Murray N. Rothbard, “Keynesian Myths” — Summary

This short single-author polemical essay, printed as part of Making Economic Sense, is Rothbard’s Austrian critique of Keynesian macroeconomics. Its central claim is that Keynesianism repeatedly misreads inflation and unemployment because it treats “idle resources” as aggregate facts while ignoring the price system that explains why resources are idle in the first place.

Rothbard opens by placing Keynesian economics on the defensive. The stagflation of the 1970s, he argues, had already contradicted the Keynesian expectation that recession and inflation were opposites. He then points to a later recurrence: Keynesians had insisted that inflation could not return while industry operated below capacity, yet inflation did return.

As we all know, despite Keynesian assurances that inflation could not reignite, it did despite the idle capacity, leaving them with something else to puzzle over.

The essay’s structure turns on a reversal of a common Keynesian accusation. Keynesians often charge their critics with “assuming full employment,” but Rothbard asks why unemployment and unused capacity should be treated as unexplained givens. For him, the decisive omission in Keynesian theory is price adjustment.

The Keynesians themselves create the problem by leaving out the price system.

Rothbard’s core conceptual move is to translate macroeconomic unemployment back into market surplus. If labor, machines, or inventories remain unused, then their owners are asking prices above what buyers will pay. In this framework, unemployment is not caused by deficient aggregate demand as such, but by prices and wages failing to clear markets.

The way to cure a surplus or unemployment of anything, is to lower the asking price, whether it be wage rates for labor, prices of machinery or plant, or of the inventory of a retailer.

Invoking William H. Hutt, Rothbard gives this argument its sharpest formulation: idleness is a withholding of resources from exchange at available prices. He therefore calls unemployment “voluntary” in the analytical sense that owners of resources are holding out for better terms, though he then distinguishes this from cases where state policy makes such holding-out systematic.

In a profound sense, therefore, all unemployment and idleness is voluntary.

The essay then broadens the point into a political-economic criticism. Since the 1930s, Rothbard argues, government policy, compulsory unionism, minimum wages, welfare payments, and unemployment insurance have kept wages above market-clearing levels and subsidized nonemployment. This is where the essay’s abstract price theory becomes an institutional argument: mass unemployment is not merely a market failure but a consequence of intervention that blocks wage flexibility.

Rothbard’s final target is the Keynesian idea that monetary expansion can mobilize idle capacity without inflation. He argues that extra money can draw forth unused labor or machinery only by raising the prices paid to their owners. If spending succeeds in overcoming their resistance, it does so through higher wages or higher capital-good prices—in other words, through price inflation.

It will only do so if workers or machine owners are induced to think that they are getting a higher return and at least some of their holdout demands are being met.

The conclusion is that inflation and idle resources are not paradoxical at all. They coexist precisely because Keynesians misunderstand causality: monetary inflation raises prices, while unemployment persists where prices and wages remain above clearing levels. The essay’s relevance lies in its compact statement of Rothbard’s broader Austrian position: macroeconomic aggregates obscure the market processes that coordinate production, employment, and prices.

As usual, the Keynesians have the entire causal process bollixed up.