The Original Gold Standard Did Not Submit Wage-Policies to Dictation But Made Them the Resultant of Impersonal Forces

Lord Keynes, however, is, I think, not right in saying that ‘the error of the gold standard lay in submitting national wage-policies to outside dictation’. The original gold standard did not submit wage-policies to dictation, by governing authority anywhere, but made them the resultant of impersonal forces issuing out of the disposition, and potentiality, of individuals to follow what they conceived to be their own interest. This system, as Professor Hayek points out, had many virtues, and we should be badly advised if we should throw away its virtues along with its imperfections. The automaticity of the gold standard was, per se, all to the good, and what we need is a similarly automatic system which will be free of the vices of the traditional gold standard. We should not forget that the once well-nigh universal adhesion to the gold standard was spontaneous rather than imposed, and that it was only after the gold standard had been subjected to varying national management, in an attempt to overcome the original objections against it, that it was abandoned by those countries that could not make their ideas on its management effective, that is, after (unstable) price levels had been imposed from without.

--Friedrich A. von Hayek, A Tiger by the Tail: The Keynesian Legacy of Inflation, ed. Sudha R. Shenoy, 3rd ed. (London: The Institute of Economic Affairs and the Ludwig von Mises Institute, 2009), 50.

Keynes Has Given Us a System of Economics Which Is Based on the Assumption That No Real Scarcity Exists

Now such a situation, in which abundant unused reserves of all kinds of resources, including all intermediate products, exist, may occasionally prevail in the depths of a depression. But it is certainly  not a normal position on which a theory claiming general applicability could be based. Yet it is some such world as this which is treated in Mr. Keynes' General Theory of Employment, Interest and Money, which in recent years has created so much stir and confusion among economists and even the wider public. Although the technocrats, and other believers in the unbounded productive capacity of our economic system, do not yet appear to have realised it, what he has given us is really that economics of abundance for which they have been clamouring so long. Or rather, he has given us a system of economics which is based on the assumption that no real scarcity exists, and that the only scarcity with which we need concern ourselves is the artificial scarcity created by the determination of people not to sell their services and products below certain arbitrarily fixed prices. These prices are in no way explained, but are simply assumed to remain at their historically given level, except at rare intervals when "full employment" is approached and the different goods begin successively to become scarce and to rise in price.

--Friedrich A. Hayek, The Pure Theory of Capital (1941; repr., Auburn, AL: Ludwig von Mises Institute, 2009), 373-374.

Economic Education Must Unmask and Must Refute the Ten Main Theses of "Progressive Economics"

The doctrines which are taught today under the appellation “Progressive economics” can be condensed in the following ten points.

1. The fundamental economic thesis common to all socialist groups is that there is a potential plenty, thanks to the technological achievements of the last two hundred years. The insufficient supply of useful things is due merely, as Marx and Engels repeated again and again, to the inherent contradictions and shortcomings of the capitalist mode of production. Once socialism is adopted, once socialism has reached its "higher stage," and after the last vestiges of capitalism have been eradicated, there will be abundance. To work then will no longer cause pain, but pleasure. Society will be in a position to give "to each according to his needs." Marx and Engels never noticed that there is an inexorable scarcity of the material factors of production. 
• The academic Progressives are more cautious in the choice of terms, but virtually all of them adopt the socialist thesis.
2. The inflationist wing of Progressivism agrees with the most bigoted Marxians in ignoring the fact of the scarcity of the material factors of production. It draws from this error the conclusion that the rate of interest and entrepreneurial profit can be eliminated by credit expansion. As they see it, only the selfish class interests of bankers and usurers are opposed to credit expansion.
• The overwhelming success of the inflationist party manifests itself in the monetary and credit policies of all countries. The doctrinal and semantic changes that preceded this victory, which made this victory possible and which now prevent the adoption of sound monetary policies, are the following:
• Until a few years ago, the term inflation meant a substantial increase in the quantity of money and money-substitutes. Such an increase necessarily tends to bring about a general rise in commodity prices. But today the term inflation is used to signify the inevitable consequences of what was previously called inflation. It is implied that an increase in the quantity of money and money-substitutes does not affect prices, and that the general rise in prices which we have witnessed in these last years was not caused by the government's monetary policy, but by the insatiable greed of business. 
• It is assumed that the rise of foreign exchange rates in those countries, where the magnitude of the inflationary increment to the quantity of money and money-substitutes in circulation exceeded that of other countries, is not a consequence of this monetary excess but a product of other agents, such as: the unfavorable balance of payments, the sinister machinations of speculators, the "scarcity" of foreign exchange, and the trade barriers erected by foreign governments, not by one's own.
• It is assumed that a government, which is not on the gold standard and which has control of a central bank system, has the power to manipulate the rate of interest downward ad libitum [at will] without bringing about any undesired effects. It is vehemently denied that such an "easy money" policy inevitably leads to an economic crisis. The theory, which explains the recurrence of periods of economic depression as the necessary outcome of the repeated attempts to reduce interest rates artificially and expand credit, is either intentionally passed over in silence or distorted in order to ridicule it and to abuse its authors.
3. Thus the way is free to describe the recurrence of periods of economic depression as an evil inherent in capitalism. The capitalist society, it is asserted, lacks the power to control its own destiny. 
4. The most disastrous consequence of the economic crisis is mass unemployment prolonged year after year. People are starving, it is claimed, because free enterprise is unable to provide enough jobs. Under capitalism technological improvement which could be a blessing for all is a scourge for the most numerous class.
5. The improvement in the material conditions of labor, the rise in real wage rates, the shortening of the hours of work, the abolition of child labor, and all other "social gains" are achievements of government pro-labor legislation and labor unions. But for the interference of the government and the unions, the conditions of the laboring class would be as bad as they were in the early period of the "industrial revolution."
6. In spite of all the endeavors of popular governments and labor unions, it is argued, the lot of the wage earners is desperate. Marx was quite right in predicting the inevitable progressive pauperization of the proletariat. The fact that accidental factors have temporarily secured a slight improvement in the standard of living of the American wage earner is of no avail; this improvement concerns merely a country whose population is not more than 7 percent of the world's population and moreover, so the argument runs, it is only a passing phenomenon. The rich are still getting richer; the poor are still getting poorer; the middle classes are still disappearing. The greater part of wealth is concentrated in the hands of a few families. Lackeys of these families hold the most important public offices and manage them for the sole benefit of "Wall Street." What the bourgeois call democracy means in reality "pluto-democracy," a cunning disguise for the class rule of the exploiters.
7. In the absence of government price control, commodity prices are manipulated ad libitum [at will] by the businessmen. In the absence of minimum wage rates and collective bargaining, the employers would manipulate wages in the same way too. The result is that profits are absorbing more and more of the national income. There would prevail a tendency for real wage rates to drop if efficient unions were not intent upon checking the machinations of the employers.
8. The description of capitalism as a system of competitive business may have been correct for its early stages. Today it is manifestly inadequate. Mammoth-size cartels and monopolistic combines dominate the national markets. Their endeavors to attain exclusive monopoly of the world market result in imperialistic wars in which the poor bleed in order to make the rich richer.
9. As production under capitalism is for profit and not for use, those things manufactured are not those which could most effectively supply the real wants of the consumers, but those the sale of which is most profitable. The "merchants of death" produce destructive weapons. Other business groups poison the body and soul of the masses by habit-creating drugs, intoxicating beverages, tobacco, lascivious books and magazines, silly moving pictures, and idiotic comic strips. 
10. The share of the national income that goes to the propertied classes is so enormous that, for all practical purposes, it can be considered inexhaustible. For a popular government, not afraid to tax the rich according to their ability to pay, there is no reason to abstain from any expenditure beneficial to the voters. On the other hand, profits can be freely tapped to raise wage rates and lower prices of consumers' goods.

