“The big cannon should be fiscal policy [more deficit spending].” — Peter Diamond, Nobel Prize Economist and New Fed Member

Every year I attend (and sometimes speak) at the American Economic Association (AEA) meetings, where the top economists meet and present papers on current issues. In the past, I’ve confronted Fed chairman Ben Bernanke, government officials, and Nobel laureates with tough questions.

This year’s conference was held in Chicago, home of the famed free-market Chicago School of Economics. After the financial crisis of 2008, the Chicago school has been under assault, and there was a session on “Has the Chicago School Emerged from the Crisis Unscathed?” Clearly not, the panelists concluded.

Peter Diamond’s Solution to the Unemployment Problem: Tax (the Rich) and Spend!

Panels are always the most provocative, and usually involved famous people. This year the panels were dominated by Keynesian Nobel Prize winners such as Paul Krugman and Peter Diamond. Diamond was just appointed by President Obama to be a new Fed member. A major topic at this year’s conference was the lousy employment numbers. The unemployment rate is 8.5%, and more importantly, job openings are falling. Apparently the unemployed are dropping out of the labor force and giving up.

In a popular session, “What Happened to the US Employment Miracle,” the panelists agreed that the employment miracle ended around 2000, even before the 2008 crisis. And 10.6 million jobs will be needed just to get back to 2007 levels. Chicago economist Steven Davis said that despite the clear benefits of a college education, men are not responding and going to college.

What to do? “The big cannon is now fiscal policy,” Diamond said. He recommended that Washington spend more and run even deeper deficits, preferably on education, R&D, and infrastructure, not foreign wars. And he meant “now is the time to act to get people back to work.”

More than $1.7 trillion a year? Aren’t we risking default like Europe? Apparently not. “There is no imminent debt problem in the United States as there is in Europe,” he responded.

Since he was headed to the Fed, I asked him what he would recommend Bernanke do to stimulate the economy. “Should we inflate our way out?”

“There is no inflation problem today,” he said. Meaning: Get the printing presses going 24/7!

I asked Diamond and other experts on why the employment market was so stagnant. Was it due to excessive regulation (ObamaCare, Sarbanes-Oxley, Dodd-Frank, minimum wage)? They said “no” to all these reasons. But higher taxes and unpredictable monetary policy could hamper the recovery in the jobs market.

Diamond recommended that now is time to reform Social Security, before all the baby boomers start getting benefits. I suspect that means higher taxes on the wealthy and raising the retirement age — not privatization — but he didn’t go into particulars.

Diamond is an advocate of a sharp increase in the marginal tax rate on wealthy individuals — to as high as 73%, according to the latest issue of the Journal of Economic Perspectives — and without any loopholes.  He says the studies show this high rate won’t hurt incentives. Really?

Krugman Sings the Same Tune

Paul Krugman (see photo) echoed Diamond. He told me that the only option left open now is “more massive deficit spending.”

What about the fear that we are headed toward default European style?

“Not a chance,” he replied. “We’re years away.” He pointed out that Treasury bonds are still rising, so there’s no worry. (10 year bond yield is under 2%!)

I pointed to numerous examples of developed countries (Canada, Sweden, New Zealand) that had cut spending and reduced their deficits, and their economies flourished. “Not relevant!” he exclaimed. “None of these countries were suffering from a severe recession.”

Would he favor a cut in the corporate tax rate, as advocated even by Democrats? “No,” he said emphatically. In fact, he supports a tax increase on wealthy Americans, up to 50% without loopholes.

Sadly, these are the kind of economists who President Obama is listening to. Can we afford another four years of tax and spend? It’s scary.

Robert Shiller and the Real Estate Market

Yale economist Robert Shiller is more cordial and open-minded. He was on the platform at an AEA luncheon, along with a dozen or more other economists (why is it that only ivy-league economists are so honored?).

He is famous for his book Irrational Exuberance, wherein he predicted the tops of both the stock market in 2001 and the real estate market in 2006. He is also co-inventor of the Case-Shiller Real Estate Index. I asked him if the index suggested a bottoming pattern. He didn’t know, but the futures market for real estate looked promising.

In fact, a new report states that “the number of improving housing markets nearly doubled,” including Dallas, Denver, and Philadelphia. I’m bullish and have been recommending housing stocks.

Interestingly, Paul Krugman told me that Nouriel Roubini, the notoriously bearish economist from NYU, recently bought a house in the New York area. “That’s a clear sign of a bottom,” Krugman said with some glee.

Bob was kind enough to ask me about my new book. I told him about The Maxims of Wall Street and shared with him some of the Wall Street sayings.

Robert Mundell on the Euro and EU Crisis

I also had a chance to interview free-market economist and Nobel Prize winner Robert Mundell. We were on the same flight together to and from New York. He was appalled by the “crude” Keynesians at the AEA meeting who advocated all-out inflationary policies.

