(I wrote the following article for Human Events, but apparently it was too controversial and was removed after about 100 e-letters of commentary, both favorable and critical. Read here’s the original op-ed, uncensured.)

By Mark Skousen

This week the Senate grinches stole Christmas. The Obama Nation is getting Obama Care.

It’s easy to blame the sixty Democrats, as the Wall Street Journal does, for “the worse bill ever.” It solemnly declares: “These 60 Democrats are creating a future of epic increases in spending, taxes and command–and control regulation.”

True enough. But what’s the root cause of this disaster?

Sorry, friends, it’s not the Democrats, nor the American people who elected them.

The real culprits are two “conservative” Republicans who ran the show the previous eight years: George W. Bush, and his “master political strategist” Karl Rove. If it weren’t for these two fools in the White House, the Democrats wouldn’t have sixty Senators, including a professional comedian from Minnesota, to close off debate and ram down our throats a bill worse than Hillary Care.

The fact is that the Bush & Rove comedy act pushed through a litany of ruinous government policies that led to the lowest approval numbers in history:

–the undeclared and costly War in Iraq and its stepchild the unconstitutional Patriot Act.

–the monstrous No Child Left Behind Act that dramatically increased federal intervention in private education.

–the Prescription Drug Act that gave the American people another benefit-corrupted entitlement and unfunded liability.

–large and growing deficits and national debt (according to the Cato Institute, George W. Bush was the biggest spender since LBJ: http://www.cato-at-liberty.org/2009/12/19/george-w-bush-biggest-spender-since-lbj/)

–the worst financial crisis since the Great Depression, largely due to their failure to reform government-sponsored agencies Freddie Mac and Fannie Mae.

The supply-side tax cuts were probably the only major piece of economic legislation that Bush/Rove deserve credit for, but even then, they blundered in not making the tax cuts permanent. So now even if the Republicans take back Capitol Hill in the 2010 elections, all President Obama has to do is veto an extension of the Bush tax cuts, a voila, taxes will increase automatically.

In short, we are paying a heavy price for the “compassionate conservativism” of Bush/Rove.

Once Obama Care becomes law, like Medicare and other “Great Society” programs, it will never end. We will be stuck with national health care for the rest of our lives.

And how are Bush and Rove rewarded? Fortunately, we aren’t seeing much of George Bush, who is quietly in retirement in Texas.

The tragedy is Karl Rove, who has been rewarded by conservatives. He’s treated like a triumphant general on Fox News almost every night, and was signed on as a regular columnist in the prestigious Wall Street Journal.

Shame.

In liberty, AEIOU,

Mark Skousen

From the Gilroy Dispatch

Officially, President Obama’s $3.6 trillion budget is titled “A New Era of Responsibility.”

That’s false on two counts. It’s an era – not of responsibility, but of big-government taxation, spending, and regulation. And it’s not new. History is full of attempts to inflate the state to grow the economy. Virtually all have ended badly. As the recent sell-off reminds us, Wall Street’s verdict on Obamanomics has been quick and sharp.

The president’s budget is right in castigating the “troubled past” of the Bush administration, which spent money like a drunken sailor on education, healthcare, bailouts, and two seemingly endless wars in the greater Middle East, with virtually no regard for how to pay for a rapidly growing national debt.

But now we must confront the troubled future. Obama has adopted the big-spending policies of George W. Bush, with trillions more proposed for education, bailouts, and healthcare. He wants to sharply reduce (but not end) the American presence in Iraq. At the same time, he plans to deploy an additional 17,000 troops to Afghanistan, which may lead to an expanded quagmire there.

Hasn’t Obama read the bestseller “Three Cups of Tea: One Man’s Mission to Promote Peace … One School at a Time,” by Greg Mortenson and David Oliver Relin? A Pakistani general who talked with Mr. Mortenson aptly identified the real problem in Afghanistan: “The enemy is ignorance. The only way to defeat it is to build relationships with these people, to draw them into the modern world with education and business. Otherwise the fight will go on forever.”

In some ways, Obama’s plans are more grandiose than Bush’s. He wants to encourage green technology and energy independence, and move toward national healthcare. The cost is enormous. The deficit for this year alone is expected to reach $1.7 trillion.

To help pay for this, Obama proposes the largest tax increase in history. Some of this, such as new taxes on oil and gas companies, is explicit. Some of it, such as the new cap and trade program, is quite subtle. And some of it will “merely” repeal the Bush tax rates on high incomes. But all of it represents a tremendous muzzle on the economy at a time when it needs to be unleashed.

Even these huge tax hikes won’t be nearly sufficient to pay for the outlays. In fact, to pay for it in full, The Wall Street Journal pointed out, Uncle Sam would have to confiscate every penny earned by Americans making at least $75,000 a year.

What’s the future for Obamanomics? The stock market’s reaction doesn’t bode well. The Dow has fallen more than 18 percent since the last trading day of Bush’s term. Clearly, Wall Street thinks that Obama’s tax, spend, and regulate policies will be a disaster.

Despite the dire headlines, the world is not coming to an end, we are not headed into another Great Depression, and free-market capitalism has not breathed its last breath.

In my book, “The Big Three in Economics,” I found that the press has frequently and prematurely written the obituary of Adam Smith and his free-market philosophy, only to see a new and more vibrant global marketplace reemerge after being savagely attacked by Keynesians, Marxists, and assorted socialists. Market capitalism survived and prospered after the boom-bust industrial revolution of the 19th century, and the Great Depression and world wars of the 20th century. It will recover from the financial panic of 2008-09 and Obamanomics.

Adam Smith, the supreme defender of market capitalism, expressed this optimism well in 1776 when he wrote in “The Wealth of Nations”:

“The uniform, constant, and uninterrupted effort of every man to better his condition … is frequently powerful enough to maintain the natural progress of things toward improvement, in spite both of the extravagance of government, and of the greatest errors of administration.”

The ideas of Adam Smith and his modern followers will make a comeback. Already, pro-market forces are gathering in Congress to defeat Obama’s ambitious and highly socialistic agenda. Charities and nonprofits are already up in arms about the proposed limits on tax deductions for wealthy donations for good causes.

I’m doing my part by holding the world’s largest gathering of free minds at FreedomFest, July 9-11, 2009, in Las Vegas.

Details: www.freedomfest.com.

“The Obama budget is nothing less than an attempt to end the ideas of Ronald Reagan.” — New York Times

Adam Smith, the father of free-market economics, once stated, “There is much ruin in a nation.”  President Obama is out to prove it in his Newspeak program he calls “A New Era of Responsibility.”  It should be called “A New Era of Irresponsibility.”

And there’s no better proof than the stock market’s reaction to Obamanomics, which is big-government Keynesianism at its worst.  Since Obama took office, the Dow is down a whooping 15% — and that’s after the huge sell off in the market in 2008 by more than 30%.

And the market has continued to drop precipitously since Obama addressed Congress and announced his obscene $3.6 trillion budget for fiscal year 2010.  This budget includes:

–the largest tax increase in history, including a monstrous tax on oil & gas (cap and trade) and the repeal of the Bush tax rates on incomes higher than $200,000 for individuals and $250,000 for couples.  Contrary to Obama’s claim, over 65% of tax filers in this category are small business owners and investors.

–the highest level of federal spending since 1945, from today’s 21% of GDP to a whooping 27.7%.  This includes new entitlements in health care and energy.

Clearly Wall Street has spoken:  Obama’s tax, spend and regulate policies are a disaster for the nation.

And sadly Obama doesn’t get it.

What should investors do?  Play it conservative.  Be well-diversified in global stocks.  Maintain a high cash position, look for bargain opportunities, and keep squirreling away gold and silver coins.

And do not despair.  It is not time to head for the hills, although some wealthy friends are talking about moving to New Zealand, or the Bahamas.  (One friend of mine has already taken the extreme step of renouncing his US citizenship!)

In writing “The Big Three in Economics” (click here to order), I found that Adam Smith and his “system of natural liberty” have come under attack on many occasions by his sworn enemies Keynesians, Marxists and socialists, and has often been left for dead, but always makes a comeback.

As Adam Smith declared in his 1776 classic “The Wealth of Nations,”

“The uniform, constant, and uninterrupted effort of every man to better his condition . . . is frequently powerful enough to maintain the natural progress of things toward improvement, in spite both of the extravagance of government, and of the greatest errors of administration.”

In sum, the ideas of Adam Smith, and his modern followers, including Ronald Reagan, are far from dead.  They are only in hibernation.  The free-market giant will soon be awakened by our dire situation.

Hopefully pro-market forces in Congress (both Republicans and Democrats)  will filibuster the Obama tax increases and budget excesses.  Charities and non-profits are already up in arms about the proposed limits on tax deductions for wealthy donations for good causes.

I’m doing my part by holding the world’s largest gathering of free minds at FreedomFest, July 9-11, 2009, in Las Vegas, the focal point of liberty.  For details, go to www.freedomfest.com.  I hope you will join us.

I know I’m a dreamer but I’m not the only one.

Unfortunately, the [Keynesian] balance week is unbalanced. ~ Milton Friedman

We have outlived the short-run and are suffering from the long-run consequences of [Keynesian] policies. ~ Ludwig von Mises

Last week, Treasury Secretary Timothy Geithner announced another solution to the financial crisis — his new “Financial Stability Plan.” Since the announcement, Citigroup has fallen 51 percent, Bank of America is down 46 percent, and Wall Street had its worst week in 2009.

So much for the Financial “Stability” Plan.

