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RESPONSE TO REISMAN ON CAPITALISM

ALEXANDER TABARROK

eisman’s Capitalism is longer than either Mises’s Human Action or

Rothbard’s Man, Economy, and State. It thus seems unreasonable to

object to my review because it ignores major portions of his work.
Reisman’s other objections are similarly weak.

Capitalism has surprisingly little to say on entrepreneurship or other typically
Austrian and Objectivist themes. | do not think any objective reader would infer
from my statement that Reisman is a socialist. Nevertheless, this is Reisman’s
reading. For the record, Reisman is a strong proponent of capitalism. In Human
Action, Mises (1966, p. 253) calls entrepreneurs the “pioneers of economic
improvement.” In Ayn Rand's works, the great capitalists are heroes and vision-
aries, every bit as creative as the great artists and scientists. In Reisman’s book,
capitalists are mostly owners of capital. One will not find stirring descriptions, for
example, of Carnegie, Rockefeller, Groves or other titans of industry in Capital-
ism. As | stated in my review, | do not object to Reisman’s not placing en-
trepreneurship at the heart of the economic process. | am merely surprised.

Reisman believes that | did not explain in what respects his book is distinc-
tive. He has no difficulty understanding, however, that | imply that the unique-
ness of Capitalism “is defined by its unintelligible peculiarity, a peculiarity
reinforced by its being subject to the influence of the classical economists.” Yes,
thats it.

One distinct idea in Reisman’s book is his rejection of the “primacy of wages
doctrine.” Here we have an all-too-typical move by Reisman. A doctrine is
introduced and stated to be of great importance in classical and contemporary
economics. Reisman then demolishes the doctrine and establishes his own
unique views. All this would be most impressive if the doctrines Reisman
demolishes actually existed. True, a plausible case can be made for many of the
Classicals believing something like the primacy of wages doctrine, but to suggest
that Rothbard (along with “virtually all economists” other than Reisman) believes
wages are primary and all other incomes are deductions from wages is absurd.

ALEXANDER TABARROK is assistant professor of economics at Ball State University and direc-
tor of research for the Independent Institute.

The Quarterly Journal of Austrian Economics vol. 1, no. 3 (Fall 1998): 57-59
57


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58 THE QUARTERLY JOURNAL OF AUSTRIAN ECONOMICS VOL. 1, NO. 3 (FALL 1998)

Reisman’s discussion of the primacy of wages doctrine did not escape me; |
ignored it to concentrate on better aspects of his book. Alas, he is not grateful for
my oversight. For what it is worth, the contemporary view (going back to John
Bates Clark [1899]), is that profits (in the sense of capital income) are not
deducted from labor income, nor is labor income deducted from profits. Instead,
both capital and labor income are determined jointly according to their marginal
product.

| indeed failed to understand that Reisman wants the classical notion of
demand and supply to apply only to the economy as a whole. But the misunder-
standing could have been avoided had Reisman chosen to express himself in
standard terms. If in the equation P=D/S, P is the price level, D is aggregate
spending on consumer goods and S the aggregate supply of consumer goods,
then Reisman’s theory is nothing more than the quantity theory of money,
P=M-V/Y, because M+V is spending on consumer goods and Y is the supply of
consumer goods."

In the last 40 years, the methods and tools of economics have increasingly
come to be applied to fields like political science, law, sociology, and ethical
philosophy. Mises’s insistence that economics is but one part of a larger field
which studies purposeful human action thus looks prescient. Reisman, in con-
trast, favors a much older definition of economics, “the science that studies the
production of wealth under a system of division of labor.” In a footnote to my review,
| pointed out that Reisman’s definition suffers by contrast with Mises’s because it
cannot make sense of the post-1950s expansion of economics into cognate fields. It
is unclear why Reisman finds my statement of his views to be in error. On page 42 of
Capitalism, he discusses “the mistaken claim that economics is a science of choices
rather than a science of wealth,” and later on the same page, “To claim that
economics is on this account a science of human choices rather than a science of
wealth is to confuse an aspect of the science with its totality.” The last statement
is especially difficult to understand. Is it not clear that the science of wealth is but
a part of the science of human choice??

In another footnote to my review, | said that Reisman rejects the time-prefer-
ence theory of interest. In his reply Reisman tells us that he only rejects “the
traditional version” of the time-preference theory. One might similarly say that Ayn
Rand didn’t reject altruism, only the traditional version of altruism. In another
distinction without a difference, Reisman claims that he rejects the traditional theory
not because it explains the rate of return in terms of goods (as | stated) but rather
because it fails “to explain the rate of profit and interest in terms of money.”

"Reisman also creates confusion by introducing the classical concepts alongside the
standard concepts as if they were alternatives (see pp. 152-53). Furthermore, on p. 152, Reis-
man refers to P as “the price.” Elsewhere (for example, p. 560) he refers to P as the “price level”
but there he gives the equation as P=D¢/Sc where Dc is the monetary demand for consumer
goods and Sc is the supply of consumer goods. If P is always meant to refer to the price level, as
he claims in his reply, why the distinction between D and Dc and S and Sc?

2| did not mention in my review that by wealth Reisman means physical goods, which
only makes his definition all the more odd.


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RESPONSE TO REISMAN ON CAPITALISM 59

Readers can judge for themselves the uniqueness of Reisman’s insights on
national income accounting by comparing the quotations from Reisman with
those of Rothbard and Skousen given in my review. Also, as | said in my review,
Reisman’s perspective on capital accumulation is essentially a modified version
of Solow’s growth model.

In my review, | praised many aspects of Reisman’s Capitalism. | also pointed
out that Capitalism has some errors and peculiarities. In his reply, Reisman found
it necessary to focus on those errors and peculiarities. This is unfortunate, but
does not detract from the better aspects of Reisman’s book.

REFERENCES
Clark, John Bates. 1899. The Distribution of Wealth. London and New York: Macmillan.
Mises, Ludwig von. 1966. Human Action. 3rd ed. Chicago: Contemporary Books.

Rothbard, Murray. [1962] 1993. Man, Economy, and State. Auburn, Ala.: Ludwig von Mises
Institute.


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