austrian economics newsletter fall 1991

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AustrianEconomics Newsletter

THE 1991 M IS ES UNIVERS ITY :ANOTHER YEAR OF EXCELLENCEIN AUSTRIAN ECONOMICS

S t a n f o r d University was flooded with Austrianschool economists from July 7-14, in what has

become an annual pilgrimage to present 120 studentsfrom al l over the world an inst ruct ional al ternat ive tomainstream neoclassical thought. The event is theMises University sponsored by the Ludwig von MisesInstitute. Now in its seventh year, the 1991 program wasa br i l l ian t success .

"The quality of the students was higher thanever," said Joseph Salerno, professor of economics atPace University and Mises University faculty member. "They were well read, interested, had excellentquestions, and demonstrated outstanding prospectsfor th e future. I don' t know where all these youngAustrians keep coming from, bu t it sure was encouraging."

Hans-Hermann Hoppe of the University of Nevada, Las Vegas, agreed. "Because of this program,th e Austrian school is beginning to represent astrong voice in economics today. These studentswere se r i ous a bou t e c onom i c sc i ence . Th e i r mindswere open to new approaches. That's what we needto bui ld th e school ."

"Times sure have changed," said Murray N.Rothbard, professor of economics at the Universityof Nevada at Las Vegas and dean of the Mises University. "I remember when you could count the Austrianeconomis t s on one h an d a nd th e i n t e re s t ed s tuden tson two. Now we've got an army out there, in both faculty and students. What a pleasure. I wish Misescould have seen this ."

These sentiments were echoed by all 17 members of the faculty. In addition to Rothbard, Hoppe,and Salerno, the faculty included Robert Batemarco,Marymount College; Walter Block, Holy Cross College; Roy Cordato, Institute for Research on the Economics of Taxation, and Johns Hopkins University;

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The 1992 Mises Univers ity wil l be held,July 4-11, at Stanford University. For moreinformation contact t he Mi ses I ns ti tu te ,Auburn University, Auburn, AL, 36849-5301; (205) 844-2500; fax (205) 844-2583.


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Thomas DiLorenzo, University of Tennessee at Chattanooga; John Egger, Towson State University; RogerGarrison, Auburn University; David Gordon, Ludwigvon Mises Institute; Jeffrey Herbener, Washingtonand Jefferson College; Robert Higgs, University of Seattle; Yuri N. Maltsev, Carthage College; Llewellyn H.Rockwell,Jr., Ludwig von Mises Institute;JustinRaimondo, The Libertarian-Republican; Joe Sobran, National Review; and Mark Thorn ton , Auburn University.

The students had much praise for the faculty."These professors were simply extraordinary," saidMatthew McDonald of the University of NorthTexas. "Without a single exception, this was an assembly of the most powerful minds I've had thepleasure of studying with." Lee Kessler of t he University of Pennsylvania added: "I was looking forward to this for a long time, because the MisesUniversity has an outstanding reputation, but this

AustrianEconomics Newsletter

Volume 13 , Number 1CONTRIBUTORS TO THIS ISSUEJames P. Philbin is a Mises fellow and graduate studentin economics at the University of Nevada, Las Vegas.Gerard Radnitzky is professor of the philosophy of science at the University of Trier in Germany.George Selgin is an assistant professor of economics atthe University of Georgia.STAFFEditor: Mark Thornton/Auburn UniversityAssociate Editor: Jeffrey A.Tucker/George Mason UniversityAssistant Editor: Peter G. Klein/University ofCalifornia, BerkeleyManaging Editor: Judith F. ThommesenC O R R E S P O N D E N T SRichard R. Hite/George Mason UniversityAmy Marie Marshall/l/n/Vers/ry of Notre DameJames P. PhWbin/University of Nevada, Las VegasAlexander Tabarrok/George Mason UniversityP E R M I S S I O N S AN D S U B M I S S I O N SChange of address requests and subscription requestsshould be addressed to Austrian Economics Newsletter,Mises Institute. Auburn University, Auburn, AL36849-5301.Questions pertaining to submissions of articles and bookreviews should be addressed to Mark Thornton , AustrianEconomics Newsletter, Economics Department, AuburnUniversity, Auburn, AL 36849-5242.Articles that ar e submitted should be double-spaced andno more than 6 pages in length. Articles that ar e acceptedwill be requested on an IBMformat diskette, when possible. There is no submiss ion fee.Permission to reprint articles is hereby granted providedfullcredit and address are given.Copyright 1991The Ludwig vonMises Institute, Auburn University, Auburn,AL36849-5301; (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. "Thedemand is high, and the quality of applicants is excellent," sa id Rockwel l. "Admission standards havebecome rather competitive. I expect this trend tocon t i nue . "

With growth comes diversification in both th es t uden t s ' ach i evemen t levels and the i r individua l interests. The strategy of the Mises University is to accommodate that diversity. That's why the classes arediv ided into t h r ee levels o f advancemen t and coverall aspects of Austrian economics, from th e convent ional to th e unconven t i ona l. Theo r e t i c a l discussions of money, banking, capital and interest,business cycles, pricing, industrial organization, andmore were common. So were methodological andphilosophical discussions. But the line-up also included history, economic policy, and critiques ofother schools of thought. An added feature this yearwas a series of classes in public goods, externalities,and th e law and e conomi c s l i te r a tu r e .

Altogether, the Mises University offered 58classes, 12 small seminars, 4 plenary lectures and discussions, and plenty of t ime for socializing. Thisamoun t s to 146 individua l sessions conduc t ed ove rthe course of 7-and-a-half days. Each applicant choseth e sessions he o r s h e w a nt ed wi thin a f r ameworkthat allowed for 40 hours of classroom time, plusseminars and plenary lectures. At any one time, 4 or5 classes were in session. On two occasions, 12 seminars ran simultaneously.

