… is from page 40 of Hayek’s 1979 monograph, Unemployment and Monetary Policy:
The conquest of opinion by Keynesian economics is due mainly to the fact that its argument conformed to the age-old belief of the businessman that his prosperity depended on consumer demand. This plausible but erroneous conclusion was derived from his individual experience in business, namely, that general prosperity could be maintained by keeping general demand high. Economic theory had been rejecting this conclusion for generations, but it was suddenly made respectable by Keynes. And since the 1930s it has been embraced as obvious good sense by a whole generation of economists brought up on the teaching of his school. Thus for a quarter of a century we have systematically employed all available methods of increasing money expenditure, which in the short run creates additional employment but at the same time leads to a misdirection of labor that must ultimately result in extensive unemployment.
It is useful to add to this Austrian insight Bob Higgs’s important theory of regime uncertainty. (For a longer treatment, see here.) Nothing in economic theory argues against the possibility of a relatively rapid restoration of employment – employment of labor and other resources rapidly channeled into what Arnold Kling describes as patterns of sustainable specialization and trade. In contrast, demand-management policies, such as those favored by Keynesians, effectively aim to channel unemployed workers and other resources back into the employments that have proven to be unsustainable.
The freer the market, the more rapid such restoration will be. But frantic post-boom government meddling into the economy – meddling both real and monetary, and both actual and plausibly threatened – dampens not only the ability but also the willingness of entrepreneurs and investors to experiment with creating sustainable patterns of specialization and trade. The faux-sensible “government must do something” attitude itself prolongs, and perhaps even deepens, the economic problem that that “doing something” is imagined to solve.
