BETWEEN CHICAGO AND VIENNA: INTERVIEW WITH MARK SKOUSEN

Mark Skousen is an American economist, investment analyst, newsletter editor, college professor and author of more than 25 non-fiction books.

AR: Professor Skousen… Thank you for this opportunity to let us know a little more about yourself. Please, explain the context in which you grew up in Portland, Oregon.

Yes, I grew up in Portland, a great intellectual environment (Reed College, a hotbed of radical thinking, was nearby). It forced me to always be informed and ready to defend my beliefs in economics, politics and religion. My two older brothers, Royal and Joel, as well as my high school friends, constantly challenged me to debate and learn new things.

AR: I have read that your father was an FBI agent. Is this a key to understand why you have been interested in economics and politics since such a young age?

Primarily politics. Like my better-known uncle, W. Cleon Skousen, my father was an FBI agent and a lawyer involved in the anti-Communist movement and gave speeches through the Northwest on politics and the communist threat. We subscribed to publications such as “National Review” and “The Freeman” and attended events and anti-communist rallies.

AR: Was your father a libertarian? Did he introduce you to the Austrian tradition of ideas?

No, he was a strict social conservative, and most of his books in his library were written by William F. Buckley, Jr., Barry Goldwater, Fred Schwartz, Phyllis Schlafly, J. Edgar Hoover, and the like. He did have a copy of Ludwig von Mises’s “Human Action” on his shelf, so I was familiar with his name, although Austrian economics did not really capture my imagination until I read Murray Rothbard’s “America’s Great Depression,” “Man, Economy and State,” and “What Has the Government Done to Our Money?”

Economics did not become a topic of focus until I took a class in the subject in my senior year in high school. It was taught so badly that I knew I could do better and suddenly I could think of little else. My interests have always been eclectic, and economics interested me intensely because it covers my other interests in mathematics, history, finance, politics and writing. My interest was so intense that I got a B. A., M. S., and Ph.D., all in economics.

AR: Some authors do not like to be called “Austrian”, “Monetarist”, “Keynesian” or “Marxist”. Are we right if we say that you are an Austrian Economist?

I used to be of the opinion that we should all be simply “good economists” as Milton Friedman and Lionel Robbins preached, and not compartmentalize ourselves into various schools. If economics is an objective science, we shouldn’t divide ourselves in various camps, or even “left“ or “right,” terms that create more heat than light. We should all be searching for the truth, no matter what the source. Nevertheless, over time I’ve come to appreciate the biases and advantages of each school. Monetarists focus on the importance of money and the competitive marketplace; Keynesians on consumption, government spending, and institutions; Marxists on labor and management relations; and Austrians on capital and the structure of production. One can learn a great deal by studying the focal points of various schools that otherwise would be missed. But of all the schools, I’ve always found Austrian school to be the most rewarding.

AR: You have been working in the Austrian tradition for a long time, writing books and articles, teaching and giving conferences everywhere. You have even organized FreedomFest. Why? What have you found in this tradition that was absent in other schools of thought?

My first introduction to economics in college was through the popular Keynesian textbook written by Paul Samuelson, and his defense of deficit spending, the welfare state, and his anti-saving mentality (“paradox of thrift”) was a turnoff, contradicting everything I had been taught as a social conservative Mormon, and so I was immediately looking for alternative models.

I was first attracted to writings of Milton Friedman, having been introduced to the Chicago school by Professor Larry Wimmer at Brigham Young University (my alma mater) in the 1960s. Wimmer got his Ph. D. under Friedman. I was especially interested in “Capitalism and Freedom.” While I found Friedman’s writings refreshing and convincing, he could not answer all my questions and doubts about Keynesian macroeconomics and the business cycle.

It was then that I discovered Murray Rothbard in the early 1970s, and was smitten by “America’s Great Depression” and his magnum opus, “Man, Economy and State.” I even read the latter on my honeymoon in 1973 (though I didn’t get far). Here were  all the answers about economic theory and policy. I was also quite taken with his booklet, “What Has the Government Done to Our Money?” It finally revealed the mystery of money. To this day, I consider Rothbard’s booklet as powerful a polemic as Marx’s and Engel’s “Communist Manifesto.”

The Austrians definitely have the upper hand when it comes to discussions of money and banking, the business cycle, the structure of production, and how the economy works. I found their macroeconomics far more sophisticated and satisfying than the standard Keynesian and Monetarist models.

However, I should add that since the Seventies, I have regained a great deal of respect for the Chicago tradition, especially their approach of looking at the data and testing various theories in micro and macro economics. Today I consider myself having one foot in the Austrian school and one foot in the Chicago school. But if I lean toward any one school, it is Austrian.

AR: You have received your Ph.D. in Economics and Monetary History from the George Washington University. How was that experience? What have you learned from mainstream economics?

It was a traditional mainstream Ph.D. program, although it did not emphasize advanced mathematics as much as other schools at the time. The professors focused more on theory, history and statistics than mathematical modeling, which I found attractive. I learned a great deal from John W. Kendrick, Arthur E. Burns, and Robert Grossfarb, among others.

They gave me plenty of leeway, and in fact, they let me chose as my dissertation “The Economics of a Pure Gold Standard,” which was heavily Rothbardian — and it sailed through with few changes. I believe I’m the only economist to write a “no compromise” Ph.D. dissertation on the 100% gold standard. At the end of my dissertation committee oral, I was asked, “You don’t really believe in a pure gold standard, do you?” Not surprisingly, Rothbard always loved my dissertation, which has been published and gone through four editions so far (published currently by the Foundation for Economic Education).

AR: And what was your contribution in that dissertation?

It was a history of economic thought about the pure gold standard, as well as a discussion of a silver standard, and its role in society. I tried to show there were strong economic arguments for gold, that monetary gold increased at a rate similar to the monetary rule and that a commodity-based system was not a burden. I was surprised to read that even Mises and Hayek rejected the economic arguments for gold, and only favored gold for political reasons. I also did a comparative study between the gold standard, a monetary rule, free banking, and the current model of central banking under fiat money, pointing out the pros and cons of each.

Ultimately, I came to the conclusion that the search for a monetary nirvana, an ideal or perfect monetary system, remains elusive. Each monetary program has its pluses and minuses. Economists have solved so many problems, but the ideal monetary system has eluded us. On a purely theoretical level, the international gold standard is probably the best of the lot. On a practical level at this point, the best we can hope for is a monetary system that minimizes structural imbalances, and I think it must include gold in some way as a monitoring device and discipline.

AR: You have been connected with most of the great Austrian economists such as Friedrich Hayek or Murray Rothbard. Any experience you would like to share with us?

I knew both of them. I met Hayek two or three times, and was one of the last people to interview him. In 1985, Gary North and I spent three hours with Hayek at his summer home in the Austrian Alps and peppered him with questions about philosophy, history of the early Austrian school in Vienna, and economics. Much of the interview showed up in “Hayek on Hayek,” in the collected works of Hayek (without attribution, strangely enough). Hayek was in delicate health, but loved every minute of the interview.  Afterwards, his wife yelled at us for taking so much of his time. “He won’t be able to do any work for weeks! Get out!” she shouted as she shooed us out the door.

I spent more time with Rothbard in New York, and at conferences sponsored by the Mises Institute, back in the 1980s and early 1990s. He was one of those people who could talk for hours on any subject. It’s like you could never reach the depth of his knowledge.

Around 1980, I commissioned and paid him a handsome sum to write an alternative popular history to Robert Heilbroner’s “Worldly Philosophers.” Heilbroner had an unforgettable title, but his favorite economists were Marx, Keynes and Veblen. We deserved better, so I asked Murray to write the definitive history from an Austrian perspective. He was supposed to write around 12 chapters in 1-2 years, starting with Adam Smith. It turned out to be a much bigger project, a Schumpeterian tome, beginning with the Greeks. I kept encouraging him, but ultimately gave up. The running joke was “Are you to Marx yet?” Adam Smith was supposed to be the subject of chapter 1. Instead it was chapter 16. He finally got to Marx, but then suddenly died of a heart attack in 1995, and the publisher Edward Elgar published two volumes posthumously. Murray planned on writing two more volumes in his exhaustive history, but sadly never got to them.

A few years later, I decided to  write the one-volume Heilbroner alternative myself, calling it “The Making of Modern Economics” (ME Sharpe, 2001).

AR: “The Structure of Production” (New York University Press, 1990) was your first academic book, and sometimes is described as a classic of modern Austrian macroeconomics. What can the reader find in that book?

“Structure of Production” has been viewed an the underground bible of supply-side economics; a revival of Say’s law; a tool for financial analysis; and most importantly, as an Austrian advance over the standard Keynesian and monetarist Weltanschauung.

I firmly believe that during our short sojourn in life, we should concentrate on advancing and improving upon the works of others. Why spend time in an activity that others are already carrying on satisfactorily? I saw a need to improve upon Hayek’s masterful macroeconomic model found in “Prices and Production” (1931). The Austrians needed an up-to-date macro model that countered the Keynesian and Monetary models in vogue today. I thought that Hayek’s triangles were a good starting place, but they were entirely theoretical, which was one reason it didn’t catch on. In my work, “The Structure of Production” (NYU Press, 1990), I attempted to modernize Hayek’s triangles into a universal four-stage model of the economy (resources, production, distribution, and final output) that could be integrated into national income statistics and could be tested empirically.

In addition to the universal four-stage model of the economy, the book introduces a new aggregate statistic, Gross Domestic Expenditures (GDE), which attempts to measure total spending in the economy. I show that GDE can easily be integrated into textbook national income statistics such as GDP. See below for the diagram 4-stage model of the economy, and the relationship between GDE and GDP.

The current macro model is Keynesian in nature and starts with final output (GDP), which creates distortions about the economy, overemphasizing consumption at the expense of saving and investment. My “Austrian” model creates the proper balance between the “make” economy and the “use” economy. Using GDE, I discovered that consumer spending represents only about 30% of the US economy, not 70% as is commonly reported. For more detail, see my recent article: http://www.thefreemanonline.org/columns/consumer-spending/

I’ve incorporated the 4-stage model and GDE in my own textbook, “Economic Logic” (Capital Press, 2000, 2010), and hopefully it will be adopted eventually in all textbooks. But as Max Planck once said, “science progresses funeral by funeral.”

I also seek to advance the Austrian theory of the business cycle with my introduction of Aggregate Demand Vectors (ADV) and Aggregate Supply Vectors (ASV).

It took me nearly 10 years to write the book, and it’s only now getting some recognition. New York University Press recently released a paperback edition, with a new introduction (2007). I see it was recently translated into Polish.

AR: If I am not wrong, Rothbard had read that book. Did he give you any comments? What does he thinks about so many graphs?

Murray read the entire manuscript and offered numerous suggestions. I think he recognized the breakthrough nature of my work as an Austrian advance in macroeconomics. He has some doubts about my use of graphs, but ultimately endorsed the book, and it was carried for many years by the Mises Institute.

I firmly believe that if we don’t encourage graphics and statistical work in Austrian economics, we will never get accepted by the mainstream textbook community. I wrote my textbook “Economic Logic” in order to demonstrate how it could be done without sacrificing theoretical purity. I was amazed that it could be done. And yes, there are lots of graphs and statistics in my textbook.

I remember the story Larry Wimmer told me. In the 1960s he attended a FEE seminar in New York, and when he tried to draw a supply and demand curve on the blackboard, he was severely reprimanded by the hard-core Misesians. I hope we’ve gotten beyond that kind of Misesian Puritanism. (As far as I’m aware, Mises drew only one graph in all his books, one in “Socialism”).

AR: What do you think about Capital Based Macroeconomics developed in “Time and Money” by Roger W. Garrison?

Professor Garrison is a creative genius and his book offers a significant advancement in Austrian macroeconomics. He has lots of graphs! I especially like the way he integrates and contrasts the Austrian triangles with the Keynesian cross. Absolutely brilliant. I’ve used his book in my classes at Columbia University.

AR: Why do you think that most of the mainstream economists do not pay attention to the Austrian Theory of Capital and the Austrian Theory of Business Cycles?

They are still caught up in Keynes’s law (demand-side management) rather than Say’s law (supply-side management). Until the most recent financial crisis (2008), the mainstream macro models were deemed sufficient to explain the business cycle. For Keynesians, it was the deficiency in either aggregate demand (like the Great Depression) or aggregate supply (as in the case of the Stagflation of the 1970s); for the Monetarists, it was monetary disequilibrium (tight money in the Great Depression or easy money in the 1970s). Both the Keynesian and Monetary models downplayed the impact of asset bubbles because when these asset bubbles collapsed, they only had a micro effect on the economy. So for years, the Austrian model of structural imbalances was ignored.

Then along came the real estate bubble and collapse in the most recent financial crisis, and for the first time, economists had to pay attention to the macro effects of an asset bubble (real estate and mortgage securitization) that collapsed and impacted the entire monetary system. So now the profession cannot ignore asset bubbles any longer, and the Austrian theory of the business cycle can no longer be ignored. The Austrian theory is the only macro model that focuses on the structural imbalances created by below-natural interest rates and easy money, so I expect more and more economists will pay attention to it.

AR: Am I wrong if I say that even today most of the Austrian Economists still do not understand the meaning and the complexity of the structure of production?

Austrian macroeconomics is a sophisticated theory that has challenged even the best economists. Most economists desire simple, predictable models, and that’s difficult to achieve in the Austrian model with various stages of production and consumption, the structure of interest rates, and changes in savings rates, monetary policy, and technological development. I discuss a variety of scenarios using the Austrian model in “The Structure of Production” (see chapters 7-9).

I must admit I was shocked and disappointed that an Austrian economist of such stature as Walter Block would question the value of Hayek’s triangles in a recent article. It’s bad enough that Friedman and the Chicago school consider Hayek’s capital theory “obtuse and confusing,” but for Austrian economists to question it is a sad commentary on the state of Austrian economics today. Hopefully, these criticisms won’t undermine the good work that Roger Garrison and others have done to advance Hayek’s macroeconomics.

AR: Your second academic book was “Economics on Trial” (Irwin McGraw Hill, 1991). What was your contribution there? What were the lies, myths and realities?

Here again I tried to do something new, i.e., review the top ten textbooks in economics at the time, including Samuelson’s “Economics,” and categorize their sins of omission and commission. I noted how they were all pretty much Keynesian in their approach, using Aggregate Supply and Demand, perfect competition, etc. They were largely anti-saving, pro-progressive taxation, and pro-government/welfare state in their macroeconomics.

I uncovered some pretty dumb statements by textbook writers, which got some publicity, such as:

“While savings may pave the road to riches for an individual, if the nation as a whole decides to save more, the result may be a recession and poverty for all.” — William Baumol and Alan Blinder (1988)

“It is difficult to conceive of government bankruptcy when government has the power to create new money by running the printing presses!” — Campbell McConnell and Stanley Brue (1990)

“The Soviet economy is proof that, contrary to what many skeptics had earlier believed, a socialist command economy can function and even thrive.” — Paul Samuelson and William Nordhaus (1989)

The latter statement came out right before the Berlin Wall collapsed and was especially embarrassing to the Nobel Prize winning economist Paul Samuelson.

But my book isn’t entirely about sins of commission. I urged the profession to focus more on savings and economic growth (using the Asian boom as a good example) rather than the business cycle and distribution of wealth and income, and that it should look to the “next economics,” one that focuses on capital and growth — i.e., the Austrian model of Mises, Hayek, and Schumpeter. I also championed the return of Say’s law, with its emphasis on saving, investment, productivity, entrepreneurship and other aspects of the supply side as the keys to economic growth and higher living standards.

I’ve received a number of letters from readers suggesting I update “Economics on Trial.” I do think the profession has made some improvements, especially by focusing on the classical model more than the Keynesian model in the most recent textbooks (Mankiw’s textbook leads the way in this respect), but it still needs to replace the defective AS-AD in macro and the perfect competition model in micro. I’ve replaced both with better Austrian-style models in “Economic Logic,” and I encourage economists of all stripes to look at my new approach in pedagogy.

AR: Some of your books deal with the History of Economic Thought. If you have to make a list of the five most important books that have influence your own thinking on the field, what would they be?

The reason I commissioned Murray Rothbard to write a contra-Heilbroner history was out of frustration with all previous histories of thought. They were all written by either Keynesians, Marxists or socialists. One exceptional work was “The Enterprising Americans,” by John Chamberlain, an economic journalist, but it was far from complete.

In writing my on one-volume history, I benefited significantly from several recent “tell all” biographies on John Stuart Mill, Karl Marx, Alfred Marshall, Thorstein Veblen, Max Weber, Joseph Schumpeter, John Maynard Keynes, Ludwig von Mises, Friedrich Hayek, and Milton Friedman, among others.

I also like Albert Hirschman’s “The Passions and the Interests” and Mark Blaug’s “Not Only an Economist,” and his two volume work “Great Economists Before Keynes” and “Great Economists After Keynes.” Blaug is the foremost historian of economic thought, and he has recently said some positive things about the Austrians.

Of course, I found Rothbard’s two volume history of economics useful. Another helpful textbook is Ekelund’s and Hebert’s “History of Economic Theory and Method” (1990) — a graduate level text that is comprehensive, fair and balanced.

AR: Let me jump for a moment to your “The Making of Modern Economics” (M. E. Sharpe Publishers, 2001, 2009). Let´s start with your first chapter. Is it correct to conclude that “All started with Adam” Smith? What about Cantillon or Turgot?

Obviously, there were “pre-Adamites,” as I call them. But Adam Smith’s “Wealth of Nations” was the first real “fat” book that attempted to bring together the full body of theory and history of economic life, far more than any theoretical treatises of Cantillon, Turgot, or even Aristotle, Thomas Aquinas, and the Spanish scholastics. In many ways, Smith’s two-volume tome was the beginning of modern political economy. As George Stigler said, “You can find it all in Adam Smith.” Well, not quite, but it was the start of something big.

AR: By the way, what do you think of Rothbard´s criticism to Adam Smith?

When I first started writing “The Making of Modern Economics” in the late 1990s, I was still quite infatuated with everything Rothbardian, including his surprising critique of Adam Smith. According to Rothbard, Smith was a plagiarist who “originated nothing that was true, and whatever he originated was wrong.” That’s quite an indictment of the Scottish philosopher celebrated by almost all free-market economists, including Rothbard’s teacher Ludwig von Mises. Mises wrote a glowing introduction to “The Wealth of Nations” edition published by Regnery, calling it a “marvelous” and “great” book that brought together “the ideology of freedom, individualism, and prosperity, with admirable logical clarity and in an impeccable literary form.”

Who was right, Rothbard or Mises? There was only one way to find out. I decided to read the entire 1,000-page “Wealth of Nations,” page by page and cover to cover, and come to my own conclusion. Two months later, I put the book down and said to myself: “Murray Rothbard is wrong and Mises is right.” Adam Smith has written a grand defense of the invisible hand and economic liberalism.

