===== PAGE 1 ===== ST TT — Yo! 13 | Austrian Economics Newsletter THE 1991 MISES UNIVERSITY: ANOTHER YEAR OF EXCELLENCE IN AUSTRIAN ECONOMICS S tanford University was flooded with Austrian school economists from July 7-14, in what has become an annual pilgrimage to present 120 students from all over the world an instructional alternative to mainstream neoclassical thought. The event is the Mises University sponsored by the Ludwig von Mises Institute. Now in its seventh year, the 1991 program was a brilliant success. “The quality of the students was higher than ever,” said Joseph Salerno, professor of economics at Pace University and Mises University faculty mem- - | ber. “They were well read, interested, had excellent questions, and demonstrated outstanding prospects for the future. I don’t know where all these young Austrians keep coming from, but it sure was encour- | aging.” Hans-Hermann Hoppe of the University of Ne- vada, Las Vegas, agreed. “Because of this program, the Austrian school is beginning to represent a strong voice in economics today. These students were serious about economic science. Their minds were open to new approaches. That's what we need to build the school.” “Times sure have changed,” said Murray N. Rothbard, professor of economics at the University of Nevada at Las Vegas and dean of the Mises Univer- sity. “T remember when you could count the Austrian economists on one hand and the interested students on two. Now we've got an army out there, in both fac- ulty and students. What a pleasure. I wish Mises could have seen this.” BULLETIN BOARD These sentiments were echoed by all 17 mem- bers of the faculty. In addition to Rothbard, Hoppe, The 1992 Mises University will be held, and Salerno, the faculty included Robert Batemarco, July 4-11, at Stanford University. For more 4 Marymount College; Walter Block, Holy Cross Col- information contact the Mises Institute, lege; Roy Cordato, Institute for Research on the Eco- Auburn University, Auburn, AL, 36849. nomics of Taxation, and Johns Hopkins University; 5301; (205) 844-2500; fax (205) 844-2583, EEE I ——— ===== PAGE 2 ===== Thomas DiLorenzo, University of Tennessee at Chat- tanooga; John Egger, Towson State University; Roger Garrison, Auburn University; David Gordon, Ludwig von Mises Institute; Jeffrey Herbener, Washington and Jefferson College; Robert Higgs, University of Se- attle; Yuri N. Maltsev, Carthage College; Llewellyn H. Rockwell, Jr., Ludwig von Mises Institute; Justin Raimondo, The Libertarian-Republican; Joe Sobran, Na- tional Review; and Mark Thornton, Auburn Univer- sity. The students had much praise for the faculty. “These professors were simply extraordinary,” said Matthew McDonald of the University of North Texas. “Without a single exception, this was an as- sembly of the most powerful minds I've had the pleasure of studying with.” Lee Kessler of the Uni- versity of Pennsylvania added: “I was looking for- ward to this for a long time, because the Mises University has an outstanding reputation, but this Austrian Economics Newsletter Valume 13, Number 1 CONTRIBUTORS TO THIS ISSUE James P. Philbin is a Mises fellow and graduate student in economics at the University of Nevada, Las Vegas. Gerard Radnitzky is professor of the philosophy of sci- ence at the University of Trier in Germany, George Selgin is an assistant professor of economics at the University of Georgia. STAFF Editor: Mark Thornton/Auburn University Associate Editor: Jeffrey A. Tucker/George Mason University Assistant Editor: Peter G. Klein/University of California, Berkeley Managing Editar: Judith F. Thommasen CORRESPONDENTS Richard R. Hite/George Mason University Amy Marie Marshall{University of Notre Dame James P. Philbin/University of Nevada, Las Vegas Alexander Tabarrok/George Mason University PERMISSIONS AND SUBMISSIONS Change of address requests and subscription requests should be addressed te Austrian Economics Newsletter, Mises Institute, Auburn University, Auburn, AL 36849-5301. Questions pertaining to submissions of articles and book reviews should be addressed to Mark Thornton, Austrian Economics Newsletter, Economics Department, Auburn University, Auburn, AL 36849-5242. Articles that are submitted should be double-spaced and no more than 6 pages in length. Articles that are accepted will be requested on an IBM format diskette, when possi- ble. There is no submission fee. Permission to reprint articles is hereby granted provided full credit and address are given. Copyright © 1991 The Ludwig von Mises Institute, Aubum Univer- sity, Auburn, Al. 36849-5301; (205) 844-2500; fax (205) 844-2583. week surpassed all my expectations.” The conference was open only for full-time stu- dents this year, a change from previous years, “The demand is high, and the quality of applicants is ex- cellent,” said Rockwell. “Admission standards have become rather competitive. I expect this trend to ' continue.” With growth comes diversification in both the students’ achievement levels and their individual in- i terests. The strategy of the Mises University is to ac- commaodate that diversity. That's why the classes are divided into three levels of advancement and cover all aspects of Austrian economics, from the conven- tional to the unconventional. Theoretical discus- sions of money, banking, capital and interest, business cycles, pricing, industrial organization, and more were common. So were methodological and philosophical discussions. But the line-up also in- cluded history, economic policy, and critiques of other schools of thought. An added feature this year was a series of classes in public goods, externalities, and the law and economics literature. Altogether, the Mises University offered 58 classes, 12 small seminars, 4 plenary lectures and dis- cussions, and plenty of time for socializing. This amounts to 146 individual sessions conducted over the course of 7-and-a-half days. Each applicant chose the sessions he or she wanted within a framework that allowed for 40 hours of classroom time, plus seminars and plenary lectures. At any one time, 4 or 5 classes were in session. On two occasions, 12 semi- nars ran simultaneously. “The Mises University is more structurally com- plex than most programs,” said Pat Heckman, the Institute’s vice president for conferences. “But that’s what it takes to give the students what they want. We try to stay on the cutting edge.” Perhaps that’s why, according to Heckman, the Mises Institute is already receiving applications for next year. —— B [Rp — ===== PAGE 3 ===== Most students found it difficult to single out