"The Mises University is more structurally complex than most programs," said Pa t Heckman, theInstitute's vice president for conferences. "But that'swhat it t akes to give the students what they want. Wetry to stay on the cutting edge." Perhaps that's why,according to Heckman, the Mises Institute is alreadyreceiving applications for next year.


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one most significant intellectual highlight in a weekshining with them. But David Fitzsimons of the University of Michigan voted for Rothbard's evening-long survey of American business history, which hedescribed as "the most intellectually compelling public lecture of my academic life."

The students thought th e lectures weregreat, but they also appreciated the t ime allowedfo r group discussion, both formal a nd inf ormal. The formal discussion took place in comfortable settings with about 10 students pergroup. For two hours, they traded i deas onsome particular aspect of economics, discussedwhat's going on in the profess ion in some area,o r t a l ked a b o u t th e n ew r e se a r ch s c ho l ar s a redoing. The informal session took place later, withrefreshments being served.

If anyone thinks the Austrianschool is static he should attendthe Mises University. The schoolis vibrant and changing all thetime, as much in our time as inMenger's and Bohm-Bawerk's.

"You can't overestimate the importance of thisprogram," said DiLorenzo. "Not only is it a highlight for the students, but also for the professors.When you get so many like-minded people together for a week an d an opportunity to exchange

ideas, it becomes more than a teaching session. It'san academic conference where you really get thingsdon e . "

What were the controversies this year? Bankingand methodological exchanges were themes of theweek, but so were discussions of history, otherschools of thought, and t he mos t appropriate way tointerpret and respond to them. "If anyone thinksth e Austr ian school is static h e s ho ul d a tt en d thisprogram," said Cordato. "The school is vibrant andchanging all the t ime, as much in our time as inMenger's and Bohm-Bawerk's."

What's on the agenda for next year? "We will refine and perfect the course offerings, update themin light of new literature, and give other professors achance to teach," said Heckman. The academic levelo f classes will be r a is e d even f ur th e r, s h e sa id, cont inuing a process which has gone on for years.

Mises University 1992 will also add two new features. First, in the opening session th e Mises Institute will show a new documentary about Mises's lifeand work, produced and directed by Emmy Awardwinner Sandra Garri tano of San Francisco. The people who have seen sneak previews described the filmas better than anything on PBS. (I t will also be available for showing in classrooms a round the world.)The second feature will be two simultaneous paneldiscussions on various aspects of Austr ian school theory and policy.

"Students ar e well advised to get the ir applications in soon for next year's conference," Rockwellcautions. It will again be held at Stanford Universityfrom July 4-11. Full-time students are encouraged towrite Pa t Heckman at the Mises Institute (AuburnUniversity, Auburn, Alabama 36849) fo r a more complete catalog of course listings an d an informationpacket, a


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Review Essay

THE NEW SUBJECTIVIST REVOLUTION:AN ELUC IDATION AND EXTENSION OFLUDWIG VON MISES' CONTRIBUTIONSTO ECONOMIC THEORYJ. Patrick GunningRowman & Littlefield, 1991

REVIEWED BY GEORGE SELGIN

I like to read with pen or pencil in hand, markingpassages for emphasis or editorial comment: An

asterisk or "NB" marks an especially important passage; a check expresses agreement; a question markexpresses puzzlement at the meaning of a word orsentence or paragraph; an exclamation mark signifies shock or surprise. I stopped markingJ. PatrickGunning's New Subjectivist Revolution somewhere inchapter 4, after packing its margins with more question marks than were in this year's census survey andmore exclamation points than might be found in as tack o f Ba tman comics .

That was several months ago. I have since takenup the book again, vowing to finish it without the distracting influence of a pen or penci l. But the book'scontents remained as perplexing and amazing to meas ever. My hand involuntarily crept toward the pencil jar. This report is really an admission of failurewritten instead of a proper review.

Why have I failed? One possible explanation ist ha t I have a lo w threshold fo r d i scuss i ons o f methodology,having taken an overdose of the stuff in graduateschool. I admit to having no desire to wri te on thesubject ; I am anxious to escape from what LelandYeager calls "the curse of methodology." Nevertheless I still retain a healthy interest in the subject. Iam, moreover, quite sympathetic toward t he methodological views of Ludwig von Mises, which I myse l f once t r i ed to e l abo ra t e a n d de fend . So t h e r eis nothing, I think, about th e topic of Gunning'sbook t h a t s h ou l d m ake m e un f i t to review it . I tis, instead, Gunning's presentation that rubs. Reviewing my marginal notes , I think I have isolated some of t he major problems. They are that(1) Gunning is careless in his statements about economic theory; (2) his terminology belies a misunderstanding of the praxeological method; (3) he failsto appreciate (as Mises himself did) th e import an t d i f f e r ence be tween me t h o d s o f historical a ndmethods of theoretical investigation; (4) in connection with (3), Gunning ove rs ta te s t he r ol e of"intuition" in th e Misesian approach to theory;

GeorgeSelgin

and (5) Gunning confuses positivism with institution-a l i sm an d h i s t o r i c i sm.

These are th e main problems. Minor ones include Gunning's insistence upon coining new expressions when perfectly good old ones exist andhis frequent use of the feminine personal pronoun to refer to "the economist"this an apparent sop to "politically correct" readers who, Ithink, must constitute a very small percentage ofthe potential audience for this work. (Most professional economists today a re men . As far as I amconcerned this is not something to gloat about; nevertheless it is a fact and pronouns should abide by itunless we are to prefer minority to majority rule. Alternatively a true individualist may op t for "he orshe," though this construction gets tedious after awhile.)

