Free Market Economics: Are We Winning?

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Charles
Dickens’s A Tale of Two Cities opens with the famous words,
“It was the best of times. It was the worst of times.” These days,
these words seem to apply to economics. Free market ideas are
far more prevalent on campus today than in 1975, yet taxes remain
high, and regulation is worse. Marxism is dead as an ideology,
Keynesianism seems to be in retreat, but the politics of envy
still has millions of adherents. Social Security is still the
third rail of American politics: touch it, and you die. So, are
free market ideas winning or losing?

To
begin to answer this question, we need to know something about
the history of economic thought. A new textbook on this subject
has just been published, Mark Skousen’s The Making of Modern
Economics. It devotes far more space to Austrian economic
theory than any previous textbook. He thinks free market ideas
are winning, but to support his thesis, he offers the recent successes
on campus of Chicago School economics. The problem here is that
on several very big issues, such as the legitimacy of central
banking, anti-monopoly policy, and the graduated income tax, Chicago
School economists have usually been on the wrong side of the debate.
And where they have been on the right side, such as de-regulation,
we have seen only marginal success in the real world, and this
came mainly under the Carter Administration, e.g., the removal
of price floors, such as airline fare de-regulation.

We
need an empirical test of Skousen’s thesis that we are winning.
I suggest this one. If Skousen’s textbook replaces Robert Heilbroner’s
The Worldly Philosophers on college campuses, we will
know his thesis is correct. He will then have a secure retirement
income when Social Security goes belly-up. I wish him well. But
I suggest, as they say, “don’t quit your day job.”

The
History of Economic Thought

What
should a textbook on this topic look like? Economists, as usual,
are divided on the answer. Should it be strictly a history of
conflicting economic theories and their temporary resolution,
which are then followed by more conflicts? Or should it also include
biography? George Stigler, a University of Chicago economist and
Nobel Prize-winner, thought that biographical information was
irrelevant to the history of economic ideas. His view is an example
of what Robert Nisbet dismissed with an aphorism: the history
of ideas written as if ideas beget ideas the way that butterflies
beget butterflies.

If
the textbook does include biographies, should these biographies
be stand-alone affairs — the economist did this; then he
did something else — or should the author provide reasons
as to why this or that economist adopted this or that idea? If
the biographical information does not provide information about
why an economist argued the way he did, then why clutter up the
book? Why not write a book on the life and loves of world-famous
economists, and let it go at that? Why deal with their professional
opinions at all?

Then
there is the question of each economist’s era. Do economists deal
with certain technical or theoretical problems because of the
climate of opinion, either within the economics profession or
in society at large? For example, should a history of economic
thought ignore the fact that John Maynard Keynes’s General
Theory was published in the seventh year of the worst economic
depression in modern history? Did this timing also have something
to do with its popularity? Would it have gained such popularity
if it had been published six years earlier? That was the year
of publication of his Treatise on Money, which only specialists
read these days, or in any day, for that matter. It has had no
lasting effect in the economics profession. His 1936 book changed
everything.

If
you want to read a history of economic thought that is of the
butterflies variety, read Joseph Schumpeter’s massive History
of Economic Analysis (1954). That should keep you busy. My
advice: don’t read it while smoking in bed.

If
you want to read a history of economic thought that gives historical
background and biographical information that helps you understand
why economists wrote what they wrote, read Murray Rothbard’s two
volumes, Economic Thought Before Adam Smith and Classical
Economics. Your problem is this: he died before he got to
the marginalist revolution, meaning Carl Menger, meaning contemporary
economics. What should you read to fill in the gap?

You
can go to various fat academic tomes that cover the later period
along with the early period. Or you can go to the best-selling
(four million copies) introductory textbook, The Worldly Philosophers,
written by the multi-millionaire socialist author, Robert Heilbroner.
For a generation, this has been the standard textbook on modern
economic thought, especially for non-economics majors. Or you
can read Mark Skousen’s textbook. I recommend the latter.

Skousen
provides far more biographical information than the competing
books. These biographical passages are lively. I especially liked
the sections on Marx (where I have some expertise — my first
book was on Marx: Marx’s
Religion of Revolution
[1968]) and on Schumpeter, who turns
out to have been bizarre beyond compare in a profession with its
share of eccentrics. I do wonder, however, about this bit of information:
“John Stuart [Mill] practiced a disciplined lifestyle; he would
breakfast on a boiled egg and tea, taking nothing else for the
rest of the day” (p. 118). A boiled egg has about 90 calories.
What in the world did he put in his tea to supply the other 1,500?
And then there is the information about Richard T. Ely, who at
age 84 was the proud father of a five-year-old (p. 235). Under
such circumstances, what man wouldn’t be proud?

