Mark Skousen, Author at MSKOUSEN.COM

Getting Published–An “Austrian” Triumph

September 5, 1998 By Mark Skousen Leave a Comment

Economics on Trial — THE FREEMAN

By Mark Skousen

“[Austrian economists] feel they’ve been frozen out of mainstream economics and seldom get even a footnote in standard textbooks.”
-Todd G. Buchholz 1

Austrian economist makes good! I just got published in the Journal of Economic Perspectives, the most widely read economics journal in the country.

The article, “The Perseverance of Paul Samuelson’s Economics,” is a damning review of the 15 editions of Samuelson’s famous textbook2 I am still in shock a year after getting an email from the JEP saying they had accepted my paper. Undoubtedly it is a watershed event when the No. 1-read economics journal in the country is willing to publish an article critical of the top Keynesian economist in the world and first American to win the Nobel Prize in economics. One of the co-editors, Brad de Long, said that my study is “one of the best and most exciting papers we published in the second half of the 1990s.” Tim Taylor, the managing editor, said that ten years ago they would not have published it.

Dethroning the King of Keynes

There are two major stories that come out of my study.

First, Samuelson’s Economics–the most popular textbook ever published, with over four million sold and translated into 41 languages–taught students a lot of bad economics. Until recently, the MIT professor taught students that high saving rates were bad for the country, federal deficits and progressive tax rates were beneficial, and Soviet central planning could work. In my review of his 15 editions, which covers the entire postwar period, I point out that Professor Samuelson spent whole chapters discussing the failed economics of the Soviet Union and China, while writing little or nothing on the success stories of West Germany, Japan, the East Asian Tigers, or Chile. He had numerous sections in his textbook on “market failure” while offering very little on “government failure.” He constantly highlighted the economics of Keynes, but downplayed the economics of Friedman, Hayek, and other free-market economists.

Samuelson’s Economics: From Keynes to Adam Smith

Not everything was negative in my review of Samuelson’s textbook. On the positive side: Samuelson frequently declared his optimism about the future of capitalism and rejected doomsayers’ predictions of another Great Depression or national bankruptcy. He regularly defended free trade and free markets in agriculture. And he was highly critical of Karl Marx and Marxian economics.

The most amazing discovery I made in my study is that Samuelson, under the influence of co-author William D. Nordhaus (Yale) and recent events, has had a change of heart and is gradually shifting back to classical economics. In more recent editions, he has reversed his position on a number of important issues. In the most recent edition, for example, Samuelson states that Soviet central planning was a “failed” model, that national savings is too low and needs to increase, and that the national debt is excessive.

The JEP also published a rejoinder by Samuelson, which was surprisingly reserved and anemic in response to my blistering critique. “I am pleading no alibi nor extenuations,” he wrote. “My present-day eyes do discern regrettable lags in sloughing off earlier skins.”3 He only denied that he was anti-saving, one thing he is famous for.

My study of Samuelson’s Economics points to the real need for a college-level textbook on sound economics. That is my primary goal right now. My forthcoming textbook is called Economic Logic and I hope to finish it next year. I’11 keep you posted.

Past Prejudices Against Austrians

Austrian economists have had a long struggle in getting recognized by the profession. The mainstream has shown little interest if not disdain for a school that is laissez faire in government policy and critical of mathematical modeling and empirical econometrics.

Following the postwar Keynesian revolution, the economics establishment was unreceptive to the works of Ludwig von Mises and Friedrich Hayek. In the 1960s, Austrian economists depended on the conservative publisher Regnery and the engineering publisher D. Van Nostrand & Co. to get published.

Future Is Brighter

Gratefully that’s all changing. Today Austrians hold a small but growing number of positions at major universities (George Mason, Auburn, NYU, University of Georgia, California State at Hayward, etc.), get published by major university and academic presses (Cambridge, Chicago, Oxford, NYU, Kluwer, Routledge, and Edward Elgar, among others), and are getting accepted in major journals (Journal of Economic Literature, History of Political Economy, Journal of Macroeconomics, and Economic Inquiry).

Still, other “free-market” schools (the monetarists and the new classicists) have advanced much further because of their mathematical and empirical approach. The Austrian school still largely remains a “book culture,” as Peter Boettke puts it, and needs to devote more efforts to “strategic” publishing in the journals rather than preaching to the choir if it wants to have an impact.4 Happily, things are looking up.

Notes:
1. Todd G. Buchholz, From Here to Economy: A Shortcut to Economic Literacy (Dutton, 1995), p. 238. Buchholz’s popular history, New Ideas from Dead Economists (Plume, 1990), completely ignores the Austrians because Hayek and Mises weren’t discussed at Harvard.