As John Adams once said, “Facts are a stubborn thing.”  The Obama model of Keynesian-style bailouts and massive deficits is simply failing to cure the growing financial crisis.

Despite all the bailouts President Obama has put forth — for the banks, the big 3 auto companies, and homeowners — the global economy is still reeling.

In fact, I would argue that Obamanomics (Keynesian economics in disguise) is counterproductive and making matters worse.  That’s because business and Wall Street recognize that there is no free lunch — government spending is piling up huge debts that will need to be paid back, probably through the printing presses.  And inflation — another evil — will come back with a vengeance.

Keynes is famous for the line, “In the long run, we are all dead.”  And that’s what Wall Street fears — that financially we are all going to be killed by excessive debt.

Lack of confidence in Obama, Geitner and Bernanke is why gold is going through the roof now, and is approaching $1,000 an ounce. The U.S. Mint is having a hard time keeping up with demand for American eagle gold and silver coins.

The problem is Keynesian-style policy, the darling of the establishment politicos and media giants.  Keynes has suddenly trumped Adam Smith.  And that’s dangerous.

One day last week, I walked into the largest Barnes & Noble bookstore in New York and saw a big display table up front with all kinds of books on John Maynard Keynes and Keynesian economics.  One book, The Return of Depression Economics, was written by Paul Krugman, the caustic New York Times columnist who just won the Nobel Prize.

Another book was called The Case for Big Government by Jeff Madrick, the editor of Challenge magazine.  I can understand writing a book in support of good, efficient, strong, and productive government, but “big” alone?  Most Americans prefer the motto “cheaper and better.”

The biggest surprise at Barnes & Noble was to see my own book, The Big Three in Economics, prominently displayed along side all the Keynesian and Marxist books.  It has suddenly become my most successful book.

Mark Skousen with the Totem Pole of Economics

But mine was the only book there that took a dim view of Keynes and Marx and their solutions to the financial crisis (always more government, more taxes, and more regulations).  For my money, Adam Smith and his followers (Ludwig von Mises, Friedrich Hayek, Milton Friedman, Murray Rothbard) deserve to be on top of the Totem Pole of Economics.

Unfortunately, Keynes is all the rage now.  The British economist became famous in the 1930s for advocating going off the gold standard, running deficits and bailing out troubled banks with easy money as a way to end the Great Depression.
Today’s politicians, from George Bush to Barack Obama, have suddenly become Keynesians during this financial crisis, spending money they don’t have in a vain effort to right the ship.  Even Newsweek has gone so far to say, “We are all socialists now.”  Alan Greenspan, the ex-student of Ayn Rand, now favors nationalization of the big American banks Citibank and Bank of America.

Every investor and gold bug should know the enemy: Keynes, the advocate of big government and the welfare state, and Karl Marx, the radical who advocated outright state socialism and total central control of the means of production.
After World War I, Randolph Bourne observed, “War is the health of the state.”  Today he might say, “A financial crisis is the health of the state.”

It looks like modern-day statists are getting their wish.  We’re getting big government, good and hard.  Adam Smith and Milton Friedman are out of favor, while John Maynard Keynes, the patron saint of bailouts, inflation, and the welfare state, is making a comeback with a vengeance.

The tentacles of the leviathan state are growing by leaps and bounds.  In 2009, global governments will be the largest shareholders in commercial banks, reversing 20 years of retreat by the state.  The costs of entitlements are exploding upwards, and Congress hasn’t had the courage to address future liabilities.  Social Security and Medicare are government-sponsored Ponzi schemes that will make Bernie Madoff’s embezzlement look like a picnic.

The late management guru Peter Drucker said, “Government is better at creating problems than solving them.” In fact, wrote a cynical Ducker, government has gotten bigger, not stronger, and can only do three things well — taxation, inflation, and making war.  According to Drucker, the state has become a “swollen monstrosity….Indeed, government is sick — and just at a time when we need a strong, healthy, and vigorous government.”  (He said all this in 1969.)  If you want to solve problems, he counseled, you must turn to business and the private sector.

But where does one get the straight scoop on Keynes, Marx, and their nemesis, Adam Smith and the followers of free-market capitalism?

I have no apologies for where I stand on the issue.  In writing The Big Three, I commissioned a Florida woodcarver, James Sagui, to create “The Totem Pole of Economics.”  (The Tolem Pole of Economics is shown on the back cover of the book.)  Clearly, my hero is Adam Smith, the author of The Wealth of Nations, published in 1776, a declaration of economic independence.

Adam Smith, the 18th century philosopher, is on top of the Totem Pole for his advocacy of a revolutionary new doctrine which he called a “system of natural liberty,” what we might call laissez faire or free-market capitalism.  He used the “invisible hand” to symbolized how the private actions of individual entrepreneurs would lead to the public good.

Today’s advocates of Smithian economics have real solutions to the crisis, as I’ve outlined in previous HUMAN EVENTS columns:  suspend “mark to market” accounting rules, make the Bush tax cuts permanent, slash the corporate tax rate, and mostly importantly “do no harm.”  Also, it wouldn’t hurt to take a look at the Canadian banking system, ranked #1 in the world in soundness (US is #40) for its conservative reserve requirements and nationwide branching.  (Not a single Canadian bank has failed in either the Great Depression or now.)

Keynes is ranked below Adam Smith, because he supported big government and the welfare state as a way to stabilize the crisis-prone capitalist economy, the “middle ground” between laissez faire and totalitarian socialism.  But as we have seen, Keynesian activism has led to much mischief in the world today, and countries that have adopted his bureaucratic, regulated mindset have witnessed “slow growth” and “stagflation” style economies.

And Marx is the “low man” on the Totem Pole.  His radical solution, government ownership and control of the production, distribution and consumption of goods and services, would be, as Hayek says, “the road to serfdom.”

Adam Smith and his “system of natural liberty” have come under attack many times by his arch enemies, the Marxists and Keynesians.  But Smithian economics has nine lives, and has always managed a comeback.  With your help, Adam Smith will return.

Click here for a copy of The Big Three in Economics.

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

by Mark Skousen

“The problem of making poor countries rich was much more difficult than we thought.”

—William Easterly, World Bank1

“If there is one formula for our success, it was that we were constantly studying how to make things work, or how to make them work better.”

—Lee Kuan Yew, former Prime Minister, Singapore2

William Easterly has spent his entire adult life working for the World Bank, living in the Third World, and helping poor countries develop into rich countries. You would think he would severely lecture the World Bank and his fellow economists about the dumb policies governments have pursued.

Instead, Easterly throws his hands in the air and offers no clues to the “elusive” quest for growth. He confirms a few economic truths, such as “incentives matter” and “government can kill growth,” but ultimately he thinks luck has as much to do with it as anything. “There are no magic elixirs,” he sighs. The almighty empirical evidence solemnly declares it. Foreign aid doesn’t work. Foreign investment doesn’t work. High savings don’t work. Investment in machinery doesn’t work. Education doesn’t work. Technology doesn’t work. Tax cuts don’t work. All have failed to live up to expectations. It’s time for the economist to be humbled: “It’s very, very hard to predict success in sports, music, and politics—as well as in economics.”3

Over the years I have witnessed a split in the economics profession. Some adhere to the view that we live in an Age of Ignorance; that we know very little about how the world economy really operates and what government policies should be pursued. They are in large measure armchair critics and doubting Thomases.4 Others believe we live in an Age of Enlightenment; that despite maddening uncertainties about the marketplace, we do know with some assurance how a freely competitive market economy works and we have learned a great deal about what governments should and should not do. It is sad commentary to see that despite his honesty, Easterly, a seasoned veteran in the war on world poverty, tends to fall into the former category. He certainly lost an opportunity to clear the air and reveal the root causes and cures of poverty.

Singapore’s Economic Miracle

Perhaps one reason Easterly’s story ends in tragedy is that he apparently spent too much time in failed economies and not enough time in successful ones. I notice that his book says almost nothing about Chile, the economic model of Latin America, or the Four Tigers—Hong Kong, Korea, Taiwan, and Singapore.

Contrast Easterly’s confused story with Lee Kuan Yew’s autobiographical account of Singapore. Lee became president of the tiny, poverty-stricken British colony after it was granted independence in 1965. In one generation, he oversaw its transformation into an Asian giant with the world’s number-one airline, best airport, busiest port of trade, and the world’s fourth-largest per capita real income.

How did this economic miracle happen?

First, Lee offered real leadership. He was a seminal figure in Asia who accomplished extraordinary things. He built an army from scratch, won over the unions, and destroyed the communists after the British left a vacuum. Despite strong opposition, he insisted on making English one of four official spoken languages, knowing it was fast becoming the language of international business. Singapore, like other Southeast Asian countries, was known for its nepotism, favoritism, and covert corruption; Lee cleaned up the courts, police, and immigration and customs offices. Today Singapore is ranked as the least corrupt country in Asia. Singapore was also dirty, so Lee began a “clean and green” campaign. Rivers, canals, and drains were cleaned up and millions of trees, palms, and shrubs were planted.

The Lee government tore down dilapidated shacks and replaced them with high-rise apartments. He imposed law and order by demanding severe sentences for murder and other crimes. Today Singapore ranks no. 1 in the world for security. To reduce traffic congestion, a huge problem in Asian cities, Singapore built an underground subway system, and imposed an electronic road-pricing program. Every vehicle has a “smart card” on its windshield, and the toll amount varies with the road used and the time of day. During rush hour, the price goes up. “Since the amount people pay now depends upon how much they use the roads, the optimum number of cars can be owned with the minimum of congestion.”5 A sound economic principle!