the ideas, it becomes more than a teaching session. It’s one most significant intellectual highlight in a week an academic conference where you really get things shining with them. But David Fitzsimons of the Uni- | done.” versity of Michigan voted for Rothbard’s evening- long survey of American business history, which he described as “the most intellectually compelling pub- lic lecture of my academic life.” What were the controversies this year? Banking and methodological exchanges were themes of the week, but so were discussions of history, other schools of thought, and the most appropriate way to The students thought the lectures were interpret and respond to them. “If anyone thinks great, but they also appreciated the time allowed the Austrian school is static he should attend this for group discussion, both formal and infor- program,” said Cordato. “The school is vibrant and mal. The formal discussion took place in com- changing all the time, as much in our time as in ~~ fortable settings with about 10 students per Menger’s and Bohm-Bawerk's.” & group. For two hours, they traded ideas on What's on the agenda for next year? “We will re- fine and perfect the course offerings, update them in light of new literature, and give other professors a chance to teach,” said Heckman. The academic level of classes will be raised even further, she said, contin- uing a process which has gone on for years. some particular aspect of economics, discussed what's going on in the profession in some area, or talked about the new research scholars are doing. The informal session took place later, with refreshments being served. Mises University 1992 will also add two new fea- tures. First, in the opening session the Mises Insti- tute will show a new documentary about Mises’s life and work, produced and directed by Emmy Award f anyone thinks the Austrian winner Sandra Garritano of San Francisco. The peo- school is static he should attend ple who have seen sneak previews described the film the Mises University. The school as better than anything on PBS. (It will also be avail- LL i able for showing in classrooms around the world.) is vibrant and changing all the The second feature will be two simultaneous panel time, as much in our time as in discussions on various aspects of Austrian school the- Menger’s and Béhm-Bawerk's. ory and policy. “Students are well advised to get their applica- tions in soon for next year’s conference,” Rockwell cautions. It will again be held at Stanford University “You can’t overestimate the importance of this from july 4-11. Full-time students are encouraged to program,” said DiLorenzo. “Not only is it a high- write Pat Heckman at the Mises Institute (Auburn light for the students, but also for the professors. University, Auburn, Alabama 36849) for a more com- When you get so many like-minded people to- plete catalog of course listings and an information gether for a week and an opportunity to exchange packet. a 3 _ -~ ===== PAGE 4 ===== Review Essay THE NEW SUBJECTIVIST REVOLUTION: AN ELUCIDATION AND EXTENSION OF LUDWIG VON MISES’ CONTRIBUTIONS TO ECONOMIC THEORY J. Patrick Gunning Rowman & Littlefield, 1991 George Selgin @® REVIEWED BY GEORGE SELGIN ; and (5) Gunning confuses positivism with institution- i alism and historicism. like to read with pen or pencil in hand, markin ) . . | | pen or penct’ 8 These are the main problems. Minor ones in- passages for emphasis or editorial comment: An ! clude Gunning’s insistence upon coining new ex- asterisk or "NB" marks an especially important pas pressions when perfectly good old ones exist and sage; a check expresses agreement; a question mark . his frequent use of the feminine personal pro- expresses puzzlement at the meaning of a word or : « A . . . noun to refer to “the economist”—this an appar- sentence or paragraph; an exclamation mark signi- : “ves " . . . ent sop to “politically correct” readers who, 1 fies shock or surprise. I stopped marking J. Patrick : ) . i think, must constitute a very small percentage of Gunning's New Subjectivist Revolution somewhere in | ) . ) 2 y | the potential audience for this work. (Most profes- chapter 4, after packing its margins with more ques- Lo, . . . : , . sional economists today are men. As far as [ am tion marks than were in this year’s census survey and ! oo concerned this is not something to gloat about; nev- more exclamation points than might be found in a . . . po 8 . ertheless it is a fact and pronouns should abide by it stack of Batman comics. ! eo. LL. . unless we are to prefer minority to majority rule. Al- That was several months ago. I have since taken ternatively a true individualist may opt for “he or up the book again, vowing to finish it without the dis- | she,” though this construction gets tedious after a tracting influence of a pen or pencil. But the book's while.) contents remained as perplexing and amazing to me 9 as ever. My hand involuntarily crept toward the pen- cil jar. This report is really an admission of failure written instead of a proper review. The central chapters of Gunning’s book, grouped together under the mysterious heading “The Method of Contrasting Images of Functions,” are more concerned with matters of model build- ing and applied theory than with problems of the- ory justification per se. The problem with these chapters is that they consist mainly of statements that are either banal or wrong, The banal state- ments might be justified in an introductory eco- i nomics text, but seem wholly out of place in a work . laying emphasis on a particular approach to eco- nomics. The wrong statements nullify any gain the banal statements may offer in making the book more accessible to non-economists. Gunning for Confusion Why have I failed? One possible explanation is that I have a low threshold for discussions of methodol ogy, having taken an overdose of the stuff in graduate school. I admit to having no desire to write on the subject; I am anxious to escape from what Leland Yeager calls “the curse of methodology.” Neverthe- less I still retain a healthy interest in the subject. I am, moreover, quite sympathetic toward the meth- odological views of Ludwig von Mises, which I my- self once tried to elaborate and defend. So there is nothing, I think, about the topic of Gunning’s book that should make me unfit to review it. It is, instead, Gunning’s presentation that rubs. Re- viewing my marginal notes, I think I have iso- Because statements can so easily be made to ap- lated some of the major problems. They are that pear banal by being stripped out of