My change of heart completely transformed my history. Suddenly, “The Making of Modern Economics” had a plot, an heroic figure, and a bold storyline. Adam Smith and his system of natural liberty became the focal point from which all economists could be judged, either adding to or distracting from his system of natural liberty. After coming under attrack by socialists, Marxists and Keynesians, the invisible-hand model of Adam Smith was often left for dead but revived from time to time and revised and improved upon by the French, Austrian, British, and Chicago schools, and ultimately triumphed with the collapse of the socialist central planning model in the early 1990s (although it is again being tested by the ongoing financial crisis).

Granted, Smith made numerous mistakes in his classic work, such as his crude labor theory of value, his attack on landlords, and his failure to recognize marginal subjective values, but French, British, Austrian and Chicago economists have done a great job improving upon the House that Adam Smith Built without destroying his fundamental system of natural liberty, and his policy prescriptions, which were largely libertarian (the classical model of limited government, free trade, balanced budgets, and sound money).

I noticed that Murray Rothbard largely ignored the strong libertarian language found in “The Wealth of Nations” and overemphasized marginal statements by Smith that were pro-government or anti-market. His attack on Smith reminds me of free-market critics who take the same parenthetical statements in Smith’s writings and make him into some kind
of social democrat. Both are wrong. Mises had the right attitude when it came to Adam Smith. Smith established the “keystone” of the market economy.

By the way, “The Making of Modern Economics” has been my most successful academic book, having been translated into five languages, including most recently a fine Spanish volume published by Union Editorial through the good support of Professor Jesus Huerta de Soto. It also won the Choice Book Award for Outstanding Academic Title in 2009. Choice is the official organ of the academic libraries in the United States. It has been adopted by dozens of history of thought classes around the United States and the world. Roger Garrison uses it at Auburn, and he tells me that the students love it. I do hope your readers will check it out either the English or Spanish edition.

AR: What do you mean saying that “Marx madness plunges economics into a New Dark Age”? Can we see in the future a revival of Socialism?

That’s my famous chapter 6 in “The Making of Modern Economics.” Marxism-Leninism has done so much harm in the world that I wanted my views unmistakably clear about Marxist doctrine and policies. This chapter has been translated into many languages and has converted many Marxists around the world into free-market advocates. The latest edition has a section of “liberation theology” that has been so popular in Latin America.

AR: In “The Big Three in Economics” (M. E. Sharpe, 2007) you talk about Adam Smith, Karl Marx and John Maynard Keynes. Was Keynes the saver of capitalism?

During the 1930s and the Great Depression, Marxism was all the rage on campuses, threatening to undermine democracies around the world. Students, academics and government officials were searching for a more moderate alternative, and rejecting laissez faire, they discovered in Keynes a “middle of the road” alternative in big government and the welfare state. If Keynes hadn’t come along, the West might have fallen into a Marxist state. Now our challenge is to dig out of the pit that Keynes has put us into.

In “The Big Three,” I came up with the idea of the totem pole of economics, ranking economists from top to bottom, rather than the pendulum approach, where economists are linked to the left, middle and right. As Ronald Reagan once said, “There’s no left or right, only up or down.” Of the big three, I rank Adam Smith on top, Keynes below him, and Marx is low man on the totem pole. I commissioned a Florida woodcarver to create the Totem Pole of Economics, which I display in my home.

AR: Are we living today a Return of the Master?

Sadly, yes. Whenever the world faces a financial crisis or downturn in the economy, the political leaders turn to the Keynesian policies of activist deficit spending, easy money, and the welfare state. As a result, we are facing an unprecedented sea of red ink in the fiscal budgets of the West. As Mises said years ago, “We have outlived the short-run and are suffering the long-run consequences of [Keynesian] policies.”

AR: Let´s talk about “Vienna and Chicago: Friends or Foes?” (Capital Press, 2005). What do you think are the four areas where both schools dissent?

You mean dissent from each other? My book looks primarily at their major differences in methodology, monetary policy, the business cycle, and antitrust.

But they also agree on many points. Both the Austrian and Chicago schools see no value in heavy deficit spending to stimulate a typical recovery. Milton Friedman demonstrated years ago (and most recently confirmed by Harvard’s Robert Barro) that the deficit spending multiplier is close to zero. The two schools also oppose any tax increases during a recession.

One area they likely disagree is in monetary policy during a recession: Chicago economists argue that the money multiplier is significantly positive and can generate a faster recovery than doing nothing. The Austrian school is opposed to any effort to reduce interest rates below the natural rate or to artificially pump up the economy through easy money during a downturn. That can only have negative consequences down the road.

AR: The first big question is why do you think that Chicago has an advantage on methodology versus the Austrians? What about the Austrian traditional criticisms?

Chapter 4 of “Vienna and Chicago” deals with the debates over methodenstreit. Like most economists and, I might add, more and more Austrians, I reject the Misesian a priori view that theories can’t be confirmed or tested looking at historical data. One must always be cautious, but I found that one can learn a great about the value of a theory by looking at the evidence, and often studying history can reveal new theories that were previously overlooked. Stagflation is a case point. It was discovered in Austrian business cycle theory only after it appeared historically.

I reject both the “theory only” approach of the hard-core Misesians and the “history only” approach of the hard-core institutionalists. We need both theory and history to find out the truth. I’m glad to see more empirical testing of theories in the Austrian academic journals. It’s the only way Austrian economics is going to get any attention by the profession.

AR: The second big question is why do you think that Chicago has an advantage on sound money versus the Austrians? Why would a central bank system with a monetary rule be better than a free banking system?

It’s a matter of practical policy. I’m willing to give free banking a try, because I have a great deal of faith in free markets, but I doubt if the public or the legislatures are willing to take such risks. Name me a country in the world who is willing to give up central banking and adopt a free-banking regime? Even Hong Kong has a central bank or monetary authority (the Hongkong Bank). A return to the classical gold standard is also unlikely at this stage. Gold is playing a more important role, but only as a reserve asset and monitoring device. I think it’s much more likely that a central bank will adopt a monetarist rule of increasing the money supply (M2) at a steady rate than adopting free banking (no reserve requirements, giving banks the right to print their own money, etc.).

AR: What were those friendly debates you had with Professor Friedman?

Over a twenty year period, up until the time of his death (2006), I engaged in quite a few friendly fights with Milton Friedman, primarily over paper money vs. the gold standard and Austrian theory of capital and the business cycle. I keep in my wallet Milton Friedman’s torn up $20 bill as proof of one such incident in New Orleans in the late 1990s. I also challenged Friedman at a Mont Pelerin Society meeting in Vancouver on his cure (“print more money”) for Japan’s economic ills. I tell these stories and more in an article I wrote on the subject for “Liberty” magazine in late 2007: http://www.mskousen.com/2007/09/my-friendly-fights-with-dr-friedman/

AR: In the annual meeting of the Mont Pelerin Society that took place in Guatemala in 2006 I remember you gave a lecture. At the end I was allow to ask a question, and that was, “Would you accept an end to the Fed?” I thought your answer would be, Yes, but it wasn´t. Can you explain why?

I’d like to see the Fed replaced by either a computer (Friedman’s monetarist rule) or an international gold standard, or a competitive free-banking system, but it’s not likely to happen in our lifetimes. The humorist Will Rogers once said, “There have been three great inventions since the beginning of time: the fire, the wheel, and central banking.” Every developed nation has a central bank, and every developing country is adding one. Public choice economics suggests that having a monetary authority is simply too seductive and powerful to give up. Even Friedman’s simple proposal of replacing the Fed with a computer that automatically increases the money supply equal to real GDP hasn’t been adopted, because the governments want to be able to intervene at times during a crisis and inject liquidity at a faster pace than real GDP. They don’t have the faith that you and I have that capitalism will right itself and overcome these unpredictable crises. They want to maintain the power to manipulate interest rates and the supply of money and credit. They are too power hungry to give it up. They aren’t willing to accept the discipline of an international gold standard. Nor are they willing to try free banking. It’s too risky for them. So we talk all we want about what ideally we’d like to see, but it’s not likely to happen any time soon.

AR: I always remember Joseph Schumpeter starting his “Capitalism, Socialism and Democracy” (1942, p. 61) with a profound insight: “What counts in any attempt at social prognosis is not the Yes or No that sums up the facts and arguments which lead up to it but those facts and arguments themselves. They contain all that is scientific in the final result.” Are we wrong if we conclude that Chicago´s arguments are not scientific?

The Chicago school has definitely adopted a more pragmatic approach to economics, i.e., what works or what is predictable, as described in Friedman’s famous and controversial article on methodology. I think we need to use more logic and empirical studies to test our theories and knowledge. We can learn from both. For example, for years technical chartists used “guaranteed” formulas for making money in the stock market, but I was always skeptical of their logic. Eventually, they collapsed.

An old Wall Street saying applies to these fights between the Austrian and Chicago schools on theory and history: “In the land of the blind, the one-eyed is king.”

AR: What about Robert Lucas, Thomas Sargent, Robert Barro and “Rational Expectations?” Why did you ignore this New Classical Economists in your history of economic thought book?

I don’t think I did ignore them. I cover them in several chapters of my book, although not in any detail. See chapters 13, 15 and 17, inter alis.

AR: In your “EconoPower” (Wiley & Sons, 2008), you explained “How a New Generation of Economists Is Transforming the World”. Can you make a summarize of your arguments for the reader?

My main argument is that economics has moved from the “dismal science” to the “imperial” science, with economists making inroads into finance (modern portfolio theory, defined contributions plans), business (economic value added, auctions), law (capital punishment), politics (public choice and forecasting elections), history (cliometrics), environmentalism, religion, and even sports. It’s a fascinating broadening of the discipline in the past generation. I’m glad to be a part of it.

AR: There are two other academic books that I would like to talk about here. The first one is “Economic Logic” (Capital Press, 2000, 2010), which includes chapters on macroeconomics and government policy. Is this a new treatise on economics? Is this book better than Mises´s “Human Action,” Rothbard´s “Man, Economy and State” or Reisman´s “Capitalism?”

“Economic Logic” is not a treatise, but a modern-day textbook. I don’t think I can improve upon Mises’s or Rothbard’s magnum opuses, although Reisman’s captivating “Capitalism” is flawed in its defense of the Ricardian cost-of-production theory of value.

I wanted to create an Austrian-style “no compromise” textbook that could be integrated into mainstream economics and be adopted by the profession generally. So it is divided into micro and macro chapters, similar to other textbooks, but there are important additions — in micro, I start with the profit-and-loss income statement and Menger’s theory of the good, which business students can relate to and an important “missing link” in microeconomics. But my textbook is not so radical that it ignores standard microeconomics. By chapter six, I introduce supply and demand, cost analysis, the factors of production (land, labor, capital, and entrepreneurship), and the financial markets.

My macro chapters start with the Austrian 4-stage model of the economy, integrating GDE with GDP and other national aggregate statistics. In my money and banking chapter, I introduce the history of money and the international gold standard before I discuss monetary policy. I also include the pros and cons of Keynesian economics, so students become familiar with this defective macro model, AS-AD, etc.

“Economic Logic” also has a test bank, and we are working on a student manual, so it has everything a professor would want to teaching sound economics at a college level. It has been adopted by a half dozen institutions, including the business school at Universidad Francisco Marroquin, the free-market university in Guatemala.

AR: The second is “The Power of Economic Thinking” (Foundation for Economic Education, 2002). How has economics invaded and transformed politics, finance, history, law, religion and other social sciences?

This book is an earlier version of “EconoPower,” discussed above, a compilation of columns I wrote for “The Freeman” during the 1990s.

AR: What about your “Investing in One Lesson” (Regnery Publishing, 2007). Is that book as clear as Hazlitt lessons were on economics?

I have always been envious of Henry Hazlitt’s classic title, “Economics in One Lesson,” and wanted to create a similar title in finance if I could come up with the “one lesson.” I finally did in 2007 — the one lesson being “Wall Street exaggerates everything: The business of investing is not the same as investing in a business.” I explain why stocks are inherently more volatile than the underlining businesses they represent, and then in the rest of the book, I offer ways to minimize the risks of stock-market investment while increasing the chances of making money.

One reason Wall Street is not the same as Main Street is based on the Austrian concept of stages of production — the stock market is a capital good further removed from final consumption. I’ve written extensively on Austrian theory of finance in “The Structure of Production,” “Economics on Trial,” “Economic Logic,” and an essay for “The Elgar Companion to Austrian Economics,” edited by Peter Boettke.

AR: Can you say a word on Ayn Rand and the fifty years of “Atlas Shrugged?”

I’m both an admirer and critic of Ayn Rand and her philosophy. She articulated better than any other novelist the evils of totalitarianism, interventionism, corporate welfarism, and the socialist mindset. “Atlas Shrugged” describes in wretched detail how collective “we” thinking and middle-of-the-road interventionism leads a nation down a road to serfdom. No one has written more persuasively about property rights, honest money (a gold-backed dollar), and the right of an individual to safeguard his wealth and property from the agents of coercion (“taxation is theft”).

Yet her dogmatic defense of greed and selfishness hurts her cause and has created an apologetic brand of capitalism that is still viewed negatively by the general public. John Mackey, the brilliant CEO of Whole Foods Markets, offers an improved brand of “conscious” capitalism that hopefully will convert business leaders and the general public to a more positive view of free enterprise.

I’ve written an extensive review of “Atlas Shrugged” for the “Christian Science Monitor”:
http://www.mskousen.com/2007/03/atlas-shrugged-50-years-later/

AR: What about Peter Drucker? Is he an Austrian?

Like Joseph Schumpeter, Peter Drucker grew up in Austria along with Mises and Hayek, but is considered an enfant terrible of the Austrian school. He became the world’s most celebrated management guru, and his management style was definitely Austrian, with his emphasis on economy, thrift, creative destruction, and entrepreneurship. He was critical of Keynesian economics, but was not a true believer like Mises. He thought that laissez faire capitalism was defective. But rather than endorse big government, he endorsed big business as the ideal social institution.

AR: You have been the President of the Foundation for Economic Education (FEE) between 2001 and 2002. How was that experience?

It was a great experience that ended too quickly. My goal was to bring back the glory days of FEE and make it a household name like Cato or Heritage. I planned a series of events, including FEE’s first national convention in Las Vegas, which attracted over 850 attendees, and a promotional campaign to increase ten fold the circulation of “The Freeman.” I also engineered the acquisition of Laissez Faire Books. Lastly, I invited America’s mayor Rudy Giuliani to speak at our annual Liberty Ball and leased the large Hilton Hotel ballroom in New York that holds more than 2000 people.

But my plans were cut short when Rudy Giuliani proved to be a controversial choice, and I wasn’t especially adept at fundraising in my first year. I guess the board wanted someone who didn’t rock the boat and spent more time quietly raising money than creating new programs and expanding old ones. Alas, I lasted only a year as president. I’ve had a successful career in marketing, but I don’t think I was cut out to be a fundraiser, and I don’t envy those who have to do it every day.

Still, it was a thrilling time, and I continue to be a supporter of FEE and other free-market think tanks, and invite them to participate in my annual show, FreedomFest, in Vegas. (FreedomFest is a for-profit event — we don’t fundraise.)

AR: If we take your more than 25 books and all your papers, and ask which is your most important contribution to economics and finance. What would you say?

I can boil down my primary goals to three, all admittedly ambitious:

First, replace Keynes’s macro model with the universal four-stage model of the economy. This my work, “The Structure of Production;” It has application to the financial markets.

Second, write an alternative one-volume history of thought to Robert Heilbroner’s “Worldly Philosophers.” This is my book “The Making of Modern Economics,” which has now gone through two editions.

And third, develop a “no compromise” college-level textbook in economics that rivals Paul Samuelson’s “Economics.” “Economic Logic” seeks to integrate Austrian economics into the mainstream textbooks.

Professor Ken Schoolland has written a paper detailing my attempt to achieve this triathlon, published by the Cobden Centre in the UK: http://www.cobdencentre.org/?s=mark+skousen

Of the three, #2 has been the most successful so far.

AR: Please, tell us the story behind “The Mark Skousen School of Business,” in the Grantham University.

I was surprised as much as anyone when I was told in 2005 that Grantham University, an online university with headquarters in Kansas City, Missouri, was naming their business school after me. Usually you have to be a billionaire or dead to have a school named after you. They want to create a free-market brand of business, finance and management based on my free-market views, since I’ve had experience in all three fields. I have just completed a personal finance course, “Dollars and Sense,” for all the students (15,000 and growing, mainly in the US military), and will be using my “Economic Logic” textbook as the main book for their business students. I’m working closely with them to develop a new business school program for Grantham, and they have high hopes of expanding aggressively around the world.

AR: We can´t finish this interview without comments on FreedomFest.

Thanks for asking. FreedomFest has been a surprising success, rivaling my success as an investment newsletter writer (“Forecasts & Strategies,” which I’ve been writing since 1980).

For years, I thought that the freedom movement, broadly defined, needs to gather together once a year to learn, network, socialize and celebrate liberty, or what’s left of it. But we’ve always been too individualistic, too much like a herd of cats, and we need to come together more to show and feel a unity of support. So when I was president of FEE, we had our first national convention, and it was a big success with 850 attendees.

When I left FEE, I continued the idea by producing FreedomFest, “the world’s largest gathering of free minds.” We meet every July, a week after the 4th, in Las Vegas, the world’s most laissez faire city. It’s a “hot” conference, and we continue to set records every year. This year we had nearly 2400 attendees, with over 200 speakers and exhibitors. All the major think tanks and freedom organizations — Cato, Reason, Heritage, FEE, Goldwater, Adam Smith, PRI, Heartland, ISI, Eagle, etc. — come from around the world, and it’s quite an affair. Steve Forbes and John Mackey (CEO, Whole Foods Market) attend all three days every year and are now our official ambassadors.

I encourage everyone from around the world to join us: www.freedomfest.com.

AR: Can you conclude with some reflections or suggestions to the young students that are reading this interview?

Let me say something controversial. If you want to change the world and the economics profession, learn from the great Austrians at Hillsdale, GMU, Grove City, etc., as an undergraduate, and then apply to the top ivy-league graduate schools (Harvard, Chicago, Princeton, Yale, Stanford, etc.). With your Ph.D. in hand, apply to teach at these top ivy league schools, and if you get a position, start teaching Austrian economics to the next generation of students. Don’t write academic articles for Austrian journals. Write for the top economic journals — AER, JEP, etc. That way the best and the brightest will finally know about Mises and Hayek.

One of my regrets is that I got my Ph.D. at George Washington University, a second-tier graduate program. As a result, I found it difficult to teach at the top schools. I taught two years at Columbia, but that was it.

When I wrote “The Making of Modern Economics,” I decided to have it published by a non-market publisher, M. E. Sharpe. It proved to be a good move, because it has exposed a large group of social democrats to Austrian and Chicago economics.

Back when I got started as a student in the 1960s, there were virtually no free-market textbooks, few free-market economics departments, and only a handful of treatises and publications you could read that introduced your to market principles — Friedman, Mises, Hayek, Rothbard, Hazlitt, and the like. Now there are hundreds of professors, books, think tanks, organizations and conferences to teach free-market principles and the heroes behind the marketplace. I encourage you at attend these seminars and become involved with the various think tanks and websites.