2. Mark Skousen, “The Perseverance of Paul Samuelson’s Economics,” Journal of Economic Perspectives, vol. 11, no. 2 (Spring 1997), pp. 137-152.

3. Paul A. Samuelson, “Credo of a Lucky Textbook Author, Journal of Economic Perspectives, vol. 11, no. 2 (Spring 1997), p. 155.

4. Peter J. Boettke, “Alternative Paths Forward for Austrian Economics,” The Elgar Companion to Austrian Economics (Edward Elgar, 1994), pp. 601-15.

Darwin on Wall Street

August 31, 1998 By Mark Skousen Leave a Comment

Darwin on Wall Street
Mark Skousen
Forecasts & Strategies August 1998

“No other theory or concept ever imagined by man can equal in boldness and audacity this claim — that everything revolves around human existence — that all the starry heavens, that every species of life, that every characteristic of reality exists for mankind and for mankind along. It is simply the most daring idea ever proposed.”
— Michael Denton, Nature’s Destiny

I can’t think of a more depressing philosophy than that of Darwinian evolution as expressed by apologists Stephen J. Gould and Richard Dawkins.

According to them, life is a mindless perpetuation of the species, without meaning or design, just natural selection and survival of the fittest.

Man is nothing special. The creation of life did not have man in mind. Man is accidental and random, a descendant of “punctuated equilibrium.” There’s no God, no special creator, no life after death, no spiritual existence at all. There’s no beauty in life — it’s all random matter. There’s no free will, only material determinism.

It’s all in the genes, didn’t you know?

Not surprisingly, Darwin suffered from this blead outlook on life and was terribly unhappy at the end of his life. Prior to writing The Origin of Species, he delighted in reading poetry and Shakespeare, and listening to music.

Afterwards, however, he lost all interest. “But now for many years, I cannot endure to read a line of poetry: I have tried lately to read Shakespeare, and found it so intolerably dull that it nauseated me. I have also almost lost any taste for pictures or music.” (The Autobiography of Charles Darwin, pp. 138-139)

The evolutionist view is pervasive; we even see it in economics and the financial world. “Today’s economy is a dog-eat-dog world; it’s a jungle out there, and only the fittest survive; the big corporations gobble up the weak competition.”

Economic Darwinism ignores the cooperative side of the economy, and the ability of weaker participants to survive and even thrive.

In the financial field, the efficient market theorists proudly declare: “The markets are random and unpredictable. You can’t beat the market, so why try?” Their investment technique is pretty boring stuff: Buy index funds, never trade, just buy and hold until retirement. It’s like watching paint dry.

A Better Alternative: Intelligent Design

Fortunately, there’s an alternative to Darwinian philosophy called “intelligent design,” and there’s growing support for this more upbeat theory of life, even among evolutionists.

One of the most fascinating books I’ve read recently is Nature’s Destiny: How the Laws of Biology Reveal Purpose in the Universe, by Michael J. Denton (Free Press, $27.50, buy at a discount through www.amazon.com).

Denton is a biologist at the University of Otago in New Zealand. He joins forces with the physicists who have demonstrated how the planet is uniquely formed to sustain life.

Moreover, Denton concludes, “the cosmos is uniquely fit for only one type of advanced intelligent life — Homo sapiens.” He demonstrates, for example, how the earth’s size and atmosphere are fit both for our size and dimension.

He writes eloquently about the unique features of man compared to other animals — our superior intelligence, vision, linguistic ability, and most interestingly, the dexterity of the hand. (A chimp can’t peel an apple, tie a knot, use a typewriter or thread a needle.)

Denton also points out how man is just the right size to handle fire. He also has an engaging chapter on water, and why humans and life in general couldn’t exist without it.

In one of his great books, Human Action (hardcover, $49.95, paperback, $24.95 available at www.lfb.org), the Austrian economist Ludwig von Mises asserted correctly that man alsways acts purposefully and with design.

Human beings think, adopt values, make choices, are conscious, make mistakes and learn from experience. In the financial markets, humans invest with a specific purpose in mind, whether to earn income, make a capital gain or hedge their portfolio. Thus, all movements in stock prices are purposeful, and never random.

In sum, Darwinian evolution as a philosophy is an empty black box. It’s time sciencists and social thinkers look to “intelligent design” as a more consistent and more fulfilling concept of life.