Lee rejected Soviet-style central planning and domestic heavy industry, although he did target certain industries for development. He focused on a two-pronged plan to advance Singapore: First, his government encouraged domestic industry to leap over their neighbors and link up with the developed world of America, Europe, and Japan, and tried to attract their manufacturers to produce in Singapore. Second, Lee wished to create a First World oasis in the Third World by establishing top standards in security, health, education, communications, and transportation, and a government offering a stable currency, low taxes, and free trade. Singapore would become a “base camp” for multinational corporations from around the world. And, after years of effort, it worked.

Under Lee’s brilliant leadership, Singapore has advanced far beyond anyone’s dreams. Yet we cannot ignore his mistakes—his paternalistic strong-arm tactics, his interventionist targeting of industries, his forced saving programs, his denial of a free press, and his excessive punishments for certain crimes. It will be interesting to see how Singapore performs, both as a people and economy, after Lee Kuan Yew is gone. We can only hope that economic freedom will lead to political liberty.

1. William Easterly, The Elusive Quest for Growth (Cambridge, Mass.: MIT Press, 2001), p. 291.
2. Lee Kuan Yew, From Third World to First: The Singapore Story, 1965–2000 (New York: Harper Collins, 2000), p. 687.
3. Easterly, p. 208. Despite Easterly’s failure to come to any clear conclusions, his book offers an honest and often entertaining appraisal of development literature.
4. See my columns, “Is This the Age of Ignorance—or Enlightenment?,” June 1994; “European Unemployment: The Age of Ignorance, Part II,” January 1995; and “The Age of Confusion,” August 1995.
5. Lee, p. 206.

Mark Skousen is president of FEE.

Ideas On Liberty
Economics on Trial
July 2001

by Mark Skousen

“We must raise and train an army of fighters for freedom.”
—F. A. Hayek

Frequently students or parents approach me at investment or economics conferences with the question, “Can you recommend an undergraduate or graduate program in free-market economics?” With the explosive interest in a degree in economics, it’s imperative that students get a topnotch education.* In my experience, if students aren’t exposed early to the principles of Adam Smith and Ludwig von Mises, it is often difficult for them to shed the philosophies of John Maynard Keynes, Karl Marx, and other interventionsts later on.

Here in the United States most colleges and universities have a goodly number of “neoclassical” economists with a free-market bent. (There are a number of “free market” colleges and universities in Latin America, Europe, and Asia, a topic I shall pursue in a future column.) The American schools include the University of Virginia; the University of California, Los Angeles (UCLA); Florida State University; and the University of Chicago. However, anyone pursuing a degree in economics from these institutions will need to be well-versed in advanced mathematics in order to understand the professional language. As New York University Professor Mario Rizzo wrote me, “Contemporary economics has become a branch of applied mathematics.”

Graduate Schools in Austrian Economics

Fortunately, there’s a growing number of schools that specialize in Austrian economics. The best-known program is located at New York University, ranked as one of the top 20 economics departments in the country. The Austrian Economics Program, under the tutelage of Israel Kirzner, David Harper, and Rizzo, has been functioning at NYU since the days of Mises. The Austrian course work attracts students from around the world.

NYU also offers a weekly Austrian Economics Colloquium and an annual summer course held at FEE. (Go to www.econ.nyu.edu/dept/austrian.) However, it should be noted that the NYU program is small, and most of the teachers there are non-Austrian.

George Mason University (in northern Virginia) is also attracting undergraduate and graduate students who want to specialize in Austrian economics, although Professor Peter Boettke, who also edits The Review of Austrian Economics, says that “what makes GMU particularly attractive are its affiliated fields of Public Choice, history of thought, and constitutional economics.” Boettke and Karen Vaughn teach the Austrian theory of the market process; Richard Wagner offers a course in institutional economics; and Walter Williams serves as chairman of the department. (Go to www.gmu.edu/departments/economics.) The Institute for Humane Studies is also located at GMU (www.theihs.org).

Another graduate Austrian program that is gaining prominence is at Walsh College of Accountancy and Business Administration in Troy, Michigan (near Detroit). Walsh College (www.walshcol.edu) specializes in business degrees—in marketing, management, finance, and economics. Under the direction of Harry Veryser, the school now offers a two-year bachelor’s degree and a master’s degree in economics. The entire faculty consists of free-market economists, with a special emphasis on Austrian economics. Students are assigned books and readings by Mises, Hayek, Henry Hazlitt, Wilhelm Ropke, Paul Heyne, and me, among others. Walsh’s program is impressive.

The Expanding Austrian Universe

With the Ludwig von Mises Institute (www.mises.org) next door, Auburn University (www.auburn.edu/business/economics) has attracted a large number of students over the years. The most prominent Austrian economist on campus is Roger Garrison, author of the new advanced macro text Time and Money. Garrison teaches the main course in macroeconomics. (Leland Yeager, former Ludwig von Mises Professor of Economics at Auburn, is now retired.) Unfortunately, Auburn recently discontinued its Ph.D. program. There are a goodly number of colleges offering solid undergraduate courses. Two mainstays are Hillsdale College in Michigan and Grove City College, near Pittsburgh. Grove City College (www.gcc.edu) no longer has Hans Sennholz as chairman of the department, but Hans indicates that the school is still free-market oriented, and John Moore, the president, is an economist. Hillsdale College (www.hillsdale.edu/dept/economics) has several free-market professors, the most well-known being Richard Ebeling, who runs the annual Ludwig von Mises lecture series. Hillsdale also houses the Mises library.

I should also mention Northwood University, an associate- or full-degree business school with campuses in Midland, Michigan; West Palm Beach, Florida; and Cedar Hill, Texas. Founded by Gary Stauffer and Arthur Turner in 1958, Northwood stresses free-market and Austrian economics. (Go to www.northwood.edu.)

In California, there are two universities with an Austrian bent. Santa Clara University, under the guidance of Daniel Klein, offers the Civil Society Institute (www.scu.edu/csi), which involves a weekly colloquium, lectures series, and “coffeehouse” for libertarian ideas. Other prominent members of the faculty are Laurence Iannaccone, Henry Demmert, Fred Foldvary, and David Friedman. Charles Baird, labor economist and Ideas on Liberty columnist, is the co-chairman of the department at California State University at Hayward (www.sbe.csuhayward.edu) and director of the Smith Center for Private Enterprise Studies. According to Baird, half the tenure-track economists there are “unabashedly free-market.”

Lawrence H. White, a specialist in free banking, was recently appointed the first F A. Hayek Professor of Economic History at University of Missouri-St. Louis (www.umsl.edu/divisions/artscience/economics). According to his colleague David C. Rose, “a number of economists are either outright Austrian or are very sympathetic to the Austrian school and free market ideals.”

If you want year-round sunshine, you can always come to central Florida and take one of my courses in investments, history of thought, or Austrian economics at Rollins College in Winter Park, Florida (near Orlando). (See www.rollins.edu.)

Austriae est imperare orbi universo!

*See Jon E. Hilsenrath, “In Hot Pursuit of Economics Ph.D.s—Short Supply and Big Demand Mean Young Graduates Are Courted Like Royalty,” Wall Street Journal, February 20, 2001, p. B1.

Ideas On Liberty
Economics on Trial
June 2001

by Mark Skousen

“The circle had come right round; it was as though Keynes had never been.”
-Robert Skidelsky1

“Textbooks have to be rewritten in the aftermath of each scientific revolution.”
-Thomas S. Kuhn2

In his third and final volume on John Maynard Keynes, Robert Skidelsky comes to the shocking conclusion that the Keynesian revolution was temporary, that Keynes’s General Theory was really only a “special” case, and that “free market liberalism” has ultimately triumphed. This is all the more amazing given that Lord Skidelsky has spent the past 20 years of his professional career studying Keynes and resides in Keynes’s old estate, Tilton House. Few scholars would have the guts to repudiate the theory of the man they adore.

It’s even tougher for old dogs to learn new tricks, and that refrain applies to Paul Samuelson, the “American Keynes” who introduced millions of students to the “new economics” of the master. He continues to hang his hat on the Keynesian cross, even as he publishes the 17th edition of his world-famous textbook. The pedagogical paradigm keeps shifting further toward the classical model of Adam Smith, and as each edition of Economics moves in that direction, Samuelson resists the change. He cites his mentor more than any other economist; only Keynes, not Adam Smith or Milton Friedman, is measured as a “many-sided genius.” His textbook still begins macroeconomics with the Keynesian model, even though most other textbook writers have adopted Greg Mankiw’s method of starting with the long-run classical model.3 According to Samuelson, Adam Smith’s invisible-hand doctrine-that laissez-faire behavior maximizes social welfare-”holds only under very limited conditions.”4 On the final page (755) of his massive textbook, he renders “two cheers to the market, but not three.”

Two Cheers for Hayek and Friedman

Having reviewed all 17 editions of Samuelson’s magnum opus, I conclude that his textbook has gradually shifted, albeit grudgingly, from one cheer to two cheers for the market. Much of this improvement is due to Yale’s Bill Nordhaus, his co-author since 1985. (He writes the entire text now, which Samuelson then reviews.)

What’s new about the latest edition? More free-market economists are cited, including Julian Simon, Ronald Coase, James Buchanan, Arthur Laffer, Robert Mundell, and Gary Becker. Samuelson and Nordhaus devote an entire page (41) to F.A. Hayek and Milton Friedman, “guardians of economic freedom.” They recommend Hayek’s The Road to Serfdom and Friedman’s Capitalism and Freedom, saying, “All thoughtful economists should study his arguments carefully.”