Be sure to check out several resources and think tanks in free-market economics. Every institution has its biases and its favorite writers, and sometimes even suppresses scholars they don’t like. It’s unfortunate but a fact of life in the freedom movement.

I invite you to visit my website at www.mskousen.com and check out my articles and books that may advance your knowledge of free-market economics and finance. I’m also starting an Austrian-oriented business undergraduate and MBA program online at Grantham University, if you are so inclined to pursue a business degree.

AR: Professor Skousen, thank you so much for your time and effort!

Un placer! It was a honor, and I wish you the best of luck in your work and your interviews. And remember, A. E. I. O. U.

On January 7-8, I attended the American Economic Association (AEA) meetings in Denver, Colorado.  Usually around 10,000 economists attend this annual conference.

I substituted for Tyler Cowen, who was supposed to be one of the panelists for a session entitled, ”What’s Wrong (and Right) with Economics?  Implications of the Financial Crisis.” Cowen’s assigned topic was “Lessons for Libertarians.” (Tyler had a conflict and couldn’t make it.)

The other panelists were James Galbraith (son of John Kenneth Galbraith), Brad DeLong (Berkeley), and Scott Somner (Bentley University).

It was a packed audience, with maybe 300 economists and journalists in the room.

I focused on the need to replace the current macro model to incorporate Austrian economics. I said that libertarian economists consider the Keynesian and monetary models defective — Keynesian models being anti-saving and pro-deficit, and monetarists believing that the economy is “depression proof” as long as the money supply goes up (I noted that M2 rose 10% in 2008 but we still came close to a financial collapse).

I made two major points:

1.  “There’s no free lunch in fiscal or monetary policy — deficit spending and inflation have unintended consequences.”

2.  “Bad government drives out good business.”  The feds encouraged irresponsible banking practice (bad real estate lending policies) that led to the financial crisis and real estate bust in 2008.

Finally, I encouraged students, economists and textbook writers to study the Austrian school of Mises & Hayek, the Austrian theory of the business cycle, etc.

I also stressed that we could learn a great deal by studying the policies of foreign countries, such as Canada and Australia, which didn’t suffer from a financial collapse like we did.  The host, John Quiggin, an economist from Australia, appreciated this, and he spoke about the better-run Australian banking system.

I noticed that Cato and the Liberty Fund were exhibitors at the AEA meeting, and they said they got a lot of good response.  Also, at the end of my talk, I mentioned my book “The Making of Modern Economics,” and after the session a bunch of people went to the ME Sharpe Publishers booth and the book sold out quickly.

This enthusiasm for libertarian economics suggests to me that the Austrians are missing a great opportunity to introduce Austrian economics to faculty, students and journalists from around the world hungry for an alternative to establishment economics and textbooks. Marxists are always at the AEA meetings in large numbers and URPE (the Marxist organization) hosts a lot of sessions.  But virtually no Austrian economists were there giving a paper, or attending. Pity.

The next morning was a session on “Popular Economics” with Robert Shiller (Yale professor and author of “Irrational Exuberance”), Robert H. Frank (NYTimes columnist), Steve Levitt (Chicago economist and author of “Freakonomics”), and Diane Coyle (UK economist).  During the Q&A, I asked whether the panel and the econ profession were willing to take some responsibility for the irresponsible debt crises facing the US and other countries (because for decades they’ve been teaching students the Keynesian theory that deficits don’t matter or are beneficial)….and none would!

In fact, Steve Levitt said, “Economists have little or no influence on public policy.” That was pretty astonishing considering the influence the Chicago school has had on public policy.  I felt like yelling out, “What about the Chicago boys in Chile?”  I wrote an entire book, “EconoPower” about the positive influence economists have had on public policy (auctions, retirement, investments, etc.).

In liberty, AEIOU,
Mark Skousen

Perspective – Liberty Magazine – May 2009

Brother, Can You Spare a Decade?
by Mark Skousen

Few things other than a New Deal can be more painful than an economic depression. But few eras were more vital and enjoyable than the private side of the last one.

One of the rare books in my financial library is “I Like the Depression,” by Henry Ansley, the “Jackass of the Plains.” This amusing little volume was published by Bobbs-Merrill in 1932, and the price was a buck fifty.

Ansley, a newspaperman from Amarillo, Texas, described a prosperity in the 1920s that wasn’t that great. He burned candles at both ends, became a financial hotshot, and ultimately overextended himself. Then the depression hit: “Good-by twin beds, frozen salads, indigestion, credit and swelled head. Hail to the old-fashioned nightgown, buttermilk, sow bosom [a kind of food], comfort and cash.” He lost his job but found happiness by rediscovering leisure, friends, and neighborliness. Hard times taught him the value of a dollar and not to take things for granted: “My dog is my pal again; my wife my lover and my Dad my advisor.”

Ansley’s book was never a bestseller, but it started me thinking. Can the worst of times also be the best of times? The history books are replete with the evils of the 1930s — soup lines, bank closings, Hoovervilles, dustbowls, bear markets, demoralizing despair. It’s all been retold countless times, in such books as Milton Meltzer’s “Brother, Can You Spare a Dime?,” John Steinbeck’s “The Grapes of Wrath,” and most recently Amity Shlaes’s “The Forgotten Man.” The Great Depression brought us Nazi Germany, the New Deal, Keynesianism, and, some say, World War II.

Not surprisingly, everyone from Wall Street to the halls of Congress is worried that the current recession will turn into the dreaded D, and has seized on desperate rescue measures. But was the Great Depression all bad? Did anything good come out of the 1930s? I started doing some research and was amazed to find a bright side to the gloomy ’30s — a lower cost of living, great new inventions and other technological advances, new forms of entertainment, more sports and reading, and a return to sober social behavior.

Start with leisure. Henry Ansley describes the free time he had during the depression. Indeed, millions of Americans had a lot more leisure time. Before the depression, almost everyone worked a six-day week. In the 1930s, the five-day work week became commonplace. “Spread the work!” was the rally cry. By 1937, wage earners in 57% of all manufacturing companies enjoyed a five-day week. Saturday was now a free day, and the Saturday rush hour was replaced by the Friday rush hour.

As a result, there was a tremendous increase in sports and leisure-oriented jobs. People began getting out into the sun and open air and taking a greater interest in golf, tennis, skiing, roller skating, and bicycling. Softball became a national pastime; by 1939, there were nearly half a million teams and 5 million players of all ages throughout the country. Expensive private club golf courses withered, but inexpensive public courses grew. Miniature golf was all the rage in the early ’30s. Bobby Jones became the first and only person to win the Grand Slam of golf in 1930. And black athletes became national idols for the first time, Joe Louis in boxing and Jesse Owens in track and field.

Americans traveled more. House trailers became a very big business. Camping, canoeing, and other inexpensive outdoor activities increased in popularity. People took their cameras with them, and photography became a craze of remarkable dimensions. Americans took tons of pictures with their small German cameras. Life and Look — big, glossy picture magazines — became popular.

Dancing, all the rage in the ’20s, continued to rage in the ’30s. Americans would dance their way out of the depression! Young people everywhere danced the swing, the jitterbug, and the boogie woogie to the music of Benny Goodman, Tommy Dorsey, and Louie Armstrong.

Indoors, parlor games such as bridge and the ingenious “Monopoly” were popular. People read more, and circulation at local public libraries increased. Kids loved comic books, especially “Superman,” the world’s first comic book superhero. Books “condensed” by Reader’s Digest saved time and money. There was an intense interest in epic novels — Pearl Buck’s “The Good Earth,” A.J. Cronin’s “The Citadel,” Margaret Mitchell’s “Gone with the Wind” — as well as such how-to books as Dale Carnegie’s “How to Win Friends and Influence People.” (1937, with 17 printings right away).

In the same year, Lin Yutang, the Chinese-American Taoist, published “The Importance of Living,” which was to become especially popular among libertarians. It encouraged Americans to stop worrying and start “letting go.” One chapter was entitled “The Art of Loafing.” “I am quite sure,” Lin wrote, “that amidst the hustle and bustle of American life, there is a great deal of wistfulness, of the divine desire to lie on a plot of grass under tall beautiful trees of an idle afternoon and just do nothing.” Whether fortunately or unfortunately, in their own opinion, millions of Americans got to live Lin’s upbeat message of idleness.

New Entertainments

Idleness — and its companion, entertainment. People wanted to forget their troubles, and radio and motion pictures provided an escape. Radio really came of age during this period, with up to 80 million listeners on some evenings. There was a lot more to radio than FDR’s fireside chats. It was the way to hear worldwide news bulletins, good music, and such half-hour comedies as “Amos ’n’ Andy,” the first syndicated program, and “The Jack Benny Show.” In the late 1930s, NBC was carrying broadcasts of symphony orchestras, especially its own orchestra, conducted by the immortal Arturo Toscanini, to 10 million listeners every week. And who can forget the night of Sunday, October 30, 1938, when Orson Welles broadcast his version of H.G. Wells’ “The War of the Worlds”?

Hollywood blossomed during the ’30s. In one decade, the motion picture industry went from silent films to talkies in Technicolor. Films brought the American public together as never before. Gary Cooper, Fred Astaire, Ginger Rogers, Katharine Hepburn, John Wayne, Mickey Rooney, and Clark Gable were welcome alternatives to Adolf Hitler, Benito Mussolini, Josef Stalin, and other demagogues of the era. Many considered Shirley Temple a gift from God during the gloomy de-pression. The motion picture event of 1938 was the first full-length animated cartoon, Walt Disney’s “Snow White.” The same year saw one of the first films in Technicolor, the blockbuster “The Adventures of Robin Hood,” starring Errol Flynn. A burst of classic award-winning films came out the next year, including “The Wizard of Oz,” “Mr. Smith Goes to Washington,” and the greatest of all epic films, “Gone With the Wind.”

The ’30s was the era of the first great horror films, “Frankenstein,” “Dracula,” “Dr. Jekyll and Mr. Hyde,” and “King Kong.” For a dime, Americans could go to the Saturday matinee and see double features of cowboys, adventurers, and gangsters. The silver screen brought us science fiction, serial thrillers and the Singing Cowboy (Gene Autry). The theater was filled with humor — Laurel and Hardy, W.C. Fields, the Three Stooges. Americans would laugh their way out of the depres-sion! There were reasons why Chicago economist Robert Lucas, Jr., called the 1930s “one long vacation.”

New Technology

Alvin Hansen and other Keynesian economists developed their “stagnation thesis” in the late 1930s, arguing that the United States was indefinitely stuck in an economic rut. They claimed that there was no new technology, no new frontier to drive the American economy. They ignored the tremendous economic progress that took place throughout the depression — the invention of plastics, artificial fibers, plywood, the 2-cycle diesel engine, and lighter, tougher steels.

Ernst Ruska and Max Knoll invented the electron microscope in 1932. Howard Armstrong created FM radio in 1933. Wallace Carothers manufactured nylon, and Robert A. Watson-Watt discovered radar in 1935. Hans Pabst von Ohain developed the jet engine in 1937 and the first jet airplane in 1939. Chester Carlson originated xerography in 1938. Igor Sikorsky made the first practical helicopter in 1939. Several people, including Philo T. Farnsworth and Isaac Shoenberg, developed television in the 1930s. CBS and NBC began broadcasting TV during this decade.

Manufacturers weren’t idle in getting new technology to market. New household products included electric mixers, pop-up toasters, vacuum cleaners, refrigerators, and irons. For the first time, consumers enjoyed sliced bread and packaged frozen foods. Union Pacific came out with fancy new streamlined, air-conditioned trains. Mass-market automobiles could now accelerate to 60 mph, carrying passengers along new highways with underpasses and cloverleafs. The dirigible, a new form of air transportation, appeared in 1936 (but disappeared with the fiery destruction of the Hindenberg a year later). The Douglas DC3 came out in 1936, traveling at 200 mph, compared to the 1932 passenger airplane speed of 110 mph. Coast-to-coast travel in overnight air sleepers was now possible. New ocean liners, such as the Queen Mary, appeared in a crowded New York harbor. Everyone came to witness the building of the 102-story Empire State Building and the Rockefeller Center (the only skyscraper group to rise in the 1930s). And who could not marvel at the Golden Gate Bridge, opened to traffic on May 28, 1937?

Social historian Frederick Lewis Allen, author of “Only Yesterday” (1931), a bestselling history of the 1920s, summed it up best when he wrote in a sequel, “Since Yesterday” (1940), “the American imagination was beginning to break loose again.” At the end of the decade, the New York World’s Fair had as its theme “The World of Tomorrow.”

Society and Economics

The depression brought about a change in American social trends. People attended church more. Many retreated from the sexual revolution of the roaring ’20s. The mood was more somber and prudent, even after Prohibition was repealed in December 1933. (By the end of the decade, Alcoholics Anonymous was founded.) There was greater approval of marriage and family life. The divorce rate dropped sharply, by 23% from 1929 to 1932, though so did the marriage rate and the birth rate — possibly because marriage and children cost money.

Not all economic news was bad. The most favorable statistic was the decline in the cost of living. During the period 1929–32, retail prices dropped by an average 24%, wholesale prices by 31%, farm prices by 51%, and raw commodity prices by 42%. Of course, wages, salaries, dividends, and other forms of income declined as well, but for those who kept their jobs and held onto their assets, the loss of nominal income was offset by sharply lower prices for all consumer products. “Everything was all right in those years,” said a woman quoted in Amity Shlaes’ book, “but only if you had a job.”

Unemployment reached 25% and higher in some regions at the depths of the depression, causing enormous hardship for millions of Americans. But see it in another light: three out of every four people were employed in the worst parts of the depression. Total employment rose after 1932, reaching 90% by the end of the decade. In a sense, the Democrats were right: happy days were here again!

Businesses adjusted to the new deflation by downsizing, cutting costs, and implementing labor-saving devices. Even the farming industry mechanized. By 1936, despite persistent unemployment, real national output had nearly recovered to pre-depression levels. Auto sales exceeded all previous years except 1928–29. The steel industry was operating at close to capacity. Even the building industry was climbing briskly. Miami was having its best season since the collapse of the Florida land boom. The race tracks were crowded, lavish debutante parties flourished in the big cities, and the night clubs were full.

For bulls and bears alike, the 1930s was the most fantastic period in stock market history. Stock prices collapsed between 1929 and 1932, losing an average 88%, but industrial, rail, and utility stocks all shot up from their lows in the summer of 1932, anticipating the end of hard times. Few bull markets have ever equaled the rocket performance of the summer of 1932, when the rails tripled within eight weeks and the utility averages doubled. Wall Street went on a rampage for the next four years. The Dow rose 67% in 1933, 4% in 1934, 38% in 1935, and 25% in 1936. After a sharp 32% correction in 1937, the market re-sumed its upward trend until war broke out in Europe in September, 1939. There were also plenty of speculative opportunities on the long side of gold and other natural resource stocks during the ’30s. In sum, the bulls, not just the bears, had plenty of chances to make money in the 1930s.

There’s an old saying, “It is the irritation in the oyster that forms the pearl.” The Great Depression was an irritation that most people didn’t expect. A few people couldn’t take the hard times and jumped out of windows, but most responded to the challenge. Adversity often demonstrates the virtue and creativity of humankind. Bad news often creates good news and opportunities to learn and advance. The 1930s were no exception.

Mark Skousen is the author of Economic Logic, now available in its second edition.

Suggestion – Liberty Magazine
The Necessary Evil
by Mark Skousen

Today libertarians spend most of their time lamenting the consequences of big government. And rightly so. Today government is less a defender of freedom and more a Hobbesian leviathan that undermines prosperity. When we do talk about limited government, it is often seen solely as “a necessary evil.”1 Too much government and the economy chokes. Too little, and it cannot function. Is there a Golden Mean?

George Washington best summarized the libertarian view: “Government is not reason; it is not eloquence; it is force! Like fire, it is a dangerous servant and a fearful master.”2 So it is with some trepidation that I suggest that societies or countries may not have enough good or legitimate government. In the never-ending battle against big government, it might be well to consider what constitutes “good government” to see how far we have strayed from the proper role of the state.

Each year the Fraser Institute publishes their Economic Freedom of the World Index (see www.fraserinstitute.org), which measures five major areas of government activity in more than 100 countries: size of government, legal structure, sound money, trade, and regulation. The most surprising thing about the study, according to its author James Gwartney, a professor of economics at Florida State University, is the importance of legal structure as the key to maximum performance for an economy. “It turns out,” he told me in a recent interview, “that the legal system — the rule of law, security of property rights, an independent judiciary, and an impartial court system — is the most important function of government, and the central element of both economic freedom and a civil society, and is far more statistically significant than the other variables.”

Gwartney pointed to a number of countries that lack a decent legal system, and as a result suffer from corruption,insecure property rights, poorly enforced contracts, and inconsistent regulatory environments, particularly in Latin America, Africa, and the Middle East. “The enormous benefits of the market network — gains from trade, specialization, expansion of the market, and mass production techniques — cannot be achieved without a sound legal system.” 3

The Proper Role of the State

Milton Friedman identifies the legitimate roles of the state: “The scope of government must be limited. Its major function must be to protect our freedom both from the enemies outside our gates and from our fellow- citizens: to preserve law and order, to enforce private contracts, to foster competitive markets. Beyond this major function, government may enable us at times to accomplish jointly what we would find it more difficult or expensive to accomplish severally.” 4

Adam Smith suggests that this “system of natural liberty” will lead to a free and prosperous society. As Smith declares, “Little else is required to carry a state to the highest degree of opulence from the lowest level of barbarism, but peace, easy taxes, and a tolerable administration of justice.”5

The division between the positive and negative role of government can be represented visually. In the diagram on the next page, we have on the vertical axis “socio-economic well-being”: some general measure of the quality of life in a free and civil society. For empirical studies, economists might want to use changes in real per capita income, but this may be too confining. On the horizontal axis we have “government activity.” At point O, we have zero government, and as we move along the horizontal axis, the size and scope of government activity increase. The ultimate extreme is the totalitarian regime, which institutes “total government,” though I would hesitate to label this “100% government,” since no government can control all activity.

Too Little vs. Too Much Government

My thesis is that as a society moves from zero government to point P, economic well-being increases to peak performance. Then, as it adopts a larger and less necessary government, its growth diminishes, and can even turn negative if government becomes too burdensome and controlling. Looking at the left side of the mountain, point O (zero government) to P (optimal government) constitutes “too little” government. For example, a nation may spend too few of its resources on personal protection, property control, and government administration. Here we see how increasing the size and scope of government activity initially leads to increased well-being, as measured by individual freedom and prosperity. Point P represents the right amount of government and the optimal amount of expenditure necessary to fulfill its legitimate functions.

This is the ideal of the minimalist state. Any point to the right of P represents too much government, when the central authority becomes a burden rather than a blessing. I’ve drawn it as a gradual downward slope, so that the more bad government a country adopts, the greater the decline in performance, even to the point X where government is so large and so intrusive that it results in the destruction of economic and social well-being, which is probably worse than the costs of anarchy.