Gunning for ConfusionThe central chapters of Gunning 's book,

grouped together under th e mysterious heading"The Method of Contrasting Images of Functions,"a re m o re c on c e r n ed wi th mat t e r s o f mod e l bu i l ding and applied theory than with problems of th eory justification perse. The problem with thesechapters is that they consist mainly of statementsthat ar e either banal or wrong. The banal statements might be justified in an introductory economics text, bu t seem wholly ou t of place in a worklaying emphasis on a particular approach to economics. The wrong statements nulli fy any gain thebanal statements may offer in making th e bookmore access ib le to non - e c onomi s t s .

Because statements can so easily b e mad e to appear banal by being stripped out of context, I willstick mainly to listing examples of wrong statements.A "market economy" is defined as an economy involving production, saving, and monetary exchange. Barter, subsistence, and pure-exchange economies arethus supposedly "non-market" economies (pp. 57-58). This is nonsensical. Money is defined as "[A]common denominator fo r exchange," i.e., a uni t o faccount (p. 59). Most economists, including most


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Austrian economists, would insist that money mustalso be a medium of exchange, and that this funct ion ra ther than the un i t o f account funct ion is mos tfundamental . On page 61: "In a market economy, everyone occupies positions of monopoly. That is, everyone has some degree of monopoly power overothers." This is an unusual view, especially for a self-styled Misesian. Most theorists would link "monopoly power" to a producer's ability to influence amarket price; Austrians traditionally take a stillnarrower view of monopoly, linking it to exclusivefactor ownership or legislative barriers to entry .(Also appearing on p. 61 is a statement that wouldbe banal in most any context. It reads, "Monopolypower in a market economy is also affected bywhat economists have come to call competition."Who, pray, is the audience for this book?) Continuing on page 61: "Competition consists of pricingactions that result in copying or innovating." Itwould be more correct to say that competition is"copying or innovating" in a market setting. According to Gunning's definition, a firm that raisesits product price, and so encourages new entry("copying"), is acting competitively, whereas onethat discourages entry by keeping its price low isno t !

Cooperation is identified with "collusion" on p.109. Surely there are non-collusive forms of cooperat ion, such as peaceful exchange. If Gunning simplymeans to definecooperation to mean collusion, whydoesn't he just stick to using the ordinary term? Collusion ("cooperation") is supposed furthermore toinvolve the assignment of particular consumers toparticular producers. But this is only one, rather unusual, manifestation of collusion in t he economis t 'susual sense. On the same page we are also told that"Competition is [not "can be"] defined in terms ofboth an outcome and a process." This should say "interms of either an outcome ora process" since theone, identified with equilibrium, is contrary to theexistence of the o ther . Misesians traditionally insiston the process definition of competition, rejectingth e ou t c ome de f in i t i on .

The reader is told on p. 109 that "Consumersovereignty literally means that consumers . . . ar ethe agents responsible fo r determining whichgoods ar e produced, which consumers ge t thegoods , which i tems ar e factors , how much the factors ar e paid, and what th e rates of return onloans are"! Having foisted this fan tast ic meaningonto th e term "consumer sovereignty", Gunningthen hastens to take it back, saying in th e n ex t sentence: "Actually, the claim of consumer sovereignty should no t be taken so literally." This reader

was at least mollified by the thought that a potential,gross misunderstanding of the meaning of consumersovereignty had after all been avoided. But that wasb ef or e h e r ea d th e n ex t s en te nc e, which states that"Sovereignty applies broadly to individuals acting intheir roles as consumers, lenders, and factor-suppliers. Thus, a more apt name is individual sovereignty." More apt, indeed, if one wishes to rob auseful economic concept of its analytical meaning,namely that consumers' wants determine the mix ofoutputs in a market economy.

These examples are, I trust, sufficient to suggestthe general shoddiness of the book's arguments. Yetthey are as nothing in comparison with the many instances of statements that conveyed no meaningwhatever to this reader. I mention just a few of these;any reader anxious for more will no t have to lookvery hard to find them. Two appear on p. 111.Thefirst refers to a situation, supposedly no t special, inwhich "an increase in the demand for one good, whichis accompanied by a decrease in the demand for another good . . . leads robo-ents to expect lower robo-profi ts in the first industry and higher robo-profitsin the second than previously." (I suppose this maymerely involve an unintended transposition of "first"and "second", bu t I am not sure.) A second instanceis in the closing sentence of the same page, which argues that " the market value of factors in the marketeconomy is caused by entrepreneurship." I supposethis s t a t emen t is cons i s t en t with th e doc t r i n e o f " ind ividual sovereignty"; I am certain anyway that it ismeaningless in terms of orthodox (subjective) valuetheory.

Robo-SubjectivismOne does not usually expect to find robots in a

book about economics; ye t Gunning's book ha s somany robots in it that it reads like a screenplay for"Lost in Space." There are robot savers, robot consumers, robot factor supplierseven robot entrepreneurs! There is even a passage in which theshe-economist "converts an actor into a maximizingrobot" (p. 126).