In chapter 2, “Markets and Government in a Modern Economy,” the authors highlight the benefits of globalization and the importance of property rights, noting that Russia and other former communist nations have suffered because of a failure to enforce “the legal framework.”

They also add an entire new page on the issue of lighthouses as public goods. For years Samuelson used the lighthouse as a prime example of market failure; only government could build and operate lighthouses. Several years ago I chided Samuelson for ignoring Ronald Coase’s famous essay, “The Lighthouse in Economics,” which proved that the Trinity House and other lighthouses in England were built and owned by private firms that imposed tolls on ships docking at nearby ports.5

Now, finally, Samuelson and Nordhaus have responded to Coase’s challenge in the 17th edition (pp. 37—38). They admit that privately operated lighthouses existed in England, but then point to the east coast of Florida as a case where “there were no lighthouses until 1825, and no private-sector lighthouses were ever built in this area.” According to Nordhaus, the only response to shipwrecks was a thriving private “wrecking” industry that charged high fees for “saving lives and cargo.” Nordhaus goes on to note that lighthouses have become obsolete, replaced by the satellite-based Global Positioning System, a service provided by the government.

In sum, the paradigm in economics has definitely shifted from Keynesianism to classical economics, but the case for complete laissez faire is still raging in the halls of academia.

1. Robert Skidelsky, John Maynard Keynes: Fighting for Britain, 1937-1946 (London: Macmillan, 2000), p. 506.
2. Thomas S. Kuhn, The Structure of Scientific Revolutions, 2d ed. (Chicago: University of Chicago Press, 1970), p. 137.
3. See N. Gregory Mankiw, Principles of Economics, 2d ed. (Ft. Worth, Tex.: Harcourt College Publishers, 2001). I still regard Roy J. Ruffin and Paul R.Gregory, Principles of Economics, 7th ed. (Boston: Addison Wesley Longman, 2001) as the best mainstream textbook on the market today.
4. Paul A. Samuelson and William D. Nordhaus, Economics, 17th ed. (New York: McGraw-Hill Higher Education, 2001), p. 325.
5. Mark Skousen, “The Perseverance of Paul Samuelson’s Economics,” Journal of Economic Perspectives, Spring 1997, p. 145. Coase’s article appeared in the Journal of Law and Economics, October 1974, pp.357-76.

Forecasts & Strategies
Personal Snapshots
June 2001

By Mark Skousen

Governments are generally reluctant to admit mistakes and to change mistaken policies until much harm has been done. -P.T. Bauer and B.S. Yamey

In Whatever Happened to the Egyptians?, a popular book in Egypt, author Galan Amin raises a good question. Thousands of years ago, Egypt was the birthplace of one of the world’s greatest civilizations, with remarkable advances in architecture, astronomy, mathematics and economics, and the pharaohs ruled the world for centuries.

But today Egypt is a fallen nation. My family and I visited Egypt for the first time last month, and we were appalled. Arriving in Cairo to see the ancient pyramids, we also saw filthy canals, undrinkable water, dire poverty, noisy traffic, teeming millions, incessant vendors and dust everywhere (due to cement factories nearby).

I picked up a copy of a guidebook on what it’s like for a Westerner to live in Cairo. The author, Claire Francy, lists so many shortages that she urges foreign residents to bring the following with them: answering machines, major appliances, computers, modems, printers, telephones, fax machines, cosmetics, flashlights, pantyhose, wines, books in English, clothes and shoes. Yes, shoes. “In a city with nearly as many shoe stores as feet, it is almost impossible to find decent shoes.” Oh, the joys of import substitution laws!

And yet, Egypt has tremendous resources: oil, cotton, some of the best fertile land in the world along the Nile Valley, a first-rate irrigation system, the Suez Canal, and a huge labor force (nearly 70 million and the population is growing rapidly, despite the common practice of female circumcision, which leaves women without sexual feeling but not without children). Yet true unemployment is 20% and underemployment is endemic. Egypt suffers from a huge “brain drain,” with 2.5 million Egyptians working abroad. The nation has illiteracy rates of 66% among women and 37% among men. It imports half of its food. After Israel, this Arab-African nation is the highest recipient of U.S. foreign aid in the world.

Anti-Market Policies

What’s the cause of this demise? The culprit is socialist interventionism in the economy. As one economist states, “The Egyptian economy bears the legacy of economic policies dating from the 1950s which were motivated by concern for equity and assistance to the poor. These policies were characterized by price regulation, subsidization of consumer goods, a dominant public sector and state control.” When Gamal Nasser gained power in 1954, he established a “democratic socialist state” and nationalized everything under the sun (including the local beer company) and dramatically increased government control of the economy. Moreover, under a Napoleonic code, Egypt suffers from a regulatory nightmare of paperwork and bureaucracy.

Fortunately, Nasser’s replacement, Anwar Sadat, began a program of reducing the role of government. After his tragic assassination in 1981, his successor, Hosni Mubarak, has accelerated market policies of privatization and foreign investment, and eliminated price and exchange controls. Yet, even today, 36% of the labor force is employed by the government, and the economy continues to suffer from overregulation and controls.

Egypt has made substantial progress since 1990, when the Fraser Institute ranked it #88 in its Economic Freedom report. Today it is ranked #52. But clearly the Egyptian leaders have a long way to go to fulfill the Koran’s promise of “wealth and children” as the “adornments of this present life.”

IDEAS ON LIBERTY
Economics on Trial
APRIL 2001

Beyond GDP: A Breakthrough in National Income Accounting
by Mark Skousen

“It is apparent that a large part of a country’s total production serves for the production of capital goods and not for the production of consumer goods, and that the production of capital goods must itself become a specialized branch of manufacturing.” —Wilhelm Ropke 1

Good news! The U.S. Department of Commerce, which compiles Gross Domestic Product (GDP), has just added a new national income statistic, Gross Output (GO), as a measure of total spending in the economy. I have been making the case for this new statistic for over ten years. Now it is a reality. In The Structure of Production (1990) and Economics on Trial (1993), I was critical of GDP for two reasons:

First, GDP is a Keynesian concept that measures only the output of final goods and services and excludes intermediate production. Second, government spending is included in GDP data, an autonomous addition to national output.2

Both peculiarities of GDP have led to much mischief. In the first case, by focusing solely on final output, many economists and commentators in the media have concluded that consumer spending is more important than capital investment in an economy, based on the fact that consumption expenditures usually represent about two-thirds of GDP. In the second case, including government spending in GDP has led many pundits to believe that an increase in that spending—even if accomplished through deficit spending—will automatically increase economic growth (or conversely, a cut in government spending will inevitably lead to a recession). Both conclusions are false.

Most students of economics are unaware of the fact that GDP was created by Simon Kuznets during World War II to quantify final aggregate demand according to the new economics of Keynes. As such, GDP ignores all intermediate spending in the economy, based on the tenuous argument that earlier stages of production constitute double counting.

However, the goods-in-process sector of the economy—the natural resource, manufacturing, and wholesale stages—are important for several reasons. Austrian economist Eugen von Bohm-Bawerk and German economist Wilhelm Ropke, among others, demonstrated that interest rates and technology greatly influence the structure of production and that changes in the early stages are especially important in the business cycle.

In an effort to measure intermediate production, The Structure of Production introduced a new national income statistic, Gross Domestic Output (GDO)—a more complete measure of spending at all stages of production—as an “Austrian” alternative to the Keynesian GDP. It counts spending (sales or revenues) of firms at all stages of production, not just at the retail level.

GO: A New National Statistic

For a decade I thought my criticisms of GDP had fallen on deaf ears and no one was interested in using a new national income statistic like GDO that accurately included total spending in the economy, not just final output. However, I am happy to report that the Commerce Department’s Bureau of Economic Analysis has just begun to publish a new series called “Gross Output,” an annual measure of total spending at all stages. GO is defined as Intermediate Input (II) plus GDP (final output).3

Intermediate Input (II) represents the sale of all products in the natural resource, manufacturing, and wholesale markets. GDP represents the final retail market.

I am currently working on a professional paper analyzing GO and II statistics and how they increase our understanding of the economy. Since this paper will not be published for some time, let me give you a few of my preliminary conclusions. Overall, much of the data appears to confirm several Austrian themes.

First, the data support the Austrian theory that the structure of production lengthens as an economy grows. Indeed, from 1987 until 1998 real GDP rose from $6.1 trillion to $8.8 trillion, or 39 percent (using 1996 as a base year). But real Intermediate Input (II) increased from $4.3 trillion to $6.5 trillion, or 53 percent, much faster than GDP. In other words, the producer/capital goods market grew more rapidly than the consumer/retail good market. This suggests that the number of stages of production increased.

Second, the data seem to confirm the Austrian view that production in the intermediate processes tends to be more volatile than final output and thus more sensitive to the business cycle. For example, during the 1990-91 recession, real GDP fell $31.5 billion, while real II fell $74.6 billion—more than twice retail sales. Since then, intermediate production has grown substantially faster (41 percent) than consumer spending (27 percent) from 1991 to 1998. I would like to test these statistics during previous boom-bust cycles (such as 1973-75 and 1980-82), but unfortunately, the data for II and GO are incomplete prior to 1987.

Third, GO data support the Austrian argument that business investment—not consumer spending—is the driving force behind economic growth. The Keynesian argument that consumer spending is the largest sector of the economy is specious and is based on a misunderstanding of GDP statistics. It is true that personal consumption expenditures typically represent 67 percent of GDP, but GDP is not total spending in the economy. On measuring total spending (GO), one sees that the capital/producer goods industry is substantially larger than the final consumer/retail goods industry. Using 1998 data, we find that personal consumption expenditures amount to $5.8 trillion, only 38 percent of GO, and gross business investment (which includes all intermediate production, plus gross fixed investment) amounts to $7.9 trillion, 52 percent of total spending.