“What about the future of the euro and the Euro zone?” I asked. Mundell is considered the father of the euro.

“Some countries like Greece will have to default on their debt, but the euro is here to stay and the EU will survive,” he predicted. He no doubt would reject out of hand Robert Barro’s op ed in the Wall Street Journal (January 9) that the euro be disbanded. Such an event would undoubtedly cause a stock market crash.

I interviewed Larry Summers, former president of Harvard and recently President Obama’s top economist. (See photo.) I asked if he it was true that no president has ever been re-elected with an unemployment rate over 8%, and he said, “It’s not so much the rate as the direction of the unemployment rate.”  If it’s headed down, that’s positive for Obama.

China: Threat to the West?

Summers participated in an high-powered panel on “The United States and China” with Robert Mundell, Gary Becker, and Robert Zoellick, the new president of the World Bank. It was a lively session moderated by Fordham professor Dominick Salvatore. Gary Becker said that China is surpassing us rapidly in education. While our graduation rates are declining, theirs is increasing. Our immigration policy is biased against skilled workers.

Robert Mundell and Larry Summers agreed that the rise of China is “the greatest fact of the 21st century,” and China’s GDP could surpass ours in ten years or less. But both Summers and Becker warned not to extrapolate too much, recalling that pundits predicted in the 1960s that the Soviet Union would bury us economically, and in the 1980s Japan would dominate the world. Neither prediction came true.

Robert Zoellick noted that when he visited China, the Chinese officials were concerned not to develop into an excessive welfare state like Europe. But he warned that there is little dialog between the US and China on China’s growing political/military side — a real danger.

I was the only one who was given the opportunity to ask a question at the end of the two hour session. I asked them what their reaction was to the China bashing that Mitt Romney, Donald Trump and other Republicans are doing, especially Trump’s advocacy of a 25% tariff on all Chinese imports?

All four panelists responded. Robert Mundell said it would be a financial disaster, like an atomic bomb hitting the world. “Besides,” he said, “It would be illegal under GATT rules.” The other panelists agreed that the China bashing was “bad rhetoric” that hopefully would not carry over if they won the presidency.

Tour of the Exhibit Hall and Book Publishers

It’s always fun to tour the exhibit hall and meet with all the publishers here in the States and from the UK. My publisher, ME Sharpe, was there, and told me that my books, The Making of Modern Economics and The Big Three in Economics continue to sell well around the country.

Usually the Cato Institute has a booth at the AEA meetings, but not this year. However, I did see Liberty Fund and the Ayn Rand Institute there. The Institute for Humane Studies (IHS) has a reception Friday night for friends of IHS. It was crowded and a nice opportunity to meet like-minded economists.

Adrián Ravier, a professor of economics at Francisco Marroquin University in Guatemala and the National University of La Pampa in Argentina, has just completed a major interview with me on my life and contributions to economics, finance and the freedom movement.  It will appear in the third volume of “LA ESCUELA AUSTRIACA DESDE ADENTRO: Historias e ideas de sus pensadores,” edited by Adrián Ravier and to be published later this year by Union Editorial in Spain.

Please click here for the entire interview.

BETWEEN CHICAGO AND VIENNA: INTERVIEW WITH MARK SKOUSEN

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

AR: And what was your contribution in that dissertation?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Three uses for my award-winning book, The Making of Modern Economics:

Since winning the Choice Book Award for Outstanding Academic Title, my book has been translated into Spanish, given away to all the board members of a major Russian corporation, and read as a main selection of the Boulder Book Club and the Show-Me Institute (Missouri think tank).

Why all the buzz?

The book is about the great economic thinkers, fully illustrated with lots of pictures, stories, and a cunning plot with Adam Smith as the heroic figure.  Smith and his free-market theories are attacked by the Marxists and Keynesians, but he triumphs in the end.

As Roger Garrison, Auburn professor, states, “My students love The Making of Modern Economics!  Mark Skousen makes the history of economics come alive like no other textbook.”

Available at Amazon.com.

The Cobden Centre is the world’s largest international website devoted to “honest money and social progress” based in London and founded by Toby Baxendale, the libertarian businessman who funds the annual Hayek chair at the London School of Economics.

They have just published a paper by Prof. Ken Schoolland (Hawaii Pacific University) on my contributions to economics: ”Mark Skousen’s Contributions to Economics.”

And on my mother’s birthday!

Cheers, AEIOU,
MSkousen

Great News! Just released:  A new 4th edition of “The Economics of a Pure Gold Standard,” with a new introduction, by the Foundation for Economic Education (FEE).  This edition tells why more central banks fear the dollar as a reserve currency and are buying gold. To obtain a copy, go to amazon:
http://www.amazon.com/Economics-Pure-Gold-Standard-Skousen/dp/1453753087/ref=ntt_at_ep_dpi_7 Only $12 plus S&H.