Forecasts & Strategies
August 1998 issue

Milton Friedman, Ex-Keynesian

July 31, 1998 By Mark Skousen Leave a Comment

Economics on Trial
THE FREEMAN
July 1998

Milton Friedman, Ex-Keynesian

by Mark Skousen

“I had completely forgotten how thoroughly Keynesian I then was.”

–MILTON FRIEDMAN ¹

What?! The world’s most famous freemarket economist a former Keynesian?

Yes, it’s true. One of the more remarkable revelations in Milton and Rose Friedman’s new autobiography, Two Lucky People, is Milton Friedman’s flirtation with Keynesian economics in the early 1940s. During his stint with the Treasury Department, Friedman was asked to give testimony on ways to fight inflation during World War II. His reply, couched in Keynesian ideology, mentioned several options: cutting government spending, raising taxes, and imposing price controls. Amazingly, nowhere did he mention monetary policy or controlling the money supply, the things Friedman is famous for today.

During the 1930s, Friedman had also favored Keynesian-style deficit spending as a way out of the Great Depression. His mentor was not Keynes himself but Friedman’s teachers at the University of Chicago. Friedman recounts, “Keynes had nothing to offer those of us who had sat at the feet of [Henry] Simons, [Lloyd W] Mints, [Frank] Knight, and [Jacob] Viner.” ² In short, Chicago economists were Keynesian before Keynes.

In his autobiography, Friedman says he was “cured” of Keynesian thinking “shortly after the end of the war,” but doesn’t elaborate. In a recent letter, he denies ever being a thorough Keynesian. “I was never a Keynesian in the sense of being persuaded of the virtues of government intervention as opposed to free markets.” It should also be pointed out that Friedman’s teachers at Chicago blamed the Great Depression on “misguided government policy.” Friedman indicates he was “hostile” to the Keynesian idea that the Depression was a market phenomenon. ³

Despite these statements, many free-market economists have long accused Friedman of being a quasi-Keynesian.

On December 31, 1965, Time magazine put John Maynard Keynes on the cover and quoted Friedman as saying, “We are all Keynesians now.” Later, Friedman said he was quoted out of context. “In one sense, we are all Keynesians now; in another, no one is a Keynesian any longer. We all use the Keynesian language and apparatus, none of us any longer accepts the initial Keynesian conclusions.” ⁴

In an article published in 1986, Friedman glorified Keynes as a “brilliant scholar” and “one of the great economists of all time.” He described The General Theory as a “great book,” although he considers his Tract on Monetary Reform as his best work. Moreover, he declared, “I believe that Keynes’s theory is the right kind of theory in its simplicity, its concentration on a few key magnitudes,its potential fruitfulness.” ⁵

Many conservatives wonder how Milton Friedman, defender of free markets, could speak so highly of a man considered the intellectual architect of the postwar inflation and the modern welfare state.

Friedman is known as the leader of the Monetarist opposition to the Keynesian revolution. According to Friedman, monetary policy (manipulation of the money supply and interest rates) influences economic activity far more than fiscal policy (taxes and government spending). Yet it must be remembered that monetary and fiscal policies are both forms of state intervention in the economy. Accordingly, some free-market advocates see Keynes and Friedman as partners in crime.

Granted, Friedman, as opposed to the Keynesians, favors a strict limit on monetary growth. Yet even Friedman occasionally succumbs to interventionist fever. Late last year he endorsed this remedy for Japan’s sluggish economy: print more money. Apparently Friedman felt that the easy-money policy in effect in Japan since 1994 (recent M1 was growing at 9.9 percent, M2 at 4.3 percent) was insufficient. “The surest road to a healthy economic recovery,” he wrote, “is to increase the rate of monetary growth.” What about tax relief, deregulation, and open markets? Friedman failed to list any of these options. ⁶

Undoubtedly he favors these remedies, but the article rekindled the old accusation that “only money matters” to Friedman.

Friedman the Anti-Keynesian

I have to admit that, like many free-market economists, I am surprised by these findings and the favorable comments Friedman has made about Keynes. I’ve always viewed the leader of the Chicago school as strongly anti-Keynesian. His Monetary History of the United States clearly contradicts Keynes’s contention that the capitalist system is inherently unstable. ⁷ The book shows that the Fed’s inept policies, not free enterprise, caused the Great Depression. Friedman’s permanent-income hypothesis modifies Keynes’s consumption function and undermines the case for progressive taxation. His natural-rate-of-unemployment doctrine denies any long-run trade-off between inflation and unemployment (the Phillips curve). In Capitalism and Freedom, Friedman challenges the effectiveness of the Keynesian multiplier and declares that the federal budget is the “most unstable component of national income in the postwar period.” ⁸ And, as early as 1963, he labeled as “erroneous” the Keynesian proposition that the free-market economy can be stuck indefinitely at less than full employment. ⁹