In sum, intermediate production does matter, and GO is a better indicator of what is happening in the entire economy, not just the retail sector. Hopefully, the next step will be for the Commerce Department to release up-to-date quarterly data for GO and II as they currently do for GDP. We could learn a lot more about the direction of the economy with these new Austrian national income statistics

1. Wilhelm Ropke, Economics of a Free Society (Chicago: Henry Regnery & Co., 1963), p. 43.
2. See The Structure of Production (New York: New York University Press, 1990), chapter 6, and Economics on Trial (Homewood, Ill.: Irwin, 1993), chapter 4.
3. See “Improved Estimates of Gross Product by Industry for 1947-98,” Survey of Current Business 80:6 (June 2000), pp. 24-63. Table 8 measures Gross Output 1987-98, and table 9 measures Intermediate Input 1987-98.

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.

Forecasts & Strategies
Personal Snapshots
January 2001

Is Alan Greenspan Really That Good?
By Mark Skousen

“He played the game, skillfully …. He helped breath life into the vision of America as strong, the best, invincible.” -Bob Woodward, Maestro: Greenspan’s Fed and the American Boom

Last month I listened on audiotape to Bob Woodward’s new book, Maestro (Simon & Schuster), the inside story of Alan Greenspan and his long tenure as chairman of the world’s most powerful central bank. Woodward gave Greenspan extremely high marks for his ability to manipulate interest rates and keep the American economy stable and growing. He also felt that Greenspan was one of the first economists to recognize the surprise jump in productivity in the United States in the early 1990s. As a result, Greenspan fought against efforts to raise interest rates during most of the 1990s.

Certainly Greenspan has achieved remarkable success as measured by the low level of price inflation in the 1990s, and his handling of various crises (1987 crash, 1990-91 recession, Long Term Capital Management fiasco and the 1997 Asian meltdown). He has also been willing to raise interest rates when the American boom appeared to be getting out of hand (1994 and 2000) and thereby engineering a soft landing.

On the negative side, I give him low marks for opposing tax cuts in the 1990s, creating an asset inflation by pumping too much money into the economy after the 1997 Asian meltdown, and buying into the Y2K computer glitch problem in 1999. He’s been too easy, too long and too tight since he’s been chairman. But by far his worse decision was before he became Fed chairman. In 1983, he chaired the Social Security reform commission and refused to even entertain the idea of privatization. Instead he raised taxes and broadened the tax base. Ayn Rand, his mentor, must have been turning over in her grave.

Ideas on Liberty
Economics on Trial
January 2001

The Imperial Science
by Mark Skousen

“I think it is quite likely that we are entering an era of much more interaction among the sciences.” Kenneth E. Boulding 1

During the 20th century it was popular to label economics the “dismal science,” a term of derision coined by the English critic Thomas Carlyle in the 1850s. Carlyle lashed out against laissez-faire capitalism, which be defined as “anarchy plus the constable,” for, among other things, being inconsistent with slavery.2

But attitudes are rapidly changing as we enter the 21st century. Economics, no longer dismal, has come a long way toward reinventing itself and expanding into new territories so rapidly that another descriptive phrase is needed. Like an invading army, the science of Adam Smith is overrunning the whole of social science–law, finance, politics, history, sociology, environmentalism, religion, and even sports. Therefore, I have dubbed 21st-century economics the “imperial science.”

Boulding’s Dream Comes True

The father of economics as an interdisciplinary movement is Kenneth E. Boulding, longtime professor at the University of Colorado in Boulder, who died in 1993. He published over 1,000 articles on more than two dozen eclectic subjects, ranging from capital theory to Quakerism. But Boulding’s vision of every discipline borrowing ideas from other disciplines isn’t exactly what has happened. Instead, economics has started to dominate the other professions.

The first breakthrough came in finance theory. Harry Markowitz, a graduate economics student at the University of Chicago, wrote an article on portfolio theory in the March 1952 issue of The Journal of Finance. It was the first attempt to quantify the economic concept of risk in stock and portfolio selection. Out of this work came modern portfolio theory and the “efficient market theory,” which argues that short-term changes in stock prices are virtually unpredictable and that it is extremely difficult if not impossible to beat the market averages over the long run.

These ivory-tower theories were greeted with scorn by Wall Street professional managers, but eventually confirmed by numerous studies. Index funds, the economists’ favorite investment vehicles, are now the largest type of mutual fund sold on Wall Street?

James Buchman and Gordon Tullock, both at the University of Virginia, published The Calculus of Consent in 1962 and forever changed how political scientists view public finance and democracy. Today public-choice theory has been added to every economics classroom’s curriculum.

Buchanan and other public-choice theorists contend that politicians, like businessmen, are motivated by self-interest. They seek to maximize their influence and set policies in order to be re-elected. Unfortunately, the incentives and discipline of the marketplace are often missing in government. Voters have little incentive to control the excesses of legislators, who in turn are more responsive to powerful interest groups. As a result, government subsidizes vested interests of commerce while it imposes costly, wasteful regulations and taxes on the general public.

The public-choice school has changed the debate from “market failure” to “government failure.” Buchanan and others have recommended a series of constitutional rules to require the misguided public sector to act more responsibly, including requiring supermajorities to raise taxes, protecting minority rights, returning power to local governments, and imposing term limits?

Economics Enters the Courtroom

In 1972 Richard A. Posner, an economist who teaches at the University of Chicago Law School and serves as chief judge of the U.S. Seventh Circuit of Appeals, wrote Economic Analysts of Law, which synthesized the ideas of Ronald Coase, Gary Becker, F. A. Hayek, and other great economists at the University of Chicago. Today centers of “law and economics” are found on many campuses. Judge Posner states, “Every field of law, every legal institution, every practice or custom of lawyers, judges, and legislators, present or past-even ancient-is grist for the economic analyst’s mill” 5. Economists apply the principles of cost-benefit and welfare analysis to all kinds of legal issues antitrust, labor, discrimination, environment, commercial regulations, punishments and awards. In my October 1999 column, I reported on Chicago law professor John R. Lott, Jr.’s new work on the relationship between gun ownership and crime. He applied the incentive principle to demonstrate that well-armed citizens deter crime.

Chicago’s Gary Becker has been in the forefront of applying price theory to contemporary social problems, such as education, marriage and divorce, race discrimination, charity, and drug abuse. Not surprisingly, he called his book for the general public The Economics of Life. But Becker warned, “This work was not well received by most economists,” and the attacks from his critics were “sometimes very nasty.”6

There are many other cases where economists have made significant improvements in other disciplines-in accounting (see July 1999 column on “Economic Value Added,” or EVA), history (see the work of Robert Fogel and Douglass North), religion (Lawrence Iannaccone and Edwin West have shown that increased competition in religions increases attendance at churches), management (the Center for Market Processes at George Mason University), and sociology (see the writings of Richard Swedberg). They’ve even changed the way Treasury bills are auctioned.

As we enter the 21st century, false theories still prevail in politics, law, history, sociology, and other disciplines. As Lord Acton once stated, “There is no error so monstrous that it fails to find defenders among the ablest men.” The sooner the principles of market economics enter the fray and attack false doctrines, the better off we’ll all be.

1. Kenneth E. Boulding, The Skills of the Economist (Cleveland: Howard Allen, Inc., 1958). p 134.
2. For the complete background of Carlyle’s racism and vile attack on market capitalism, see David M. Levy, “150 Years and Still Dismal!” in Ideas on Liberty, Marsh 2000, and chapter 3 of my book, The Making of Modern Economics (Armonk, N.Y.: M. E. Sharpe, 2001).
3. Two excellent books on modern portfolio theory are Burton Mankiel, A Random Walk Down Wall Street, 6^th ed. (New York: W. W. Norton, 1996) and Peter L. Bernstein, Capital Ideas (New York: Simon & Schuster, 1992).
4. Buchanan and Tullock’s The Calculus of Consent (Ann Arbor: University of Michigan Press 1962) is still worth reading. For an excellent summary, see chapter XI, “The Public Choice School: Politics as a Business,” in Todd G. Buchholz, New Ideas From Dead Economists (New York: Penguin Book, 1989).
5. Richard A. Posner, Law and Literature, 2nd ed. (Cambridge, Mass.: Harvard University Press, 1998). p. 182. A comprehensive summary of the “law and economics” movement can be found in Nicholas Mercuro and Steven G. Medema, Economics and the Law: From Posner to Post-Modernism (Princeton, N.J.: Princeton University Press, 1997).
6. Gary S. Becker and Guity Nashat Becerk, The Economics of Life (New York: McGraw-Hill, 1997), p.3.

Economics on Trial – Ideas on Liberty – SEPTEMBER 2000

by Mark Skousen

“Government measures . . . give individuals an incentive to misuse and misdirect resources and distort the investment of new savings.”
- MILTON FRIEDMAN 1

Several months ago, I had the opportunity of speaking before a Miami chapter of Legatus, a group of Catholic business leaders organized originally by Tom Monaghan, founder of Domino’s Pizza. The topic was the outlook for the stock market, which had reached sky-high levels and by any traditional measurement appeared extremely overvalued. Even many experienced Wall Street analysts recognized that a bear-market correction or crash was inevitable and necessary. As the old Wall Street saying goes, “Trees don’t grow to the sky.” Indeed, in the spring the stock market took a well-deserved tumble. What is the cause of this boom-bust cycle in the stock market? Does capitalism inherently create unsustainable growth? Is the bull market on Wall Street real or a bubble?