My book The Making of Modern Economics has just won the Choice Book Award for Outstanding Academic Title for 2009. Choice is the reviewing journal for academic libraries. I was delighted by this surprise announcement, especially for a 2nd edition!

Winner of 2009 Choice Award for Outstanding Academic Title

Some of the unique characteristics of The Making of Modern Economics:

1. A major critique of Karl Marx’s theories of capitalism, labor, imperialism and exploitation, and why most of his predictions have utterly failed. (Many former Marxists report that that this chapter alone converted them to the free market.)
2. Two chapters on Keynes and Keynesian economics, what one economist has called “the most devastating critique of Keynesian economics ever written.”
3. Five full chapters on the Austrian and Chicago schools of free-market economics. It is the only one-volume history of economics written by a free-market economist (all previous histories had been written by socialists, Keynesians and Marxists).
4. How Keynes saved capitalism — from Marxism!
5. Over 100 illustrations, portraits, and photographs.
6. Provocative sidebars, humorous anecdotes, even musical selections reflecting the spirit of each major economist.

Choice Review: “With a supreme, lively blend of economics and sociology, Skousen has magnificently managed to put flesh, blood, and DNA on the skeleton of economics in this survey of great economic thinkers. This new work is must reading for economists who want to acquire professional depth and richness. Essential. All economics collections and all levels of readers.”

Description: Here is a bold, updated history of economics–the dramatic story of how the great economic thinkers built today’s rigorous social science. Noted financial writer and economist Mark Skousen has revised this popular work to provide more material on Adam Smith, Marx, and Keynes, and expanded coverage of Joseph Stiglitz, “imperfect” markets, the financial crisis of 2008, and behavioral economics.

Available in hardback and paperback on Amazon.com.

Other quotes about The Making of Modern Economics:

“Mark’s book is fun to read on every page. I have read it three times, and listened to it on audio tape on my summer hike. It deserves to stay in print for many decades. I love this book and have recommended it to dozens of my friends.” — John Mackey, CEO/President, Whole Foods Market

“I champion Skousen’s new book to everyone. I keep it by my bedside and refer to it often. An absolutely ideal gift for college students.”– William F. Buckley, Jr., National Review

“Mark Skousen has emerged as one of the clearest writers on all matters economic today, the next Milton Friedman.” –Michael Shermer, Scientific American

“Both fascinating and infuriating….engaging, readable, colorful…”–Foreign Affairs

“Provocative, engaging, anything but dismal.”–N. Gregory Mankiw, Harvard University

“Lively…amazing…good quotations!” –Journal of Economic Perspectives

“One of the most original books ever published in economics.”–Richard Swedberg, University of Stockholm

“Lively and accurate, a sure bestseller. Skousen is an able, imaginative and energetic economist.” — Milton Friedman, Hoover Institution

“Having no previous interest in economics, I was honestly surprised to find your book so captivating.” –Haila Williams, Production Manager, Blackstone Audio Books

“Skousen gets the story ‘right’ and does it in an entertaining fashion, without dogmatic rantings.” –Peter Boettke, George Mason University

“One of the most readable ‘tell all’ histories of the 20th century.”–Richard Ebeling, Hillsdale College

“I couldn’t put it down! The musical accompaniments for each chapter are a wonderful touch. Humor permeates the book and makes it accessible like no other history. It will set the standard.”–Steven Kates, chief economist, Australian Chamber of Commerce

“The most fascinating, entertaining and readable history I have ever seen. I highly recommend it for translation abroad.”–Ken Schoolland, Hawaii Pacific University

“My students love The Making of Modern Economics! Mark Skousen makes the history of economics come alive like no other textbook.”– Roger W. Garrison, Auburn University.

“It’s unputdownable!”–Mark Blaug, University of Amsterdam

“Skousen is the only economist I know who I can understand. He writes for the common man!” — Dr. Laurence Hayek, U. K.

“Mark Skousen has a genius for explaining complex issues in a clear way and connecting ideas. He is the Henry Hazlitt of our time.” –Steve Mariotti, President, NFTE

“Mark Skousen is a great economist, great philosopher, great entrepreneur, and great friend. He should win the Nobel in economics.” — Steve Forbes

Available in hardback and paperback on Amazon.com.

Click here to purchase The Making of Modern Economics by Mark Skousen

From an online book review on BillyBush.Net:

I recently finished “The Making of Modern Economics” by Mark Skousen.  I found this book quite intriguing.  It provides a powerful foundation and historical background to economic thought by offering the histories of the individuals that most contributed to modern schools of economics and public policy.

Mark Skousen and Milton Friedman at lunch

I was at the New Orleans Investment Conference when I learned that free-market economist extraordinaire Milton Friedman, died on November 16. He was a dear friend. I was probably the last person to go out to lunch with Milton. We met at his favorite restaurant in San Francisco, where I showed him a picture of him standing next to John Kenneth Galbraith, the premier Keynesian and welfare statist of the 20th century. Galbraith towered over the diminutive Friedman. Beneath the picture was a funny line by George Stigler: “All great economists are tall. There are two exceptions: John Kenneth Galbraith and Milton Friedman.” Milton was so pleased with the photo and caption that he sent it to all his friends only two weeks before his passing.