Quantifying the Right Amount of Government

Can we quantify P, the optimal size of government? Several economists have attempted to determine the ideal level of government spending as a percentage of GDP. In the1940s, Australian economist Colin Clark said that the maximum size of government should not exceed 25% of GDP. Anything higher would hurt economic growth.6 Professor Gerald W. Scully, of the University of Texas at Dallas suggests that the tax rate ought not to exceed 23%.7 World Bank economists Vito Tanzi and Ludger Schuknecht analyzed 17 countries during the period 1870 to 1990 and concluded that public spending in newly industrialized countries should not exceed 20% and in industrialized countries not more than 30%.8 Is optimal government (point P) the same for every country?

This would make an interesting study, but I suspect that differences in culture and socio-economic circumstances suggest that some nations require more government than others. As Benjamin Franklin states, “A virtuous and laborious [industrious] people may be cheaply governed.”9 And a lazy, dishonest people must be expensively governed.

Graph

Optimistically, I would think that if all nations were featured together on the diagram above, the various points P would constitute a fairly narrow mountain range. Almost every country in the world today is to the right of Point P, and could grow faster and enjoy a higher quality of life by reducing the size and scope of government. Countries from China to Ireland to Chile have demonstrated how dramatically the economy can improve by cutting back the state. I’m sure even Hong Kong, #1 in the Fraser Institute’s study in terms of performance and freedom, could benefit from some improvements by scaling back some types of government services.

According to the latest surveys of economic freedom by the Fraser Institute and Heritage Foundation, countries on average are becoming more free, and not surprisingly, the world’s economic growth rate is rising.10 After noting that government represents 40–50% of GDP in most developed nations, Tanzi and Schuknecht conclude, “we have argued that most of the important social and economic gains can be achieved with a drastically lower level of public spending than what prevails today.”11

Two Case Studies in Little or No Government

Are there any examples of countries to the left of point P, that have too little government? The United States suffered from too little government under the Articles of Confederation, which was the basic law of the land from its adoption in 1781 until 1789, when they were replaced by the Constitution. The Articles limited the federal government to conducting foreign affairs, making treaties, declaring war, maintaining an army and navy, coining money, and establishing post offices. But it could not collect taxes, it had no control over foreign or interstate commerce, it could not force states to comply with its laws, and it was unable to payoff the massive debts incurred during the Revolutionary War. States were already putting up trade barriers, striking a serious blow to free trade, and the economy struggled. After the Constitution became law, the United States flourished because of improved government finances, protection of legal rights, and free trade among the 13 states.

A modern-day example of too little government is Somalia, located east of Ethiopia and Kenya, where life has been difficult and often dangerous without any central authority since 1991. For example, drivers pass seven checkpoints, each run by a different militia, on their way to the capital. At each of these “border crossings” all vehicles must pay an “entry fee” ranging from $3 to $300, depending on the value of goods being transported. Competing warlords vie for control of the countryside, which has frequently collapsed into civil war. Only an estimated 15% of children go to school, compared to 75% in neighboring states. However, a recent report by the World Bank indicates that an innovative private sector is flourishing in Somalia. This vindicates the Coase theorem, named for economist Ronald Coase, which argues that in the absence of government authority, the private sector will step in to provide alternative services, depending on the transaction costs.12 The central market in Bakara is thriving: all kinds of consumer goods, from bananas to AK-47s, are readily sold; mobile phones proliferate and internet cafes prosper. But with no public spending, the roads and utilities are deteriorating. Private companies have yet to appear to build roads — the transaction costs are apparently too prohibitive. Public water is limited to urban areas, and is not considered safe, but a private system extends to all parts of the country as entrepreneurs have built cement catchments, drilled private boreholes, or shipped water from public systems in the city.

There are now 15 airline companies providing service to six international destinations, and airplane safety can be checked at foreign airports. After the public court system collapsed, disputes have been settled at the clan level by traditional systems run by elders, with the clan collecting damages. But there is still no contract law, company law, or commercial law in Somalia. Sharp inflation in 1994–96 and 2000–01 destroyed confidence in the three local currencies, and the U.S. dollar is now commonly used. Because of a lack of reliable data, neither the Fraser Institute nor the Heritage Foundation’s economic freedom indexes rank Somalia. The World Bank concludes, “The achievements of the Somali private sector form a surprisingly long list. Where the private sector has failed — the list is long here too — there is a clear role for government intervention. But most such interventions appear to be failing. Government schools are of lower quality than private schools. Subsidized power isbeing supplied not to the rural areas that need it but to urban areas, hurting a well-functioning private industry. Road tolls are not spent on roads. Judges seem more interested in grabbing power than in developing laws and courts. Conclusion: A more productive role for government would be to build on the strengths of the private sector.”13

In short, most countries could use less government, but a few countries could use more of the right kind of authority. There is an optimal size and structure of government, and when it is reached, the result is, in the words of Adam Smith, “universal opulence which extends itself to the lowest ranks of the people.”14

Personal Snapshots
Forecasts & Strategies
June 2002

“Economic repression breeds intolerance, fanaticism and terrorism.”

— Gerald P. O’Driscoll, Jr., Heritage Foundation

I couldn’t believe my eyes when I saw this unusual map of the world. “The World Map of Economic Freedom” was published by the Heritage Foundation and The Wall Street Journal before the terrorist attacks on September 11, 2001. This incredible map—reproduced in full in the May issue of Ideas on Liberty—predicted in living color a war between America and the Middle East, and reveals in unmistakable clarity why Islamic extremists attacked New York and Washington.

Since September 11, we’ve heard all kinds of reasons why the terrorists struck America—in retaliation for the United States’ supporting Israel, for America’s meddling in the Middle East, Arab’s envy of America’s superpower status and their hatred of America’s lifestyle. This map gives the real reason.

World Economic Freedom Map from the Fraser Institute

In this “world map of economic freedom,” each nation is ranked according to its degree of economic freedom, based on 10 factors, such as level of taxation, trade restrictions, labor regulations, inflation, property rights and government intervention in the economy. Countries in blue, like the United States and Britain, are ranked “free.” Countries in green, like Canada and France, are considered “mostly free.” Nations in yellow, like Russia and Brazil, are labeled “mostly unfree.” Finally, nations in red are ranked “repressed.”

This world map is an eye-opener. It shows that few nations are truly free. Countries colored in blue include the United States, Britain, Australia, New Zealand and Hong Kong. Clearly, freedom is a delicate and rare flower. Canada and Europe are “mostly free.” Third World nations are “mostly unfree.” Countries painted yellow include Russia, China, India, Brazil and most of Africa. In fact, of the 155 nations surveyed, over half (81) received a negative grade (yellow or red).

The Biggest Shock: Where Is the Red?

But the most shocking fact is that almost all of the red nations are located in the Middle East. It is clearly the area of the world with the highest concentration of “repressed” freedom. This area of the world has been crippled from constant war, corruption, inflation, black markets, protectionism and government intervention on a grand scale. Most of the Arab world continues to suffer from economic dislocation, political turmoil and military conflict. It is not surprising that for most Arabs the standard of living is low, despite an abundance of oil.

The Most Important Lesson in the War on Terrorism

What is the most important lesson we can learn from this map? Simply this: Economic repression leads to intolerance, fanaticism and terrorism. It is not surprising that the Middle East is a major source of radicalism and chaos. A closed society breeds intolerance and fanaticism. Interestingly, most of the Middle East is also famous for its lack of political democracy and religious tolerance. Most are ruled by dictators or kings. Religious proselyting is prohibited in Arab nations and even in Israel.

But there is another important lesson to learn from this map. Liberalized trade and open markets break down cultural and social monotheism, and destroy fanaticism and intolerance. Business encourages people to become educated, industrious and self-disciplined. Commerce encourages trade, travel and exchange between nations and cultures.

What then is the real solution to the War on Terrorism? Sending troops and fighting war in faraway lands may offer a short-term solution to terrorism, but the only real permanent peace can be achieved through expanding trade and business, and establishing a legal system conducing to a civil society and prosperous economy. In short, a good dose of open markets and competition in all walks of life could go a long way toward bringing peace, prosperity and goodwill in this dangerous part of the world. Until that happens, however, many will shout “peace, peace, when there is no peace.” (Jeremiah 8:11)

Our Goal at FEE: Color the World Blue!

This world map also gives us the opportunity to explain our mission here at FEE in simple terms that everyone can see: Freedom in our time for all peoples. Our goal is to color the world blue. I do think that we are making progress. If you saw this world map of economic freedom in 1985, when the Soviet Union and China were closed communist nations, over half the world’s population would have been colored “red.” With the collapse of the Berlin Wall and the downfall of Soviet communism, many nations have moved from “red” to “yellow” and from “yellow” to “green.” Will they eventually move to “blue”? Through our books, monthly magazines and seminars, FEE will do everything in its power to achieve this lofty goal.

Action to Take: To receive a copy of “The Map That Predicted the Terrorist Attacks,” subscribe now to Ideas on Liberty, only $39 for 12 issues. We’ll send you, free, the map and a four-page commentary. Make your payment to Foundation for Economic Education, 30 South Broadway, Irvington, New York 10533. Or www.fee.org or call 800/960-4FEE, ext. 209, for credit-card orders.

FEE Fest 2002: Special Report

“I’ve attended many conferences, but yours is the best of the best. Thank you!”

—Attendee, FEE National Convention

Last month, FEE held its first ever FEE National Convention, and it was a huge success. With only four months of planning, we were able to register nearly 900 attendees. Nathaniel Branden, a keynote speaker at the Saturday night banquet, described the atmosphere well when he said, “I feel an electricity here that I haven’t sensed at libertarian meetings for a long time.” Actor Ben Stein wrote a poem just for FEE (to be published in the June issue of Ideas on Liberty), and C-SPAN Book TV videotaped six book authors (check the schedule on www.booktv.com or www.FEEnews.org).

The FEE Fest was packed with workshops, panels and debates on philosophy, history, economics, finance, education, art and public policy.

Audiotapes/Videos Now Available

If you missed the FEE Fest, I have good news. Audio and videotapes are available for almost all the sessions at the FEE National Convention. Audiotapes cost only $5 per session, ($275 for all) and videotapes are available for only $15 ($110 for all). Go to www.FEEnationalconvention.org for the complete list of tape recordings available and how to order or call Harold Skousen, 800/254-2057.

SKOUSEN’S PUZZLER FOR JUNE:

1883 is a very important year in economics. Name one economist who died in 1883, and two economists who were born in that same year. They say that it took two economists to make up for the mischief of the one who died. Who are these three economists? (Hint: You can find the answer in my book, The Making of Modern Economics, available from FEE, 800-960-4FEE, ext. 209).

The first 10 winners with the correct answer will receive a copy of my book, Economic Logic. Drawing will be on July 31, 2002. Send answer to Quarterly Puzzler, c/o Phillips Investment Resources, LLC, 7811 Montrose Rd., Potomac, Maryland 20854, or e-mail your answer to msfs_cs@investor-place.com.

From The President’s Desk
Published in Ideas on Liberty – May 2002

The Right to Be Left Alone

by Mark Skousen

“The makers of the Constitution conferred the most comprehensive of rights and the right most valued by all civilized men—the right to be let alone.”

-JUSTICE LOUIS D. BRANDEIS

According to Thomas Jefferson and the Declaration of Independence, one of the “repeated injuries and usurpations” committed against the American people by the King of England was the erecting of “a multitude of New Offices, and . . . swarms of Officers to harass our people, and eat out their substance.”

Today, following the tragic events of September 11, 2001, the American people face another troublesome threat—swarms of security agents harassing us at airports, borders, buildings, and highways. Like many of you who travel frequently, my wife, Jo Ann, and I have been subjected to these often overzealous security guards who ask inane questions; force us to remove our shoes, jackets, and belt buckles; and meticulously go through our carry-on bags. I’ve had my fingernail clippers confiscated twice. Jo Ann was frisked three times in one day. Others have fared far worse. My friend and IOL fellow columnist Walter Williams was almost arrested in Jacksonville, Florida, after he refused to be patted down. A congressman was required to disrobe. After these security encounters, I always feel my privacy, indeed my dignity, has been violated.

President George W. Bush has urged citizens to return to normal life, but business and domestic affairs are never the same when a war is on, and this war on terrorism is no exception.1 Bush’s proposed federal budget jumped 9 percent from last year, pushing the United States into a deficit again. Private enterprise has been forced to spend billions on security measures, a real burden on a recessionary economy. (Imagine, intelligent employees spending the rest of their lives trying to catch some nut out there, representing 1/1000 of 1 percent of travelers.) Airport security has now become federalized. And we have become, in the words of Sheldon Richman, “tethered citizens.”

In revolutionary times, colonists were so incensed by the invasions of privacy and other personal abuses by British officers that Congress’s first act was to pass a Bill of Rights, including Amendment III, “No Soldier shall, in time of peace be quartered in any house, without the consent of the Owner, nor in time of war, but in a manner to be prescribed by law,” and Amendment IV, “The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but upon probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized.”

The Fourth Amendment forms the basis of a “right to privacy,” the right to be left alone, as Justice Louis Brandeis put it. The enjoyment of financial and personal privacy is fundamental to a free and civil society. True liberty is to be able to walk down the street, cash a check, buy goods, talk on the telephone, or take a trip without being hassled, hounded, followed, or interrogated by government agents. People should be able to get away from the madding crowds without being followed or asked stupid questions. When I travel abroad, there is no better feeling than walking through the green customs door marked “Nothing to Declare.” When I return home and close the door, there is a feeling of security, knowing that the police aren’t going to break it down in the middle of the night for a “warrantless” search. It happened in Soviet Russia and Nazi Germany, but surely not in America!

Privacy Eroding

Yet the right to privacy so cherished by Americans of generations past is gradually eroding. New airport-security laws require all travelers to carry a “government-issued” ID, usually a driver’s license or passport. Thus we have come dangerously close to creating a national identity card for all Americans. The war on drugs has made it virtually impossible to deal legally in large amounts of cash, the most anonymous form of doing business. Some banks are requiring thumbprints for identification. Mandatory drug-testing of students and employees is becoming commonplace without any reference to the constitutional principle of “probable cause.” Since September 11, police routinely check automobiles and trucks coming into New York City without a warrant. Tampa and other big cities are videotaping citizens in “crime-prone” areas around the clock. California and other states are capturing all drivers on film and issuing tickets for alleged speeders.

I wrote the first book on financial privacy in the early 1980s.2 It was a huge underground hit, selling over 400,000 copies. Clearly, vulnerable Americans felt the need for protection against potential lawsuits, government surveillance, prying relatives, aggressive salesmen, and professional thieves. From time to time, I am asked to do an updated edition, but I have refused. Why? Because the law has changed and become so complex that it takes a full-time professional to stay up on all the dos and don’ts. However, I can recommend an excellent newsletter that focuses on privacy issues: The Financial Privacy Report, published and written by Michael Ketcher (to subscribe, call 1-866-429-6681; P.O. Box 1277, Burnsville, MN 55337).

Despite the recent intrusions into individual personal affairs, you can still maintain a certain degree of privacy. You can take a car, bus, or train, and go to most destinations without being noticed or tracked. In small transactions, you can still pay with cash instead of using credit cards or checks. You can buy a large number of gold and silver coins with cash and avoid reporting requirements. You can refuse to give your Social Security number to schools, hospitals, dentist and doctor offices, insurance companies, and most private organizations (but not banks, brokers, or the IRS). You can open a foreign bank account with less than $10,000 and not have to report it. You can use a post office box to keep direct mail promoters from contacting you. You can demand a search warrant before allowing the police to come into your house or business, or to search your automobile.

In short, by maintaining a low profile, you can usually avoid the scrutiny of overzealous bureaucrats, nosy neighbors, or jealous relatives.

1. Historian Robert Higgs makes this very clear in his excellent article, “How War Makes Government Bigger,” Ideas on Liberty, December 2001.
2. Mark Skousen, The Complete Guide to Financial Privacy (Alexandria House Books, 1979; New York: Simon & Schuster, 1983).

Published in January, 2001, issue of Liberty Magazine:

THE TROUBLED ECONOMICS OF AYN RAND
by Mark Skousen

“No creator was prompted by a desire to serve his brothers…”

–Howard Roark, The Fountainhead (1994:710)

Ayn Rand, author of the celebrated Capitalism: The Unknown Idea, is honored almost universally as the fountainhead of market capitalism, an impassioned proponent of reason, individualism, and rational self-interest.

There is much to praise in Ayn Rand’s novels and writings, especially her uncompromising defense of freedom and her unrelenting denunciations of collectivism. No one has written more persuasively about property rights, the right of an individual to safeguard his wealth and property from the agents of coercion. Her novels The Fountainhead and Atlas Shrugged have probably done more than any other works of fiction to vindicate and honor the glories of “making money.”

Yet in reading her novels and writings, I was surprised to learn that her work often portrays a strange, distorted view of the money-making process. In a perverse way, her model of business may even give aid to the cause of the enemies of liberty–by giving capitalism a bad name.

Consumer Sovereign in The Fountainhead

Take, for example, Howard Roark’s philosophy toward his architectural work in The Fountainhead. In the beginning, Roark indicates that he chose architecture as a profession because he loves his work. He seeks to set the highest standards of excellence. He tries to be creative. All of these traits are to be admired.

But then Roark denies a basic tenet of sound economics–the principle of consumer sovereignty. When the dean of the architectural school tells Roark, “Your only purpose is to serve him [the client],” Roark objects. “I don’t intend to build in order to serve or help anyone. I don’t intend to build in order to have clients. I intend to have clients in order to build.” (1994:14) This bizarre, almost anti-social, attitude sounds like a perverse rending of Say’s Law, “supply creates its own demand,” or the statement made in the film Field of Dreams, “If you build it, they will come.” But supply only creates demand if the supply can be sold to customers; and people come to a new baseball field only if they want to play or watch. Supply must satisfy demand, or it becomes a wasted resource.

Now I have no problem with an architect who tries to set new standards of design, just as I would applaud entrepreneurs who seek to invent a new product or design a new process. Such actions are often highly risky and financially dangerous, and are often met with derision at first. Ayn Rand rightly points out that they are a major cause of economic progress. History is full of examples of “men who took first steps down new roads armed with nothing but their own vision.” (Rand 1994:710)

But the goal of all rational entrepreneurship must be to satisfy the needs of consumers, not to ignore them! Discovering and fulfilling the needs of customers is the essence of market capitalism. Imagine how far a TV manufacturer would get if he decides to build TVs that only tune into his five favorite channels, the consumer be damned. It wouldn’t be long before he would be on the road to bankruptcy.

Rand Denies the Essence of Business Enterprise

In short, Howard Roark’s conviction is irrational and contradicts a basic premise of Rand’s Objectivist philosophy. For Roark, A is not A. He wants A to be B–his B, not his customer’s A. Thus, Ayn Rand’s ideal man misconceives the very nature and logic of capitalism–to fulfill the needs of customers and thereby advance the general welfare. As Ludwig von Mises writes in his book, The Anti-Capitalist Mentality, “The profit system makes those men prosper who have succeeded in filling the wants of the people in the best possible and cheapest way. Wealth can be acquired only by serving the consumers.” (1972:2) Apparently Howard Roark doesn’t believe in consumer sovereignty. As he states in his final court defense, “An architect needs clients, but he dos not subordinate his work to their wishes.” (1994:714) Really?