The Parable of the Wheat and the Tares

To answer these questions, I applied Jesus’ parable of the wheat and the tares (Matthew 13:24-30) to today’s financial situation.

Jesus tells the story of a wheat farmer whose crop comes under attack by an unknown assailant. In the middle of the night this enemy sows tares (weeds) in his wheat fields. Soon the farmer’s servants discover that the farmer’s crop appears to be twice the normal size. Yet the master realizes that half the crop is fake-weeds instead of wheat. But he warns his servants not to tear out the weeds for fear of uprooting the good shoots; they must wait and let the wheat and the tares grow up together until harvest time. Months later, the wheat produces good grain, while the tares are merely weeds and provide no fruit. The servants pull out the weeds and burn them, and store the grain in the barn.

The parable is imminently applicable to the recent wild ride on Wall Street. In today’s robust global economy, the wheat represents genuine prosperity-the new products, technologies, and productivity generated by capitalists and entrepreneurs. It represents real economic growth and when harvested, reflects a true higher standard of living for everyone. Under such conditions, stock prices are likely to rise.

On the other hand, the tares represent artificial prosperity that bears no fruit in the end and must be burned at harvest time. Where does this artificial growth come from? The central bank’s “easy money” policies! The Fed artificially lowers interest rates and creates new money out of thin air (through openmarket operations). This new money, like regular savings, is invested in the economy and stimulates more growth and higher stock prices-higher than sustainable over the long run.

Who is the enemy who sows artificial prosperity? Alan Greenspan! (Or, to be more accurate, central bankers.) The money supply-which is controlled by the Fed-has been growing by leaps and bounds, especially since the 1997 Asian crisis.

But there is no free lunch, as sound economists have warned repeatedly. At some point, the harvest time comes and the wheat must be separated from the tares. This is the crisis stage, where the boom turns into the bust. Harvest time in wheat is fairly easy to predict, but not so in the economy. Clearly economic conditions are heating up, as measured by asset inflation, real estate prices, the art mar ket, and recently the Consumer Price Index. At some point, a “burning” of excessive asset values in the financial markets must occur. As Ludwig von Mises stated long ago, “if a brake is thus put on the boom, it will quickly be seen that the false impression of `profitability’ created by the credit expansion has led to unjustified investments..”2

Lesson: Globalization and supply-side freemarket policies have justified genuine economic growth and higher stock prices over the past two decades, but “easy money” policies have at the same time created an artificial boom and “irrational exuberance” on Wall Street. Ignore this lesson at your own peril. Remember the parable of the wheat and the tares!

1. Milton Friedman, Capitalism and Freedom (University of Chicago, 1962), p. 38.
2. Ludwig von Mises, “The `Austrian’ Theory of the Trade Cycle,” in The Austrian Theory of the Trade Cycle and Other Essays, compiled by Richard M. Ebeling (Auburn, Ala.: Ludwig von Mises Institute, 1996), p. 30.

Ideas on Liberty
Economics on Trial
August 2000

by Mark Skousen

“Government provides certain indispensable public services without which community life would be unthinkable and which by their nature cannot appropriately be left to private enterprise.” – PAUL A. SAMUELSON

If you take a course in public finance, you will invariably encounter the “public goods” argument for government: Some services simply can’t be produced sufficiently by the private sector, such as schools, courts, prisons, roads, welfare, and lighthouses.

The lighthouse example has been highlighted as a classic public good in Paul Samuelson’s famous textbook since 1964. “Its beam helps everyone in sight. A businessman could not build it for a profit, since he cannot claim a price for each user.” 1

Really? Chicago economist Ronald H. Coase revealed that numerous lighthouses in England were built and owned by private individuals and companies prior to the nineteenth century. They earned profits by charging tolls on ships docking at nearby ports. The Trinity House was a prime example of a privately owned operation granted a charter in 1514 to operate lighthouses and charge ships a toll for their use.

Samuelson went on to recommend that lighthouses be financed out of general revenues. According to Coase, such a financing system has never been tried in Britain: “the service [at Trinity House] continued to be financed by tolls levied on ships.”2

What’s even more amazing, Coase wrote his trailblazing article in 1974, but Samuelson continued to use the lighthouse as an ideal public good only the government could supply. After I publicly chided Samuelson for his failure to acknowledge Coase’s revelation,3 Samuelson finally admitted the existence of private lighthouses “in an earlier age,” in a footnote in the 16th edition of his textbook, but insisted that private lighthouses still encountered a “free rider” problem.4

Private Solutions for Public Services

The lighthouse isn’t the only example of a public good that can be provided for by private enterprise. A privately run toll road operates in southern California. Wackenhut Corrections manages state prisons. Catholic schools provide a better education than public schools. The Mormon Church offers a better welfare plan than the USDA food stamp program. Habitat for Humanity builds houses for responsible poor people.

And now, for the first time in 38 years, there is a privately built major league baseball stadium-Pacific Bell Park, new home of the San Francisco Giants. After Bay area voters rejected four separate ballot initiatives to raise government funds to replace the windy and poorly attended Candlestick Park, Peter Magowan, a Safeway and Merrill Lynch heir, teamed with local investors, to buy the club and, with the help of a $155 million Chase Securities loan, built the new stadium for $345 million. The owners also got huge sponsorships from Pacific Bell, Safeway, CocaCola, and Charles Schwab.

So far the private ballpark has been a super success, selling a league-leading 30,000 season tickets for the 41,000seat stadium. The team’s 81 home games are nearly sold out. Other team owners, whose stadiums are heavily subsidized, were skeptical, but a dozen team owners have visited the new operation to study what they’ve done. They include George Steinbrenner, who is considering a $1 billion new Yankee stadium.5

Economists Attack Public Financing

Perhaps private funding of major league sports facilities has been influenced by two recent in-depth studies by professional economists attacking publicly subsidized sports arenas. In Major League Losers, Mark Rosentraub of Indiana University (and a big sports fan) studied stadium financing in five cities and meticulously demonstrated that pro sports produce very few jobs with little ripple effects in the community, take away business for suburban entertainment and food venues, and often leave municipalities with huge losses.6

A Brookings Institution study came to similar conclusions. After reviewing major sports facilities in seven cities, Roger G. Noll (Stanford) and Andrew Zimbalist (Smith College) found they were not a source of local economic growth and employment, and the net subsidy exceeded the financial benefit to the community.7

These empirical studies confirm a longstanding sound principle of public finance: Beneficiaries should pay for the services they use. In my free-market textbook I call this “The Principle of Accountability,” also known as the “benefit principle.” It’s amazing how often politicians violate this basic concept. For example, John Henry, a commodities trader worth $300 million and owner of the Marlins baseball team, is pushing through the Florida state legislature a bill to tax cruiseship passengers to help fund a new Miami ballpark. (Fortunately, Governor Jeb Bush just vetoed the bill.)

Please, will someone send Mr. Henry a copy of my free-market textbook, Economic Logic?

1. Paul A. Samuelson, Economics, 6th ed. (New York; McGraw Hill, 1964), p. 159.
2. Ronald H. Coase, “The Lighthouse in Economics” in The Firm, the Market, and the Law (Chicago: University of Chicago Press, 1988), p. 213. Coase’s article originally appeared in The Journal of Law and Economics, October 1974.
3. Mark Skousen, “The Perseverance of Paul Samuelson’s Economics,” Journal of Economic Perspectives, Spring 1997, p. 145.
4. Paul A. Samuelson and William D. Nordhaus, Economics, 16th ed. (New York: McGraw Hill, 1998), p. 36n.
5. Peter Waldman, “If You Build It Without Public Cash, They’ll Still Come,” Wall Street Journal, March 31, 2000, p. 1.
6. Mark S. Rosentraub, Major League Losers: The Real Cost of Sports and Who’s Paying for It (New York: Basic Hooks, 1997).
7. Roger G. Noll and Andrew Zimbalist, Sports, Jobs, and Taxes: The Economic Impact of Sports Teams and Stadiums (Washington, D.C.., Brookings Institution, 1997).

Economics on Trial
IDEAS ON LIBERTY
April 2000

What It Takes to Be an Objective Scholar
by Mark Skousen

“It was the facts that changed my mind.” -Julian Simon (1)

During the 1990s we watched the Dow Jones Industrial Average increase fourfold and Nasdaq stocks tenfold. Yet there were well-known investment advisers-some of them my friends-who were bearish during the entire period, missing out on the greatest bull market in history. (2)

How is this possible? What kind of prejudices would keep an intelligent analyst from missing an overwhelming trend? In the financial business the key to success is a willingness to change 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?”

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 type, the most flexible, are the most successful on Wall Street.

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 interprets them to suggest that gold is ready to reverse its downward 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.