context, I will (1) Gunning is careless in his statements about eco- stick mainly to listing examples of wrong statements. nomic theory; (2) his terminology belies a misunder- A “market economy” is defined as an economy involy- standing of the praxeological method; (3) he fails ing production, saving, and monetary exchange. Bar- to appreciate (as Mises himself did) the impor- ter, subsistence, and pure-exchange economies are tant difference between methods of historical and thus supposedly “non-market” economies (pp. 57- methods of theoretical investigation; (4) in con- 58). This is nonsensical. Money is defined as “[A] C) nection with (3), Gunning overstates the role of common denominator for exchange,” i.e., a unit of “intuition” in the Misesian approach to theory; account (p. 59). Most economists, including most ===== PAGE 5 ===== Austrian economists, would insist that money must was at least mollified by the thought that a potential, also be a medium of exchange, and that this func- gross misunderstanding of the meaning of consumer tion rather than the unit of account function is most sovereignty had after all been avoided. But that was fundamental. On page 61: “In a market economy, ev- before he read the next sentence, which states that eryone occupies positions of monopoly. That is, ev- “Sovereignty applies broadly to individuals acting in eryone has some degree of monopoly power over their roles as consumers, lenders, and factor-suppli- others.” This is an unusual view, especially for a self- ers. Thus, a more apt name is individual sover- styled Misesian. Most theorists would link “monop- eignty.” More apt, indeed, if one wishes to rob a oly power” to a producer’s ability to influence a useful economic concept of its analytical meaning, market price; Austrians traditionally take a still namely that consumers’ wants determine the mix of narrower view of monopoly, linking it to exclusive outputs in a market economy. factor ownership or legislative barriers to entry. These examples are, I trust, sufficient to suggest (Also appearing on p. 61 is a statement that would the general shoddiness of the book’s arguments. Yet be banal in most any context. It reads, “Monopoly they are as nothing in comparison with the many in- power in a market economy is also affected by stances of statements that conveyed no meaning what economists have come to call competition.” whatever to this reader. I mention just a few of these; Who, pray, is the audience for this book?) Continu- any reader anxious for more will not have to look ing on page 61: “Competition consists of pricing very hard to find them. Two appear on p. 111. The actions that result in copying or innovating.” It first refers to a situation, supposedly not special, in would be more correct to say that competition is which “an increase in the demand for one good, which “copying or innovating” in a market setting. Ac- is accompanied by a decrease in the demand for an- cording to Gunning’s definition, a firm that raises other good . . . leads robo-ents to expect lower robo- its product price, and so encourages new entry profits in the first industry and higher robo-profits (“copying”), is acting competitively, whereas one in the second than previously.” (I suppose this may that discourages entry by keeping its price low is | merely involve an unintended transposition of “first” not! | and “second”, but I am not sure.) A second instance Cooperation is identified with “collusion” on p. is in the closing sentence of the same page, which ar- 109. Surely there are non-collusive forms of coopera- | gues that “the market value of factors in the market tion, such as peaceful exchange. If Gunning simply | economy is caused by entrepreneurship.” I suppose means to define cooperation to mean collusion, why this statement is consistent with the doctrine of “indi- doesn't he just stick to using the ordinary term? Col- vidual sovereignty”; Iam certain anyway that itis lusion (“cooperation”) is supposed furthermore to meaningless in terms of orthodox (subjective) value involve the assignment of particular consumers to theory. particular producers. But this is only one, rather un- usual, manifestation of collusion in the economist’s Robo-Subjectivism usual sense. On the same page we are also told that “Competition is [not “can be”} defined in terms of both an outcome and a process.” This should say “in terms of either an outcome or a process” since the one, identified with equilibrium, is contrary to the existence of the other. Misesians traditionally insist on the process definition of competition, rejecting One does not usually expect to find robots in a book about economics; yet Gunning’s book has so many robots in it that it reads like a screenplay for “Lost in Space.” There are robot savers, robot con- sumers, robot factor suppliers—even robot entrepre- neurs! There is even a passage in which the she-economist “converts an actor into a maximizing the outcome definition. robot” (p. 126). The reader is told on p. 109 that “Consumer I think I understand Gunning's reason for talk- sovereignty literally means that consumers. . . are ing so much about robots. He wants to emphasize the agents responsible for determining which the fact that economic models are, after all, abstrac- goods are produced, which consumers get the tions populated with utility maximizers whose means goods, which items are factors, how much the fac- and ends (utility functions) are assigned to them by tors are paid, and what the rates of return on a theorist. In this sense, they are “programmed” to il- loans are”! Having foisted this fantastic meaning lustrate some principle. Although one may under- onto the term “consumer sovereignty”, Gunning stand Gunning’s motive, this does not mean that his & then hastens to take it back, saying in the next sen- approach is helpful. In fact, economists are used to tence: “Actually, the claim of consumer sover- talking about “agents” in their models; they also under- eignty should not be taken so literally.” This reader stand that these agents are not flesh and blood ===== PAGE 6 ===== human beings, since the agents’ goals and opportu- | that the role of verstehen in economics is widely nities are specified by the theorist. To this extent, | misunderstood. This is evident in Gunning's book; Gunning offers nothing new except the term it is, indeed, the most serious problem in Gunning’s “robot” in place of “agent.” To the Austrian treatment of subjectivist method. Gunning’s book is reader, however, Gunning’s approach seems more rife with references to