Talk to any architects about The Fountainhead. Yes, they will tell you that there are a few self-centered, highly-egotistical, elitist Howard-Roark types in architecture who can get away with making monuments to their egos at their client’s expense. Frank Lloyd Wright, an architect Rand deeply admired, may be one of them. But the book’s thesis is entirely unrealistic in the everyday world of commercial building. Occasionally a client values more the notoriety of living in a home built by a signature designer than getting what he really wants, but not many. Almost all of Rand’s scenarios are extreme and idealistic, a strategy that works to sell novels, but does violence to all sense of reality. Normally architects work closely with the client and make numerous changes in order to fit the client’s needs.

Compromise is a necessary element to a successful completion of a project. And this consumer-oriented approach is true in all areas of capitalistic production. An architect or producer of any product who acts like Roark in The Fountainhead is likely to be out of work. Roark’s fate is even worse–he is guilty of his crime, blowing up a much-needed housing project rather than permit the slightest alteration in his designs. The jury may have exonerated him, but the market punishes his kind of behavior.

Ironically, Ayn Rand herself compromised in the making of the movie “The Fountainhead.” She insisted that only Frank Lloyd Wright would design the models for the film, but her demand was later rejected due to Wright’s outrageous fee. In the end, the models were done by a studio set designer. Rand called them “horrible” and “embarrassingly bad.” But the film was made and released. (Branden 1986:209) Oh, the agonies of dealing with other people!

The fact that Howard Roark represents the ideal man in Ayn Rand’s novel and the fact that she denigrates other characters in The Fountainhead who “compromise” with client’s demands suggest that Ayn Rand is philosophically in denial when it comes to comprehending the nature of business. She denies the very raison d’etre of capitalism–consumer sovereignty.

Assault on the Common Man

In this sense, Ayn Rand is not much different from other artists and intellectuals. Artists often bash the capitalist system. They hate the idea of subjecting their talents to crass commercialism and the crude tastes of the common man. Yet Ludwig von Mises chastised this snobbish attitude in The Anti-Capitalist Mentality: “The judgment about the merits of a work of art is entirely subjective. Some people praise what others disdain. There is no yardstick to measure the aesthetic worth of a poem or of a building.” (1972:75) Mises adds that only through economic progress — the creation of surplus wealth — has the level of taste and art been raised to meet the criteria of the more sophisticated artist. “When modern industry began to provide the masses with the paraphernalia of a better life, their main concern was to produce as cheaply as possible without any regard to aesthetic values. Later, when the progress of capitalism had raised the masses’ standard of living, they turned step by step to the fabrication of things which do not lack refinement and beauty.” (1972:80)

The Flaw in Atlas Shrugged

This brings us to the fatal flaw in Atlas Shrugged. Rand’s basic plot violates the whole rationale of business’s existence–constantly working within the system to find ways to make money. There will never be a Galt’s Gulch, where the world’s greatest entrepreneurs isolated themselves from the rest of the world. There will never be enough principled business leaders to fight the system. The business world does not typically attract ideologues and true believers; it attracts people primarily interested in money making by whatever means. They wouldn’t give John Galt the time of day. As Mises states, “There is little social intercourse between the successful businessmen and the nation’s eminent authors, artists and scientists…Most of the ‘socialites’ are not interested in books and ideas.” (Mises 1972:19) Ayn Rand admired Mises, but apparently she didn’t learn much from his writings. Pity.

Altruism Vs. Selfishness

Howard Roark’s diatribe against consumer sovereignty is undoubtedly a way to introduce Rand’s philosophy of selfishness. There are two extremes here: The philosophy of those who serve and satisfy themselves only, and the philosophy of those who believe that they should strive at all times to serve and sacrifice for others. Rand labels the latter “altruism.” In The Virtue of Selfishness, she opines, “Altruism declares that any action taken for the benefit of others is good, and any action taken for one’s own benefit is evil.” (Rand 1999:80) Obviously, Rand protests against altruism and espouses the opposite extreme. As Francisco d’Anconias tells Dagny Taggart in Atlas Shrugged: “Don’t consider our interests or our desires. You have no duty to anyone but yourself.” (Rand 1992:802) No sacrifice, no altruism, just pure egotistical selfishness.

The Adam Smith Solution

The founder of modern economics, Adam Smith, takes a different approach by trying to incorporate both concepts in his “system of natural liberty.” Smith and Rand are in agreement about the universal benefits of a free capitalistic society. But Smith rejects Rand’s vision of selfish independence. He teaches that there are two driving forces behind man’s actions–in his Theory of Moral Sentiments, he identifies the first as “sympathy” or “benevolence” toward others in society, while in his Wealth of Nations, he focuses on the second, “self interest,” the right to pursue one’s own business. Smith believes that as the market economy develops and individuals move away from their community, “self interest” becomes a more dominant force than “sympathy.” But both are essential to achieve “universal opulence.” (Smith 1965:11)

Adam Smith is famous for making a statement that sounds Randian in tone: “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.” (Smith 1965:14) But this statement is often taken out of context. Smith’s self-interest never reaches the Randian selfishness that ignores the interest of others. On the contrary, in Smith’s mind, an individual’s goals cannot be fully achieved in business unless he appeals to the self-interest of others. Smith says so in the very next sentence: “We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.” (Ibid.) Moreover, he writes earlier on the same page, “He will be more likely to prevail if he can interest their self-love in his favour….Give me that which I want, and you shall have this which you want, is the mean of every such offer.” (Ibid.) Smith’s theme echoes his Christian heritage, particularly the golden rule, “do unto others as you would have them do unto you.” (See Matthew 7:12)

Perhaps a true capitalist spirit can best be summed up in the Christian commandment, “Love thy neighbor as thyself.” (Matthew 22:39) Adam Smith and Ludwig von Mises would undoubtedly agree with this creed, but apparently Howard Roark and John Galt — and their creator — would agree with only half. And that’s a great tragedy for the greatest novelist of the 20th century.

References

* Branden, Barbara. 1986. The Passion of Ayn Rand. Doubleday.
* Mises, Ludwig von. 1972 [1956]. The Anti-Capitalist Mentality. Libertarian Press.
* Rand, Ayn. 1992 [1957]. Atlas Shrugged. Dutton Books.
* Rand, Ayn. 1994 [1943]. The Fountainhead. Penguin Books.
* Rand, Ayn. 1999. The Ayn Rand Reader, ed. by Gary Hull and Leonard Peikoff. Penguin Books.
* Smith, Adam. 1965 [1776]. The Wealth of Nations. Modern Library.

Economics on Trial
Ideas on Liberty
November 2000

by Mark Skousen

“In the excitement over the unfolding of his scientific and technical powers, modern man has built a system of production that ravishes nature and a type of society that mutilates man.” -E. F. SCHUMACHER (1)

In 1956, Ludwig von Mises countered myriad arguments against free enterprise in his insightful book, The AntiCapitalistic Mentality. “The great ideological conflict of our age,” he wrote, “is, which of the two systems, capitalism or socialism, warrants a higher productivity of human efforts to improve people’s standard of living.” (2)

Unfortunately, Mises’s counterattack has done little to stem the tide of anti-market sentiments. One that continues to be popular is E. F.Schumacher’s 1973 book, Small Is Beautiful which has recently been reprinted in an oversized text with commentaries by Paul Hawken and other admirers. Schumacher has a flourishing following, including Schumacher College (in Devon, England) and the Schumacher Society (in Great Barrington, Massachusetts). Hawken hails Schumacher as a visionary and author of “the most important book of [his] life.” (3) Schumacher’s message appeals to environmentalists, self-reliant communitarians, and advocates of “sustainable” growth (but not feminists the old fashioned Schumacher cited favorably the Buddhist view that “large-scale employment of women in offices or factories would be a sign of economic failure” (4) ).

From Austrian to Marxist to Buddhist

Oddly enough, Fritz Schumacher’s background is tied to the Austrians. Schumacher was born in Germany in 1911 and took a class from Joseph Schumpeter in the late 1920s in Bonn. It was Schumpeter’s course that convinced Schumacher to become an economist. While visiting England on a Rhodes scholarship in the early 1930s, Schumacher encountered F. A. Hayek at the London School of Economics and even wrote an article on “Inflation and the Structure of Production.” (5) But his flirtation with Austrian economics ended when he discovered Keynes and Marx. He renounced his Christian heritage and became a “revolutionary socialist.” The Nazi threat forced him to live in London, where he was “interned” as an “enemy alien” during World War II. After the war, he worked with Keynes and Sir William Beveridge and supported the nationalization of heavy industry in both Britain and Germany. But his real change of heart came during a visit to Burma in 1955, when he was converted to Buddhism. “The Burmese lived simply. They had few wants and they were happy,” he commented. “It was wants that made a man poor and this made the role of the West very dangerous.” (6)

Schumacher greatly admired Mahatma Gandhi and his saying, “Earth provides enough to satisfy every man’s need, but not for every man’s greed.” Eventually he wrote a series of essays that became his classic, Small Is Beautiful, published in 1973. In the 1970s, he became passionate about trees and began a campaign against deforestation. After a successful book tour in the United States, including a visit with President Jimmy Carter, he died in 1977 of an apparent heart attack.

The Lure of Buddhist Economics

Schumacher’s message is Malthusian in substance. Small Is Beautiful denounces big cities and big business, which “dehumanizes” the economy, strips the world of “nonrenewable” resources, and makes people too materialistic and overspecialized. According to Schumacher, individuals are better off working in smaller units and with less technology.

His most important chapter is “Buddhist Economics,” with its emphasis on “right livelihood” and “the maximum of wellbeing with the minimum of consumption.” Foreign trade does not fit into a Buddhist economy: “to satisfy human wants from faraway places rather than from sources nearby signifies failure rather than success.” (7) In sum, traditional Buddhism rejects labor-saving machinery, assembly-line production, large-scale multinational corporations, foreign trade, and the consumer society.

There are two problems with Schumacher’s glorification of Buddhist economics. First, it denies an individual’s freedom to choose a capitalistic mode of production; it enslaves everyone in a life of “nonmaterialistic” values. And second, it clearly results in a primitive economy. Mises responded to both these issues: “What separates East and West is . . . the fact that the peoples of the East never conceived the idea of liberty . . . . The age of capitalism has abolished all vestiges of slavery and serfdom.” And: “It may be true that there are among Buddhist mendicants, living on alms in dirt and penury, some who feel perfectly happy and do not envy any nabob. However, it is a fact that for the immense majority of people such a life would be unbearable.” (8)

I have no objection to preaching the Buddhist value that sees “the essence of civilization not in a multiplication of wants but in the purification of human character.” Nor do I disapprove of localized markets (see my favorable review last November of the Grameen Bank, which makes small-scale loans to the poor). But none of this idealism should be forced on any society. Ultimately we must let people choose their own patterns of work and enjoyment. Clearly, whenever Third World countries have been given their economic freedom, the vast majority have chosen capitalistic means of production and consumption. As a result, poor people have been given hope for the first time in their lives-a chance for their families to break away from the drudgery of hard labor, to become educated, see the world, and enjoy “right living.”

Freedom is beautiful!

1. E. F. Schumacher, Small is Beautiful Economics as if People Mattered: 25 Years Later with Commentary (Point Roberts, Wash.: Hanley & Marks, 1999 (1973)), p. 248.
2. Ludwig von Mises, The Anti-Capiaadatie Mentality (South Holland, Ill.; Libertartan Press, 1972 [1956]),p. 62.
3. Paul Hawken, Introduction to Schumacher, p. xiii.
4. Ibid., p. 40.
5. Sec The Economics of Inflation, ed. by H, P. Willis and J. A Chapman (New York: Columbia University Press, 1935).
6. Quoted in Barbara Wood, E. F. Schumacher: His Life and Thought (New York: Harper & Row, 1984), p. 245.
7. Schumacher, p. 42.
8. Mises, p. 74.

Economics on Trial
Ideas on Liberty
October 2000

Having Their Cake
by Mark Skousen

“The duty of ‘saving’ became nine-tenths of virtue and the growth of the cake the object of true religion.” -JOHN MAYNARD KEYNES (1)

In his 1920 bestseller, The Economic Consequences of the Peace, John Maynard Keynes made a profound observation about the success of capitalism before the Great War. He lauded “the immense accumulations of fixed capital” built up by the “new rich” during the half century before the war and compared the huge capital investment of this golden era to a “cake,” noting how “vital” it was that the cake “never be consumed;” but continue to “grow.”

Keynes was intensely optimistic about the prospects of humanity, “if only the cake were not cut but was allowed to grow in the geometrical proportion predicted by Malthus for population.” Rapid capital accumulation would result in the elimination of “overwork, overcrowding, and underfeeding,” and workingmen “could proceed to the nobler exercises of their faculties.”

Alas, it was not to be. The First World War destroyed Keynes’s dream of universal progress. The cake was consumed. “The war has disclosed the possibility of consumption to all and the vanity of abstinence to many.” (2)

War isn’t the only enemy of capital accumulation. Since World War II, the greatest threat to capital formation (the growth of the cake) has been the direct and indirect taxation of capital.

Take, for example, the federal estate tax. The estate tax is often viewed as an “inheritance” tax and even a “death” tax. But it’s much worse than that. It’s also a tax on capital. An estate’s taxable property includes stocks, bonds, business assets, real estate, coins and collectibles-all after-tax, afterconsumption investments.

If your net worth exceeds $675,000, your heirs will be forced to pay at least 18 percent to the IRS. The tax rate hits a confiscatory 55 percent at a mere taxable estate of $3 million.

Capital is the lifeblood of the economy. Capital investment finances new technology, new production processes, quality improvements, jobs, and economic growth in general. When those investment funds are taxed-$28 billion in 1998-the funds are removed from the investment pool and transferred to Washington, where they are consumed. For the most part the funds are consumed through government expenditures and “transfer payments” (welfare, salaries of government workers, and so on).

The estate tax also creates economic distortions. It encourages individuals to engage in “estate planning,” expensive legal exercises to avoid the death tax. It forces individuals to buy insurance policies they would not otherwise buy and create tax-exempt trusts and foundations that they would not ordinarily create. Undoubtedly, millions of fiends are transferred every year into foundations and charities just to avoid estate taxes. Charitable giving and public foundations have become big business, but what is the price? Mismanagement and waste are common features in these nonbusiness organizations.

Another Inefficient Tax: Capital Gains Taxes

Perhaps an even more sinister tax is the capital gains tax. If you sell an asset (stock, bond, commodity, real estate, or collectible), the profits are taxed between 20 and 40 percent, depending on how long you held the asset. (If you hold for more than a year, the maximum rate is 20 percent.) This is a terrible penalty on capital. It means that every time a stock or other asset is traded outside a taxexempt vehicle, 20 to 40 percent of the profits are removed from the private economy and sent to Washington, never to be invested again. With the recent bull market on Wall Street, annual capital gains taxes have exceeded $100 billion. What a terrible drain on the economy.

Capital gains taxes also result in economic inefficiency. Because of the high tax on capital gains, many investors refuse to sell their assets. They may prefer to switch into a potentially more profitable investment, but they stay with their original investment because they hate the idea of paying Uncle Sam. Clearly, capital would be more efficiently allocated to its more productive use without this burdensome profits tax.

The United States can learn a lot from foreign nations. Hong Kong has a flat 15 percent personal income tax, a 16.5 percent corporate income tax, and no tax at all on capital gains. In fact, most of the New Industrial Countries in Southeast Asia do not tax capital gains.

Thus capital can move freely throughout Hong Kong and around the world without distortion. And the cake has grown rapidly because of capital’s tax-free status. Hong Kong does have an estate tax on values exceeding HK$7 million, but the maximum rate is only 18 percent. (3)

Fortunately, the U.S. government has recently recognized the negative drain these taxes have on the economy. It has reduced long-term capital gains, and Congress has even entertained a bill to abolish federal estate taxes altogether.

Eliminating taxes on estates and capital gains has been criticized as a break for the rich. Moreover, critics say, estate taxes should be kept in order to establish a level playing field. They argue, “Children and grandchildren of wealthy people didn’t earn inherited money. They should have to work for it, just as their parents did. Inheritances create disincentives to work.”

But these critics fail to understand the broader implications of a large tax-free estate and tax-free capital gains. Everyone-not just the rich-benefits from eliminating these taxes because wealthy people’s capital would be left intact, invested in the stock market, businesses, farms, banks, insurance companies, real estate, and other capital assets, thus insuring strong economic growth and a high standard of living for everyone. As Ludwig von Mises once stated, “Do they realize that every measure leading to capital decumulation jeopardizes their prosperity?” (4)

As an investment adviser, I share the concern that unrestricted inheritances to children or grandchildren can be morally corrupting, but there are other solutions besides a confiscatory tax. For example, a will can limit the use of inherited funds until a certain age of responsibility is reached, or a trust can offer matching funds as a way to encourage work and responsibility.

1. John Maynard Keynes, The Economic Consequences of the Peace (New York: Harcourt, Brace, 1920), p. 20.
2. Ibid., pp. 20-21.
3. For an excellent summary of tax policies throughout the world, see International Tax Summaries, published annually by Coopers & Lybrand (New York: John Wiley & Sons).
4. Ludwig von Mises, Planning for Freedom, 4th ed. (South Holland, Ill.: Libertarian Press, 1980), p. 208.

Forecasts & Strategies
Personal Snapshots
January 2000

What Are the Bears Missing?
By Mark Skousen

“He has been wrong about the stock market for a decade, he said, because he is a contrarian.” — The New York Times, December 26, 1999

The 1990s has turned out to be the best-performing decade of the 20th century in terms of stock market performance. Several new factors palyed a role: Unexpected low commodity and consumer inflation, fiscal restraint, increased productivity, globalization and the collapse of the Soviet communism and the socialist model of central planning.

And yet, an incredible number of bright people missed the entire bull market. Year after year, they predicted the imminent collapse in stocks, yet the Dow increased three fold and the NASDAQ 10-fold. The New York Times named names: James Grant, Marc Faber, and more recently Barton Biggs. All Ivy League graduates. Many of my gold bug friends missed the bull market, too.

How is this possible? What kind of prejudices would keep an intelligent analyst from issing an overwhlming trend?

Confessions of a Gold Bug Technician

A good friend of mine is a technical analyst who searches the movement of prices, volume, and other technical indicators to determine the direction of stocks and commodities. Most financial technicians are free of prejudices and will invest their money wherever they see a positive upward trend and avoid or sell short markets that are seen in a downward trend. But my friend is a gold bug and no matter what the charts show, he somehow interprest these charts to suggest that ogld is ready to reverse its down ward trend and head back up. Equally, he always seems to think the stock market has peaked and is headed south. As a result, throughout the entire 1990s, he missed out on the great bull market on Wall Street and lost his shirt chasing gold stocks.

Another friend uses an old-style Dow theory that requres both the Dow Industrials and the Dow Transports to hit new highs before a bull is declared. Durring the 1990s, this Dow theorist had the bear in the box more than the bull.

