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Thursday, October 3, 2013

William Hutt’s Fantasy World Economics

William Hutt’s The Theory of Idle Resources (1939) is touted by libertarians as some kind of authoritative refutation of the idea that resources can be “idle.”

In fact, Hutt simply redefines what is generally called (1) involuntary unemployment, and (2) unused (but potentially useable) capital goods as types of “pseudo-idleness.” Hutt’s analysis consists of serial use of the fallacy of equivocation. Hutt simply re-defines terms at will and implies that he has made some substantive point that refutes Keynesianism. But his arguments do no such thing.

For example, for Hutt, an unemployed man actively searching for work is really “employed,” because he is “working on his own account without immediate remuneration” (Hutt 2011 [1939]: 24). But such an eccentric definition of “employment” does not change the fact that the man in question remains unemployed in the sense of not being employed in work for which he receives money wages which can be used to buy output, and where he creates goods and services for sale in the community. Hutt refutes no substantive idea in Keynesian economics with his hare-brained re-definition of “employment.”

Amongst Hutt’s other inane observations we find the statement that humans who are sleeping are not economically “idle” resources (Hutt 2011 [1939]: 23). Yet no Keynesian, or any other economist for that matter, has ever regarded sleeping human beings as an economic problem requiring government intervention. So what’s the point of Hutt’s trivial comment?

With regard to capital goods, Hutt says that idle capital goods maintained by their owners but not used in production are only “pseudo-idle,” because the owners are preserving the availability of the capital goods for future use (Hutt 2011 [1939]: 25). This does not change the fact that the capital goods in question would be of greater social and economic use if they were actually employed in production. During recessions, that can be brought about by government policy to create more demand for final output.

One can only marvel at the stupidity of Hutt’s verbal legerdemain and the awe with which he is treated by equally deluded libertarian ideologues.

Finally, this statement by Hutt gives us an example of the level of his economic analysis:
“If we consider the actual ‘unemployed,’ it is impossible to regard them as ‘valueless resources.’ They are not unemployed for that reason. At low enough wage-rates they could practically all be profitably absorbed into some task, even if their earnings were insufficient in many cases to pay for physically or conventionally necessary food, let alone clothing and housing. In a slave economy, such people might be allowed to die off; or they might, for sentimental reasons, be kept alive.” (Hutt 2011 [1939]: 19).
There you have it.

In Hutt’s imaginary world, all involuntary unemployment can just be eliminated by lowering wages and prices, and employment is reduced to a simple function of well-behaved supply and demand curves for labour. Unfortunately, some equilibrium wages might be below subsistence level, so that people working for such wages can expect to starve to death – a state of affairs that will no doubt provide a “final solution” to all those pesky unemployed people.

In the set of assumptions required for Hutt’s imaginary world to work, there are no complex causes of unemployment. If only wages and prices were near perfectly flexible, economic problems would disappear. Hutt’s fantasy world economics requires that businesses and households can just magically change fixed nominal debt or wage contracts. Businesses do not prefer to administer prices. Business inducement to investment is not strongly influenced by expectations, demand, expected demand, the level of consumption in the community, or the state of the financial system, and so on.

In short, William Hutt’s economics has virtually zero relevance to a real world market economy. And it doesn’t inspire much confidence in the rest of his analysis.


BIBLIOGRAPHY
Hutt, William Harold. 2011 [1939]. The Theory of Idle Resources (2nd edn.). Ludwig von Mises Institute, Auburn, Ala.

11 comments:

  1. I agree that what Hutt calls employment does not match with the Keynesian or everyday definition. It is bad rhetoric for both sides.
    Nevertheless, this does not undermine his point. Hutt is claiming that the definition of employment used by statisticians is meaningless. Each individual is doing what he thinks is best at that time. He is employing his resources in the subjectively most productive way, just as he does when "employed." His productive resources are not idle.

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    1. Hutt's definition of "employment" in that sense is trivial and does not refute the standard definition of unemployment.

      "Nevertheless, this does not undermine his point. Hutt is claiming that the definition of employment used by statisticians is meaningless."