So where does that leave us? In one of the more controversial contributions to my edited volume Dissent on Keynes, Roger Garrison of Auburn University asks, “Is Milton Friedman a Keynesian?” Garrison contends he can argue it either way. Indeed. Yet, in the final verdict, I can’t help but think that Friedman, as an open-minded scholar, is willing to investigate and test all theories, no matter their source, and this methodology has gradually led him to discard most of Keynesianism. As he himself has written, “I have been led to reject it… because I believe that it has been contradicted by experience,” ¹⁰

1. Milton and Rose Friedman, Two Lucky People (Chicago: University of Chicago Press, 1998), p. 113.

2. Milton Friedman, “Comments on the Critics,” in Robert J. Gordon, ed., Milton Friedman’s Monetary Framework (Chicago: University of Chicago Press, 1974), p. 163.

3. “Comments on Critics,” pp. 48-49.

4. Milton Friedman, “Why Economists Disagree,” Dollars and Deficits (New York: Prentice-Hall, 1968), p. 15.

5. Milton Friedman, “Keynes’s Political Legacy,” in John Burton, ed., Keynes’s General Theory: Fifty Years On (London: Institute of Economic Affairs, 1986), pp. 47-48, 52.

6. Milton Friedman, “Rx for Japan: Back to the Future,” Wall Street Journal, p. A22, December 17, 1997.

7. With Anna J. Schwartz (Princeton, N.J.: Princeton University Press, 1963).

8. Milton Friedman, Capitalism and Freedom (Chicago: University of Chicago Press, 1962), p. 76.

9. Milton Friedman and David Meiselman, “The Relative Stability of Monetary Velocity and the Investment Multiplier in the United States, 1897-1958,” in E. Cary Brown, et al., ed., Stabilization Policies (New York: Prentice-Hall, 1963), p. 167. See also Friedman’s recently published article, “John Maynard Keynes,” Economic Quarterly, Federal Reserve Bank of Richmond, 83/2, Spring, 1997.

10. “Keynes’s Political Legacy,” p 48

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Economics on Trial
The Freeman
Foundation for Economic Education
30 South Broadway
Irving-on-Hudson, NY 10533

Great Turnabouts in Economics, Part II

June 28, 1998 By Mark Skousen Leave a Comment

Economics on Trial
THE FREEMAN
June 1998

by Mark Skousen

“I used to love hedgehogs but those were ‘my salad days when I was green in judgement’. Now I prefer foxes–Smith over Ricardo, Mill over Senior, Marshall over Walras.” — MARK BLAUG ¹

Last November, I reported on three economists who courageously reversed their published views. Now, I’d like to add a fourth: Mark Blaug. He is a prolific and intense writer, and most famous for his arduous textbook, Economic Theory in Retrospect (Cambridge University Press, 1997), now in its fifth edition. Blaug is primarily a historian of economic ideas and as such, he is, to borrow from Peter Drucker, a “bystander,” an unbiased reporter and critic of economic ideas. And my, does Mark Blaug write with profundity and wit. His latest work, Not Only an Economist: Recent Essays by Mark Blaug, is one of the most delightful books I’ve read in a long time. I found myself making notes and exclamation points on practically every page.

As perhaps the most profound keeper of economic thought since Joseph Schumpeter, Blaug has made remarkable progress. His unrelenting search for truth has led him along the intellectual road from Karl Marx to Adam Smith, and even now shows increasing sympathy with Joseph Schumpeter, Friedrich Hayek, and the Austrian school.

Blaug’s intellectual odyssey is curiously broad: like Whittaker Chambers, he started out a Marxist and a card-carrying member of the American Communist Party, then became disillusioned and betrayed. He flirted with Freud, but now recognizes Freudian psychology to be a “tissue of mumbo-jumbo.” Regarding religion, Blaug “was brought up an orthodox Jew, achieved pantheism by the age of 12, agnosticism by the age of 15, and militant atheism by the age of 17.” ² He has shifted ground as frequently as he has transferred allegiance: born in the Netherlands, educated in the United States, and now a resident of Great Britain.