Over the years, I’ve encountered three kinds of investment analysts: Those who are always bullish, those who are always bearish, and those whose outlook depends on market conditions. I’ve found that the third types, the most flexible, are the most successful on Wall Street.

“What Am I Missing?”

In the financial business, the key to success is a willingness to chage your mind when you’re wrong. Stubbornness can be financially ruinous. When a market goes against you, you should always ask, “What am I missing?”

Sound “Austrian” economics has taught me two principles that can be applied to this situations. First, marginal changes in the political or economic landscape can make big differences in the markets. Economists always talk about marginal analysis. Thus, marginal tax cuts, reducing the size of government, and minimizing trade barriers can turn a bear market into a roaring bull market.

Second, beware historical data. History does not repeat itself in every cycle. It does make a difference who is president, or what the new technology is.

“The bears are transfixed by historical data,” reports The New York Times. Indeed, in bull versus bear debates over the past 10 years, the bears have always brought up the fact that stocks are vastly overvalued “on an historical basis.” No argument there! But does that mean we must be bearish? Again, we must ask ourselves the all important question, “What am I missing?” The markets have been overvalued for years — but they keep going up because of new net benefits to the economy. This is data that is not part of the past.

Discovery
LIBERTY Magazine

The Other Austrian
By Mark Skousen

Swashbuckling corporate raiders take heed, here’s another Austrian economist offering advice.

Peter F. Drucker once walked into the boardroom of a major company in crisis and bluntly demanded, “Gentlemen, what is your business?” Most of the executives thought it was a sophomoric question, but Drucker kept pushing. He repeated the question over and over again. “What is your business?” It took them an hour to figure out what Drucker was getting at: they had lost their vision. Once they returned to fundamentals, they found their way back to profitability — all because Drucker asked a “dumb” question.

Drucker is eclectic, independent and unpredictable. Although he is known as Mr. Management, he is a lone wolf, operates without a secretary, and has no supporting organization. He is an outsider. In the words of one admirer, he is an “iconoclast–the smasher of idols, seeker of proof, demander of evidence, gadfly, thorn in the side, tough and hard-nosed commentator on problems faced by our society.” 1

Nearly everyone in the business world is familiar with Drucker, either through his books or his columns in The Wall Street Journal. He is a household name among MBAs, corporate executives and business students. Drucker is the world’s most sought-after business consultant. His vitae are multifarious: lawyer, journalist, political theorist, economist, novelist, futurist, and philosopher extraordinaire. Now in his eighties, with 25 books under his belt, he is still active in writing and consulting, though he does not travel much anymore.

Business students and executives have often told me that Drucker’s ideas have a certain “Austrian” streak to them. They say that his emphasis on entrepreneurship, innovation and investment capital as well as his denunciations of big government, excessive taxation and Keynesian economics, has right in harmony with the ideas of Bohm-Bawerk, Mises, Hayek and the Austrian school of economics.

So: is Peter Drucker a closet Austrian?

Viennese Roots

In the very literal sense, Drucker is an Austrian. He was born in 1909 in Vienna, during the heyday of the Austrian school. But he was too young to attend Ludwig von Mises’ famous seminar. When he graduated from gymnasium in 1927, he went to the University of Frankfurt, where he got his LL.D. in the early 1930s. But his roots remained Viennese. He refused a job offer from the Nazi’s Ministry of Information. Instead, he wrote a 32-page monograph on the 19th century German philosopher, Friedrich Julius Stahl. There is as much to learn about Drucker as there is about Stahl in this paper. Stahl was paradoxical: a Jew by birth, a Protestant by conversion, and a conservative opposed to absolute monarchy.  Not surprisingly, Drucker’s paper was banned by the Nazis. Like Mises, Hayek, and other enemies of the Nazi state, Drucker immigrated to the West before the war broke out. He traveled to England in 1933 and the United States in 1937.

The Manager’s Manager

Of course, the question of whether Drucker is an Austrian is not a question about his birthplace. It is a question about his economic theory. If one limited the question to his management approach, the answer is clearly in the affirmative: Drucker’s style of management is Austrian through and through. Time, expectations, new information, and potential change in production processes–all Austrian focal points–are constantly emphasized in his writings and consultations. The manager must be an entrepreneur, not just an administrator. Innovation is essential. In 1985, he wrote an entire book on the subject, Innovation and Entrepreneurship.

He criticizes management for engaging in short-term planning, what he labels “industrial Keynesianism.” Long-term planning is more risky, says Drucker, but is essential for survival, especially for large corporations. Owners and managers must be future oriented, he stresses. “Tomorrow’s vision is today’s work assignment.” The Japanese have been so successful, Drucker asserts, because they’re so long-term oriented.

In Search of a New Social Order

It was his life in America that turned his interest to business management. During the late 1930s, Drucker began searching for a new social and industrial order. He became disenchanted with “unbridled” capitalism as the Great Depression wore on and on. But socialism, fascism, and communism seemed even worse alternatives to society’s ills.

He finally found his answer in the only “free, non-revolutionary way”–the large corporation. He was enthusiastic about his discovery: big business could provide a superior alternative to socialism and big government. According to Drucker, the large corporations should be the conduit through which economic stability and social justice would be established. Only big business could afford to assume social responsibilities such as job security, training and educational opportunities, and other social benefits. Such an alternative was absolutely critical in an age when free enterprise was on the defensive around the world.

After the war, Drucker got a consulting contract with General Motors, which gave him an opportunity to develop his thesis more fully. His exhaustive study of GM culminated in the 1946 publication of Concept of the Corporation. Drucker came to the unshakable conviction that the large corporation should be the “representative social institution” of the postwar period and that major American companies such as GM should take the lead in building the free industrial society.

Top officials at General Motors resented the book and scoffed at the idea that a large corporation should assume social responsibilities. But Drucker’s reputation as a management expert grew despite GM’s cold shoulder. By 1950, he was professor of management at New York University, and in 1973 he was appointed Clarke Professor of Social Science at Claremont Graduate School in California.

Drucker maintains that a company is more than an economic entity. “Even more important than economics are the psychological, human, and power relationships which are determined on the job rather than outside it. These are the relationships between worker, work group, task, immediate boss, and management.” 3 A company’s administrators have a moral purpose and social responsibility beyond making short-term profits. Drucker envisions the large corporation as the social institution, far superior to government in providing a retirement income, health care, education, childcare, and other fringe benefits. He argues that corporate welfarism should replace government welfarism. Drucker acknowledges that such social activity could undermine economic performance, but he rejects Milton Friedman’s admonition that business’ only legitimate responsibility is to increase its profits. A lethargic government has created a “vacuum of responsibility and performance” which big business must fill.

A Moral Dimension

Drucker’s attitudes toward business management and government may not be economic in origin, but religious. “The only basis of freedom is the Christian concept of man’s nature: imperfect, weak, a sinner, and dust destined for dust; yet man is God’s image and responsible for his actions.”‘ He calls for a return to spiritual values, “not to offset the material but to make it fully productive.”

But how far he is willing to carry this insight is open to question. Drucker has been criticized as an apologist for big business. And it is true that he has been reluctant to discuss big business as a special interest lobbying power. Drucker usually envisions business and government in an adversarial role rather than a cooperative one. In his massive volume, Management, his chapter on “Business and Government” fails to mention how big business often uses its power to gain special tax breaks, subsidies, monopoly power and restrictions on foreign competition.

Paul Weaver, a former Ford executive, describes the extent of corporate statism as follows: “From the beginning it [big business] has worked aggressively and imaginatively in this spirit, and over the years it has won a dazzling array of benefits — tariffs, subsidies, official monopolies, tax breaks, immunity from certain tort actions, government-supported research and development, free manpower training programs, countercyclical economic management, defense spending wage controls, and so on through the long list of the welfare state’s indulgences and beneficences.”6 Unfortunately, the master is oddly silent on this critical issue.

Drucker Qua Economist

Drucker is much more than a management consultant and writer. He is also a commentator on politics, economics and culture. Here Drucker is less easy to categorize.

His economic views are often in line with Mises and today’s Austrians; other times they are not. He often rejects notions that Austrians consider essential. Ludwig von Mises and he were colleagues at New York University in the 1950s, but they did not see much of each other. “Mises considered me a renegade from the true economic faith,” Drucker says, and “with good reason.”‘ Drucker became disenchanted with pure laissez faire capitalism during the Great Depression. Today he supports a Hamiltonian approach to government — small, but powerful. He believes in a strong president and a central government that plays a serious role in education, economic development, and welfare. Furthermore, he rejects the gold standard and favors a central bank.

At the same time, however, Drucker advocates many positions that free market economists would applaud.

Inflation is a “social poison.” Government has gotten bigger, not stronger, and can now only do two things effectively — wage war and inflate the currency. The state has become a “swollen monstrosity.” He continues, “Indeed, government is sick–and just at a time when we need a strong, healthy, and vigorous government.” 8 Drucker advocates privatization of government services as a way to reduce a bloated bureaucracy. Indeed, Drucker claims he invented the term, calling it reprivatization in his 1969 book, The Age of Discontinuity. 9 Social Security should be gradually replaced by private pension plans. The corporate income tax, says Drucker, is the “most asinine of taxes” and should be abolished (but replaced with a value added tax). Defense spending is a “serious drain” on the civilian economy, and should be cut sharply. The costs of “free” government services are “inevitably high.” 10 Echoing Hayek, Drucker claims that no public institution can operate in a businesslike manner because “it is not a business.”

Drucker is largely optimistic about he future. He talks excitedly about an expanding global economy and the collapse of Communism. Multinational corporations, both large and small, are far more important than foreign aid or domestic spending programs by the state, and will lead the way into a new nirvana. The more firms become “transnational,” the healthier the world economy will be.

Drucker is encouraged by events in developing countries, especially efforts to privatize and denationalize and open up domestic economies to foreign capital. The worst move a developing country can make is to adopt Marxism. “Communism is evil. Its driving forces are the deadly sins of envy and hatred. Its aim is the subjection of all goals and all values to power; its essence is bestiality; the denial that man is anything but animal, the denial of all ethics, of human worth, of human responsibility.” 11 Drucker debunks Soviet-style central planning, which only produced “disdevelopment.”  He rightly concludes that Soviet economic growth rates are largely figments of the bureaucratic imagination.

Search for the “Next Economics”

Drucker expresses a withering contempt for the economics profession, which he says is still largely Keynesian in nature. Economists are too concerned with the equilibrium theory of a closed economy rather than the growth, innovation and productivity of a global economy. Drucker claims that contemporary economics is where medical school or astronomy was in the 17th century. “There are no slower learners than economists. There is no greater obstacle to learning than to be the prisoner of totally invalid but dogmatic theories.” 12

He blames Keynesianism for an unhealthy anti-saving mythology, causing “undersaving on a massive scale” among the western nations, especially the United States. Moreover, “Keynes is in large measure responsible for the extreme short-term focus of modern politics, of modern economics, and of modern business … Short-run, clever, brilliant economics — and short-run, clever, brilliant politics — have become bankrupt.”

The management guru is also discouraged by today’s popular schools of economics, including the monetarists and the New Classical school. They too ignore entrepreneurship, uncertainty and disequilibrium. Drucker calls for the “next economics” to be “microeconomic and centered on supply,” not aggregate demand, and should emphasize productivity and capital formation.”

Contemporary Austrian economics seems very much like Drucker’s vision of the “next economics.” Somewhat surprisingly, Drucker’s writings do not mention the work of today’s Austrians, like Murray Rothbard, Israel Kirzner and Roger Garrison. When I asked him his opinion of contemporary Austrians, he told me that he was not familiar with their writings. He had not heard of Kirzner’s major work, Competition and Entrepreneurship, even though Kirzner and Drucker both taught at NYU in the sixties.15

Drucker’s favorite economist is Joseph Schumpeter, the Austrian-born Harvard economist. In a 1956 article, Drucker advocates privatization of government services as a way to reduce a bloated bureaucracy. Indeed, Drucker claims he invented the term, calling it “reprivatization” in 1969.

“Modern Prophets: Schumpeter or Keynes?,” he clearly sides with Schumpeter, predicting that of these “two greatest economists of this century … it is Schumpeter who will shape the thinking … on economic theory and economic policy for the rest of this century, if not for the next thirty or fifty years”16 Drucker likes Schumpeter’s emphasis on dynamic disequilibrium and innovation by entrepreneurs who engage in “creative destruction.” In his 1985 book, Innovation and Entrepreneurship, he emphasizes the impact of technological change, innovation, the unexpected and new knowledge on business and the world economy.

But, of course, Schumpeter was an enfante terrible and renegade from the Austrian school as it developed under Mises and Hayek. In this sense, Drucker fits more into the Schumpeterian mode, although he does not share Schumpeter’s pessimism about the future of capitalism.

In the final analysis, Peter Drucker is his own man.

Drucker’s mind is like a rough diamond, providing flashes of insight at every turn. He is able to analyze complex subjects so that his readers and clients catch Drucker’s vision, seeing the essential simplicity behind the apparent chaos.

Sooner or later, every student of business discovers Peter Drucker. Now it is time for economists and social scientists to discover him too.

Notes

1 Tony H. Bonaparte, Peter Drucker: Contributions to Business Enterprise (New
York: NYU Press, 1970), p. 23.

2 Peter F. Drucker, Preparing Tomorrow’s Business Leaders Today (Englewood Cliffs, NJ: Prentice Hall, 1969), p. 290.

3 Drucker, The Unseen Revolution (New York: Harper 6r Row, 1976), pp. 134-35, 168.

4 Quoted in John J. Tarrant, Drucker: The Man Who invented the Corporate Society (Boston: Cahners Books, 1976), p. 30.

5 Drucker, The Landmarks of Tomorrow, p. 264.

6 Paul H. Weaver, The Suicidal Corporation: How Big Business Fails America (New York: Simon & Schuster, 1988), p. 18.

7 See Drucker’s autobiography, Adventures of a Bystander (New York: Harper k Row, 1979), p. 50. In an interview in 1991, Drucker told me that on the few occasions they met, Mises was always depressed. “He was one of the most miserable men I ever met.”

8 Peter F. Drucker, The Age of Discontinuity (New York: Harper k Row, 1969), p· 212

9 ibid., p. 234.

10 Drucker, The New Realities (New York: Harper & Row, 1989), p. 215.

11 Drucker, The Landmarks of Tomorrow (New York: Harper & Row, 1959), p. 249.

12 Drucker, The Frontiers of Management (New York: Harper & Row, 1986), p. 13. 13 Drucker, The Unseen Revolution, pp. 114-15.

14 Drucker, Toward the Next Economics and Other Essays (New York: Harper k Row. 1981), pp.1-21.

15 Israel M. Kirzner, Competition and Entrepreneurship (University of Chicago Press, 1973).

16 The Frontiers of Management, p. 104.

Journal of Economic Perspectives

By Mark Skousen

Paul Samuelson’s Economics ranks with the most successful textbooks ever published in the field, including the works of Adam Smith, David Ricardo, John Stuart Mill and Alfred Marshall. His 15 editions have sold over four million copies and have been translated into 41 languages (see Table 1). My own Econ 101 class at Brigham Young University used the 1967 (7th) edition, which turned out to be near the high water mark in annual sales (Elzinga, 1992, p. 874). Since its first edition in 1948, Samuelson’s Economics has stood the test of time. It has survived nearly half a century of dramatic changes in the world economy and the economics profession: peace and war, boom and bust, inflation and deflation, Republicans and Democrats, and an array of new economic theories. The fiftieth anniversary edition is expected to be published in 1998.

His textbook has so dominated the college classrooms for two generations that when publishers look for new authors for a principles of economics text, they say that they are searching for the “next Samuelson” (Nasar, 1995). Its legacy goes beyond sales figures; in fact, the textbook may no longer be in the top 10 sellers in the U.S. market. However, most of the existing popular textbooks borrow heavily from Samuelson’s pedagogy, both in matters of tone and in the use and exposition of diagrams, like supply and demand, cost curves, the multiplier and the Keynesian cross.

This article does not attempt an encyclopedic review of the 15 editions of Samuelson’s text. Instead, it uses the succeeding generations of Samuelson’s text as a basis for reflecting on what lessons have been emphasized in introductory economics courses over the last 50 years. In doing so, it draws upon a notion suggested by Samuelson in his introduction to the fourteenth edition (p. xi): “A historian of mainstream-economic doctrines, like a paleontologist who studies the bones and fossils in different layers of earth, could date the ebb and flow of ideas by analyzing how Edition I was revised to Edition 2 and, eventually, to Edition 14.” The discussion here will spend little time on pure microeconomics and will focus instead on macroeconomics and policy advice. The reason for de-emphasizing basic microeconomics is that this is the area where the victory of Samuelson’s early pedagogy has been most complete and where the beliefs of economists have changed least. All references to Samuelson’s 15 editions of Economics, including the 12th and subsequent editions co-authored by William D. Nordhaus, are listed according to edition followed by page number.

Table I
The Publishing History of Paul A. Samuelson’s Economics

Source: Elzinga (1992, p. 874)
N/A–Not available

For members of the economics profession, looking back at Samuelson’s text is like looking into a mirror that reflects many of our past beliefs. If we are uncomfortable with some of what we see in that mirror, then we must also feel uncomfortable with the version of economics that was taught, and perhaps also uncomfortable with the impact that the teaching of economics may have had on the economy.

The Keynesian Motif

In the introduction to an early edition, Samuelson denied that his primary purpose in writing Economics was to convey any “single Great Message” (3:v). But it is clear that Samuelson intended to introduce the “New Economics” of Keynes to students. The multiplier, the propensity to consume, the paradox of thrift, countercyclical fiscal policy, and C + I + G were all incorporated into the language of Econ 101. The now-familiar Keynesian cross income-expenditure diagram was printed on the cover of the first three editions. Macro preceded micro sections of the book, a novel approach at the lime. Moreover, only John Maynard Keynes was honored with a biographical sketch in early editions, and only Keynes, not Adam Smith nor Karl Marx, was labeled “a many-sided genius” (1:253n).

In the first edition, Samuelson claimed that the Keynesian “theory of income determination” was “increasingly accepted by economists of all schools of thought,” and that its policy implications were “neutral” (1:253). For example, “it can be used as well to defend private enterprise as to limit it, as well to attack as to defend government fiscal interventions.” However, his explanation of the model emphasized that “private enterprise” is afflicted with periodic “acute and chronic cycles” in unemployment, output and prices, which government had a responsibility to “alleviate” (1:41). “The private economy is not unlike a machine without an effective steering wheel or governor,” Samuelson wrote. “Compensatory fiscal policy tries to introduce such a governor or thermostatic control device” (1:412).

In the editions that followed, Samuelson’s rhetorical strategy seemed designed to give students the impression that the economics profession had achieved a monolithic belief structure. By the fourth edition (1958), he declared that “90 percent of American economists have stopped being ‘Keynesian economists’ or- ‘anti-Keynesian economists.’ Instead they have worked toward a synthesis of whatever is valuable in older economics and in modern theories of income determination.” He labeled this new economics a “neo-classical synthesis” (4:209-10), although “demand management” model might be more accurate.

