Free Market Economics: Are We Winning?

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.


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