The Perversity of Ricardo, Marx, and Sraffa

Blaug’s sojourn in economics is equally diverse. Leaving Marx, he became a convert to the British economist David Ricardo, wrote his Ph.D. dissertation on Ricardian economics, and even named his first son after him. But eventually he concluded that Ricardian economics is flawed and too formalistic. Blaug is especially disturbed by the development of a perverse version of Ricardian economics known as Sraffian economics. Sraffian economics is named after Piero Sraffa, author of the obscure theoretical work Production of Commodities by Means of Commodities (Cambridge University Press, 1960), which has highly influenced Marxists and post-Keynesians. Essentially, Sraffa uses a Ricardian model to claim that national output is completely independent of wages, prices, or consumer demand. Accordingly, governments can pursue their grandest redistributive schemes without damaging economic growth in the least.

In a scathing critique of The New Palgrave Dictionary of Economics, Blaug lambastes Sraffian economics as mathematically obtuse and irrelevant to the real world, and assails the editors for citing Marx and Sraffa “more frequently, indeed, much more frequently, than Adam Smith, Alfred Marshall, Leon Walras, Maynard Keynes, Kenneth Arrow, Milton Friedman, Paul Samuelson or whomever you care to name.” ³

Recently, Blaug has criticized modern economics for the “noxious influence” of Swiss economist Leon Walras in creating the “perfectly competitive general equilibrium model,” or GE for short. Most of the textbook writers, including Paul Samuelson, are enamored with GE, because of its mathematical precision. For example, the perfect competition model focuses on the final end-state of competition, rather than the competitive process itself. Blaug labels perfect competition a “grossly misleading concept” that ignores the role of the entrepreneur. He urges economists to “rewrite the textbooks” and replace the current Walrasian GE model with the dynamic Austrian view of the competitive process. ⁴

Blaug on Anstrian Economics

Joseph Schumpeter, FA. Hayek, and Israel Kirzner have been in the forefront of developing the Austrian view of competition. Blaug writes favorably about them all. Although belittling Mises’s methodology (“cranky and idiosyncratic”) and his business-cycle theory (“empty”), he grants Mises and Hayek “the better case” in the socialist calculation debate. He rates Schumpeter’s The Theory of Economic Development (1911) one of the three most important books ever written by an economist. Ultimately he prefers Hayek: “In short, it is Hayek, not Mises, who deserves to be patron saint of Austrian economics.” ⁵

Incomplete Conversion

Blaug’s conversion toward free-market capitalism is on the right track. He has gradually shifted toward Adam Smith and Hayek, though he is still enamored with John Maynard Keynes, who he says caused a “permanent revolution.” Keynes divides the time line between Blaug’s two biographical works, Great Economists Before Keynes and Great Economists Since Keynes. His current attitude is summed up as “capitalism tempered by Keynesian demand management and quasi-socialist welfarism.” ⁶ Hopefully, that’s not the final word on his economic philosophy.

One last note. Regarding Blaug’s intolerance of religion, I’m reminded of G.K. Chesterton’s response to H.G. Wells’s atheism: “H.G. suffers from the disadvantage that if he’s right he’ll never know. He’ll only know if he’s wrong.” ⁷ And the last thing that Mark Blaug wants to find out is that he is wrong.

Notes

1. Mark Blaug, Economic Theory in Retrospect, 5th ed. (Cambridge University Press, 1997), preface. According to the Greek poet Archilochus (c. 680 B.C.), “The fox knows many things, but the hedgehog knows one great thing.”

2. Mark Blaug, Not Only an Economist: Recent Essays by Mark Blaug (Edward Elgar, 1997), preface.

3. Mark Blaug, Economics Through the Looking Glass: The Distorted Perspective of The New Palgrave Dictionary of Economics (Institute of Economic Affairs, 1988), p. 15.

4. Mark Blaug, “Competition as an end-state and a process,” Not Only an Economist, pp. 78-81.

5. Ibid., pp. 9-91.

6. Ibid., p. 9.

7. Quoted in Joseph Pearce, Wisdom and Innocence: A Life of G. K. Chesterton (Ignatius Press)

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Economics on Trial
The Freeman
Foundation for Economic Education
30 South Broadway
Irving-on-Hudson, NY 10533

Today’s Most Influential Economist?

May 5, 1998 By Mark Skousen Leave a Comment

Economics on Trial — THE FREEMAN May 1998

by Mark Skousen

“But half a century later, it is Keynes who has been toppled and [______________], the fierce advocate of free markets, who is preeminent.”

–DANIEL YERGIN and JOSEPH STANISLAW, The Commanding Heights ¹

Fill in the blank. Who is the mysterious economist named above? Most of my colleagues named Milton Friedman, but in Daniel Yergin and Joseph Stanislaw’s bestseller, the Chicago economist runs a close second to….