Schutz and Weber; and it is ap- wv seriously misguided. For he seems to have taken parent that he views Mises’s method as an extension Mises’s observation that agents in an evenly-rotat- of the methods endorsed by these writers. To derive ing economy do not act because they have no incli- economic theories, the economist is, according to nation to change their plans, and so function like Gunning, supposed to put himself in the place of pre-programmed automata, and turned it into a some particular actor, asking how he—meaning the principle for constructing economic models of act- economist—would act in the same situation. Thus ing individuals! Surely for the Austrian-subjectivist “To understand entrepreneurship, the economist it is meaningless to speak of robot entrepreneurs must interchange positions with the hypothetical en- (or “robo-ents”). Agents act “like robots” when trepreneur and ask how he would act under similar they are either too dull or too satiated to conceive circumstances.” Elsewhere there are repeated refer- of new ways in which to improve their well-being; | ences to the economist’s reliance upon “intuition once we begin to confront the reality of change as and experience” in deriving economic laws. All of this manifested in entrepreneurial innovation the shows a serious neglect of the distinction between the- robot metaphor ceases to be applicable. “Robot en- ory and history that Mises was anxious to stress. Ver- trepreneur” is a crude oxymoron. stehen is a tool for historical inquiry, i.e., for understanding concrete actions of real individuals under particular circumstances. Interpretation of such historical actions necessarily requires the imputation of some specific ends and perceived means to the agents involved; there can be no question of any complete account of an historical event relying solely upon apriorism, deductive reasoning, and ab- straction. Yet the latter tools are essential in construct- ing economic theories—theories that will be ) applicable to numerous historical events, and which therefore cannot be based upon appeal to verstehen. Theory does not, in other words, endeavor to ex- plain particular, concrete choices of particular agents. It strives to provide a general framework for understanding particular actions—a “pure logic of Moreover from the Austrian (subjectivist) per- spective, it is surely incorrect to speak of actors be- having in a manner consistent with economic theory only in so far as they have first been “converted” into robots by the theorist. This point of view seems to re- gress to the concept of “economic man” that domi- nated classical method but is rejected by (most) Austrians. In the Austrian view, real-world actors re- ally do behave according to economic principles. If the theorist cannot account for some actual behav- ior, he or she does not conclude that the behavior in question is insufficiently robot-like; rather, he or she concludes that the perceived means and desired ends of the individual in question have not been properly understood—that a renewed attempt at ver- stehen is called for. Economic models that abstract choice.” from certain kinds of change and opportunities in In some passages Gunning seems to recognize order to elucidate certain principles do not need to the difference between the method of theory and “convert” agents into robots: It is sufficient for the the method of history. Thus on pp. 1-2 he observes .models to assume a correct environment of means that “the theorist is not interested in the specific and ends to give rise to some particular pattern of ac- wants, abilities, or knowledge that individuals pos- tion that is the logical outcome of constrained maxi- sess.” The same point is reiterated at some length mization (or constrained attempts to remove felt and quite accurately on pp. 24 and 25. Yet Gunning uneasiness). If, having created a certain economic does not seem to recognize that verstehen is after all a environment and specified particular ends, Gunning tool for historical analysis and “applied” economics, still has to convert agents in his models into robots not a tool of economic theory. in order to get them to behave “economically,” then there is something wrong with his concept of eco- Gunning’s confusion appears compounded nomic behavior. when he writes (p. 37) that “[w]hen economists in- terpret historical events they do not construct ideal types.” On the contrary, in doing history or applied economics especially an economist cannot dispense I refer to verstehen—the method of “common with ideal types, for the application of a theory to @ sense” or intuitive understanding in the social sci- particular events is largely a matter of interpreting ences—with some trepidation, for I recognize actual choices using ideal types of agents as well as Ee ——— Misunderstanding Verstehen ===== PAGE 7 ===== institutions as a basis for understanding their real- casting reaps substantial fortunes.” Entrepreneurs world counterparts. Ideal typification is a crucial have a need for estimates of future product demand, counterpart to the method of verstehen. but have little use for economic modelling. Another task would be to explain the art of entrepreneurship Subjective-“Isms” along with the other phenomenon of the market pro- cess such as production and exchange, the role of A final problem with Gunning’s book is its failure i money, and time preference. accurately to distinguish between positivism, histori- | cism, and institutionalism. They are, after all, dis- Itis in the interventionist society that the tinct. Yet Gunning’s discussions and definitions economist’s role expands.’ The economist can be an create quite another impression. Witness the pas- aid to the entrepreneur and the individual by analyz- tiche of “isms” offered on pp. 22-23, where Gunning ing the effects of state intervention in the market writes that positivism “has manifested itself in three economy. The increased demand for the services of ways. The first is the use of mathematical modelling economists is described by Rothbard: “In a hampered and statistical definitions of economic phenomena to market economy, indeed, the economist often be- make predictions about the future. The second is the comes useful to the businessman—where chains of eco- institutionalist opposition to isolating economic phe- nomic reasoning become important, e.g., in analyzing nomena from the specific political, cultural, and phys- the effects of credit expansion or an income tax and, in ical environment. The third is historical positivism, many cases, in spreading this to the outside world.” which is like institutionalism but that also advocates Thus, interventionism makes the economist useful out- ‘holism’.” In his first appendix Gunning expands on side academia, for he can provide the important service this conflation by stating that positivism “defines of unmasking the real effects of state action in the mar- [sic] economic phenomena to include all behavior ketplace. that is related to production and exchange for Ludwig von Mises says clearly the subject matter money, as it takes place in a particular culture, in a of economics is means not ends. Ends are values that particular physical environment, and under a particu- individuals hope to attain through action. The selec- lar set of laws.” I do not deny that positivism and insti- | tion of values by individuals falls into the realm of tutionalism have certain things in common; but to . ethics, a discipline that deals with what kind of ends treat them as if they are one and the same seems to individuals should adopt. Economic science is “neu- me inexcusable. 4 | tral” in regard to ends.’ The economist can only de- i termine if the means employed by individuals are | appropriate for attaining the desired ends. For exam- ple, suppose an individual wants to amass a fortune. An economist can only address the means by which WHAT SHOULD ‘AUSTRIAN’ ECONOMISTS DO? the individual must employ to attain his end. The economist can demonstrate that in the free market BY JAMES P, PHILBIN the only way to increase wealth is by serving consum- ers better than one’s competitors. Whether an indi- vidual should become a millionaire or be a | n a 1964 essay, James Buchanan asked: “What volunteer in the Peace Corps is not in the domain of Should Economists Do?” 1 would like to at- tempt to answer his query, but from an Austrian . economics. school perspective. In the unhampered market or free society, the economist has a limited role. A free society is distin- guished from the hampered market by the absence of the legalized institution of coercion-~the state. The free society is characterized by mutually beneficial ex- Nobel Laureate changes between individuals, the absence of taxation, James Buchanan and the abolition of a monopoly justice and police delivering a system. In a free society, an economist would mostly speech at Auburn have an “educational” role to perform. The primary University. task would be the elucidation of the general theory of human action. Economists who could successfully forecast future consumer wants would quickly leave their meager-paying academic posts and move to the stock and commodity markets where successful fore- L______________________________________________________________________________________________________ 7 ===== PAGE 8 ===== If economics is a werifrei science, why have econo- nomics as a science of means not ends. Economic sci- mists over time participated in the formulation of state ence is only equipped to elucidate the effects of policy?® Public policy is hardly value free. Political deci- what a negative or a general income tax would lead sions are value judgments by those in control of the tothe depletion of capital, coerced exchanges, an state apparatus. State action involves the use of con- increase in state power. Friedman's proposal was not / fiscated wealth by elected officials or dictators to advanced by a concerned citizen hoping to mitigate : achieve some ends. Economists who advocate or con- the inefficiency of the welfare bureaucracy. On the { struct policy, whether laissez faire or statist, are not contrary, the negative income tax was initiated by Milton Friedman, a future Nobel Prize winning 3 employing economics as a value-free science. “value-free” economist.'” Mises made a valiant and commendable attempt ] during his lifelong crusade for the free market to jus- By no means is Friedman the only economist tify, on utilitarian grounds, value-laden statements in guilty of such a digression. One only has to look at economics. Although this attempt was admired by such bureaucracies as the Federal Reserve or the his most devoted followers, its weakness was nonethe- President's Council of Economic Advisors as exam- ples of economists intimately involved in the formu- lation of state policy. These economists typically present themselves to the public as disinterested ana- lysts. Once an economist endorses a policy, however, he implicitly adopts its ends. less revealed.’ An obvious reason why many economists engage in public policy despite their supposed value- free profes- sion is that both the economist and the staté mutually benefit. The obvious gain to an economist from the “exchange” can be an increase in prestige, income, or The same is true of an economist who advises a position. State gains are more difficult to decipher. Os- businessman. A fashionable slogan that many academ- tensibly, the state obtains the advice of an “expert” for ics are fond of using to describe themselves is “busi- the formulation of policy; however, this is not all, for I ness economist.” Such a term is misleading, for it the state profits on a far more essential, though surrep- creates a false impression about the function of the titious, level. A necessary requirement for the state businessman in the market, and that of the economist maintaining its monopoly of force is to convince the as scholar. A businessman is a capital-owning fore- public that its rule is legitimate and it is working in caster, who arranges scarce factors of production in their interest. The courting of the intelligentsia is a order to satisfy the future demands of consumers for ww strategic ingredient in this process.” profit. Economists are primarily pedagogues who teach and expound upon the fundamental tenets of economics. Those academics who regard themselves as business economists are usually neither. Most are engaged in some sort of economic modeling which is of little, if any use to the entrepreneur. Mises rec- ognized the unhealthy hybrid of the term "business economist” prevalent in academia: By soliciting the advice of the economist,’ the state appears to attain the counsel of an indepen- dent arbitrator in formulating legislation (even if it is often ignored). Whether the advice is heeded or ignored is immaterial to the real significance of the action, for what the state needs is legitimacy—which it achieves by having a supposedly value-free scientist confer on, or construct its policy. The economist act- | ing as a disinterested scientist knowingly or unknow- ingly contributes to this legitimatizing process. Both What is wrong with the discipline that is nowadays taught in most universities under the misleading label of economics is not that the teachers and au- economist and the state profit, while the unsuspect- . . ing public has been duped into believing that public thors of the textbooks are either not businessmen . or failed in their enterprises. The fault is with policy has been somehow “tested” by value-free scien- their ignorance of economics and their inability tists. to think logically.'