“All great economists are tall. There are two exceptions: John Kenneth Galbraith and Milton Friedman.” –George J. Stigler

George Stigler, Milton Friedman and John Kenneth Galbraith

(Left to right: George Stigler, Milton Friedman, John Kenneth Galbraith.
Creation of Mark Skousen. Technical assistance by James Durham.)

Milton had just turned 94, yet his mind was sharp. We discussed the latest Nobel Prize in economics. He said, “We’re running out of good names.” What about the new field of behavior economics that Richard Thaler (Chicago), Robert Shiller (Yale), and Jeremy Siegel (Wharton)? “Yes,” he agreed. “They are making an important contribution. Siegel worked with me at Chicago in the 1970s and is doing brilliant work.”

I asked Milton if he wouldn’t mind giving me a blurb for my next book, “The Big Three in Economics.” He loved my previous history, “The Making of Modern Economics,” and agreed to give me a quote. It saddens me to know he never got to it.

For the past few years, he walked with a cane. He suffered from pain in his legs, a weak heart (after two heart surgeries in the 1980s), and was losing his eye sight. As we left, I asked him, “Do you think you’ll live to be 100?” He answered quickly, “I hope not!”

A few days later he fell and was taken to the hospital. He died a couple weeks later of a heart attack.

Friedman was not only a great economist, but a memorable quotesmith. Besides the standard bearers, such as “Inflation is always and everywhere a monetary phenomenon” and “There’s no such thing as a free lunch,” here are some others less well known:

“Competition is a tough weed, but freedom is a rare and delicate flower.” — (with George J. Stigler)

“If a tax cut increases government revenues, you haven’t cut taxes enough.”

“I favor tax reductions under any circumstances, for any excuse, for any reason, at any time.”

“A society that puts equality ahead of freedom will end up with neither equality or freedom.”

“Nothing is so permanent as a temporary government program.”

“Inflation is taxation without legislation.”

“The economy and the stock market are two different things.”

“If government is to exercise power, better in the county than in the state, better in the state than in Washington.”

“The great advances of civilization, whether in architecture or painting, in science or in literature, in industry or agriculture, have never come from centralized government.”

“The minimum wage law is one of the most, if not the most, anti-black laws on the statute books.”

“Nobody spends somebody else’s money as carefully as he spends his own.”

“The government solution to a problem is usually as bad as the problem.”

I will miss our lunches and dinners together. He was one of the most unforgettable people I ever met.

In liberty, AEIOU, Mark

P. S.  At our luncheon last month, Milton Friedman and I also talked about the upcoming FreedomFest.  He was a big fan and was looking forward to it. He wrote me this statement to all freedom lovers:  “FreedomFest is a great place to talk, argue, listen, celebrate the triumphs of liberty, assess the dangers to liberty, and provide that eternal vigilance that is the price of liberty. We have so much to celebrate but also much to be concerned about.”  We are going to have a special tribute to Milton Friedman at FreedomFest 2007, set for July 5-7, 2007, at Bally’s in Las Vegas.  For more information, go to www.freedomfest.com.

Personal Snapshots
Forecasts & Strategies
June 2002

“Economic repression breeds intolerance, fanaticism and terrorism.”

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

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

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

World Economic Freedom Map from the Fraser Institute

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

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

The Biggest Shock: Where Is the Red?

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

The Most Important Lesson in the War on Terrorism

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

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

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

Our Goal at FEE: Color the World Blue!

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

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

FEE Fest 2002: Special Report

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

—Attendee, FEE National Convention

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

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

Audiotapes/Videos Now Available

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

SKOUSEN’S PUZZLER FOR JUNE:

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

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

Ideas On Liberty
Economics on Trial
May 2001

by Mark Skousen

Adam Smith, that is. Having just completed writing a history of economics,1 I have concluded that, despite the protestations of Murray Rothbard and other detractors, the eighteenth-century moral philosopher and celebrated author of The Wealth of Nations deserves to be named the founding father of modern economics.