F.A. Hayek, the Austrian economist!

Why Hayek? Because, according to Yergin and Stanislaw, Hayek has done more than any other economist to debunk socialism in its many forms–Marxism, communism, and industrial planning–and to promote free markets as an alternative system. Hayek’s influence perfectly illustrates John Maynard Keynes’s remark that politicians, “madmen in authority,” are the “slaves of some defunct economist.”²

Indeed, Hayek’s influence has been ubiquitous. As Yergin and Stanislaw point out, The Road to Serfdom greatly affected Margaret Thatcher in reforming Great Britain and raised doubts about industrial planning. Hayek’s criticisms of Keynesianism (A Tiger by the Tail) called into question deficit spending and the ability of the state to fine-tune the economy. His theory of decentralized knowledge and competition as a discovery process has had an impact on microeconomic theory and experimental economics. His work on the trade cycle and the denationalization of currencies has influenced monetary policy. His co-founding of the Mont Pelerin Society spread the gospel of free markets, property rights, and libertarian thought throughout the globe.³

A Surprising Victory

Yergin and Stanislaw’s revelation in The Commanding Heights: The Battle Between Government and the Marketplace That Is Remaking the World is a monumental victory for Austrian economics. It is all the more remarkable given Yergin’s background as an establishment journalist and author of The Prize, a Pulitzer Prize-winning book about big oil.

At the beginning of this decade, I argued in Economics on Trial that the “next economics” would be the Austrian model, with its focus on entrepreneurship, microeconomics, deregulation, savings, free enterprise, and sound money.⁴ But even I am surprised how rapidly Hayek and the Austrian school have achieved recognition.

The next step is to see how quickly the economics profession absorbs Austrian economics in its theories and textbooks. A quick review of the current top-ten textbooks reveals only two with significant entries on Hayek and the Austrians: Roy Ruffin and Paul Gregory’s sixth edition of Principles of Economics, and James Gwartney and Richard Stroup’s eighth edition of Economics: Private and Public Choice. Ruffin and Gregory give credit to Hayek (and Mises) for the fall of socialism, one of Ruffin and Gregory’s “defining moments in economics.” Curious note: Ruffin and Gregory’s fifth edition had no references to Hayek or Mises; clearly Ruffin and Gregory are quick to recognize a paradigm shift.

Other textbook writers are not so prescient. Samuelson’s 16th (50th anniversary) edition highlights only Joseph A. Schumpeter. Textbooks by David Collander, John Taylor, and Joseph Stiglitz cite Hayek only once, while top sellers by Roger LeRoy Miller; Michael Parkin; William Baumol and Alan Blinder; Campbell McConnell and Stanley Brue; and Paul Heyne make no references to Hayek and the Austrians.

A Tale of Two Cities

Yergin and Stanislaw rightly point to two schools of free-market economics responsible for the shift from government to private enterprise as the solution to world economic problems. “And the eventual victory of this viewpoint was really a tale of two cities–Vienna and Chicago,” declare the authors.⁵

In the judgment of many economists, Milton Friedman and the Chicago school have had even a greater influence than Hayek and the Austrians. Yergin acknowledges Friedman as “the world’s best-known economist,” noting that “the Chicago School loomed very large” in its sway on monetarism at the Federal Reserve and economic policy (under Ronald Reagan). And, of course, all top-ten textbooks in economics have significant sections on Friedman and his theories (monetarism, natural rate of unemployment, welfare reform, privatization). Friedman and the Chicago school have mounted an effective counter-revolution to Keynesianism.

The Great U-Turn

But Keynes’s principal rival in the 1930s was Hayek. Teaching at the London School of Economics, Hayek defended the classical model of thrift, balanced budgets, the gold standard, and free markets, while Keynes (Cambridge University) promoted the “new economics” of consumption, deficit spending, easy money, and big government. Keynes won the first battle for the hearts of economists, and his brand of “mixed economy” swept the profession. Hayek fell out of favor and went on to write about law and political science. The task of dethroning Keynes fell to Friedman; he has accomplished it masterfully.

Since winning the Nobel Prize in economics in 1974, Hayek and the Austrians have had a rebirth. Equally, Friedman and the Chicago school have come out of obscurity into prominence. Fifty years ago the Keynesian-collectivist consensus expressed the sentiment, “The state is wise and the market is stupid.” Today, the growing consensus is just the opposite: “The market is wise and the state is stupid.”

Break out the champagne. It’s time to celebrate.