I
did enjoy learning some of the juicy stuff in the lives of the
practitioners of the dismal science, including the origin of the
phrase, “the dismal science.” I knew that it had been coined by
the historian, Thomas Carlyle (1795-1881), but I did not know
that it appeared in his 1848 speech, “The Nigger Question.” Its
title was sanitized for publication: “Occasional
Discourse on the Negro Question
” (1849). This speech was an
attack on supply and demand as allocational factors, and a call
for command and obedience in the economy of the West Indies (p.
82).

Yet,
having read the book, I am still puzzled. It is not clear to me
from the text why all of this biographical material is important
for understanding why each of these economists took the positions
that he did. I say “he” because there is universal agreement among
male historians of economic thought: there has only been one prominent
female economist among the most influential 200, Joan Robinson,
who by the end of her career had become a defender of North Korea
and other Marxist paradises (pp. 395, 433). (On the absence of
women in the top 200, Skousen cites Mark Blaug, Great Economists
Since Keynes, 1985.) Why spend so much space on biographies,
other than for entertainment value?

This
is a peripheral criticism. There are more important criticisms.
These apply to virtually all histories of economic thought, but
especially to Skousen’s, which is an attempt to replace Heilbroner’s
textbook with one favorable to the free market.

What
Is Modern About Modern Economics?

William
Letwin answered this question in his 1963 monograph, The Origins
of Scientific Economics. Modern economics was primarily a
late-seventeenth-century English phenomenon. It was a reaction
by highly educated defenders of a social order that would not
be based on religion or morality. These men had gone through the
English Civil War, with Puritans (“roundheads”) vs. Cavaliers,
i.e., anti-establishmentarians vs. establishmentarians. Both sides
in the war appealed to the Bible. Then they tore up society.

These
early economists, known today as mercantilists, attempted to make
the intellectual case for a prosperous economic order by an appeal
to logic, especially mathematical logic and statistics. In the
safely of universal mathematical principles, they believed, rational
men can find common ground in sorting out divisive problems. They
did not foresee the future: “Where there are four economists,
there will be five opinions.”

Letwin
argues that economics was the first social science to be founded
self-consciously on the principles of secularism. This went beyond
a reaction against theology; it was a reaction against morality
as the basis of social theory. They believed that there must be
no appeal to moral principles in the intellectual defense of any
economic policy, for moral principles are as divisive as theology.
In short, economics must be value-free.

Skousen,
a Mormon, does not identify value-free methodology as the
defining issue of modern economics. In fact, he never defines
what he means by modern economics. This is a major omission. The
ideal of a value-free economic science is one of the two pillars
of the epistemology of modern economics, the other being individualism
vs. collectivism, which he also fails to discuss in terms of methodology.

The
dualism of morality vs. value-free economics lies at the heart
of economics, and also at the heart of Adam Smith’s work. Skousen
mentions Smith’s earlier book, The Theory of Moral Sentiments
(1759). He shows that Smith, as a Deist, believed in God and morality
as the basis of society. But then a question arises — the
supreme question regarding The Wealth of Nations:
Why
are God and morality ignored methodologically in the book? This
leads to another question: Why has The Theory of Moral Sentiments
played zero role in the development of economics as a science?

We
could ask a similar question about the work of man who shaped
the modern world more than any other, Isaac Newton. Why has Newton’s
concept of a Unitarian God, who is given a role in preserving
the orbits of the planets and stars in the “General Scholium”
of Book III of Newton’s Principia (1687), played no role
in Newtonian physics? This God and His cosmic preservation function
was abandoned by Newtonian scientists in the early eighteenth
century. Newtonian science set the model for modern economics,
as Letwin shows.

Skousen
begins with Adam Smith as the maker of modern economics. But Smith
was not the maker. The mercantilists were. The issue was methodology:
value-free and God-free. The Wealth of Nations adopts this
methodology; The
Theory of Moral Sentiments does not, which is why it has been
ignored for a quarter of a millennium. By the time he wrote Wealth
of Nations, Smith could have said, “We are all methodological
neutralists now.”

