NATIONAL ISSUE -- Investor's Business Daily

TEXTBOOKS TAKE FREE-MARKET TACK But Many Welfare-State Myths Still Are Taught

Date: 10/22/98
Author: Michael Chapman

Many students today learn a lot about free-market economics. Problem is, John Maynard Keynes, the godfather of the welfare state, is doing the teaching.

Still, in recent years, textbooks have improved. Free-market economists like Milton Friedman and Friedrich Hayek get some play. But their successful ideas still aren't getting the coverage they deserve.

The problem is what's not taught, the ''sins of omission,'' said economist Mark Skousen, author of ''Economics on Trial: Lies, Myths, and Realities.''

''I give the textbooks higher marks now,'' he said, ''but there's still much more to do.''

Free enterprise and private property are what America was built on. The idea of private property - ''life, liberty and the pursuit of happiness'' - is enshrined in the Declaration of Independence.

Economic freedom is essential to political freedom, says Nobel Prize winner Friedman.

In countries with little economic freedom, such as China or the former Soviet Union, he says, there's little political liberty. You can't have one without the other.

So it's vital that American students learn the facts about free enterprise. But do they?

A few textbooks at the high school and college undergraduate levels are good, says Burton Folsom Jr., a former college professor and now senior fellow at the Michigan- based Mackinac Center for Public Policy.

''The new high school textbooks are moving away from Keynes,'' he said. ''But they're still bad on antitrust, taxes and the Great Depression. They repeat myths about (John D.) Rockefeller and Reagan.''

Professor Richard Ebeling, head of the department of economics and business at Hillsdale College, agrees.

Some college texts now cite free-market economists such as Friedman and the monetarists or Hayek and the so-called Austrians, Ebeling says. But these schools of thought ''are explained in terms of a general Keynesian model or theory.''

''The Keynesian mind-set still dominates,'' he said.

With that mind- set come many economic myths, false beliefs about markets and a skewed view of how the world works.

Folsom and his colleagues at the Mackinac Center are finishing a study of 16 high school textbooks. The books were reviewed to find whether students were getting a good economics education. So far, three books earned A's, six got D's, and two wound up with F's.

Texts in their fifth or sixth editions still rely on Keynes, Folsom says. But the new texts are kinder to free enterprise.

''They're good on trade issues and entrepreneurship - and there is some skepticism of big government,'' Folsom said. However, they're bad on antitrust, he says.

For instance, they repeat the myths about John D. Rockefeller and the robber barons, Folsom says.

''Rockefeller never had a monopoly. He had an oligopoly (a market controlled by a handful of firms),'' Folsom said. ''The price of refined oil fell from 30 cents to 6 cents a gallon . . . (and) Standard Oil's market share declined to 64% (in 1911 from 88% in 1890) because of competition - before the government broke it up.''

Standard's share of oil production had dropped from 34% in 1890 to 11% in 1911 before antitrust enforcers broke this ''monopoly.''

Folsom also notes that U.S. Steel was the largest steel company in 1901; it held 61% of the market.

But because of competition, not antitrust laws, U.S. Steel's market share fell to 39% by the mid-'20s.

''This is never mentioned in the textbooks,'' Folsom said. The same holds true for American Sugar, he says, which held 98% of the market in the 1890s only to see its share decline due to competition.

A second myth, Folsom found, concerns taxes.

''Supply-side still hasn't sunk in. Tax cuts in the '20s produced more federal revenue, and cuts in the '80s doubled federal revenue.'' Only two texts were fair on this topic, Folsom says.

College texts still don't treat supply-side economics right, Skousen says. ''It still gets a lot of criticism.''

A third myth is that laissez- faire capitalism caused the Great Depression and government spending cured it, say Folsom, Skousen and Ebeling.

''Almost every textbook misses on this,'' Folsom said. ''Friedman proved that the Federal Reserve caused it, and government programs didn't get us out of the Depression.''

Walter Williams, chairman of the economics department at George Mason University, agrees.

''Some textbooks say that runaway capitalism caused the Depression, when it was the Fed and the Smoot-Hawley tariff that did it,'' Williams told IBD. ''Friedman confirmed this.''

Among economists, only those of the Austrian School, such as Hayek and Ludwig von Mises, clearly predicted the '29 stock market crash and the Depression that followed.

They both blamed the Fed's manipulation of the money supply, years before Friedman documented it. Yet the Austrian School rarely gets a mention in textbooks.

Williams adds that other related myths are that ''World War II brought us out of the Depression and that war is good for the economy.''

In fact, war means less money for real investment, he said, because money that could be going to factories and equipment is instead spent on troops and arms.

The minimum wage and the business cycle got fair treatment in about half the texts, Folsom said, but it's still ''a mixed bag.''

Many texts still view the Fed as ''the savior'' of the business cycle, he said, ''but we had more stability under the gold standard.''

There's little debate among academic economists anymore that the minimum wage causes unemployment, Williams says. ''The debate is the magnitude.''

If money's a problem, why not just make the minimum wage $25 an hour? Or $100? Obviously, supply and demand would intercede, and people would see the danger, Ebeling says.

Ditto for Fed control of the money supply. ''(Interest) rates are real. Why not make the rate zero? It's like setting the price of shoes at zero.''

The myth that the minimum wage ''is a wonderful way of helping poor people,'' however, is peddled by professors in other fields, said Donald Boudreaux, a former economics professor and now president of the Foundation for Economic Education.

''There is a knee-jerk reaction for government intervention at universities, even among those who've had economic training,'' Boudreaux said. ''It's a statist culture.''

Boudreaux adds that the problem with the textbooks began with Paul Samuelson. He's a Keynesian and Nobel Prize winner whose books have dominated economics teaching since the '40s.

Samuelson argues that economics is a science, Boudreaux says.

''He sees the economy as a machine that government can manipulate,'' he said. ''The ideology is that if we get good people, we can master the economy.''

Ebeling adds that the myth is that ''the market is a planned mechanism'' and planning is needed because markets fail.

This thinking pervades college textbooks, he says. It ignores the entrepreneur, who is the prime mover, and myriad complex and intricate relationships at the microeconomic level.

In some ways, the teaching of college economics has grown worse, Boudreaux says.

''By and large, the top schools, they teach technique, mathematical manipulation of economic models, a series of equations. They're divorced from reality.''

But Skousen also sees a shift away from Keynes in newer college texts.

''All textbooks have shifted more toward free markets,'' he said. They are going back to the classical, long-term growth model first and the Keynesian, short-term equilibrium model second. Friedman is cited more often, he said, and the Austrians get a little credit.

One of the biggest myths still peddled, however, is that the economy is consumer- driven, Skousen says.

''You see this all the time,'' he said, ''references to retail sales, consumer spending. Consumption should be almost ignored. Focus on production. The economy is investment-driven.''