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, 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.

Economics on Trial – THE FREEMAN – JANUARY 1997

By Mark Skousen

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

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

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

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

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

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

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

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

ECONOMICS IN ONE PAGE

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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