By the seventh edition, although Samuelson was no longer using the “machine minus the steering wheel” metaphor, he continued to emphasize that “a laissez faire economy cannot guarantee that there will be exactly the required amount of investment to ensure full employment.” If full employment did occur, it would be: pure “luck” (7:197-8). He argued that “neo-classical synthesis” was “accepted in its broad outlines by all but a few extreme left-wing and right-wing writers” (7.197-8), a claim that appeared in similar language in all editions until the twelfth (1985), the first co-authored by Nordhaus. When the aggregate supply and aggregate demand framework was introduced in the twelfth (1985) and subsequent editions, they also were shown intersecting at less-than-fu11-ernployment equilibrium (12:91, 186). To the question, “Is there any automatic mechanism that guarantees that saving and investment balance at full employment?” Samuelson and Nordhaus answered “No” (12:139).

In reading Samuelson’s earlier editions, a student might reasonably conclude that there are no other schools of thought, at least in the mainstream. In fact, cf course, Keynesian thought was the subject of furious debate in economics departments across the country through the 1940s and into the 1950s, as young economists steeped in Keynesian thinking entered professorial jobs and collided with the old guard. In the late 1950s and 1960s, as economists explored how certain modeling structures could express either Keynesian or monetarist insights, it was fair to claim broad acceptance of the “neo-classical synthesis” as a modeling strategy. But Samuelson often seemed to imply that widespread acceptance of the formal models also implied an equally widespread belief that there was no mechanism to lead the macro-economy toward full employment, that consumption was too low and saving too high, that macroeconomic stability should be emphasized more than economic growth, and that government intervention was the only hope, points on which the degree of consensus was markedly lower.

This slide from Keynesian theory to particular policies was well illustrated in his seventh edition (1967),when Samuelson cited a statement by Milton Friedman, “We are all Keynesians now.” However, at the end of chapter 11, Samuelson (7:210) then referenced the full quotation from a 1966 interview of Friedman in Time magazine: “As best I can recall it, the context was: ‘In one sense, we are all Keynesians now; in another nobody is any longer a Keynesian.’” Friedman (1968, p. 15) would later put it this way: “We all use the Keynesian language and apparatus, none of us any longer accepts the initial Keynesian conclusions.”

Anti-saving Views

One way to see how nonpartisan Keynesian modeling shaded into explicit policy conclusions is to follow the anti-saving bias that appeared until the: most recent editions of Samuelson’s text. At less than full employment, there existed a “paradox of thrift,” when “everything goes into reverse” (1:271). In this case, a higher savings rate shrinks the economy, and one is left with the paradoxical result that a higher savings rate may not even increase the quantity of savings. Thus, Samuelson expressed the fear that an increased propensity to save may cause money to “leak” out of the system and “become a social vice” (1:253). To be sure, Samuelson would be pro saving when the economy was at full employment. “But full employment and inflationary conditions have occurred only occasionally in our recent history,” he wrote. “Much of the time there is some wastage of resources, some unemployment, some insufficiency of demand, investment, and purchasing power” (1:271). This paragraph remained virtually the same throughout the first eleven editions (for example, 11:226).1

These anti-thrift leanings extended to Samuelson’s discussion of progressive taxation and the “balanced-budget multiplier.” One “favorable” effect of progressive taxation was: “To the extent that dollars are taken from frugal wealthy people rather than from poor ready spenders, progressive taxes tend to keep purchasing power and jobs at a high level–perhaps at too high a level if inflation is threatening” (1:174; 7:162; 11:161). In his discussion of the “balanced-budget multiplier,” Samuelson stated, “Hence, dollars of tax reduction are-almost as powerful a weapon against mass unemployment as are increases in dollars of government expenditure” (7:234; 11:232). Why “almost”? Because only a portion of the tax cut would be “spent” (the rest would be saved) by the public, wherein all of government expenditures would be spent. In both cases, the implication is that greater consumption, not saving, is the key to prosperity.

Samuelson’s views on saving evolved over the years, with the major changes appearing in the thirteenth edition (1989). In this edition, the diagram showing savings leaking out of the economic system disappeared. The “paradox of thrift” doctrine, which had been a principal feature in all the editions until then, was made optional in the thirteenth edition (13:183-5) and removed in the fourteenth. However, it returned in 1995 in the fifteenth edition (15:455-7). Samuelson wrote:, “Disappearing to zero was, in my reconsidered judgment, an overshoot.” He argued that Japan in 1992-94 could be viewed as a modern-day example of the paradox of thrift. Nordhaus has pointed to Europe in the early 1990s and America in the early 1980s as other potential examples of the perversity of saving.2 Then, in the thirteenth edition, the authors added a major section bemoaning the gradual decline in the U.S. savings rate (13:142-4). Samuelson and Nordhaus list several potential causes of low savings: federal budget deficits, Social Security high inflation and high taxes. They also assert a strong correlation between the race of savings and economic growth: “[V]irtually all [macroeconomists] believe: that the savings rate is too low to guarantee a vital and healthy rate of investment in the 1990s” (13:144).

Samuelson’s evolving view on saving is also reflected in his discussion of government budget deficits. In the first edition, Samuelson pointed out: “According to the countercyclical view, the government budget need not be in balance in each and every month or year…. Only over the whole business cycle need the budget be in balance” (1:410-1). But remember that Samuelson argued (until the twelfth edition) that unemployed resources almost always existed; thus, this countercyclical view justified very common federal deficits (1:271; 7:228; 11:226), with less guidance as to when or how the offsetting surpluses were likely to occur.

Although Samuelson issued a series of warnings and caveats regarding the burgeoning national debt, the prevailing sense of the first 10 or so editions was that deficit spending was not a significant problem. The first edition favors the “we owe it to ourselves” argument: “The interest on an internal debt is paid by Americans to Americans; there is no direct loss of goods and services” (1:427). In the seventh edition (1967),  after  raising  the  specter  of  “crowding  out”  of private investment, he went on to say: “On the other hand, incurring debt when there is no other feasible way to move the C + I + G equilibrium intersection up toward full employment actually represents a negative burden on the intermediate future to the degree that it induces more current capital formation than would otherwise take place!” (7:346). At the end of an appendix on the national debt, Samuelson compared federal deficit financing to private debt financing, such as AT&T’s “never-ending” growth in debt (7:358; 11:347). By implication, government debt could also grow continually, rather than necessarily being balanced over the business cycle.

In this spirit, Samuelson offered a favorable reaction to the burgeoning deficits in the early 80s: “As federal budget deficits grew sharply over the 1982-1984 period, consumer spending grew rapidly, increasing aggregate demand, raising GNP and leading to a sharp decline in unemployment. The torrential pace of economic activity in 1983-1984 was an expansion, fueled by demand-side growth, in the name of supply-side economics” (12:192). But in that same edition, The AT&T comparison disappeared, the Reagan deficits were labeled as “skyrocketing” (12:349-50), and the crowding out of capital became “the most serious consequence of a large public debt” (12:361). By the fifteenth edition, Samuelson and Nordhaus were declaring “a large public debt can clearly be detrimental to long run economic growth. … Few economists today have words of praise for America’s large and growing debt” (15:638-9).

Evolving: Views on Monetary Policy

Samuelson used to emphasize fiscal policy over monetary policy as a tool for stabilization; now the reverse is true. The transition is unmistakable. In 1955 he wrote, “Today few economists regard federal reserve monetary policy as a panacea for controlling the business cycle” (3:316). In 1975, after labeling monetarism as “an extreme view,” he declared, “both fiscal and monetary policies mactc:r rrlrcc:h” (9:329). In 1995, Samuelson and Nordhaus reversed this traditional view, observing, “Fiscal policy is no longer a major tool of stabilization policy in the United States. Over the foreseeable future, stabilization policy will be performed by Federal Reserve monetary policy” (15:645).

This evolution of the perceived role of monetary policy can also be seen in the treatment of money. Early editions spent considerable space, more than most other textbooks, on the classical gold standard and the origin of money and banking. Samuelson’s preference in the earlier editions seemed to be for a government-managed monetary system, but not one based on gold. While recognizing gold’s role as a rein on monetary authorities’ ability to inflate the money supply, Samuelson was sharply critical of gold as a monetary standard. A strict gold standard was historically deflationary, Samuelson argued, because “The long term supply of gold cannot possibly keep up with the liquidity needs of growing international trade”(8:697). Deflation was dangerous because “falling price levels tend to lead to labor unrest, strikes, unemployment and radical movements generally” (8:629). Gold was an “anachronism” (8:700).

But after the United States officially left the gold standard in August 1971, Samuelson warned that the world was “in uneasy limbo” (9:652). He gradually warmed to the idea of flexible exchange rates, especially as futures markets developed (9:724-5). By 1995, Samuelson and Nordhaus were no longer deeply concerned about an international monetary crisis or breakdown in trade under a pure fiat money system. They declared that international currency management and central bank coordination in the last half-century was “one of unparalleled success” (15:736). Gold’s role had become so moribund that by the fifteenth edition, only two pages were devoted to the yellow metal.

The quantity theory of money was discussed in the first edition, although Irving Fisher, frequently cited as the modern founder of the quantity theory, was not mentioned (1:290-7). (Fisher was cited in earlier editions regarding capital theory, but not for his quantity equation.) No one expected Samuelson to cite Milton Friedman in the early editions–after all, Friedman’s studies in monetary theory and history did not gain wide credence until the early 1960s–but Samuelson soon made up for lost time. Friedman began to be quoted in 1961 (5:315), and Irving Fisher was given some credit by 1970 (8:264).

Defender of an Activist Government

Through 15 editions, Samuelson has appeared to favor a substantial role for the state. In an early edition, he forecast that while the growth in government was not “inevitable,” there was no end in sight (4:112). In a later edition, he observed, “No longer does modern man seem to act as if he believed ‘That government governs best which governs least’” (8:140). In keeping with the Keynesian motif, a large government provided “built-in stabilizers” to the economy, such as taxes, unemployment compensation, farm aid and welfare payments that tend to rise during a recession (8:332-4).

In discussing the overall U.S. tax burden, Samuelson has argued that to a large extent, higher taxes are a byproduct of economic and social development. Several editions displayed a chart showing that “poor, underdeveloped countries show a persistent tendency to tax less, relative to national product, than do more advanced countries” (4:113). In a later edition, Samuelson added, “With affluence come greater interdependence and the desire to meet social needs, along with less need to meet urgent private necessities” (14:300). Samuelson also pointed out with international comparisons that the United States lags behind most Western nations in terms of tax burden. Thus, “our government share is a modest one” (8:140n; 12:698; 15:278).

On the subject of cutting taxes, Samuelson has supported Keynesian oriented tax cuts, though not supply-side tax cuts. In the seventh edition, he argued in terms reminiscent of the Laffer curve thesis that a tax cut may pay for itself in increased government revenues: “To the extent that a tax cut succeeds in stimulating business, our progressive tax system will collect extra revenues out of the higher income levels. Hence a tax cut may in the long run imply little (or even no) loss in federal revenues, and hence no substantial increase in the long run public debt” (7:343). However, after marginal tax rates were reduced in the 1980s during the Reagan administration, Samuelson and Nordhaus wrote: “Laffer-curve prediction that revenues would rise following the tax cuts has proven false” (14:332).

What about the supply-side argument that high tax rates discourage work, saving and risk taking! The answer was “unclear.” Samuelson suggested that progressive taxes might actually make some people “work harder in order to make their million” (10:171). He argued, “Many doctors, scientists, artists, and businessmen, who enjoy their jobs, and the sense of power or accomplishment that they bring, will work as hard for $30,000 as for $100,000″ (10:171), a sentiment repeated in later editions (15:310).

In keeping with this sentiment, Samuelson has been a strong supporter of the welfare state and antipoverty programs as a response to inequality. “Our social conscience and humanitarian standards have completely changed, so that today we insist upon providing certain minimum standards of existence for those who are unable to provide for themselves,” he wrote early on (1:158).  He  denied  that welfare expenditures were “anti-capitalistic” (7:146). Moreover, “Contrary to the ‘law’ enunciated by Australia’s Colin Clark–that taking more than 25 per cent of GNP is a guarantee of quick disaster–the modern welfare state has been both humane and solvent” (8:140). Although welfare assistance was “indeed costly” and “often inefficient” (11:761), there was little choice, since private charity has always been inadequate” (11:760). His discussion of welfare reform focused on an endorsement of Milton Friedman’s proposed “negative income tax” (11:761 -3). But by the 1995 edition, Samuelson and Nordhaus seem less certain and are asking: “Have antipoverty programs helped…[or] produced counterproductive responses?” (15:372).

For society’s retirement programs, Samuelson has been a strong supporter of a pay-as-you-go Social Security system. Earlier editions contained a chapter on “Personal Finance and Social Security,” which called the pay-as-you-go system “a cheap, and sensible way” to provide retirement benefits to individuals.” Samuelson argued “It is one of the great advantages of a pay-as-you-go social security system that it rests on the general tax capacity of the nation; if hyperinflation wiped out all private: insurance and savings, social security could nonetheless start all over again, little the poorer” (4:179). But this statement–along with the chapter on personal finance and Social Security–was dropped after the fifth edition. His recommendation to buy U.S. savings bonds earning 3 percent, which were “a very great bargain,” was removed after the third edition.’

Samuelson has spent little space on Social Security since then, other than reporting higher payroll taxes with each edition. For example, in the 1985, edition, Samuelson and Nordhaus noted, “The payroll tax has been the fastest growing part of federal revenues, rising from nothing in 1929, to 18 percent of` revenues in 1960, to 36 percent in 1985″ (12:732). The 1995 edition mentions in one paragraph that Social Security taxes may contribute to a decline in thrift (15:432-5). There are several reasons why Social Security may deserve more attention. More than half of American workers pay more in payroll taxes than in income taxes. Social Security is in the center of an argument about intergenerational equity. And there are a number of interesting proposals revising the system, including privatization.

The role of government extends into a debate between market anti-government failure. Mainstream economic wisdom, as embodied by the Samuelson text, has tended to emphasize numerous examples of “market failure” (15:30-5, 164-l77, 272-3, 280-2, 291-2, 329, 347-52), including imperfect competition, externalities, inequities, monopoly power and public goods. Samuelson pointed out that the government could take of “an almost infinite variety of roles in response to the flaws in the market mechanism” (15:30-1). At one level, this is all fair enough. But for several decades, there has also been a line of thought, perhaps best embodied in the work of Ronald Cease, that points out that actors in markets may be quite creative in finding ways to address market failures.

Consider the example of lighthouses as a public good. Since 1961, Samuelson has used the lighthouse as an example of a public good, one that private enterprise could not run profitably because of the non-excludable, non-depletable nature of the service. But Cease (1974) wrote an article pointing out that numerous lighthouses in England were built and owned by private individuals and companies prior to the nineteenth century, who earned profits by charging tolls on ships docking at nearby ports.5 To be sure, some of these lighthouse organizations had more the flavor of private voluntary organizations than of perfectly competitive markets; nonetheless, an introductory economics class might well be interested in the fact that free economic actors can work out practical ways of building and paying for certain public goods without explicit government provision.

Explanations of market failure often deserve a counterbalancing discussion of government failure, lest the unwary student assume that economists believe in imperfect markets but perfect government. Various editions of the text do argue that governments should follow market-oriented policies when addressing a market failure. In the most recent edition, for example, the U.S. health-care debate was analyzed in terms of a list of “market failures” in the health-care industry, together with a market-oriented criticism of Clinton’s proposed price controls and nationalized health services in foreign countries (15:289-96). Similarly, market failures and market-oriented solutions also are stressed in the environmental arena (15:351-3).

The argument that certain types of government action are preferable to others would seem to open the door to a discussion of whether government can be counted on to enact appropriate policies. Some textbooks now have substantial sections on “government failure,” but the broad possibility of such failures has been downplayed in the Samuelson texts. In the 1955 edition, he cited a Herbert Hoover study indicating “very little” waste in federal spending, only $3 billion (3:119). Since the twelfth edition, the subject index has numerous listings under “market failure,” but none under “government failure.” Surely Samuelson’s criticism of price controls would fall under this category (1:463-6; 8:370-3; 15:66-71). Apart from price fixing, Samuelson and Nordhaus offered only two brief mentions of government failure in the fifteenth (1995) edition, a question at the end of chapter 2 on “Markets and Government in a Modern Economy” (15:37) and a mention in their discussion of “public choice theory,” which claims that “harmful” government policies are “probably rare” (15:285).

The Family Tree of Economics: The Mainstream and Marxism

Samuelson’s desire to homogenize mainstream economics into one grand “neo-classical synthesis” is evident in his “family tree of economics.” Beginning with the fourth edition (1958, flap), the author created a genealogical diagram of economic thought from the Greeks to the present. By the time the twentieth century was reached, only two schools of thought remained-followers of Marxist-Leninist socialism and those of the Marshall-Keynes “neo-classical synthesis.” In this chart, Adam Smith and the classical school were claimed as ancestors of the neoclassical synthesis by way of Alfred Marshall. The Chicago monetarists and the Austrians do not appear on the chart until the twelfth edition (1985), when “Chicago Libertarianism” and “Rational-Expectations Macroeconomics” surface alongside “Modern Mainstream Economics.” Samuelson and Nordhaus include the Austrians, Friedrich Hayek and Ludwig von Mises, in the “Chicago Libertarianism” category (13:828). This categorization is questionable. The Austrians, with their emphasis on subjectivism and microeconomics, consider themselves neither followers of the Chicago school nor philosophical descendants of Walras and Marshall. Then, in the fourteenth and fifteenth editions, the other schools again disappear from the family tree, apparently subsumed by the single category of “Modern Mainstream Economics.”

Over the years, Samuelson has gradually given more space in his textbook to non-Keynesian schools. By the eighth edition (1970), Milton Friedman was cited a half dozen times. In the ninth edition (1973), he recommended Friedman’s Capitalism and Freedom as a “rigorously logical, careful, often persuasive elucidation of an important point of view” (9:848). The ninth edition also adds a significant chapter, “Winds of Change: Evolution of Economic Doctrines,” which summarizes the spectrum of warring schools, including institutionalists (Veblen and Galbraith), the New Left and radical economics.

References to Marx and international socialism are scarce and random in the early editions. In the first edition, Marx was declared “quite wrong” in his prediction that the “poor are becoming poorer” (1:67). Samuelson expressed suspicion of Soviet central planning, and he considered the U.S. brand of “mixed-enterprise superior (1:603). Attacks on Marxism expanded with each edition. Marx’s prediction of falling real wages had been proven “dead wrong” (4:757). Lenin had been wrong in his charge that Western nations practiced imperialism for economic gain (4:756-7). The profit rate had “stubbornly refused to follow” the Marxist law of decline (7:707).