® What is generally overlooked by both the social scientist and the citizenry is that once an economist In cases where a business economist designs mod- endorses or collaborates on legislation the econo- els for the entrepreneur, the economist, like the “disin- mist is necessarily making a value judgment.'’ For terested” public policy analyst, is necessarily adopting example, Milton Friedman in the mid-1960s pro- the ends of the entreprencur.’* The businessman posed the concept of a negative income tax as a hires the economist in order to make profit—an “reform” measure for the welfare state,’' The idea end. The economist devises his model or gives ad- was to guarantee a minimum level of income vice on the basis of helping the entrepreneur reach for each adult member of society. As an economist this goal. So, just as the public policy advisor adopts the ww and a supposed practitioner of value-free science, state’s ends the business economist adopts the Friedman's proposal violated the bounds of eco- entrepreneur’s. -~ . —— ===== PAGE 9 ===== Rothbard has suggested that to combat the in- was an indefatigable spokesman for the free market. consistency of economists making policy recommen- He was an advisor to statesmen along with being a dations, they should explain the ethical basis for teacher and advocate of laissez faire to laymen.'® As . such advice.'® For instance, if an economist advocates an intellectual, Mises believed that it was imperative & that the Federal Reserve should increase the money that the truths of his science become generally supply, he must first state from his own personal stand- known. Despite unfavorable conditions, Mises as point (based on whatever ethical position) why an in- both praxeologist and concerned humanitarian was crease is needed. In addition, the policy advocate must able to promote a philosophy while remaining value explain why he believes the government should have free. : control over the money supply. Critics of such a policy, Economists can thus promote their own ends, like Austrian economists, can refrain from making their but must first drop the mantle of science in which ethical biases known because their objections are they are wrapped and do so as private citizens. By grounded in praxeology. Austrian economists describe doing so their pronouncements will be less revered by the effects of an increase in the money supply: redistri- their fellowmen, yet they will not violate the parame- bution of wealth, inflation, distortion of the struc- ters of their science. Most important, they will not be ture of production. Those who elucidate the effects tools in the state apparatus that uses the social scientist of an increase in the money supply are not making to entrench and extend its hegemony through the ma- value judgments. | nipulation of value-free science. Rothbard considers policy recommendations by i The economist’s primary function is the elucida- economists who fail to cite an ethical position a “trea- . tion of the principles of praxeology. As a forecaster, sonable” offense in a profession that is supposedly the economist is of little use to the entrepreneur. value free: . However, the praxeologist can be helpful to both the entrepreneur and the public by demonstrating the I contend . .. that it is the responsibility of any sci- + effects of state intervention on the market. Austrians entist, indeed any intellectual, to refrain from any have also made a strong case for economic science value judgment whatever unless he can support it that is value free. Therefore if economists want to on the basis of a coherent and defensible ethical participate in, or suggest, policy, they must first de- system . . . those economists who, on whatever grounds, are not prepared to think about and ad- vance an ethical system should strictly refrain from any value pronouncements or policy conclu- sions at all.!® clare an ethical base. Notes James Buchanan, “What Should Economists Do?” Southem Economic Journal 30 {January 1964): 213-22. “Murray N. Rothbard, Power and Market: Government and the Econ- William Rappard, in a tribute to Mises, con- omy, 2nd ed. (Kansas City: Sheed Andrews and McMeel, 1977), p. 257. curred with Rothbard: “[E]conomists who invoked bid. the authority of their intellectual discipline to urge “Ibid, p. 258. upon society measures calculated to reform it were 5Lionel Robbins, An Essay on the Nature and Significance of Economic impostors. Reforms could only be means to an end. Science, 2nd ed. (Londen: Macmillan, 1952}, p. 24. Economics dealt, and could legitimately deal, only See Ludwig von Mises, Notes and Recollections, trans. Hans FE Sennholz (South Holland, Ill.: Libertarian Press, 1978), pp. 71-92. : "Murray N. Rothbard, “Praxeology, Value Judgments, and Public Policy,” in The Foundations of Modern Austrian Economics, ed. Edwin with means.”"’ Thus, to follow the dictates of the dis- cipline and remain “pure,” praxeologists qua praxeologists must refrain at all times from making G. Dolan (Kansas City: Sheed & Ward, 1976), p. 89. value judgments or policy suggestions. This includes *Murray N. Rothbard, For A New Liberty: The Libertarian Manifesto, measures (abolition of taxes, a gold standard, elimi- rev. ed. (New York: Collier Books, 1978), pp. 54-69. nation of monopoly privileges) that would lead to ?The economics profession is but one sector of the intelligentsia in which the state seeks “advice.” See Harry Elmer Barnes, The Cowrt Histori- ans Versus Revisionism {Hollywood, Calif.: Sons of Liberty Press, 19584). WRothbard, “Praxeology, Value Judgments, and Public Policy,” p. 96. prosperity, liberty, and justice. These are ends no matter how socially beneficial. Austrians can promote their ends without violat- Kurt R. Leube, ed., The Essence of Friedman (Stanford, Calif.: ing value-free science by showing how the effects of Hoover Institution Press, 1987), pp. 57-68. interventionist policies can lead to socialism and Rothbard, “Praxeology, Value Judgments, and Public Policy,” p. 92. war. Ludwig von Mises was the