Then
why was Smith so important, if he did not add anything significant
to the mercantilists’ doctrine of methodological moral neutrality?
Smith’s crucial role was to move the science of economics from
the methodological holism of the mercantilists to methodological
individualism. Skousen quotes Stigler: “Smith had one overwhelmingly
important triumph: he put into the center of economics the systematic
analysis of the behavior of individuals pursuing their self-interest
under conditions of competition.” This is what Stigler called
Smith’s crown jewel: the competitive model of free enterprise
(p. 20). I agree entirely with this assessment of what was most
important in Smith’s legacy.

The
war between methodological holism and methodological individualism
has been the divisive issue of modern economics, yet this is not
even mentioned by Skousen. He discusses in detail the ramifications
of this conflict — this interventionist economist vs. that
capitalist economist — but the central issue is ignored.

The
Permanently Divisive Issues

In
his posthumously published masterpiece, Economy and Society
(Wirtshaft und Gesellschaft), Max Weber discussed the conflict
between socialism and the free market. The dividing issue is this,
he said: the socialist’s defense of morality — the intervention
of the State in the defense of impoverished groups (substantive
rationalism) — vs. the free marketer’s defense of efficiency:
the defense of common, predictable, formal rules of government
that apply to all market participants, irrespective of the economic
outcome of competition (formal rationalism). There is no reconciliation
between these views, Weber said. The dualism of economics is permanent.

This
dualism is two-fold: individualism vs. holism and ethics vs. efficiency.
In a footnote, Weber referred to Mises’s 1920 essay, Economic
Calculation in the Socialist Commonwealth.”
Weber died in
1920. As Skousen mentions, the two men knew each other (p. 260).

This
dualism between morality and efficiency, between substantive rationalism
and formal rationalism, is “the big picture.” This is the heart
of the history of modern economics. First, a methodology that
is officially value-free runs head-on into issues of public policy,
which are inherently ethical, i.e., not value-free. Second, a
system that begins with methodological individualism justifies
itself by showing that the results benefit the masses. This is
a variant of Jeremy Bentham’s “greatest good for the greatest
number.” The free market economists announce, “capitalism delivers
the goods.” But to prove this, a crucial assumption must be made:
it is scientifically possible to make interpersonal comparisons
of subjective utility.

This
philosophical issue has been the central unsolved issue of economic
theory and economic policy ever since the marginalist revolution
of 1871-74. The idea of objective economic value was officially
destroyed by the marginalist revolution of Menger, Jevons, Walras.
Methodological individualism took a giant step to overcome the
last traces of methodological holism: objective value theory.
This is the central methodological issue that divides classical
economics from neoclassical. Skousen does not discuss this issue
in relation to the question of interpersonal comparisons of subjective
utility — a subordinate topic that he never mentions in his
book.

This
has been the dividing issue in welfare economics. He does not
mention this issue in relation to A. C. Pigou’s attempt to justify
graduated (progressive) taxation. He does not mention Lionel Robbins’s
refutation of Pigou in The Nature and Significance of Economic
Science (1932). He does not mention the battle over this issue
between Robbins and Roy Harrod in the Economic Journal
(1938-39), in which Robbins backed away from his initial stance
— and offered no reason for his reversal — when Harrod
correctly challenged him. Harrod said that if Robbins was correct,
then there could be no economic policy-making based on the science
of economics. Harrod was logically correct, and Robbins, unwilling
to abandon the right of economists to advise in policy-making,
formally abandoned his position.

It
was this issue of interpersonal comparisons of subjective utility
that Rothbard addressed in his essay in Mary Sennholz’s Festschrift
to Mises in 1956, On Freedom and Free Enterprise. He believed
that he had found an answer: voluntary exchange improves all participants’
utility, and it reduces no one else’s. But Rothbard defined away
any offsetting disutility suffered by an envious person, who might
resent the advantage gained by the exchangers.

Rothbard
in 1971 adopted Helmut Schoeck’s position on envy
as a major social factor
. By doing this, Rothbard undermined
his 1956 defense of the free market by means of value-free economics.
If envy is immoral, as Rothbard believed in 1971, and if envy
is a major factor in the political success of socialism, as Schoeck
argued and Rothbard also believed, then what happens to social
utility? In asserting a value-free defense of exchange as increasing
the individual utilities of the exchangers, the economist must
either dismiss envy as unprovable (Rothbard’s position in 1956)
or else reject the envious position’s moral claim, and therefore
his methodological right, to have the value-free economist consider
the extent of his loss of utility.