I think I understand Gunning's reason fo r talking so much about robots. He wants to emphasizethe fact that economic models are, after all, abstractions populated with utility maximizers whose meansand ends (utility functions) ar e assigned to them bya theorist. In this sense, they are "programmed" to illustrate some principle. Although one may understand Gunning's motive, this does not mean that hisapproach is helpful. In fact, economists are used totalking about "agents" in their models; they also unders tand tha t t hese agents are not flesh and blood


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human beings, since the agents' goals and opportunities are specified by the theorist. To this extent,Gunning offers nothing new except the term"robot" in place of "agent." To th e Austrianreader, however, Gunning's approach seems moreseriously misguided. For he seems to have takenMises's observation that agents in an evenly-rotating economy do not ac t because they have no inclination to change their plans, and so function likepre-programmed automata , and turned it into aprinciple fo r constructing economic models of acting individuals! Surely for the Austrian-subjectivistit is meaningless to speak of robot entrepreneurs(or "robo-ents"). Agents ac t "like robots" whenthey ar e either t oo dul l or too satiated to conceiveof new ways in which to improve their well-being;once we begin to confront the reality of change asmanifested in entrepreneurial innovation therobot metaphor ceases to be applicable. "Robot entrepreneur" is a crude oxymoron.

Moreover from the Austrian (subjectivist) perspective, it is surely incorrect to speak of actors behaving in a manner consistent with economic theoryonly in so fa r as they have first been "converted" intorobots by the theorist. This point of view seems to regress to the concept of "economic man" that dominated classical method but is rejected by (most)Austrians. In the Austrian view, real-world actor s r eally dobehave according to economic principles. Ifthe theor is t canno t a c c oun t for s ome a c tu al b eh a vior, he or she does not conclude that t h e behav io r inquestion is insufficiently robot-like; rather, he or sheconcludes that the perceived means and desiredends of the individual in question have not beenproperly understoodthat a renewed attempt at verstehen is cal l ed for. E c on om ic m o d el s t ha t abst rac tfrom certain kinds of change and opportunities inorder to elucidate certain principles do not need to"convert" agents into robots: It is sufficient fo r th emode l s to a s sume a c o r re c t e n v i ro nmen t o f meansand ends to give rise to some particular pattern of action that is the logical outcome of constrained maximization (or constrained attempts to remove feltuneasiness). If, having created a certain economicenvironment and specified particular ends, Gunningstill has to convert agents in his models into robotsin order to get them to behave "economically," thenthere is something wrong with his concept of econ om i c b e h av i or .

Misunderstanding VerstehenI r e f e r to vers tehenthe me t h o d o f " c ommon

sense" or intuitive understanding in th e social scienceswith some trepidation, fo r I recognize

that the role of verstehen in economics is widelymisunderstood. This is evident in Gunning's book;it is, indeed, the most serious problem in Gunning'streatment of subjectivist method. Gunning's book isrife with references to Schutz and Weber; and it is apparent that he views Mises's method as an extensionof the methods endorsed by these writers. To deriveeconomic theories, the economist is, according toGunning, supposed to pu t himself in the place ofsome particular actor, asking how hemeaning thee c o nom i stwou ld a c t in th e s ame s i t u a t ion . Thu s"To understand entrepreneurship, the economistmust interchange positions with the hypothetical entrepreneur and ask how he would act under similarcircumstances." Elsewhere there are repeated references to the economist's reliance upon "intuitionand experience" in deriving economic laws. All of thisshows a serious neglect of the distinction between theory and history that Mises was anxious to stress. Verstehen is a tool for historical inquiry, i.e., forunderstanding concrete actions of real individualsunder particular circumstances. Interpretation of suchhistorical actions necessarily requires the imputationof some specific ends and perceived means to th eagents involved; there can be no question of anycomplete account of an historical event relyingsolely upon apriorism, deductive reasoning, and abs t rac t ion . Yet th e l a t t e r too ls a re essential in cons t r uc ting economic theoriestheories that will beapplicable to numerous historical events, and whichtherefore cannot be based upon appeal to verstehen.Theory does not , in other words, endeavor to explain particular, concrete choices of particularagents. It strives to provide a general framework forunderstanding particular actionsa "pure logic ofcho i ce . "

In some passages Gunning seems to recognizethe difference between the method of theory andthe method of history. Thus on pp. 1-2 he observesthat "the theorist is not interested in th e specificwants, abilities, or knowledge that individuals possess." The same point is reiterated at some lengthand quite accurately on pp. 24 and 25. Yet Gunningdoes no t seem to recognize that verstehen is after all atool for historical analysis and "applied" economics,not a tool of economic theory.

Gunning's confusion appears compoundedwhen he writes (p. 37) that "[wjhen economists interpret historical events they do not construct idealtypes." On the contrary, in doing history or appliedeconomics especially an economist cannot dispensewith ideal types, for the application of a theory toparticular events is largely a matter of interpretingactual choices using ideal types of agents as well as


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institutions as a basis for understanding their real-world counterparts. Ideal typification is a crucialcounterpart to the method of verslehen.

Subjective-"Isms"A final problem with Gunning's book is its failure

accurately to distinguish between positivism, histori-cism, and institutionalism. They are, after all, distinct. Yet Gunning's discussions and definitionscreate quite another impression. Witness the pastiche of "isms"offered on pp. 22-23, where Gunningwrites that positivism "has manifested itself in threeways. The first is the use of mathematical modellingand statistical definitions of economic phenomena tomake predictions about the future. The second is theinstitutionalist opposition to isolating economic phenomena from the specific political, cultural, and physical environment. The third is historical positivism,which is like institutionalism bu t tha t also advocates'holism'." In his first appendix Gunning expands onthis conflation by slating that positivism "defines[sic] economic phenomena to include all behaviorthat is related to production and exchange formoney, as it takes place in a particular culture, in aparticular physicalenvironment, and under a particular set of laws." I do no t deny that positivism and institutionalism have certain things in common; bu t tot reat them as if they are one and the same seems tome inexcusable , a

WHAT SHOULD ' AUSTR IAN 'ECONOMISTS DO?