The reason: Adam Smith is the first major figure to articulate in a profound way what has become known as the first fundamental theorem of welfare economics: that the invisible hand of competition automatically transforms self-interest into the common good. George Stigler rightly labels Smith’s model of laissez-faire capitalism (Smith never used the phrase) the “crown jewel” of The Wealth of Nations and “the most important substantive proposition in all of economics.” He states, “Smith had one overwhelmingly important triumph: he put into the center of economics the systematic analysis of the behavior of individuals pursuing their self-interests under conditions of competition.”2

In short, Smith’s thesis is that a “system of natural liberty,” an economic system that allows individuals to pursue their own self-interest under conditions of competition and common law, would be a self-regulating and highly prosperous economy. Eliminating restrictions on prices, labor, and trade meant that universal prosperity could be maximized through lower prices, higher wages, and better products. Smith assured the reader that his model would result in “universal opulence which extends itself to the lowest ranks of the people.”3

Indeed it has. Published in 1776, The Wealth of Nations was the intellectual shot heard around the world, a declaration of economic independence to go along with Thomas Jefferson’s declaration of political independence. It was no accident that the industrial revolution and sharply higher economic growth began in earnest shortly after its publication. As Ludwig von Mises declares, “It paved the way for the unprecedented achievements of laissez-faire capitalism.”4

For or Against Smith

The most amazing discovery I made in researching and writing over the past three years is that every major economic figure—whether Marx, Mises, Keynes, or Friedman—could be judged by his support of or opposition to Adam Smith’s invisible-hand doctrine. Karl Marx, Thorstein Veblen, John Maynard Keynes, and even British disciples Thomas Robert Malthus and David Ricardo denigrated Adam Smith’s classical model of capitalism, while Alfred Marshall, Irving Fisher, Ludwig von Mises, and Milton Friedman, among others, remodeled and improved on Smithian economics.

For example, Keynes is unsympathetic to Adam Smith’s worldview. “It is not true that individuals possess a prescriptive ‘natural liberty’ in their economic activities. . . . Nor is it true that self-interest generally is enlightening. . . . Experience does not show that individuals, when they make up a social unit, are always less clear-sighted than when they act separately.”5 The basic thesis of Keynes’s magnum opus, The General Theory of Employment, Interest, and Money (1936), is that laissez-faire capitalism is inherently unstable and requires heavy state intervention to survive. Keynesian disciple Paul Samuelson correctly understood the true meaning of Keynes: “With respect to the level of total purchasing power and employment, Keynes denies that there is an invisible hand channeling the self-centered action of each individual to the social optimum.”6 Thus, I conclude that Keynesian economics, rather than its savior, is an enemy of Adam Smith’s system of natural liberty.

Karl Marx went even further. Instead of creating a system of natural liberty, Marx set out to destroy it. Modern-day Marxist John Roemer agrees. The “main difference” between Smith and Marx is: “Smith argues that the individual’s pursuit of self-interest would lead to an outcome beneficial to all, whereas Marx argued that the pursuit of self-interest would lead to anarchy, crisis, and the dissolution of the private property-based system itself. . . . Smith spoke of the invisible hand guiding individual, self-interested agents to perform those actions that would be, despite their lack of concern for such an outcome, socially optimal; for Marxism the simile is the iron fist of competition, pulverizing the workers and making them worse off than they would be in another feasible system, namely, one based on the social or public ownership of property.”7

Adam Smith as a Heroic Figure

By measuring economists against a single standard, Adam Smith’s invisible-hand doctrine, I found a fresh way to unite the history of economic thought. Virtually all previous histories of economics, including Robert Heilbroner’s popular work, The Worldly Philosophers, present the story of economics as one conflicting idea after another without resolution or a running thread of truth. This hodgepodge approach to history leaves the reader confused and unable to separate the wheat from the chaff.

My approach places Adam Smith and his system of natural liberty at the center of the discipline. Think of it as a story of high drama with a singular heroic figure. Adam Smith and his classical model face one battle after another against the mercantilists, socialists, and other enemies of liberty. Sometimes even his “dismal” disciples (Malthus, Ricardo, and Mill) wound him. Marx and the radical socialists attack him with a vengeance and leave him for dead, only to have him resuscitated by the leaders of the marginalist revolution (Menger, Jevons, and Walras) and raised up to become the inspiration of a whole new science.

But the “neo-classical” model of capitalism faced its greatest threat from the Keynesian revolution during the Great Depression and the postwar era. Fortunately, the story has a good ending. Through the untiring efforts of free-market advocates, especially Milton Friedman and F. A. Hayek, Adam Smith’s model of capitalism is re-established and in the end triumphs. As Milton Friedman proclaims, “To judge from the climate of opinion, we have won the war of ideas. Everyone-left or right-talks about the virtues of markets, private property, competition, and limited government.”8

Long live Adam Smith!

1. The Making of Modern Economics (Annonk, N.Y.: M. E. Sharpe Publishers, 2001).
2. George Stigler, “The Successes and Failures of Professor Smith,” Journal of Political Economy, December 1976, p. 1201.
3. Adam Smith, The Wealth of Nations (New York: Modern Library, 1965 [1776]), p. 11.
4. Ludwig von Mises, “Why Read Adam Smith Today,” in The Wealth of Nations Washington, D.C.: Regnery, 1998), p. xi.
5. John Maynard Keynes, “The End of Laissez-Faire,” Essays in Persuasion (New York: Norton, 1963 [1931]), p. 312. Keynes’s speech was given in 1926, a full decade before The General Theory came out.
6. Paul A. Samuelson, “Lord Keynes and the General Theory,” The New Economics, ed. Seymour Harris (New York: Knopf, 1947), p.151.
7. John E. Roemer, Free to Lose (Cambridge, Mass.: Harvard University Press, 1988), pp. 2-3. Note the title, imitative, albeit negatively, of Milton and Rose Friedman’s popular Free to Choose (New York: Harcourt Brace Jovanovich, 1980).
8. Milton and Rose Friedman, Two Lucky People (Chicago: University of Chicago Press, 1998), p. 582.