But starting with the ninth edition, references to the ideas and followers of Karl Marx and Friedrich Engels expanded dramatically, including a biography of Marx and a nine-page appendix on Marxian economics. In the preface to that edition, Samuelson wrote: “It is a scandal that, until recently, even majors in economics were taught nothing of Karl Marx except he was an unsound fellow” (9:ix). Samuelson added in the tenth edition that “at least a tenth of U. S. economists” fell into the “radical” category (10:849). However, this expanded coverage did not mute his criticism of Marxist beliefs. With the fall of the Soviet Union, the discussion of Marx shrank from 12 pages in the fourteenth edition to three pages in the fifteenth (1995) edition, including a two-paragraph biography of Marx, and no appendix on Marxian economics.” Typical of the tone: “Marx was wrong about many things–notably the superiority of socialism as an economic system–but that does not diminish his stature as an important economist” (15:7)

Central Planning and Soviet Growth

In very early editions, Samuelson expressed skepticism of socialist entral planning: “Our mixed free enterprise system … with all its faults, has given the world a century of progress such as an actual socialized order–might find it impossible to equal” (1:604; 4:782). But with the fifth edition (1961), although expressing some skepticism statistics, he stated that economists “seem to agree that her recent growth rates have been considerably greater than ours as a percentage per year,” though less than West Germany, Japan, Italy and France. (5:829). The fifth through eleventh editions showed a graph indicating the gap between the United States and the USSR narrowing and possibly even disappearing (for example, 5:830). The twelfth edition replaced the graph with a table declaring that between 1928 and 1983, the Soviet Union had grown at a remarkable 4.9 percent annual growth rate, higher than did the United States, the United Kingdom, or even Germany and Japan (12:776). By the thirteenth edition (1989), Samuelson and Nordhaus declared, “the Soviet economy is proof that, contrary to what many skeptics had earlier believed, a socialist command economy can function and even thrive” (13:837). Samuelson and Nordhaus were riot alone in their optimistic: views about Soviet central planning; other popular textbooks were also generous in their descriptions of economic life under communism prior to the collapse of the Soviet Union.7

By the next edition, the fourteenth, published during the demise of the Soviet Union, Samuelson and Nordhaus dropped the word “thrive” and placed question marks next to the Soviet statistics, adding “the Soviet data are questioned by many experts” (14:389). The fifteenth edition (1995) has no chart at all, declaring Soviet Communism “the failed model” (15:714-8). To their credit, Samuelson and Nordhaus (15:737) were willing to admit that they and other textbook writers failed to anticipate the collapse of communism: “In the 1980s and 1990s, country after country threw off the shackles of communism and stifling central planning–not because the textbooks convinced them to do so but because they used their own eyes and saw how the market-oriented countries of the West prospered while the command economies of the East collapsed.”

Where are the Economic Success Stories?

While Samuelson overplayed the economy of the Soviet Union, he underplayed the successful postwar economies of Germany and Japan, and the newly developing countries in Europe, Asia and Latin America. From the second to the fourteenth edition, Samuelson briefly mentioned the dramatic story of West Germany’s post war recovery to elucidate the benefits of currency reform and price freedom (2:36; 14:36). Various editions also discuss Germany’s bout with hyperinflation in the early 1920s. But his one-paragraph account offers little space to convey the magnitude of the subsequent German economic recovery from a devastating world war. The same could be said of Japan’s postwar economic miracle. In 1945, Japan was desperate, starving, shattered; half a century later, it was an economic superpower. Yet Samuelson barely mentioned Japan. In 1970, he offered a sentence in his chapter on economic growth, with no further comment: “Japan’s recent sprint has been astounding” (8:796). In the 1980s and 1990s, even as many textbooks offered a more global approach, Samuelson and Nordhaus still practically ignored Japan. In the twelfth edition, they asked, “For example, many people have wondered why countries like Japan or the Soviet Union have grown so much more rapidly than the United States over recent decades” (12:798). They spent many pages discussing the Soviet Union, but except for a brief reference to “rapid technical change,” they were silent on Japan. The same pattern holds for the fifteenth (1995) edition.

What about the other high-performing economies in East Asia? They were not mentioned until the thirteenth edition (1089), at which point Samuelson and Nordhaus devoted two paragraphs to Hong Kong and other East Asian miracles (13:832, 886). In the fifteenth edition, they touched briefly on the causes of East Asian development, including the newly industrialized countries of Korea, Singapore, Taiwan, Indonesia, Malaysia and Thailand (15:712-3).The economic success stories of Latin America (Chile, Mexico, and so on) receive no mention at ail. Privatization, a rapidly growing phenomenon around the world, is virtually ignored in Samuelson’s and most other American textbooks.

Why such a dearth of economic success stories? Space limitations must have played a role. Another reason is that Samuelson’s rhetorical approach, like that of many textbooks, is to paint with a broad brush, to discuss concepts and problems in general, but seldom to focus on specific examples. Free-market economists might point out that some policies adopted by many of these high-growth countries–high savings rates, a general reliance on free markets, relatively low government spending and budgets often in surplus, little or no taxation on savings and investment–do not mix well with Keynesian biases. On the other hand, other policies–public education, land reform, import protection and export promotion, targeted government investment subsidies and close government/industry ties–favor Samuelson’s approach.

The Impact of Samuelson’s Textbook

It is hard to gauge the influence of Samuelson’s textbook, or in general the impact of introductory courses in economics, on U.S. policymakers or corporate executives. Samuelson has been willing to claim, with tongue only slightly in check, a considerable impact. He has made a well-known comment: “I don’t care who writes a nation’s laws–or crafts its advanced treaties–if I can write its economics textbooks” (Nasar, 199,5, C1). He has also expressed hope that his textbook would be a reference guide for former students. “Where the election of 1984 rolls around,” he wrote in 1967,”all the hours that the artists and editors and I have spent in making the pages as informative and authentic as possible will seem to me well spent if somewhere a voter turns to the old book from which he learned economics for a rereasoning of the economic principle involved” (7:vii).

The hope is worth raising not only for Samuelson’s text, but for all those students who once took an introductory economics course. To the extent that Samuelson’s text has been a much-imitated leader among all principles textbooks, it is reasonable to ask how helpful these texts would have been in thinking about the issues of public debt, inflation, foreign competition, recession, unemployment and taxes that have challenged the public over the past 50 years.

On the positive side, Samuelson must be congratulated for his optimism about the future of the American economy. Although he anticipated a deep recession following World War II (Sobel, 1980, pp. 101-2), he did not succumb to the lure of fellow Keynesian Alvin Hansen’s stagnation thesis (1:418-23). He wisely rejected the doomsayers’ frequent calls for another Great Depression or imminent bankruptcy due to an excessive national debt. “Our mixed economy–wars aside–has a great future before it” (6:809), he wrote. To his credit, Samuelson has been willing to update his textbook in keeping with new events and new theories. The virtues of monetary policy, savings and markets have received more emphasis in recent issues.

Samuelson offered a balanced brand of economics that found mainstream support. While Samuelson (especially in the earlier editions) favored heavy involvement in “stabilizing” the economy as a whole, he appeared relatively laissez faire in the micro sphere, defending free trade, competition and free markets in agriculture. He was critical of Marx, weighed the burdens of the national debt, denied that war and price controls were good for the economy, wrote eloquently on the virtues of a “mixed” free-enterprise economy, suggested that big business may sometimes be benevolent (1:132; 15:172-4) and questioned whether labor unions could raise wages (2:606; 1.5:238). This advice could often be summarized as an injunction to rely broadly on markets, hut also to be aware that markets might fail in many cases, thus creating a situation where government intervention could be justified.

Samuelson was unable to foresee many of the major economic events and crises, but this is surely no criticism. After all, most mainstream economists failed to foresee the stagflations and dollar devaluations of the 1970s or the S&L crisis and trade deficits of the 1980s. To some extent, introductory textbooks will always play catch-up to events. For example, in writing about the effects of federal deposit insurance and central bank authority, Samuelson confidently predicted in 1980:

“In the 1980s, the only banks to fail will be those involving fraud or gross negligence” (11:282). By the 1992 edition, after the collapse of hundreds of saving and loans, Samuelson and Nordhaus wrote, “Many economists believe that the deposit insurance system must be drastically overhauled if this sad episode is not to be repeated in the future” (14:535).

But although it would be unfair to criticize anyone for not being clairvoyant about events, it is surely fair criticism of a principles of economics course to point out that some of its advice seems questionable in light of current knowledge. Indeed, Samuelson has hinted in later editions that he would no longer agree with some of his analysis in earlier editions. Today, he probably would be comfortable saying, as he did in the preface of the eighth edition, that his textbook contained “nothing essential being omitted” or “nothing that later will have to be unlearned as wrong.” By the fourteenth edition, he confessed, “What was great in Edition 1 is old hat by Edition 3; and maybe has ceased to be true: by Edition 14″ (14:xiv).

When faced with such rueful comments by an author of Samuelson’s stature, a certain degree of modesty seems warranted for the rest of the economics profession. The successive editions of Samuelson’s textbook illustrate that the profession’s view of both principles and facts can shift substantially with recent experience, whether the point is the Keynesian lessons that came out of the Great Depression or the speed of Soviet economic growth. An introductory course requires some natural simplification, but it should aim to avoid false certainty.

Samuelson’s textbook has delivered a great deal of economic wisdom. For many economists, the positive side of the balance sheet has outweighed the negative. Indeed, his defenders might ask: Might the United States and the West have suffered another Great Depression if Samuelson had not emphasized the need for “automatic stabilizers”? Did not Samuelson’s heralding of the “mixed” economy curb the appetite of third world countries for national socialism?

We will never know, of course, but it is humbling to speculate on whether alterations in principles textbooks might have led to a different U.S. economy. Might the United States have experienced higher rates of saving, investment and growth if Samuelson had moderated his anti-thrift tone sooner? Would the U.S. economy and financial system have been less volatile if textbook writers had given earlier credence to monetarism? Would the United States and developing countries be growing more rapidly if textbook writers had emphasized long-term growth (as characterized by West Germany, Japan and the East Asian economic miracles) over macroeconomic stabilization policies (inflation-unemployment tradeoffs)? Would attitudes toward the Soviet Union and markets have been different if principles texts had been more critical of central planning and Soviet growth statistics? In my judgment, it is difficult to sidestep the conclusion that as the teaching of introductory economics has followed in Samuelson’s footsteps, its advice has contributed to certain of the economic problems that the United States faces today.

Thanks to Paul Samuelson, William Nordhaus, Milton Friedman, Roger Garrison, Kenna C. Taylor, Larry Wimmer, Michael Betterman and Jo Ann Skousen for comments and background materials. Special appreciation to Paul Samuelson and Ken Elzinga for locating hard-to-find early editions of Economics. I would also like to thank the editors, Alan H. Krueger, J. Bradford De Long and especially Timothy Taylor, for their many helpful changes and suggestions.

References

Cease, R. H.,”The Lighthouse in Economics.” In The Firm, the Market, and the Law. Chicago: University of Chicago Press, 1988, pp. 3R7-215; originally published in Journal of Law and Economics, October 1974, 17:2, 35776.

Elzinga, Kenneth G., “The Eleven Principles of Economics,” Southern Economic Journal, April 1992, 58:4, 861-79.

Friedman, Milton, “Why Economists Disagree.” In Dollars and Deficits: Living with America’s Economic Problems. Englewood Cliffs, N.J.: Prentice-Hall, 1968, pp. 1-16.

Lipsey, Richard G., Peter O. Steiner, and Douglas D. Purvis, Economics. 8th ed., New York: Harper & Row, 1987.

Nasar, Silvia, “Hard Act to Follow?,” New York Times, March 14, l995, C1, C8.

Samuelson, Paul A., Economics. New York: McGraw-Hill, 1948 and various years.

Skousen, Mark, Economics on Trial. Homewood, Ill.. Irwin, 1991.

Sobel, Robert, The Worldly Economists New York: Free Press, 1980.

Footnotes

1 Here is all area in which contemporary Keynesians (Heller, Solow, Okun, Ackley, et al.) might not be so anti-saving as was Samuelson. The 1962 Economic Report to the President, issued at the high tide of  orthodox Keynesianism, reflected an implicit faith that the economy would always be running near full employment. The business cycle had been tamed and any downturns would he quickly countered. Such a belief meant that savings could then play a positive role. Apparently, Samuelson was not as optimistic about the government’s ability to maintain full employment equilibrium.

2 The Samuelson quotation is taken from personal correspondence dated January 20, 1995. The Nordhaus sentiment was also expresed in private correspondence, February 4, 1995.

3 Samuelson was prescient in his first edition about the prospects for programs along the lines of Medicare and Medicaid: “It is not unlikely that in the next generation payments for sickness and disability, and a comprehensive public health and hospital program, will have been introduced” (1:222).

4 Based on his Keynesian philosophy, Samuelson also tended to argue that people should avoid saving in difficult economic times.  “Never again can people be urged in times of depression to tighten their belts, to save more in order to restore prosperity. The result will be just the reverse–a worsening of the vicious deflationary spiral” (1:272; 6:238-9; 10:239). In the third edition, Samuelson denounced families who “hysterically cut down on consumption when economic clouds arise” (3:339) He echoed the advice of Harvard economist Frank W. Taussig, who during the Great Depression went on the radio “urge everyone to save less, to spend more on consumption” (7:226) Whatever the merits of this advice as macroeconomic wisdom, it would surely increase the financial risk for the individuals involved. ‘I wrote to Samuelson about this issue. His response was: “If you read carefully the Coase article on lighthouses, you will see that the historical examples he described are not about the ‘free rider’ problem. When scrambling devices become available to meet the problem, there still remains the deadweight inefficiency intrinsic to positive pricing for the marginal use of something that involves only zero or derisory marginal cost” (personal correspondence, August 9, 1995). Without disputing these points, one can continue to hold the conclusion expressed in the text, that rather than implying that governments are the only agencies that can provide lighthouses, it would be interesting to discuss the method of lighthouse provision that actually occurred.

6 The reduction in space allocated to Marxist economics has been accompanied by less discussion about the Austrian economists Ludwig von Mises and Friedrich Hayek, who warned earlier that soviet central planning could not work and could not calculate prices and costs accurately. Samuelson and Nordhaus mention the role of Mises and Hayek in the socialist calculation debate from editions nine through 12 (9:620; 12:693), but have dropped them from the most recent editions.

7 For example, in their eighth edition, Lipsey, Steiner and Purvis (1987, pp.885-6) claimed, “The Soviet citizen’s standard of living is so much higher than it was even a decade ago, and is rising so rapidly, that it probably seems comfortable to them (cf. Skousen, 1991, pp.213-15).

Economics on Trial — THE FREEMAN

By Mark Skousen

“[Austrian economists] feel they’ve been frozen out of mainstream economics and seldom get even a footnote in standard textbooks.”
-Todd G. Buchholz 1

Austrian economist makes good! I just got published in the Journal of Economic Perspectives, the most widely read economics journal in the country.

The article, “The Perseverance of Paul Samuelson’s Economics,” is a damning review of the 15 editions of Samuelson’s famous textbook2 I am still in shock a year after getting an email from the JEP saying they had accepted my paper. Undoubtedly it is a watershed event when the No. 1-read economics journal in the country is willing to publish an article critical of the top Keynesian economist in the world and first American to win the Nobel Prize in economics. One of the co-editors, Brad de Long, said that my study is “one of the best and most exciting papers we published in the second half of the 1990s.” Tim Taylor, the managing editor, said that ten years ago they would not have published it.

Dethroning the King of Keynes

There are two major stories that come out of my study.

First, Samuelson’s Economics–the most popular textbook ever published, with over four million sold and translated into 41 languages–taught students a lot of bad economics. Until recently, the MIT professor taught students that high saving rates were bad for the country, federal deficits and progressive tax rates were beneficial, and Soviet central planning could work. In my review of his 15 editions, which covers the entire postwar period, I point out that Professor Samuelson spent whole chapters discussing the failed economics of the Soviet Union and China, while writing little or nothing on the success stories of West Germany, Japan, the East Asian Tigers, or Chile. He had numerous sections in his textbook on “market failure” while offering very little on “government failure.” He constantly highlighted the economics of Keynes, but downplayed the economics of Friedman, Hayek, and other free-market economists.

Samuelson’s Economics: From Keynes to Adam Smith

Not everything was negative in my review of Samuelson’s textbook. On the positive side: Samuelson frequently declared his optimism about the future of capitalism and rejected doomsayers’ predictions of another Great Depression or national bankruptcy. He regularly defended free trade and free markets in agriculture. And he was highly critical of Karl Marx and Marxian economics.

The most amazing discovery I made in my study is that Samuelson, under the influence of co-author William D. Nordhaus (Yale) and recent events, has had a change of heart and is gradually shifting back to classical economics. In more recent editions, he has reversed his position on a number of important issues. In the most recent edition, for example, Samuelson states that Soviet central planning was a “failed” model, that national savings is too low and needs to increase, and that the national debt is excessive.

The JEP also published a rejoinder by Samuelson, which was surprisingly reserved and anemic in response to my blistering critique. “I am pleading no alibi nor extenuations,” he wrote. “My present-day eyes do discern regrettable lags in sloughing off earlier skins.”3 He only denied that he was anti-saving, one thing he is famous for.

My study of Samuelson’s Economics points to the real need for a college-level textbook on sound economics. That is my primary goal right now. My forthcoming textbook is called Economic Logic and I hope to finish it next year. I’11 keep you posted.

Past Prejudices Against Austrians

Austrian economists have had a long struggle in getting recognized by the profession. The mainstream has shown little interest if not disdain for a school that is laissez faire in government policy and critical of mathematical modeling and empirical econometrics.

Following the postwar Keynesian revolution, the economics establishment was unreceptive to the works of Ludwig von Mises and Friedrich Hayek. In the 1960s, Austrian economists depended on the conservative publisher Regnery and the engineering publisher D. Van Nostrand & Co. to get published.

Future Is Brighter

Gratefully that’s all changing. Today Austrians hold a small but growing number of positions at major universities (George Mason, Auburn, NYU, University of Georgia, California State at Hayward, etc.), get published by major university and academic presses (Cambridge, Chicago, Oxford, NYU, Kluwer, Routledge, and Edward Elgar, among others), and are getting accepted in major journals (Journal of Economic Literature, History of Political Economy, Journal of Macroeconomics, and Economic Inquiry).

Still, other “free-market” schools (the monetarists and the new classicists) have advanced much further because of their mathematical and empirical approach. The Austrian school still largely remains a “book culture,” as Peter Boettke puts it, and needs to devote more efforts to “strategic” publishing in the journals rather than preaching to the choir if it wants to have an impact.4 Happily, things are looking up.

Notes:
1. Todd G. Buchholz, From Here to Economy: A Shortcut to Economic Literacy (Dutton, 1995), p. 238. Buchholz’s popular history, New Ideas from Dead Economists (Plume, 1990), completely ignores the Austrians because Hayek and Mises weren’t discussed at Harvard.

2. Mark Skousen, “The Perseverance of Paul Samuelson’s Economics,” Journal of Economic Perspectives, vol. 11, no. 2 (Spring 1997), pp. 137-152.

3. Paul A. Samuelson, “Credo of a Lucky Textbook Author, Journal of Economic Perspectives, vol. 11, no. 2 (Spring 1997), p. 155.

4. Peter J. Boettke, “Alternative Paths Forward for Austrian Economics,” The Elgar Companion to Austrian Economics (Edward Elgar, 1994), pp. 601-15.