quintessential exam- Ludwig von Mises, The Litimate Foundation of Economic Science: & . q An Essay on Method, 2nd ed. {Kansas City: Sheed Andrews and Mec- ple of an economist who managed to wage a con- Meel, 1978), p. 78. stant, yet largely unsung struggle for his ideals : Rothbard, “Praxeology, Value Judgments, and Public Policy,” p. 96. despite a hostile intellectual climate.” He did so both | 5\Murray N. Rothbard, “Value Implications of Economic Theory,” as a praxeologist, and as a “citizen.” As a citizen, Mises The American Economist (Spring 1973): 35. ===== PAGE 10 ===== '8Rothbard, “Praxeology, Value Judgments, and Public Policy,” p. 93. . given in the following paragraphs. "William E. Rappard, “On Reading von Mises,” in On Freedom and Free Enterprise: Essays in Honor of Ludwig von Mises, ed. Mary Sennholz The market has many advantages over the politi- (Princeton, N. ].: D. Van Nostrand, 1956), p. 18. cal process. It allows individuals to express their per- "®Murray N. Rothbard, “Ludwig von Mises and the Paradigm for Our sonal preferences. The freedom of the common man Age," Modern Age (Fall 1971): 370-79. is much greater in the market, where one man has wi Murray N. Rothbard, Mises and the Role of the Economist in Pub- many choices (“votes”) every day, than in the political lic Policy,” in The Meaning of Ludwig von Mises: Contributions in Econom- h he h . ics, Epistemology, Political Philosophy and Sociology, Jeffrey M. Herbener, © process, where ne nas only one choice (vote) among ed. {Boston: Kluwer, forthcoming), p. 197. a ' few alternatives (candidates) every I,000th day. The principle of private property is indispensable for ensuring responsible exchange and trade. Only when success brings personal rewards and failure per- sonal penalty can responsibility be learned. Only thus can effective motivation be created. Extensive private property is the best way to tame the Leviathan of gov- ernment and check its kleptocratic appetite. Book Review CAPITALISM Arthur Seldon Capitalism promotes specialization by competi- Oxford: Basil Blackwell, 1990 I tion. If the consumer can compare alternative goods : and services, fewer people are inclined to produce REVIEWED BY GERARD RADNITZKY those in which they do not excel. Incentives to effort r. Samuel Johnson put it succintly: “Political produce innovation and improvement in quality. liberty is good only so far as it produces pri- The prices emerging in competitive markets per- form the function of signals to what and how much vate liberty.” Why this is so is spelled out in Seldon's A ) to produce; without them the information cannot be latest book. Arthur Seldon as a Founder President and Editorial Director of the London Institute of found. Because socialism lacks free-market prices it Economic Affairs, the oldest and most prominent of cannot promote welfare. the market-oriented “think tanks”, bas for 30 years “Selfish” people can serve themselves only by serv- performed a decisive service in the transformation ing the wants of others in the market. “Even bad men of public opinion in Great Britain to favor the open are led by the market process to do good, but good men market economy, This book is the quintessence of . are induced by the political process to do harm” (p. 10). ww his work and the intellectual autobiography of a life | The capitalist system promotes moral behavior; people dedicated to the idea of the open society. risk their own money. The political process enables peo- Economists call the free private market economy ple to buy votes with other people’s money. “capitalism.” A politico-economic system is less capi- talist and more socialist the larger the sector of col- lective decisions in the market. All existing systems thus contain elements hostile to their main charac- ter: Capitalist systems have socialist state sectors; so- cialist systems have capitalist market sectors. An order based on a market economy requires only a minimal state that protects private property. Property rights can be respected in a “state of nature,” but the legal framework of a private rights society makes it much easier. The more tasks are solved by the market, the less important is the political process. A comparison {or contrast) of capitalism and so- cialism is significant only when comparing both as they are with all their faults or as they could be in an ideal form. Socialists like to contrast imperfect capi- talism with perfect socialism. Arthur Seldon’s latest book invites us to make significant comparisons be- tween capitalism and socialism; and he then asks us to reflect on capitalism as it could be strengthened by its yet unrealized potential. Seldon rejects the myth of “active citizenship”: The typical citizen has more important matters to at- tend to. He leaves essential government tasks to spe- cialists. But here there is danger. Governments tend In the competitive market in tracts on capitalism (Michael Novak, Charles Murray, Milton Friedman, to name only a few of the best selling authors), Capitalism ranks as a catechism for the advanced, interesting for the specialist yet understandable by the layman, Its mes- sage is that capitalism is superior to all other systems for welfare and freedom. The main line of argument is Arthter Seldon ===== PAGE 11 ===== to over-regulation (as in health standards and finan- loss of buyers from competition, it has no incentive cial transactions) because the risks of under-regulation to respect consumer preferences, are more obvious and therefore less rewarding in votes; but for the general welfare too little regulation is |») better than too much because it suppresses new enter- prise in services and industries. The market is indestructible. If it is forbidden it seeks more welcoming environments or the so-called underground economy, where it often stimulates pro- duction. But only in the minimal state with private Governments tend to raise taxes and increase spend- property can capitalism fully realize its wealth-en- ing as far as possible. But for general welfare too little hancing potential. government is better than too much—because it is eas- ier to enlarge government where essential than to re- duce it where excessive. Capitalism is in no sense a one-sided hagiography of the capitalist system, The author undertakes a painstaking examination of the criticisms leveled at Most undesirable features of existing capitalism its economic working and moral foundations—espe- are caused by the political process. Politicians tend to cially from social-democratic thinking. There are politicize economic