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.

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
February 2000

by Mark Skousen

“After occupying center stage during the 1980s, the supply-side approach to economics disappeared when Ronald Reagan left office.” – Paul Samuelson (1)

Until Robert Mundell won the Nobel Prize in 1999, supply-side economics had been a school without honor among professional economists. Established textbook writers such as Paul Samuelson (MIT), Greg Mankiw (Harvard), and Alan Blinder (Princeton) frequently condemned the supply-side idea that marginal tax cuts increase labor productivity, or that tax cuts stimulate the economy sufficiently to increase government revenues.

The Laffer Curve — the theory that when taxes are too high, reducing them would actually raise tax revenue — is dismissed. “When Reagan cut taxes after he was elected, the result was less revenue, not more,” reports Mankiw in his popular textbook.(2) Never mind that tax revenues actually rose significantly every year of the Reagan administration; the perception is that supply-side economics has been discredited. Arthur Laffer isn’t even listed in the 1999 edition of Who’s Who in Economics, although the Laffer Curve is frequently discussed in college textbooks.(3)

Now that is all about to change with Columbia University economist Robert A. Mundell’s Nobel Prize in economics. According to Jude Wanniski, Mundell, 67, is the theoretical founder of the Laffer Curve.(4) In the early 1970s he told Wanniski, “The level of U.S. taxes has become a drag on economic growth in the United States. The national economy is being choked by taxes–asphyxiated.”(5)

Mundell offered a creative solution to stagflation (inflationary recession) of the 1970s: impose a tight-money, high-interest rate policy to curb inflation and strengthen the dollar, and slash marginal tax rates to fight recession. Mundell’s prescription was adopted by Reagan and Fed chairman Paul Volcker in the early 1980s. “There’s been no downside to tax cuts,” he told reporters recently.

Yet, oddly enough, Mundell isn’t accorded much attention compared to supply-siders Laffer, Paul Craig Roberts, and Martin Anderson. In their histories of Reaganomics, Roberts and Anderson mention Mundell only once.(6) Two major studies of supply-side economics in 1982 don’t cite his works at all. Nevertheless, Mundell has accomplished a great deal worth lauding. In fact, he is considered the most professional scholar of the supply-siders.

Robert Mundell has had an amazing professional career. A Canadian by birth, he has attended, taught, or worked at over a dozen universities and organizations, including MIT, University of Washington, Chicago, Stanford, Johns Hopkins, the Brookings Institution, Graduate Institute of International Studies in Geneva, Remnin University of China (Beijing), and the IMF. Before going to Columbia in 1974, he was a professor at the University of Chicago and editor of The Journal of Political Economy. Thus the Chicago school can once again claim a Nobel, although Mundell differs markedly from the monetarist school.

Monetary vs. Fiscal Policy

Famed monetarist Milton Friedman says, “I have never believed that fiscal policy, given monetary policy, is an important influence on the ups and downs of the economy.”(7) Supply-siders strongly disagree. Cutting marginal tax rates and slowing government spending can reduce the deficit, lower interest rates, and stimulate long-term economic growth.

Mundell counters, “Monetary policy cannot be the engine of higher noninflationary growth. But fiscal policy-both levers of it can be. . . . The U.S. tax-and-spend system reduces potential growth because it penalizes success and rewards failure.”

Mundell favors spending on education, research and development, and infrastructure rather than government welfare programs. He advocates reducing top marginal income tax rates, slashing the capital gains tax, and cutting the corporate income tax. Such policies would sharply raise saving rates and economic growth-”an increase in the rate of saving by 5% of income (GDP), say from 10% of income to 15%, would increase the rate of [economic] growth by 50%, i.e., from 2.5% to 3.75%.”(8)

Mundell as Gold Bug

Supply-siders also take a different approach to monetary policy. They go beyond the monetarist policy of controlling the growth of the money supply. Unlike the monetarists, supply-siders like Mundell resolutely favor increasing the role of gold in international monetary affairs. “Gold provides a stabilizing effect in a world of entirely flexible currencies,” he told a group of reporters in New York in November 1999. According to Mundell, gold plays an essential role as a hedge against a return of inflation. He predicted that the price of gold could skyrocket in the next decade, to as high as $6,000 an ounce, if G7 central banks continue to expand the money supply at 6 percent a year. “I do not think this an outlandish figure. Gold is a good investment for central bankers.” He did not foresee central banks selling any more gold. “Gold will stay at center stage in the world’s central banking system,” he said.

