INTRODUCTION
specious theories that had supported those inflations. It was not
merely increased scholarship and thought, but his daily experiences
as a business man and as a banker, that led him to desert his pre-
Keynesian Keynesianism.
There is no more important task for the economic theorist today
than to disentangle the network of confusion and error that now
goes under the name of the Keynesian Revolution. Until this work
has been thoroughly done, clarity and real progress in economics
will not be possible. There is no more sophisticated, penetrating
and thorough guide in this task than Albert Hahn.
New York, October, 1948
1. Introductory: Cycles in
Monetary Theory and
Policy
If the luck of a monetary theorist is to be measured by the
variety of things he has experienced during his lifetime, then,
indeed, I must be considered fortunate, for I lived through
times of the widest changes in the monetary field: from the rela-
tive stability of the era before 1914, through the inflationism of
World War I and the more violent excesses of inflation that fol-
lowed; through the deep and stubborn deflationism from 1929
onwards, then through the ups and downs of the thirties; and
finally the mounting inflation of the recent decade, that has
gripped the whole world and has again in parts of Europe and in
the Orient passed beyond the limits of control. Throughout most
of these periods monetary theorists, by and large, were engaged in
rationalizing, justifying and defending the excesses of those re-
sponsible for monetary policy. My situation, on the other hand,
was often that of a Cassandra who saw the ominous implications
of what the majority of theorists considered harmless or even
beneficial.
I have attempted to counter to the best of my ability the noxious
extremes to which monetary policy and theory seem to swing,
pendulum-like, as if subject to a historical law. My first publi-
cation, the Volkswirtschaftliche Theorie des Bankkredits,1 it is
true, was an inflationary book in an inflationary time; it was under-
1 Tubingen, 1st ed. 1920; 2d ed., 1924; 3d ed., 1930.
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