      The definition of unemployment as a person ready and willing to work and looking for paid work but unable to find it is "meaningless", is it?

      Strange how the definition I just used has meaning and can be readily understood by any competent speaker of English!

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    2. You're right. Useless is an unfair claim. My point was that "unemployment" does not prove that resources are idle. Resources are still being used in to their most preferred ends given the circumstances.
      Unemployment does not tell us what Keynes claims it tells us. It has less meaning than Keynes claims. It only tells us that resources are not being used in the way that most people use, through employment. It is an a statistical construct.

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    3. "My point was that "unemployment" does not prove that resources are idle. Resources are still being used in to their most preferred ends given the circumstances."

      Even that is just another fallacy of equivocation with respect to the word "idle".

      An unemployed man (in the sense I have defined "unemployed" above) is "idle" in the sense that his labour is not being used to produce real output (whether consumption goods or capital goods) and to increase the real wealth of the community and its per capita real wealth.

      That sense also has real meaning and is not that difficulty to understand by any competent speaker of English.

      "It is a statistical construct."

      That is straightforwardly not true.

      Is it your belief that unemployed people do not exist?

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    4. "An unemployed man (in the sense I have defined "unemployed" above) is "idle" in the sense that his labour is not being used to produce real output (whether consumption goods or capital goods) and to increase the real wealth of the community and its per capita real wealth."

      Neither is an estate agent, nor a breast feeding advisor.

      'Unemployed' has to be related to the compensation regime in place. One man's work is another man's waste of time.

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    5. I understand your point, but think we are talking past each other, because of poor language do to Hutt.

      You need to distinguish between unemployed people and unemployment. Unemployed people exist. Unemployment, just like GDP, is a statistic. It depends on how the statistical agency reports the numbers. It does not tell us whether people are being the most productive, given their available options.

      To move away from the unemployment example. Is my cash idle if I do not spend it? From your definition, yes. It is unemployed cash. I wish there was something more fun to spend it on. That is not the case at this moment. But remaining in my pocket is the best use of it now. It is not idle, but being used effectively.

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    6. Neil Wilson@October 4, 2013 at 8:47 AM

      "Neither is an estate agent,"

      But on the contrary, a working estate agent is providing a non physical commodity we call a service.

      The real output of a nation includes services.

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    7. "Is my cash idle if I do not spend it? From your definition, yes. It is unemployed cash. I wish there was something more fun to spend it on. That is not the case at this moment. But remaining in my pocket is the best use of it now. "

      If you are literally hoarding cash, it is certainly "idle" in the sense that it is not being used for

      (1) purchases of goods or services, or

      (2) "saved" in the sense of (i) lent out in a time deposit for investment or (ii) adding to a bank's reserves and assets allowing them greater power in final clearing, which helps the economy.

      Your individual act of hoarding has very small effects on the economy at large, but if enough people do it we have an emergent property: a severe, unintended macroeconomic problem (falling investment, output and employment) resulting from individual micro behaviour.

      What you are engaged in, like Hutt, is serial fallacies of equivocation.

      I give you one clear definition; you deny the truth of my statement by simply redefining my terms.

      Anyone who has done elementary logic knows that this is, as I have said, just an illegitimate fallacy of equivocation.

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    8. "a working estate agent is providing a non physical commodity we call a service."

      When you're getting into defending estate agents, you know you're on the wrong side of the argument.

      :)

      The 'unemployed' person is providing a beer drinking and TV watching service.

      Compare and contrast

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  2. "The definition of unemployment as a person ready and willing to work and looking for paid work but unable to find it is "meaningless", is it?"

    There is the question of whether it is useful though.

    For example it is very easy to turn Hutt's definition of employment into reality and consistent with the standard one simply by the state paying everybody who doesn't want to find a job elsewhere a wage.

    At that point there is no unemployment as traditionally defined.

    The issue then is what is meant by 'paid work', and whether the restrictions on who is doing the paying and what is paid for actually have any genuine purpose.

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  3. "Hutt’s fantasy world economics requires that businesses and households can just magically change fixed nominal debt or wage contracts"

    Why fantasy? a default renegotiation and bankrupcy makes that, not?

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