BY JAMES P. PHILBINIn a 1964 essay,James Buchanan asked: "What

Should Economis t s Do?." I would like to attempt to answer his query, but from an Austrianschool perspective.

In the unhampered market or free society, theeconomist has a limited role. A free society is distinguished from the hampered market by the absence ofthe legalized institution of coercionthe state. The freesociety ischaracterized bymutuallybeneficial exchanges between individuals, the absence of taxation,and the abolition of a monopoly justice and policesystem. In a free society, an economist would mostlyhavean "educational" role to perform. The primarytaskwould be the elucidation of the general theoryof human action. Economists who could successfullyforecast future consumer wants would quickly leavetheir meager-paying academic posts and move to thestock and commodity markets where successful fore

casting reaps substantial fortunes.""' Entrepreneurshave a need for estimates of future product demand,but have little use for economic modelling. Anothertask would be to expla in the ar t of entrepreneurshipalong with the other phenomenon of the market process such as production and exchange, the role ofmoney, and time preference.

It is in the interventionist society tha t theeconomist's role expands." The economist can be anaid to the entrepreneur and the individual byanalyzi ng the effects of state intervention in th e marketeconomy. The increased demand for the services ofeconomists is described by Rothbard: "In a hamperedmarket economy, indeed, the economist often becomes u se fu l t o th e bus ines smanwhere cha ins o f economic reasoning become important, e.g., in analyzingthe effects of credit expansion or an income tax and, inmany cases, in spreading this to the outside world."4Thus, intervent ion ism makes t he economist useful outside academia, for he can provide the important serviceof unmasking the real effects of state action in the marketplace.

Ludwig von Mises says clearly the subject matterof economics is means no t ends. E nd s a re values tha tindividuals hope to attain through action. The selection of values by individuals falls i nto the realm ofethics, a discipline that deals with what kind of endsindividuals should adopt. Economic science is "neutral" in regard to ends.5 The economist can only determine if the means employed by individuals ar eappropriate for attaining the desired ends. For example, suppose an individual wants to amass a fortune.An economist can only address the means by whichthe individual must employ to attain his end. Theeconomis t can d emon st r at e t h at in th e free marke tthe only way to increase wealth is by serving consumers better than one's competitors. Whether an individual s h ou l d b e come a mil l ionaire o r be avolunteer in the Peace Corps is not in the domain ofe conomi c s .

Nobel LaureateJames Buchanan

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If economics is a wertfrei science, why have economists over time participated in the formulation of statepolicy? Public policy is hardly value free. Political decisions are value judgments by those in control of thestate apparatus. State action involves the use of confiscated wealth by elected officials or dictators toach ieve s ome e n d s. E c o n om is t s who advoca te o r construct policy, whether laissez faire or statist, are notemploying economics as a value-free science.

Mises made a valiant and commendable attemptduring his lifelong crusade for the free market to ju stify, on utilitarian grounds, value-laden statements ineconomics. Although this attempt was admired byhi s most devoted followers, it s weakness was nonetheless r evea l ed . '

An obvious reason why many economists engage inpublic policy despite their supposed value- free profession is that both the economist and the state mutuallybenefit. The obvious gain to an economist from the"exchange" can be an increase in prest ige, income, orposition. State gains are more difficult to decipher. Ostensibly, the state obtains the advice of an "expert" forthe formulation of policy; however, this is not all, forthe state profi ts on a far more essential, though surreptitious, level. A necessary requirement for the statemaintaining its monopoly of force is to convince thepublic that its rule is legitimate and it is working intheir interest. The courting of the intelligentsia is astrategic ingredient in this process.

By soliciting th e advice of the economist, thestate appears to attain the counsel of an independent arbitrator in formulating legislation (even if itis often ignored). Whether the advice is heeded orignored is immaterial to the real significance of theaction, for what th e state needs is legitimacywhichit achieves by having a supposedly value-free scientistconfer on, or construct its policy. The economist ac ting as a disinterested scientist knowingly or unknowingly contributes to this legitimatizing process. Botheconomist and the state profit, while the unsuspecting public has been duped into believing that publicpolicy has been somehow "tested" by value-free scient is ts .

What is generally overlooked by both the socialscientist and th e citizenry is that once an economistendorses or collaborates on legislation the economist is necessarily making a value judgment.10 Forexample, Milton Friedman in the mid-1960s proposed the concept of a negative income tax as a" refo rm" measure fo r th e welfare state." The ideawas to guarantee a minimum level of incomefo r each adu lt membe r of society. As an economistand a supposed practitioner of value-free science,Friedman's proposal violated the bounds of eco

nomics as a sc ience o f means no t ends . Economic sc ience is only equipped to elucidate the effects ofwhat a negative or a general income tax would leadtothe depletion of capital, coerced exchanges, anincrease in state power. Friedman's proposal was notadvanced by a concerned citizen hoping to mitigatethe inefficiency of the welfare bureaucracy. On thecontrary, the negative income tax was initiated byMilton Friedman, a future Nobel Prize winning"value- f ree" economi s t .

By no means is Friedman the only economistguilty of such a digression. One only has to look ats u ch b u re a u c ra c ie s as t he F e d er al R e se rv e o r th eP r e s i d en t' s Coun c i l o f Economi c Adv is o rs a s examples of economists intimately involved in the formulation of state policy. These economists typicallypresent themselves to the public as disinterested analysts. Once an economist endorses a policy, however,he implicitly adopts its ends.