I also see this type of prejudice in the academic world. Some analysts are anti-market no matter what. Take, for example, Lester Brown, president of the Worldwatch Institute in Washington, D.C., who puts out the annual State of the World and other alarmist surveys and data. He gathers together all kinds of statistics and graphs showing a decline in our standard of living and the growing threat of population growth, environmental degradation, the spread of the AIDS virus, and so on. For example, despite clear evidence of sharply lower fertility rates in most nations, Brown concludes, “stabilizing population may be the most difficult challenge of all.” (3)

Too bad Julian Simon, the late professor of economics at the University of Maryland, is no longer around to dispute Brown and the environmental doomsdayers. Simon was as optimistic about the world as Brown is pessimistic. Simon’s last survey of world economic conditions, The State of Humanity, was published in 1995. That book, along with his The Ultimate Resource (and its second edition), came to the exact opposite of Brown’s conclusions. “Our species is better off in just about every measurable material way.” (4)

Yet Julian Simon was not simply a Pollyanna optimist. He let the facts affect his thinking. In the 1960s, Simon was deeply worried about population and nuclear war, just like Lester Brown, Paul Ehrlich, and their colleagues. But Simon changed his mind after investigating and discovering that “the available empirical data did not support that theory.” (5)

Scholars Who See the Light

The best scholars are those willing to change their minds after looking at the data or discovering a new principle. They admit their mistakes when they have been proven wrong. You don’t see it happen often, though. Once a scholar has built a reputation around a certain point of view and has published books and articles on his pet theory, it’s almost impossible to recant. This propensity applies to scholars across the political spectrum.

We admire those rare intellectuals who are honest enough to admit that their past views were wrong. For example, when New York historian Richard Gid Powers began his history of the anticommunist movement, his attitude was pejorative. He had previously written a highly negative book on J. Edgar Hoover, Secrecy and Power. Yet after several years of painstaking research, he changed his mind: “Writing this book radically altered my view of American anticommunism. I began with the idea that anticommunism displayed America at its worst, but I came to see in anticommunism America at its best.” (6) That’s my kind of scholar.

1. Julian L. Simon, The Ultimate Resource 2 (Princeton, N.J.: Princeton University Press, 1996), preface.
2. See the revealing article, “Down and Out on Wall Street,” New York Times, Money & Business Section, Sunday, December 26, 1999.
3. Lester R. Brown, Gary Gardner, and Brian Halweil, Beyond Malthus (New York: Norton, 1999), p. 30.
4. Julian L. Simon, The State of Humanity (Cambridge, Mass.: Blackwell, 1995), p. 1.
5. Simon, The Ultimate Resource 2, preface.
6. Richard Gid Powers, Not Without Honor: The History of American Anticommunism (Free Press, 1996), p. 503.

Personal Snapshots

Forecasts & Strategies, February 2000

Greed is Good — NOT!

“Unbridled avarice is not in the least the equivalent of capitalism, still less its ’spirit.’” — Max Weber

Recently I heard free-market economist Walter Williams speak at a local college about capitalism. He quoted approvingly from Gordon Gekko, the fictional character of the film Wall Street, “Greed is good.”

I normally agree with most everything Walter Williams says, but not this statement. Too often, defenders of capitalism go overboard in defending pejorative phrases, such as “greed is good” or, in the case of Ayn Rand, her book title The Virtue of Selfishness. But selfishness is not a virtue, nor is greed, whether in business or finance. Selfishness leads to unethical behavior — deceptive advertising, fraud, and even theft. It often means taking advantage of another person. Greed and selfishness could land you in jail.

Adam Smith’s Model of Enlightened Self-Interest

Adam Smith, the father of free-market capitalism, did not write approvingly of selfishness or greed. He favored enlightened self-interest and industriousness. He believed that his “system of natural liberty,” his phrase for capitalism, would actually reduce greed, selfishness and fraud. Commercial society, he said, encourages people to be educated and industrious. It “cultivates patience, industry, fortitude and application of thought.” The fear of losing customers “restrains his frauds and corrects his negligence,” Adam Smith wrote in The Wealth of Nations. In contrast to political societies, which depend on flattery, favoritism and deceit, capitalist societies foster self-control, cooperation, punctuality, benevolence and deferred gratification.

Financial Advice: Don’t Get Greedy!

In the financial field, we know that the two greatest enemies to profits are fear and greed. Contrarians take advantage of inexperienced investors who panic when prices are dropping and often sell out in desperation at the bottom. Unseasoned investors also tend to buy heavily at the top, only to see their investments disappear. In short, greed is a disaster for investors. This is a vital lesson given the high-wire act Wall Street is following these days, especially with regard to Internet stocks.

The Real Significance of the Millennium

A friend of mine wrote me saying that the year 2000 was no big deal, and this new millennium was nothing unusual in terms of other calendars: For Moslems, it was 1420, for Jews it was 5760, for Buddhists it was 5119, etc. Well, he’s wrong. There is no universal celebration of the Moslem, Jewish or Buddhist calendar, yet on New Year’s Eve, what did we witness on television? Magnificent celebrations across the globe even in China, Israel, Africa and other places that are not Christian. Why? Western capitalism, which uses the Christian calendar, has captured the world — in business, in dress, in culture.

Economics on Trial
IDEAS ON LIBERTY
January 2000

Economics for the 21st Century
by Mark Skousen

“Nature has set no limit to the realization of our hopes.” — Marquis De Condorcet

Recently I came across the extraordinary writings of the Marquis de Condorcet (1743-94), a mathematician with an amazing gift of prophecy in l`age des lumieres. Robert Malthus (1766-1834) ridiculed Condorcet’s optimism in his famous Essay on Population (1798). Today Malthus is well known and Condorcet is forgotten. Yet it is Condorcet who has proven to be far more prescient.

In an essay written over 200 years ago, translated as “The Future Progress of the Mind,” Condorcet foresaw the agricultural revolution, gigantic leaps in labor productivity, a reduced work week, the consumer society, a dramatic rise in the average life span, medical breakthroughs, cures for common diseases, and an explosion in the world’s population.

Condorcet concluded his essay with a statement that accurately describes the two major forces of the twentieth century — the destructive force of war and crimes against humanity, and the creative force of global free-market capitalism. He wrote eloquently of “the errors, the crimes, the injustices which still pollute the earth,” while at the same time celebrating our being “emancipated from its shackles, released from the empire of fate and from that of the enemies of its progress, advancing with a firm and sure step along the path of truth, virtue and happiness!”(1)

As we enter the year 2000, the public has focused on the history of the twentieth century. Condorcet’s essay reflects two characteristics of this incredible period. First, the misery and vicious injustices of the past hundred years, and second, the incredible economic and technological advances during the same time.

The Crimes of the Twentieth Century

Paul Johnson’s Modern Times, by far the best twentieth-century history of the world, demonstrates powerfully that this century has been the bloodiest of all world history.* Here is a breakdown of the carnage:

Economists use a statistic to measure what national output could exist under conditions of full employment, called Potential GDP Imagine the Potential GDP if the communists, Nazis, and other despots hadn’t used government power to commit those hateful crimes against humanity.

Another great French writer, Frederic Bastiat (1801-50), wrote an essay in 1850 on “What Is Seen and What Is Not Seen.”(3) We do not see the art, literature, inventions, music, books, charity, and good works of the millions who lost their lives in the Soviet gulags, Nazi concentration camps, and Pol Pot’s killing fields.

The Economic Miracle of the Twentieth Century

Yet the twentieth century was also the best of times, for those who survived the wars and repression. Millions of Americans, Europeans, and Asians were emancipated from the drudgery of all-day work by miraculous technological advances in telecommunications, agriculture, transportation, energy, and medicine. The best book describing this economic miracle is Stanley Lebergott’s Pursuing Happiness: American Consumers in the Twentieth Century (Princeton University Press, 1993). Focusing on trends in food, tobacco and alcohol, clothing, housing, fuel, housework, health, transportation, recreation, and religion, he demonstrates powerfully how “consumers have sought to make an uncertain and often cruel world into a pleasanter and more convenient place.” As a result, Americans have increased their standard of living at least tenfold in the past 100 years.

What should be the goal of the economist in the new millennium? Certainly not to repeat the blunders of the past. In the halls of Congress, the White House, and academia, we need to reject the brutality of Marxism, the weight of Keynesian big government, and the debauchery of sound currency by interventionist central banks. Most important, ivory-tower economists need to concentrate more on applied economics (like the work of Lebergott) instead of high mathematical modeling.

As far as a positive program is concerned, the right direction can be found in an essay on the “next economics” written by the great Austrian-born management guru Peter F. Drucker almost 20 years ago: “Capital is the future . . . the Next Economics will have to be again micro-economic and centered on supply.” Drucker demanded an economic theory aiming at “optimizing productivity” that would benefit all workers and consumers.(4) Interestingly, Drucker cited approvingly from the work of Robert Mundell, the newest Nobel Prize winner in economics, who is famed for his advocacy of supply-side economics and a gold-backed international currency.

Beware the Enemy

Market forces are on the march. The collapse of Soviet communism has, in the words of Milton Friedman, turned “creeping socialism” into “crumbling socialism.” But let us not be deluded. Bad policies, socialistic thinking, and class hatred die slowly. Unless we are vigilant, natural liberty and universal prosperity will be on the defensive once again.

We need to deregulate, privatize, cut taxes, open borders, stop inflating, balance the budget, and limit government to its proper constitutional authority. We need to teach, write, and speak out for economic liberalization as never before. Let our goal for the coming era be: freedom in our time for all peoples!

1. Marquis de Condorcet, “The Future Progress of the Human Mind,” The Portable Enlightenment Reader, ed. Isaac Kramnick (Penguin Books, 1995), p. 38. Several of Condorcet’s writings can be found in this excellent anthology.
2. Paul Johnson, Modern Times: The World from the Twenties to the Nineties, rev. ed. (New York: Harper, 1992). The best survey of the horrors of communism is The Black Book of Communism: Crimes, Terror, Repression (Cambridge, Mass.: Harvard University Press, 1999), written by six French scholars, some of whom are former communists.
3. Frederic Bastiat, Selected Essays on Political Economy (Irvington-on-Hudson, N.Y.: Foundation for Economic Education, 1995 [1964]).
4. Peter F. Drucker, Toward the Next Economics, and Other Essays (New York: Harper & Rowe, 1981), pp. 1-21.