1. Daniel Yergin and Joseph Stanislaw, The Commanding Heights: The Battle Between Government and the Marketplace That Is Remaking the Modern World (Simon & Schuster, 1998), p. 15.

2. John Maynard Keynes, The General Theory of Employment, Interest and Money (London: Macmillan, 1936), p. 383.

3. For a good overview of Hayek’s works, see The Essence of Hayek, ed. Chiaka Nishiyama and Kurt R. Leube (Stanford, Calif.: Hoover Institution, 1984). For a partial autobiography, see Hayek on Hayek (Chicago: University of Chicago Press, 1994). A full-scale intellectual biography of Hayek has been completed by Alan Ebenstein, Hayek: Philosopher of Libertarianism (forthcoming).

4. Mark Skousen, “The Next Economics,” Economics on Trial (Baldwinsville, N.Y.: Irwin, 1991), pp. 274-90.

5. Yergin and Stanislaw, p. 141. See my Freeman column, “Vienna and Chicago: A Tale of Two Schools,” February 1998.

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Economics on Trial
The Freeman
Foundation for Economic Education
30 South Broadway
Irving-on-Hudson, NY 10533

How Real Is the Asian Economic Miracle? A Reprise

April 5, 1998 By Mark Skousen Leave a Comment

Economics on Trial — THE FREEMAN – APRIL 1998

By Mark Skousen

“In retrospect, all fools become wise.”
–LUDWIG VON MISES

In the November/December 1994 issue of Foreign Affairs, Stanford economist Paul Krugman wrote a controversial article titled “The Myth of Asia’s Miracle.” He argued that, like Stalinist Russia and other centrally planned economies of Eastern Europe, the Southeast Asian nations were authoritarian and engaged in “growth achieved purely through mobilization of resources” rather than real productivity. He predicted that growth would continue, but at a slower pace. In sum, these Asian tigers were subject to the law of diminishing returns.

In my July 1996 Freeman column, I disputed Krugman’s thesis, countering that they had adopted sound principles of economics, such as budget surpluses, low taxes on investment, no welfare schemes, and high levels of saving and investment.

Krugman proved to be more accurate, although the reasons for the Asian crisis are more complex than either one of us realized.

As I see it, there were two factors at work that led to the collapse in the Asian markets and recession. First, overinvestment, and second the strength of the U.S. dollar. Let’s review each of these factors and the lessons we can learn from each.

Malinvestment and the Boom-Bust Cycle

First, it is clear that most of the Southeast Asian economies, including Singapore, Thailand, Malaysia, the Philippines and South Korea, suffered from overinvestment, or what Ludwig von Mises called “malinvestment.” The authoritarian regimes engaged in a “forced savings” program, demanding its citizens and businesses to overinvest. When voluntary savings were deemed insufficient to build up the nation’s infrastructure and capital formation, the state promoted industrial planning. Moreover, it created cheap credit policies and encouraged foreign investment at low interest rates. In sum, Southeast Asia created a classic inflationary boom.

The Austrian school has warned time and time again that an inflationary boom in capital investment not only causes prices to rise, but also makes unsustainable projects look attractive. Eventually, interest rates must rise and the economy is hit by a recession.1

The Dollar as a Quasi-Gold Standard

What brought about the crash in Asia? Strangely enough, it was the strength of the U.S. dollar. While not predicting the Asian crisis, I did forecast a strong dollar in the second half of the 1990s.2 I just failed to think through all the ramifications of a strong dollar around the world.

Most of the Southeast Asian currencies were tied to the dollar, and that was their demise. In some ways, it reminds me of the specie-flow mechanism under the gold standard. Under a classic gold standard when a nation inflates, gold flows out of the inflationary country, forcing the economy to contract. That’s more or less what happened in Southeast Asia, except that instead of gold, the standard was the U.S. dollar.

When the dollar rose 30 percent against the other major currencies, Southeast Asian economies that were export-oriented and linked to the dollar were placed at a disadvantage. Their exports suddenly became 30 percent more expensive, and demand for their goods declined. Exports dropped, profits fell, and debts couldn’t be repaid at current exchange rates. Consequently, their governments were forced to delink from the dollar and their currencies collapsed. The boom turned into a bust.

Silver Lining: Free-Market Reforms Coming

There is a silver lining in the Asian crisis. It is forcing Southeast Asian countries and their governments to adopt market capitalism. No longer can these authoritarian regimes afford to subsidize favored corporations or play political favorites. Inefficient or corrupt businesses must be allowed to go bankrupt. Easy credit is not the solution to a shortage of capital. In all this, Business Week has sounded the alarm and warned Asia not to fall back to angry nationalism or anti-capitalism. This is all the more amazing because Business Week has long had the reputation for being anti-free market. But it has changed for the better. To quote a recent editorial: “There is a strong chance that the Asian crisis can act as a solvent, dissolving authoritarian governments and economic practices while spreading democratic market capitalism” (January 26, 1998). Amen.