In awarding Mundell the prize, the Bank of Sweden recognized him as the chief intellectual proponent of the euro, the new currency of the European Community. He considers the euro a super-currency of continental dimensions that will challenge the dollar as the dominant currency. The benefits of a single currency include lower transaction costs, greater monetary stability, and a common monetary policy. Mundell advocates an open global economy, expanded foreign trade, and fewer national currencies. Ultimately, he envisions a universal currency backed by gold as the ideal world monetary system. Under a strict gold standard, “real liquidity balances are generated during recessions and constrained during inflations.”(9)

Mundell is an optimist as we enter a new century. He’s bullish on the global stock markets, the gold standard, globalization, and downsized government. He’s my kind of economist.

1. Paul Samuelson and William D. Nordhaus, Economics, 16^th ed. (Boston: Irwin/McGraw-Hill. 1998) p. 640.
2. N. Gregory Mankiw, Principles of Economics (Fort Worth, Tex. Harcourt/Dryden Press, 1998), p. 166.
3. Mark Blaug, compiler of Who’s Who in Economics (Northampton, Mass. Edward Elgar, 1999), determines the top 1,000 names in the book based on frequency of citation in scholarly journals. Among the famous economists missing the cut are Arthur Laffer, Paul Craig Roberts, and Murray N. Rothbard.
4. Jude Wanniski, The Way the World Works, rev. and updated (New York: Simon and Schuster, 1983), p. x.
5. Wanniski, “It’s Time to Cut Taxes,” Wall Street Journal, December 11, 1974.
6. Paul Craig Roberts, The Supply-Side Revolution (Cambridge, Mass.: Harvard University Press, 1984) and Martin Anderson, Revolution (Stanford, Calif.: Hoover Institution Press, 1990).
7. Milton Friedman, “Supply-Side Policies: Where Do We Go from Here?” Supply-Side Economics in the 1980s Conference Proceedings (Federal Reserve Bank of Atlanta, 1982), p. 53.
8. Robert A. Mundell, “A Progrowth Fiscal System,” The Rising Tide, ed. Jerry J. Jasinowski (New York: Wiley, 1998), pp. 198, 203-204.
9. Mundell, The New International Monetary System (New York: Columbia University Press, 1977), p. 242.

Economics on Trial
IDEAS ON LIBERTY
February 2000

by Mark Skousen

“After occupying center stage during the 1980s, the supply-side approach to economics disappeared when Ronald Reagan left office.” – Paul Samuelson (1)

Until Robert Mundell won the Nobel Prize in 1999, supply-side economics had been a school without honor among professional economists. Established textbook writers such as Paul Samuelson (MIT), Greg Mankiw (Harvard), and Alan Blinder (Princeton) frequently condemned the supply-side idea that marginal tax cuts increase labor productivity, or that tax cuts stimulate the economy sufficiently to increase government revenues.

The Laffer Curve — the theory that when taxes are too high, reducing them would actually raise tax revenue — is dismissed. “When Reagan cut taxes after he was elected, the result was less revenue, not more,” reports Mankiw in his popular textbook.(2) Never mind that tax revenues actually rose significantly every year of the Reagan administration; the perception is that supply-side economics has been discredited. Arthur Laffer isn’t even listed in the 1999 edition of Who’s Who in Economics, although the Laffer Curve is frequently discussed in college textbooks.(3)

Now that is all about to change with Columbia University economist Robert A. Mundell’s Nobel Prize in economics. According to Jude Wanniski, Mundell, 67, is the theoretical founder of the Laffer Curve.(4) In the early 1970s he told Wanniski, “The level of U.S. taxes has become a drag on economic growth in the United States. The national economy is being choked by taxes–asphyxiated.”(5)

Mundell offered a creative solution to stagflation (inflationary recession) of the 1970s: impose a tight-money, high-interest rate policy to curb inflation and strengthen the dollar, and slash marginal tax rates to fight recession. Mundell’s prescription was adopted by Reagan and Fed chairman Paul Volcker in the early 1980s. “There’s been no downside to tax cuts,” he told reporters recently.

Yet, oddly enough, Mundell isn’t accorded much attention compared to supply-siders Laffer, Paul Craig Roberts, and Martin Anderson. In their histories of Reaganomics, Roberts and Anderson mention Mundell only once.(6) Two major studies of supply-side economics in 1982 don’t cite his works at all. Nevertheless, Mundell has accomplished a great deal worth lauding. In fact, he is considered the most professional scholar of the supply-siders.

Robert Mundell has had an amazing professional career. A Canadian by birth, he has attended, taught, or worked at over a dozen universities and organizations, including MIT, University of Washington, Chicago, Stanford, Johns Hopkins, the Brookings Institution, Graduate Institute of International Studies in Geneva, Remnin University of China (Beijing), and the IMF. Before going to Columbia in 1974, he was a professor at the University of Chicago and editor of The Journal of Political Economy. Thus the Chicago school can once again claim a Nobel, although Mundell differs markedly from the monetarist school.