The same is t rue o f an economi s t who advises abusinessman. A fashionable slogan that many academics are fond of using to describe themselves is "business economist." Such a term is misleading, for itcreates a false impression about the function of thebusinessman in the market, a nd th at of t he e conomis tas scholar. A businessman is a capital-owning forecaster, who arranges scarce factors of production inorder to satisfy the future demands of consumers forprofit. Economists are primarily pedagogues whoteach and expound upon the fundamental tenets ofeconomics. Those academics who regard themselvesas business economists are usually neither. Most areengaged in some sort of economic modeling whichis of little, if any use to the entrepreneur. Mises recognized the unhealthy hybrid of the term "businesseconomist" prevalent in academia:

What iswrong with die discipline that is nowadaystaught in most universities under the misleadinglabel o f e conomi c s is no t tha t the t eache rs a n d authors o f t he t ex tb o ok s a re e i th e r n o t bus inessmenor failed in their enterprises. The fault is withtheir ignorance of economics and their inability

i 13to think logically.In cases where a business economist designs mod

els for the entrepreneur, the economist, like the "disinterested" public policy analyst, is necessarily adoptingthe ends of the entrepreneur. The businessmanh ires the economist in order to make profi tanend. The economist devises his model or gives advice on the basis of helping the entrepreneur reachthis goal. So, just as the public policy advisor adopts thestate's ends the business economist adopts theentrepreneur's.


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Rothbard has suggested that to combat the inconsistency of economists making policy recommendations, they should explain the ethical basis forsuch advice.10 For instance, if an economist advocatesthat the Federal Reserve should increase th e moneysupply, he must first state from his own personal standpoint (based on whatever ethical position) whyan increase is needed. In addition, the policy advocate mustexplain why he believes the government should havecontrol over the money supply. Critics of such a policy,like Austrian economists, can refrain from making theirethical biases known because their objections aregrounded in praxeology. Austrian economists describethe effects of an increase in the money supply: redistribution of wealth , inf la t ion , distortion of th e structure of production. Those who elucidate the effectsof an increase in the money supply ar e not makingvalue judgments.

Rothbard considers policy recommendations byeconomists who fail to cite an ethical position a "treasonable" offense in a profession that is supposedlyv a lu e f re e :

I contend . . . that it is the responsibility of any scientist, indeed any intellectual, to refrain from anyvalue judgment whatever unlesshe can support iton the basis o f a c o h er e nt a n d defens ib l e e th ica lsystem . . . those economists who, on whatevergrounds, are not prepared to think about and advance an ethical system should strictly refrainfrom any value pronouncements or policy conclu

16s ion s a t a l l .

William Rappard, in a tribute to Mises, concurred with Rothbard: "[Economis t s who invokedthe authority of their intellectual discipline to urgeupon society measures calculated to reform it wereimpostors. Reforms could only be means to an end.Economics dealt, and could legitimately deal, onlywith means."17 Thus, to follow the dictates of the discipline and remain "pure," praxeologists quapraxeologists must refrain at all t imes from makingvalue judgments or policy suggestions. This includesmeasures (abolition of taxes, a gold standard, elimination of monopoly privileges) that would lead toprosperity, liberty, and justice. These a re ends nomatter how socially beneficial.

Austrians can p romo te the ir end s without violating value-free science by showing how th e effects ofinterventionist policies can lead to socialism an dwar. Ludwig von Mises was the quintessential example of an economist who managed to wage a constant, yet largely unsung struggle fo r his idealsdespite a hostile intellectual climate.18 He did so bothas a praxeologist, and as a "citizen." As a cit izen, Mises

was an indefatigable spokesman fo r the free market.He was an advisor to statesmen along with being ateacher and advocate of laissez faire to laymen.19 Asan intellectual, Mises believed that it was imperativethat the truths of his science become generallyknown. Despite unfavorable conditions, Mises asboth praxeologist and concerned humanitarian wasable to promote a philosophy while remaining valuef r ee .

Economists can thus promote their own ends,but must first drop the mantle of science in whichthey are wrapped and do so as private ci tizens. Bydoing so their pronouncements will be less revered bytheir fellowmen, yet they will no t violate the parameters of their science. Most important, they will not betools in the state apparatus that uses the social scientistto entrench an d extend its hegemony through the manipulation of value-free science.

The economist's primary function is the elucidation of the principles of praxeology. As a forecaster,the economist is of little use to the entrepreneur.However, the praxeologist can be helpful to both theentrepreneur and the public by demonstrating theeffec t s o f s ta te in te rv e nti on o n th e m a rk et . Austr ianshave also made a strong case for economic sciencet ha t is v a lu e f re e . The r e f o r e i f e c o nom i s ts wa n t toparticipate in, or suggest, policy, they must first dec l a r e an e th i ca l base .

No t e sJames Buchanan, "What Should Economists Do?" Southern Economic

Jouma/30 (January 1964): 213-22.Murray N. Rothbatd, Power andMarket: Government and theEconomy, 2nd ed. (Kansas City: Sheed Andrews and McMeel, 1977), p. 257.3lbid.''ibid, p. 258.Lionel Robbins, An Essayon theNature andSignificance of Economic

Science, 2nd ed. (London: Macmillan, 1952), p. 24.See Ludwig von Mises, Notes andRecollections, trans. Hans F.Sennholz (South Holland, 111.: Libertarian Press, 1978), pp. 71-92.Murray N. Rothbard, "Praxeology, Value Judgments, and Public

Policy," in The Foundations of Modem AustrianEconomics, ed. EdwinG. Dolan (Kansas City: Sheed 6kWard, 1976), p. 89.' Murray N. Rothbard, For A Nau Liberty: TheLibertarian Manifesto,

rev.ed. (New York:Collier Books, 1978), pp. 54-69.The economics professionis but one sector of the intelligentsia inwhich the state seeks"advice." See Harry Elmer Barnes, The Court Histori

ansVersus Revisionism (Hollywood, Calif.: Sons of Liberty Press, 1984).Rothbard, "Praxeology, Value Judgments, and Public Policy," p. 96.Kurt R. Leube, ed., The Essence of Friedman (Stanford, Calif.:

Hoover Institution Press, 1987), pp. 57-68.12Rothbard, "Praxeology, Value Judgments, and Public Policy," p. 92.Ludwig von Mises, The Ultimate Foundation of EconomicScience:

An Essay on Method, 2nd ed. (Kansas City: Sheed Andrews and McMeel, 1978), p. 78.