This
is the inescapable philosophical problem for all policy-making
by economists and judges who officially act in the name of scientific
economics. This is the problem of welfare economics, which is
still alive and well, as the enormous influence of R.
H. Coase’s theorem
indicates. Yet none of this is even mentioned
in Skousen’s book. He does not even mention the continuing debate
over the graduated income tax as it relates to welfare economics.
Yet most economists accept its legitimacy in the name of efficiency.
They are in fact the supporters of its morality.

Marx
wrote that whenever capitalists accept the right of propertyless
men to vote, private property is in theory abolished. “Is not
private property abolished in idea if the non-property owner has
become legislator for the property owner? The property qualification
for the suffrage is the last political form of giving recognition
to private property.” He wrote this in his notorious anti-Semitic
essay, “On the Jewish Question” (1843).

Show
me an academic, Ph.D-holding economist who calls for a universal
flat sales tax to replace the income tax, as well as the abolition
of the right to vote for non-property owners — property in
land or savings equal in value to a year’s income for the average
resident in the jurisdiction in which he is registered to vote.
Show me an economist who argues that a person’s receipt of direct
government transfer payments such as aid to dependent children
or food stamps should disqualify that person from the voting booth
until he or she no longer receives the money. Show me his articles
on these issues in the American Economic Review or any
other tenure-qualifying professional journal.

Skousen
quotes Milton Friedman at the 1997 meeting of the Mont Pelerin
Society: “We have gained on the level of rhetoric, lost on the
level of practice” (p. 448). Friedman is correct. Taxes remain
high. Government regulation is getting worse. Skousen says that
in most countries today, the private sector is expanding in relation
to the public sector, yet the chart on government spending that
he provides on the same page testifies to the opposite, as of
1996: Western governments are still expanding (p. 449).

The
Real Issue Is Ownership

Adam
Smith did not offer a theory of private ownership. He began The
Wealth of Nations with his description of the pin-makers.
This is the most famous passage in the history of economic thought.
He began with the division of labor, not with the doctrine of
private ownership. This was a flaw that set back free market economics
for about 175 years. By far the best discussion of this oversight
is Tom Bethell’s chapter on “The Economists’ Oversight,” in his
excellent book, The Noblest Triumph: Property and Prosperity
Through the Ages (1996).

The
issue of private property has been with us ever since God told
Adam, “This tree is mine!” God, unlike R. H. Coase, had strong
opinions on the importance of the initial distribution of property
rights.

The
division of labor is an important economic issue, but not nearly
so important as the idea of ownership, meaning the legal right
to exclude. Two pairs of phrases are at the heart of the economic
question. The first pair are these:

“Thou
shalt not steal.”

“What’s
going to stop me?”

The
war between the various schools of economics is less about graphs
and equations than it is between two fundamental definitions of
property:

"This
bread is mine." ~ Robert Lefevre

"Property
is theft." ~ Pierre Joseph Proudhon

These
twin sets of dividing issues are inescapably moral. They are not
technical issues. Any attempt to build a science of economics
by ignoring these polar opposites is an attempt to obfuscate the
nature of the science of economics. Adam Smith’s chapter on the
pin-makers was his first step in the deliberate obfuscation of
economics. With this, he unofficially adopted the mercantilists’
methodology of value-free economics, and thereby abandoned his
pre-modern methodology in The Theory of Moral Sentiments.

Conclusion

Skousen’s
book — with the exception of the unreadable sections on Samuelson’s
graphs — is better in both style and content than any other
introductory college textbook on the history of economic thought
“from Smith to Friedman.” It chronicles the long war between free
market economists and interventionist economists. It shows that
ever since the 1970′s, free market economists have begun to reverse
the tide of Keynesianism. And it offers some really juicy tidbits
about the participants.

The
book’s problems, however, are real, and they need to be dealt
with in future editions. These problems are as follows: (1) What
is modern about modern economics? (2) Why is Adam Smith the true
founder, rather than the mercantilists? (3) What are the methodological
issues that define modern economics? (4) Have the debates over
collectivism vs. the free market been the result of disagreements
over these methodological issues? (5) Can economists make scientifically
valid interpersonal comparisons of people’s subjective utility?
(6) If they can’t, then why should we pay any attention to them
when they recommend economic policies? (7) Can economics be value-free?
(8) What is ownership? (9) What is private property?

May
22,
2001

Gary North [send him mail]
is the author of an eleven-volume series, An Economic Commentary
on the Bible. The latest volume is Cooperation and Dominion:
An Economic Commentary on Romans. The series can be downloaded
free of charge at www.freebooks.com.

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