Monetary vs. Fiscal Policy

Famed monetarist Milton Friedman says, “I have never believed that fiscal policy, given monetary policy, is an important influence on the ups and downs of the economy.”(7) Supply-siders strongly disagree. Cutting marginal tax rates and slowing government spending can reduce the deficit, lower interest rates, and stimulate long-term economic growth.

Mundell counters, “Monetary policy cannot be the engine of higher noninflationary growth. But fiscal policy-both levers of it can be. . . . The U.S. tax-and-spend system reduces potential growth because it penalizes success and rewards failure.”

Mundell favors spending on education, research and development, and infrastructure rather than government welfare programs. He advocates reducing top marginal income tax rates, slashing the capital gains tax, and cutting the corporate income tax. Such policies would sharply raise saving rates and economic growth-”an increase in the rate of saving by 5% of income (GDP), say from 10% of income to 15%, would increase the rate of [economic] growth by 50%, i.e., from 2.5% to 3.75%.”(8)

Mundell as Gold Bug

Supply-siders also take a different approach to monetary policy. They go beyond the monetarist policy of controlling the growth of the money supply. Unlike the monetarists, supply-siders like Mundell resolutely favor increasing the role of gold in international monetary affairs. “Gold provides a stabilizing effect in a world of entirely flexible currencies,” he told a group of reporters in New York in November 1999. According to Mundell, gold plays an essential role as a hedge against a return of inflation. He predicted that the price of gold could skyrocket in the next decade, to as high as $6,000 an ounce, if G7 central banks continue to expand the money supply at 6 percent a year. “I do not think this an outlandish figure. Gold is a good investment for central bankers.” He did not foresee central banks selling any more gold. “Gold will stay at center stage in the world’s central banking system,” he said.

In awarding Mundell the prize, the Bank of Sweden recognized him as the chief intellectual proponent of the euro, the new currency of the European Community. He considers the euro a super-currency of continental dimensions that will challenge the dollar as the dominant currency. The benefits of a single currency include lower transaction costs, greater monetary stability, and a common monetary policy. Mundell advocates an open global economy, expanded foreign trade, and fewer national currencies. Ultimately, he envisions a universal currency backed by gold as the ideal world monetary system. Under a strict gold standard, “real liquidity balances are generated during recessions and constrained during inflations.”(9)

Mundell is an optimist as we enter a new century. He’s bullish on the global stock markets, the gold standard, globalization, and downsized government. He’s my kind of economist.

1. Paul Samuelson and William D. Nordhaus, Economics, 16th ed. (Boston: Irwin/McGraw-Hill. 1998) p. 640.
2. N. Gregory Mankiw, Principles of Economics (Fort Worth, Tex. Harcourt/Dryden Press, 1998), p. 166.
3. Mark Blaug, compiler of Who’s Who in Economics (Northampton, Mass. Edward Elgar, 1999), determines the top 1,000 names in the book based on frequency of citation in scholarly journals. Among the famous economists missing the cut are Arthur Laffer, Paul Craig Roberts, and Murray N. Rothbard.
4. Jude Wanniski, The Way the World Works, rev. and updated (New York: Simon and Schuster, 1983), p. x.
5. Wanniski, “It’s Time to Cut Taxes,” Wall Street Journal, December 11, 1974.
6. Paul Craig Roberts, The Supply-Side Revolution (Cambridge, Mass.: Harvard University Press, 1984) and Martin Anderson, Revolution (Stanford, Calif.: Hoover Institution Press, 1990).
7. Milton Friedman, “Supply-Side Policies: Where Do We Go from Here?” Supply-Side Economics in the 1980s Conference Proceedings (Federal Reserve Bank of Atlanta, 1982), p. 53.
8. Robert A. Mundell, “A Progrowth Fiscal System,” The Rising Tide, ed. Jerry J. Jasinowski (New York: Wiley, 1998), pp. 198, 203-204.
9. Mundell, The New International Monetary System (New York: Columbia University Press, 1977), p. 242.

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.

Journal of Economic Perspectives

By Mark Skousen

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

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

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

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

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

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

The Keynesian Motif

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

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

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

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

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

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

Anti-saving Views

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

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

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

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

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

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

Evolving: Views on Monetary Policy

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

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

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

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

Defender of an Activist Government

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

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

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

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

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

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

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

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

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

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

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

The Family Tree of Economics: The Mainstream and Marxism

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

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

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

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

Central Planning and Soviet Growth

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

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

Where are the Economic Success Stories?

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

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

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

The Impact of Samuelson’s Textbook

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

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

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

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

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

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

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

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

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

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

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

References

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

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

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

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

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

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

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

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

Footnotes

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

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

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

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

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

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