--Ludwig von Mises, "The Objectives of Economic Education," in Economic Freedom and Interventionism: An Anthology of Articles and Essays, ed. Bettina Bien Greaves (Indianapolis: Liberty Fund, 1990), 208-210.

The Assumptions behind John Stuart Mill's Doctrine That Supply Creates Its Own Demand

Keynes, furthermore, ignores entirely the rich, fine work done by such writers as J. B. Clark and the Austrian School, who elaborated the laws of proportionality and equilibrium.

The doctrine that supply creates its own demand, as presented by John Stuart Mill, assumes a proper equilibrium among the different kinds of production, assumes proper terms of exchange (i.e., price relationships) among different kinds of products, assumes proper relations between prices and costs. And the doctrine expects competition and free markets to be the instrumentality by means of which these proportions and price relations will be brought about. The modern version of the doctrine would make explicit certain additional factors. There must be a proper balance in the international balance sheet. If foreign debts are excessive in relation to the volume of foreign trade, grave disorders can come. Moreover, the money and capital markets must be in a state of balance. When there is an excess of bank credit used as a substitute for savings, when bank credit goes in undue amounts into capital uses and speculative uses, impairing the liquidity of bank assets, or when the total volume of money and credit is expanded far beyond the growth of production and trade, disequilibria arise, and, above all, the quality of credit is impaired. Confidence may be suddenly shaken and a countermovement may set in.

With respect to all these points, automatic market forces tend to restore equilibrium in the absence of overwhelming governmental interference.

Keynes has nothing to say in his attack upon the doctrine that supply creates its own demand, in the volume referred to, with respect to these matters.

Indeed, far from considering the intricacies of the interrelations of markets, prices and different kinds of production, Keynes prefers to look at things in block.

--Benjamin M. Anderson, Economics and the Public Welfare: A Financial and Economic History of the United States, 1914-1946 (1949; repr., Princeton, NJ: D. Van Nostrand Company, 1965), 392-393.

The "New Economics" (Keynesian Revolution) Has Several Points in Common with Marxian and Russian Socialism

From the foregoing, one may see that Keynesism [sic] has several points in common with Marxian Socialism. Among these are:

1. the theory that the rate of return on investments tends to decline and unemployment tends to increase in a free-enterprise, capitalistic economy;
2. emphasis on the depressing influence of savings in a "mature" capitalistic economy;
3. theories of an irresistible tendency to monopoly, increasing concentration of wealth, and the doom of free markets in free enterprise, or laissez faire;
4. disparagement of individual enterprise and responsibility in favor of government control over savings and provision for old age, unemployment, and other emergencies in an elaborate "social security" program;
5. proposals for "progressive" income and inheritance taxes;
6. proposals for government management of the currency and banking, for government ownership of certain industries; and for liquidation ("euthanasia") of the rentier (bond-holding and fixed-income) classes; 
7. a collectivistic view of property rights as privileges from the State, to be given or taken away at the will of the State;
8. a tendency to identify government with "all of us," or with "society," in the democratic socialist state and in the democratic Keynesian "mixed" economy;
9. a tendency to deal with persons and economic activity in terms of "classes," "averages," "aggregates," and technological or economic "forces";
10. a mechanistic view of human behavior as predictable and controllable by government, through study and manipulation of interest rates, money, government lending and spending, taxation, and technological developments. 

Yet, despite the similarities between Marxian socialism and Keynesism [sic] and despite growing hostility to Russian Marxists, the Keynesian national-income approach makes rapid headway in American colleges and universities. Why?

--Vervon Orval Watts, Away from Freedom: The Revolt of the College Economists (1952; repr., Auburn, AL: Ludwig von Mises Institute, 2008), 28-30.