Rothbard, "Praxeology, Value Judgments, and Public Policy," p. 96.Murray N. Rothbard, "Value Implications of Economic Theory,"The American Economist (Spring 1973): 35.

13 .


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Rothbard, "Praxeology, Value Judgments, and Public Policy," p. 93.William E. Rappard, "On Reading von Mises," in On Freedom and

Free Enterprise: Essays inHonor ofLudwig vonMises,ed. Mary Sennholz(Princeton, N. J.: D.VanNostrand, 1956), p. 18.Murray N. Rothbard, "Ludwig von Mises and the Paradigm for Our

Age," ModernAge (Fall 1971): 370-79.MurrayN. Rothbard, "Misesand the Role of the Economist in Pub

lic Policy," in The Meaning ofLudwig von Mises: Contributions inEconomics,Epistemology, Political Philosophy andSociology, Jeffrey M. Herbener,ed. (Boston: Kluwer, forthcoming), p. 197. A

CAPITALISMArthur SeldonOxford: Basil Blackwell, 1990

Boo k R e view

R E VI EW E D B Y GE R A R D R A D N I T Z K Y

D r . Samuel Johnson pu t it succintly: "Politicalliberty is good only so far as it produces private l iber ty." Why this is so is spelled out in Seldon'sl a t es t book . Ar t hu r Se l d on as a F o u n d e r Pre s iden tan d Ed i to r i a l Di rec to r o f th e L o n d o n Ins t i tute o fEconomic Affairs, the oldest and most prominent ofthe market-oriented "think tanks", has for 30 yearsperformed a decisive service in the transformationof public opinion in Great Britain to favor the openmarket economy. This book is the quintessence ofhis work and the intellectual autobiography of a lifededicated to the idea of th e open society.

Economists call the free private market economy"capitalism." A politico-economic system is less capitalist and more socialist t he larger the sector of collective decisions in the market. All existing systemsthus con t a i n e l emen t s host i le to t he i r ma in cha racter: Capitalist systems have socialist state sectors; socialist systems have capitalist market sectors.

A comparison (or contrast) of capitalism and socialism is significant only when comparing both asthey are with all their faults or as they could be in anideal form. Socialists like to contrast imperfect capitalism with perfect socialism. Arthur Seldon's latestbook invites us to make significant comparisons between capitalism and socialism; and he then asks usto reflect on capitalism as it could be strengthenedby its yet unrealized potential.

In the competidve market in tracts on capitalism(Michael Novak, Charles Murray, Milton Friedman, toname only a few of the best selling authors), Capitalismranks as a catechism for the advanced, interesdng forthe specialist yet understandable by the layman. Its message is that capitalism is superior to all other systemsfor welfare and freedom. The main line of argument is

10

given in the following paragraphs.The market has many advantages over the politi

cal process. It allows individuals to express their personal preferences. The freedom of t he common manis much greater in the market, where one man hasmany choices ('Votes") everyday, than in the politicalprocess, where he has only onechoice (vote) amongfeiu alternatives (candidates) every 1,000th day.

The principle of private property is indispensablefor ensuring responsible exchange and trade. Onlywhen success brings personal rewards and failure pe rsonal penalty can responsibility be learned. Only thuscan effecdve motivation be created. Extensive privateproperty is the bes tway to tame the Leviathan of government and check its kleptocratic appetite.

Capitalism promotes specialization by competit ion. If the consumer can compare alternative goodsand services, fewer people are inc lined to producethose in which they do not excel. Incentives to effortproduce innovation and improvement in quality.The prices emerging in competitive markets perform the function of signals to what and how muchto produce; without them the information cannot befound. Because socialism lacks free-market prices itcannot promote welfare.

"Selfish" people can serve themselves only byserving the wants of others in the market. "Even bad menare led by the market process to do good, bu t good menare induced by the polidcal process to do harm" (p. 10).The capitalist system promotes moral behavior; peoplerisk their own money. The political process enables people to buy votes with other people's money.An order based on a market economy requires onlya minimal state that protects private property. Propertyrights can be respected in a "state of nature," but thelegal framework of a private rights society makes it mucheasier. The more tasks are solved by the market, the lessimportant is the polidcal process.

Seldon rejects the myth of "active citizenship":The typical citizen has more important matters to attend to. He leaves essential government tasks to specialists. But here there is danger. Governments tend

Arthur Seldon


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to over-regulation (as in health standards and financial transacdons) because th e risks of under-regulationar e more obvious and therefore less rewarding invotes; but for the general welfare too little regulation isbetter th an too much because it suppresses new enterprise in services and industries.

Governments tend to raise taxes and increase spending asfar as possible.But for general welfare too littlegovernment isbetter than too muchbecause it iseasier to enlarge governmentwhere essential than to reduce it whe r e excessive.

Most undesirable features of existing capitalismare caused by the political process. Politicians tend topoliticize economic problems, bureaucrats to bureau-cratize them, and group interests to gain at the financial expense of others. The result is paternalisticsocial democracy.

The market is the best way no t only to economicgrowth and efficiency bu t also to improve the well-being of the poorest. Involuntary poverty is better curedby easing free movement from industries and regionswith lower to those with higher incomes than by redistributing income by the methods of the political process, which blunt incentives and repress growth.

