Home » Uncategorized » Study Guide for Failure of the New Economics, Chapter 3. First installment: Say’s Law and Adam Smith

Study Guide for Failure of the New Economics, Chapter 3. First installment: Say’s Law and Adam Smith

This is our second post in a series. Here’s the intro again:

Failure of the New Economics is Hazlitt’s expose of Keynes’s book General Theory. Both books are not the easiest. While a Study Guide has been written for Hazlitt’s work, it’s basically just a series of questions.

Which is why Smiling Dave is going to set up his version of a study guide, in the form of a dialogue between Keynes and Hazlitt. So K will be Keynes, H will be Hazlitt, SD will be Smiling Dave, and DA will be the straight man, Devil’s Advocate.

Note to my loyal readers. At first I thought of setting up some boring study guide, summarizing what Hazlitt said. But that’s no fun. So this study guide will not restate the simple stuff Keynes or Hazlitt say, but will focus instead on those places where one or both of them is obscure.

OK let’s dive into chapter 3. Hazlitt writes that Adam Smith exploded the fallacy of “not enough money”, a fallacy that thrives to this day, by the way. It has been given the pompous title of Monetary Disequilibrium Theory. Since Hazlitt didn’t quote Smith, we’ll do it right here:

No complaint, however, is more common than that of a scarcity of money. Money, like wine, must always be scarce with those who have neither wherewithal to buy it nor credit to borrow it. Those who have either will seldom be in want either of the money or of the wine which they have occasion for.

This complaint, however, of the scarcity of money is not always confined to improvident spendthrifts. It is sometimes general through a whole mercantile town and the country in its neighbourhood. Over-trading is the common cause of it.

SD: By over-trading he means risky business ventures that flop, as he explains:

Sober men, whose projects have been disproportioned to their capitals, [=had bigger plans than wallets] are as likely to have neither wherewithal to buy money nor credit to borrow it, as prodigals whose expence has been disproportioned to their revenue. Before their projects can be brought to bear, their stock is gone, and their credit with it. They run about every-where to borrow money, and everybody tells them that they have none to lend.

DA: OK, that’s true for a small town types who went in over their head. But what of the whole country feels a shortage of money?

Even such general complaints of the scarcity of money do not always prove that the usual number of gold and silver pieces are not circulating in the country, but that many people want those pieces who have nothing to give for them.

SD: Meaning the money is there. It did not vanish into thin air. It’s just that nobody wants to give it to you. Smith explains how so many people are suddenly unable to get the cash they crave:

When the profits of trade [=meaning exporting] happen to be greater than ordinary, over-trading becomes a general error both among great and small dealers. They do not always send more money abroad than usual, but they buy upon credit, both at home and abroad, an unusual quantity of goods, which they send to some distant market in hopes that the returns will come in before the demand for payment. The demand comes before the returns, and they have nothing at hand with which they can either purchase money, or give solid security for borrowing.

SD: Smith sums it all up beautifully:

It is not any scarcity of gold and silver, but the difficulty which such people find in borrowing, and which their creditors find in getting payment, that occasions the general complaint of the scarcity of money.

DA: So what’s he saying, Dave?

SD: Simple. “Not enough money” really means “not enough brains”. What happened was that for some reason, many people made foolish business decisions, started these ambitious projects which did not pan out, and now, not only are they broke, but all the idiots who financed them are broke, too.

DA: So “not enough money” means “I lost a lot of money on some stupid business deal.”

SD: Yep.

Let’s take a break. To be continued.



  1. Marques says:

    Hello, Dave! I just would like to say that I’m really liking your posts about “The Failure of New Economics”. I’m learning a lot!
    Keep up the good work! =)


  2. Smiling Dave says:

    Thank you, Marques.


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