A MATTER OF INTEREST
Capital and Employment. By R. G. Hawtrey. (Longmans. I5s.) MR. HAWTREY has long been recognised as the leading exponent of the theory of the vital importance of the short-term rate of interest in the functioning of the economic machine. Many of his friends and critics think that he has carried much too far his reliance upon the efficacy of this kind of control, and has ignored the great tracts of time and opportunity over which it is either inoperative or powerless. Mr. Hawtrey rises quite unabashed from a contemplation of extensive periods during which employment and industrial activity have been apparently almost insensitive to any minor, and even major, movements of interest rates, to resume his consistent thesis at a most interest- ing time, when we are faced with new theories of the trade cycle which are putting the emphasis not on interest at all, but upon controlled monetary supplies. All this array of theories "agree in assuming that credit regulation must work mainly or even exclusively through long-term investment ", an assump- tion harmless if it were only a "difference of emphasis." But he holds that as an instrument of credit regulation the long-term investment market is very intractable, so that the new theory is pessimistic in the extreme. He puts the sensitive point at which the short-rate control really applies, and from which it spreads through the other economic activities, at the merchants' holding of commodities on borrowed money ; he considers that the exclusion of these effects from theory has been specially harmful because the Bank rate policy, so vital in credit regula- tion in the past (and striking at just the bills which finance goods), has been deprived of its principal theoretical basis.
Rejecting the tried and tested, economists have now, there fore, no.adequate substitute. It would be an interesting subject for objective investigation how far in practice the behaviour of holders of commodities is affected by changes in rate, major or minor, at different stages in the trade cycle ; how important a proportion borrowed money is to total capital ; how vital are the effects of their behaviour upon the flow of production and the " pull " of consumption. These vital points ought no longer to depend upon highly abstract theoretical analysis working out postulates of behaviour. "Merchants under the microscope " would be a truly Baconian subject for an Institute of Research to which the fraternity were willing to subject them- selves for examination. Mr. Hawtrey is so... fruitful in hypo- thesis and fair in presentation, that the respect for. his work is not limited by the extent to which one can agree with all his conclusions—he omits none of the ingredients used by others; but he mixes them differently.
The first half of the work is expository rather than critical, and much of it can be followed readily by the general reader. The second half comes to grips with the recent work of Mr. Keynes, Professor Hayek and other economists, and although the conclusions of the first part are useful they do not enable the reader to enter into the full values of the' second unless he has studied the teachings under examination. Mr. Keynes, in particular, has asked his fellow experts to examine- his- loctrines carefully, and Mr. Hawtrey here responds to the invitation with animation but no aninius. His general Ccni- clusion is that the Keynesian claims to have superseded the classical theory of interest cannot be sustained ; that the
capacity of idle balances to be the decisive factor in deter- mining the rate of interest " has been exaggerated or too easily generalised ; and that under examination the distinction between voluntary and involuntary unemployment "vanishes into thin air." Mr. Keynes' divergence from the classical school is due to a sheer misunderstanding of Professor Pigou's analysis ; but Mr. Hawtrey finds the chief fault in the new theory in its inadequate notice of the short-term rate of interest. It is a pretty fundamental difference of emphasis, and needs, it seems to me, much closer study and examination, as distinct from abstract doctrines and discussions, than it has yet received. Then follows some esoteric criticism of Hayek's "Prices and Production" and Pigou's "Theory of Unemployment," and Mr. Harrod on the Trade Cycle, which will be of interest to a limited number of specialists. The chapter on Douglas "Social Credit " has a wider appeal, reaching the usual economic verdict upon the "financial misfit" and "inherent deficiency of demand," but with some original comment on the aspect of depreciation as a cost.
This book has much that is interesting and valuable for the intelligent general reader, but its main value is for the economist, in its critical comments on current theories. For, whatever our standpoint may be, it is always good for any new hypothesis or mode of thinking to be passed through Mr. Hawtrey's uniquely meshed sieve, to see how it appears from his singularly unchanging and highly individual standpoint. Surely he may rank as the most courteous controversialist of our time.
J. C. STAMP.
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