The common people stand to gain more from capitalism as it could be with less political managementthan from socialism which requires extensive political management. It is eas ier to even up differencesin purchasing power in the market than differencesin the "cultural" skills required by the political process. Socialism has not removed inequalities, it hasmerely institutionalized them.

For the Third World the fastest way out o f itsmisery is to introduce capitalism. For relativelywealthy countries th e fastest way to the economicbackwardness of th e "Third Way" (favored by somein Western an d in Eastern Europe) between the rejected communist socialism and the liberal marketcapitalism that has raised living standards for themasses is to implement discredited "social democ r a t ic " v a l ue s .

Capitalism as we know it is by no means free offault. But it can be corrected. In socialism every improvementnecessarily capitalisticmakes it less social is t . The ma r k e t m e c h an i sm is fa r moreself-correcting than the state: It is easier to escapefrom a commercial monopoly than from a politicalmonopoly. Only state protection creates long-livedmonopoly. Concentration in state industries (railways, postal services, telecommunications, and soon ) is always uneconomicat th e cost of th e consumer whom they a lso deprive of freedom of choiceand of innovation. As the state monopolist fears no

11

loss of buyers from competition, it has no incentiveto respect consumer preferences.

T h e m ark et is i nde s tr u c t ib l e . I f it is fo rb idden itseeks more welcoming environments or the so-calledunderground economy, where it often stimulates production. But only in the minimal state with privateproperty can capitalism fully realize its wealth-enhancing potential.

Capitalism is in no sense a one-sided hagiographyof the capitalist system. The author undertakes apainstaking examination of the criticisms leveled atits economic working and moral foundationsespecially from social-democratic thinking. There aresigns that the social-democratic era is slowly ebbing,and there is a renaissance of liberal politicalthought"liberal" in the sense of classical liberalism. So says Milton Friedman in discussing thechange from the "Fabian tide" to the "Hayekiant ide." The Tha tche r Revolut ion o f 1979 is such asign; so is Reaganomics whose economic creed hasinspired many books and given the Republicanst h r e e e l e c t i o n v i c to r i e s .

Does the book not have any faults? It is not easy tocriticize a book if you agree with its contents and admire its presentation. Perhaps passages like, e.g., "themarket . . . is a surer way to an egalitarian ambience... th an th e enforcement of equality by the state" (p .197) or "the equalizing power of the capitalist market" (p. 197) may puzzle a hasty reader. Seldonclaims that the market has shown its strength notonly as a source of prosperity but also as an equalizer. Yet, the marke t produces a distribution of inc ome a nd wea l th t h a t do e s n ot t e nd t owa r d s mo r eand more equality of outcomes. Competition functions as both a discovery process and a selectionprocess, and sometimes luck plays a decis ive role.Inequality of outcomes is inevitable, and it is also indispensable as an incentive to effort. Seldon rightlyargues that upward mobility for the lower incomestrata exists only thanks to the market. Propping uplow incomeswhich requires redistributiondoesless harm than distor t ing prices (e.g., through rentcontrol) or augment ing the set of publicly provided goods and servicesa clandestine form of

Gerard Radnitzky


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redist r ibut ion. However , each o f them v i ol at es t he efficiency condidons. Even when propping up low income s t he re mus t be a t r adeof f be tween moreequality of outcomes and integrity of property rightsor between actual level of consumption and thegrowth rate of consumption. This is often denied. Theclassical and very popular form of denying it is the doctrine of a "Social Market Economy" (roughly corresponding to what Ludwig von Mises labeled'hampered market economy'). The share of taxes ofall sorts (including covert taxes) in the GNP is a roughmeasure of inefficiency. One could wish to have amore extensive analysis of the redistribution problem.

In a few places the author mentions the "SwedishModel" and similar cases where th e G e rm a n idea o f a"social market" has b e en c ar ri ed to th e extremewithpredictable results. For instance, on page 208 ArthurSeldon correctly observes: "Nor has political democracy in Sweden ensured liberty in the intimate elements of everyday living . . ." Indeed, the paternalisticwelfare state has steadily and drastically reduced freedom of choice in the name of equality. One would havewished to have these issues elaborated, including ananalysis of the startling fact that the radical egalitarianpolicy tha t the Swedish social democrats have beenable to impose on the country for almost half a cen

AustrianEconomics NewsletterAuburn University, AL 36849-5301

tury has no t led to a more equalized societyon thecontrary has increased inequalities. Seldon's conceptual instruments would have provided him with excellent means for explaining this paradoxical effect.However, such criticism may appear pedantic.

F or m o st o f d ie industrial ized coun tr i es t h e bookcould no t be more timely. Their electronic media, their"intellectual" (the 'chattering classes') in schools and universities, their officialchurches, and so forth, are skeptical or ignorant of the free, private market economy, andthere are socialistsin all parties. The German Federal Republic isa good example: From 1949to the late 1950sitwasa paragon of a free-market economy, since then ithas steadily moved towards corporatism. It is to behoped that the European Community will realize thatintegration of diverse economies cannot be accomplished asa political and bureaucratic process, but canonly occur as a result of the withdrawal of the state andits agents, i.e., by delegating the taskof integration tomarkets. So far capitalism has no t been allowed to showwhat it can do, to deploy its potential for fostering prosperityand liberty. This isone of the main thesesofSeldon's book. It is heartening that Capitalism has beenawarded first prize in the contest for the book publishedin Britain in 1990 that "best contributes to public understanding of the political economy of a free society." a

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PAIDAuburn University, AL 36849-5301

PERMIT NO . 9

austrian economics newsletter fall 1991

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