problems, bureaucrats to bureau- signs that the social-democratic era is slowly ebbing, cratize them, and group interests to gain at the finan- and there is a renaissance of liberal political cial expense of others. The result is paternalistic thought—"liberal” in the sense of classical liberal- social democracy. . ism. So says Milton Friedman in discussing the The market is the best way not only to economic change from the “Fabian tide” to the “Hayekian growth and efficiency but also to improve the well- tide, The Thatcher Revolution of 1979 Is such a being of the poorest. Involuntary poverty is better cured SIgN: §O 13 Reaganomics whose cconomic craed has by easing free movement from industries and regions | inspired many books and given the Republicans with lower to those with higher incomes than by redis- three election victories. tributing income by the methods of the political pro- Does the book not have any faults? It is not easy to cess, which blunt incentives and repress growth. criticize a book if you agree with its contents and ad- The common people stand to gain more from capi- | mire its presentation. Perhaps passages like, e.g.) “the talism as it could be with less political management market . . . is a surer way to an egalitarian ambience than from socialism which requires extensive politi- ~ than the enforcement of equality by the state” (p. Ww cal management. It is easier to even up differences | 197) or “the equalizing power of the capitalist mar- in purchasing power in the market than differences ket” (p. 197) may puzzle a hasty reader. Seldon in the “cultural” skills required by the political pro- claims that the market has shown its strength not cess. Socialism has not removed inequalities, it has only as a source of prosperity but also as an equal- merely institutionalized them. izer. Yet, the market produces a distribution of in- come and wealth that does not tend towards more and more equality of outcomes. Competition func- tions as both a discovery process and a selection process, and sometimes luck plays a decisive role. Inequality of outcomes is inevitable, and it is also in- dispensable as an incentive to effort. Seldon rightly argues that upward mobility for the lower income strata exists only thanks to the market. Propping up low incomes-—which requires redistribution—does less harm than distorting prices (e.g., through rent Capitalism as we know it is by no means free of control) or augmenting the set of publicly pro- fault. But it can be corrected. In socialism every im- vided goods and services—a clandestine form of provement—necessarily capitalistic—makes it less so- cialist. The market mechanism is far more self-correcting than the state: It is easier to escape from a commercial monopoly than from a political monopoly. Only state protection creates long-lived monopoly. Concentration in state industries (rail- ways, postal services, telecommunications, and so & on) is always uneconomic—at the cost of the con- sumer whom they also deprive of freedom of choice : and of innovation. As the state monopolist fears no | EEE R= 11 For the Third World the fastest way out of its misery is to introduce capitalism. For relatively wealthy countries the fastest way to the economic backwardness of the “Third Way” (favored by some in Western and in Eastern Europe) between the re- jected communist socialism and the liberal market capitalism that has raised living standards for the masses is to implement discredited “social demo- cratic” values. Gerard Radnitzky ===== PAGE 12 ===== redistribution. However, each of them violates the ef- tury has not led to a more equalized society—on the ficiency conditions. Even when propping up low in- contrary has increased inequalities. Seldon’s concep- comes there must be a tradeoff between more tual instruments would have provided him with ex- equality of outcomes and integrity of property rights cellent means for explaining this paradoxical effect. or between actual level of consumption and the However, such criticism may appear pedantic. growth rate of consumption. This is often denied. The For most of the industrialized countries the book classical and very popular form of denying it is the doc- could not be more timely. Their electronic media, their trine of a “Social Market Economy” (roughly corre- “intellectual” (the ‘chattering classes’) in schools and uni- sponding to what Ludwig von Mises labeled versities, their official churches, and so forth, are skepti- ‘hampered market economy’). The share of taxes of cal or ignorant of the free, private market economy, and all sorts (including covert taxes) in the GNP is a rough there are socialists in all parties. The German Federal Re- - measure of inefficiency. One could wish to have a | public is a good example: From 1949 to the late 1950s it more extensive analysis of the redistribution problem. | wag a paragon of a free-market economy, since then it In a few places the author mentions the “Swedish © has steadily moved towards corporatism. It is to be Model” and similar cases where the German idea of a hoped that the European Community will realize that “social market” has been carried to the extreme—with integration of diverse economies cannot be accom- predictable results. For instance, on page 208 Arthur plished as a political and bureaucratic process, but can Seldon correctly observes: “Nor has political democ- only occur as a result of the withdrawal of the state and racy in Sweden ensured liberty in the intimate ele- its agents, i.e., by delegating the task of integration to ments of everyday living . . .” Indeed, the paternalistic markets. So far capitalism has not been allowed to show welfare state has steadily and drastically reduced free- what it can do, to deploy its potential for fostering pros- dom of choice in the name of equality. One would have perity and liberty. This is one of the main theses of wished to have these issues elaborated, including an Seldon’s book. It is heartening that Capitalism has been analysis of the startling fact that the radical egalitarian awarded first prize in the contest for the book published policy that the Swedish social democrats have been in Britain in 1990 that “best contributes to public under- able to impose on the country for aimost half a cen- standing of the political economy of a free society.” a Non-Profit Org. U ° U.S, POSTAGE u S t | of 1 d n Auburn University, AL 36848-5301 PERMIT NO. 9 SES Economics Newsletter INSTITUTE Auburn University, AL 36849-5301 Ms, Rachael FP, Black Mises Institute A — Auburn University Auburny AL