WALL STREET JOURNAL — THURSDAY, OCTOBER 9, 1997

By Mark Skousen

In 1992, Harvard Prof. Greg Mankiw was paid an unprecedented advance of $1.1 million to produce the “next Salmuelson”–a successor to Paul Samuelson’s “Economics,” the most successful economics textbook ever written, with more than four million copies sold in 15 editions and 41 foreign translations since 1948. Mr. Mankiw’s 800-page “Principles of Economics” has now been published, to great publicity. And for good reason: Mr. Mankiw has written a revolutionary–or rather, counterrevolutionary–work.

Virtually the entire book is devoted to classical economics, leaving the Keynesian model as an afterthought in the end chapters. Mr. Mankiw’s pedagogy is all the more remarkable given that he considers himself a “neo-Keynesian.” His liberal bias has allowed him to do what no other mainstream economist dares: He has betrayed Keynes.

Almost all economics textbooks published in the past 50 years have taken their cue from Mr. Samuelson, whose major influence was John Maynard Keynes’s “The General Theory of Employment, Interest and Money” (1936). Keynes’s book taught that Adam Smith’s classical model–founded on the virtues of thrift and balanced budgets, laissez faire capitalism and free trade–was a “special” case and only applied in times of full employment.

Keynes’s model portrayed the market as a driver without a steering wheel, a driver that could push the economy off the road at any time. He taught that the economy needed a large and activist government to steer it on the road of full employment. Keynesianism, or the “new economics,” became widespread–the “general” theory.

Modern economics textbooks thus focused primarily on the ups and downs of the capitalist system and how government policy could attempt to ameliorate the business cycle. They include many chapters studying cyclical fluctuations, while burying the study of economic growth and development–otherwise known as supply-side economics–in the back pages. Now Mr. Mankiw has changed all that, putting classical economics back at the forefront, where it belongs.

This is more than some free-market economists have been able to accomplish in tile past. James Gwartney and Richard Stroup, authors of “Economics: Private and Public Choice” (Dryden, 1997), don’t believe in the Keynesian model of aggregate supply and aggregate demand, or AS-AD, but they were forced to include it by their publisher’s review board, which consists of mainstream economists. Roger LeRoy Miller, author of another best-selling textbook, “Economics Today” (Addison-Wesley, 1997), told me, “AS-AD is a bunch of nonsense, but I’m required to teach it.” (One small victory: Paul Heyne refused to put AS-AD in his “The Economic Way of Thinking” (Prentice-Hall, 1997) and got away with it because he writes for a niche market.)

So, in a Nixon-goes-to-China twist, it took a Keynesian to accomplish what the free-market economists couldn’t–relegating Keynesian models to a minor role in textbooks.

Mr. Mankiw calls his classical model “the real economy in the long run.” His textbook, published by Harcourt Brace’s Dryden Press, teaches that increases in government spending crowd out private capital, producing higher interest rates. Higher thrift and greater savings produce lower interest rates and higher economic growth. Unemployment is caused not by greedy industrialists, but by minimum wage laws, collective bargaining, unemployment insurance and other regulations that raise the cost of labor.

Mr. Mankiw even approvingly quotes Milton Friedman: “inflation is always and everywhere a monetary phenomenon”–not the product of rising labor or supply costs, as many Keynesians believe. In fact, Mr. Mankiw cites Mr. Friedman more than he cites Keynes.

This is not to say that Mr. Mankiw’s textbook isn’t without a few sins of omission. He fails to tell students about the great postwar economic miracles of Japan, Germany, Hong Kong, Singapore and Chile. He also ignores the current debate over Social Security privatization. And there are no references to the great Austrian economists Ludwig von Mises and F.A. Hayek, or to Nobel laureate James Buchanan and the public choice theory he espouses.

But these complaints are small compared with the book’s overall message, that classical economics is now the “general” theory and Keynesian economics is the ”special” case. Amazingly, Mr. Mankiw doesn’t mention most of the standard Keynesian analysis: No “consumption function,” no “Keynesian cross,” no “propensity to save,” no “paradox of thrift”– and only one short reference to the “multiplier”!

That’s quite a feat for Mr. Mankiw, a man who named his dog Keynes.

Economics on Trial – THE FREEMAN – JANUARY 1997

By Mark Skousen

“What makes it [economics] most fascinating is that its fundamental principles are so simple that they can be written on one page, that anyone can understand them, and yet very few do.”1
–Milton Friedman

The above statement by Friedman got me thinking: Is it possible to summarize the basic principles of economics in a single page? After all, Henry Hazlitt gave us a masterful summary of sound principles in Economics in One Lesson. Could these concepts be reduced to a page?

Friedman himself did not attempt to make a list when he made this statement in a 1986 interview. After completing a preliminary one-page summary of economic principles, I sent him a copy. In his reply, he added a few of his own, but in no way endorses my attempt.

After making this list of basic principles (see the next page), I have to agree with Friedman and Hazlitt. The principles of economics are simple: Supply and demand. Opportunity cost. Comparative advantage. Profit and loss. Competition. Division of labor. And so on.

In fact, one professor even suggested to me that economics can be reduced to one word: “price.” Or maybe, I suggested alternatively, “cost.” Everything has a price; everything has a cost.

Additionally, sound economic policy is straightforward: Let the market, not the state, set wages and prices. Keep government’s hands off monetary policy. Taxes should be minimized. Government should do only those things private citizens can’t do for themselves. Government should live within its means. Rules and regulations should provide a level playing field. Tariffs and other barriers to trade should be eliminated as much as possible. In short, government governs best which governs least.

Unfortunately, economists sometimes forget these basic principles and often get caught up in the details of esoteric model-building, high theory, academic research, and mathematics. The dismal state of the profession was expressed recently by Arjo Klamer and David Colander, who, after reviewing graduate studies at major economics departments around the country, asked, “Why did we have this gut feeling that much of what went on there was a waste?” 2

On the following page is my attempt to summarize the basic principles of economics and sound economic policy. If anyone has any suggested improvements, I look forward to receiving them.

ECONOMICS IN ONE PAGE

1. Self-interest: “The desire of bettering our condition comes with us from the womb and never leaves till we go into the grave” (Adam Smith). No one spends someone else’s money as carefully as he spends his own.

2. Economic growth: The key to a higher standard of living is to expand savings, capital formation, education, and technology.

3. Trade: In all voluntary exchanges, where accurate information is known, both the buyer and seller gain; therefore, an increase in trade between individuals, groups, or nations benefits both parties.

4. Competition: Given the universal existence of limited resources and unlimited wants, competition exists in all societies and cannot be abolished by government edict.

5. Cooperation: Since most individuals are not self-sufficient, and almost all natural resources must be transformed in order to become usable, individuals–laborers, landlords, capitalists, and entrepreneurs–must work together to produce valuable goods and services.

6. Division of labor and comparative advantage: Differences in talents, intelligence, knowledge, and property lead to specialization and comparative advantage by each individual, firm, and nation.

7. Dispersion of knowledge: Information about market behavior is so diverse and ubiquitous that it cannot be captured and calculated by a central authority.

8. Profit and loss: Profit and loss are the market mechanisms that guide what should and should not be produced over the long run.

9. Opportunity cost: Given the limitations of time and resources, there are always trade-offs in life. If you want to do something, you must give up other things you may wish to do. The price you pay to engage in one activity is equal to the cost of other activities you have forgone.

10. Price theory: Prices are determined by the subjective valuations of buyers (demand) and sellers (supply), not by any objective cost of production; the higher the price, the smaller the quantity purchasers will be willing to buy and the larger the quantity sellers will be willing to offer for sale.

11. Causality: For every cause there is an effect. Actions taken by individuals, firms, and governments have an impact on other actors in the economy that may be predictable, although the level of predictability depends on the complexity of the actions involved.

12. Uncertainty: There is always a degree of risk and uncertainty about the future because people are often reevaluating, learning from their mistakes, and changing their minds, thus making it difficult to predict their behavior in the future.

13. Labor economics: Higher wages can only be achieved in the long run by greater productivity, i.e., applying more capital investment per worker; chronic unemployment is caused by government fixing wage rates above equilibrium market levels.

14. Government controls: Price-rent-wage controls may benefit some individuals and groups, but not society as a whole; ultimately, they create shortages, black markets, and a deterioration of quality and services. There is no such thing as a free lunch.

15. Money: Deliberate attempts to depreciate the nation’s currency, artificially lower interest rates, and engage in “easy money” policies inevitably lead to inflation, boom-bust cycles, and economic crisis. The market, not the state, should determine money and credit.

16. Public finance: In all public enterprises, in order to maintain a high degree of efficiency and good management, market principles should be adopted whenever possible: (1) Government should try to do only what private enterprise cannot do; government should not engage in businesses that private enterprise can do better; (2) government should live within its means; (3) cost-benefit analysis: marginal benefits should exceed marginal costs; and (4) the accountability principle: those who benefit from a service should pay for the service.

Endnotes:
1. Quoted in interview, Lives of the Laureates, William Breit and Roger W. Spencer, eds. (Cambridge, Mass.: MIT Press, 1986), p.91.
2. Arjo Klamer and David Colander, The Making of an Economist (Boulder, Colo.: Westview Press, 1990), p. xiv. See also David Colander and Reuven Brenner, Educating Economists (Ann Arbor: University of Michigan Press, 1992).