Notes:
1.The best summary of the Austrian position can be found in The Austrian Theory of the Trade Cycle and Other Essays, Richard Ibeling, ed. (Auburn, Ala.: The Ludwig von Mises Institute, 1996 [1983])
2. See my January 1995 issue. “The New Dollar Boom.” Forecasts & Strategies (Potomac, Md.: Phillips Publishing).

THE FREEMAN – APRIL 1998

The Exuberant Wade Cook

December 1, 1997 By Mark Skousen Leave a Comment

Ideas Matter
FORBES

By Mark Skousen

The first time I met Wade B. Cook was at a seminar for small investors in the early 1980s, when real estate and other inflation hedges were the rage. Cook gave a workshop on how to buy and sell mortgages–“discounted paper”–for quick profits, which he called the Real Estate Money Machine, which became a best-selling book of the same name. Forget buy-and-hold, he urged. Speculate. Trade mortgages: “Roll them.” Churning mortgages to create a “money machine.”

For a while Cook sold lots of books and tapes and had lots of fans, but apparently his money machine stopped working, and in 1984 he filed for bankruptcy well ahead of the real estate crash that took place later in the decade.

I thought Wade Cook would disappear like the rest of the get rich-off-real-estate gang, but I was wrong. He’s back, reincarnated as a stock market expert. Three of his books are on the Business Week bestseller list: Wall Street Money Machine, Wall Street Miracles and Bear Market Baloney. His book Real Estate Money Machine is back in print. His company is on the radio, promoting his one-day seminars, his books, videos and his three-day, $4,700 Wade Cook Workshops. Apparently the fish are biting.

Never one to overlook an opportunity, Cook has taken his company public (Nasdaq: WADE), and it has risen 500% in the past year. Recent market cap: $210 million. Cook owns 62% of the stock.

Cook’s enticements would catch the eye of any red-blooded investor: Get 14% to 34% monthly returns-consistently! Double your money every 2 1/2 to 4 1/2 months! The evangelist is not timid: “I’m into formulas which produce safe, sane 20%-plus monthly returns,” he says.

You don’t even need patience for the Cook approach: He promises fast results. In his books he annualizes his weekly, daily and even hourly returns. You’d think people would know better, but apparently they don’t.

How does Cook suggest going about investing? Forget buy-and-hold, he urges once again. Trade options. Make full use of margin. Turn your stocks over constantly. “Roll them” like a money machine. He urges buying stock right before the ex-dividend date, capturing the dividend and then selling. But doesn’t the stock price drop by the amount of the dividend “This is not always the case,” Cook claims.

For quicker profits, Cook goads his followers to load up on companies announcing stock splits. He pleads, “Show me a company that has done a stock split, which one year later (or two) is trading down.” Want faster profits? Buy options and buy on margin.

Can’t you get into trouble with a margin account? “Absolutely not.” It’s not surprising that with claims like these Cook’s company has been the subject of a fraud investigation by the SEC since March 1996. He denies any wrongdoing. And goes right on leading naive investors to potential doom.

Perhaps Alan Greenspan had Wade Cook in mind when he referred to “irrational exuberance” on Wall Street. It’s certainly irrational. This is the same nonsense Cook was peddling nearly 20 years ago, but this time it’s stocks, not real estate. The advice is just as dangerous and the people buying it are just as uninformed.

What I find scary is that there is a market for this stuff. The last time Cook prospered was when real estate became overheated and later crashed. Is his resurgence a harbinger of doom. Is the popularity of his stock market stuff telling us something? I hope not.

If it’s good stock market advice you want, read J. Paul Getty’s 12-page chapter on “The Wall Street Investor” in his classic work How to Be Rich. Sample: “The seasoned investor buys his stocks when they are priced low, holds them for the long-pull rise and takes in-between dips and slumps in his stride.” There’s more wisdom in those 26 simple words than in all the get-rich books ever written.

Forbes, December 1, 1997

How to Keep off The Forbes Four Hundred

October 20, 1997 By Mark Skousen Leave a Comment

Ideas Matter
FORBES

How to Keep off The Forbes Four Hundred
By Mark Skousen

“You see that man over there driving that tractor,” my father asked me as we drove by a farm. “He’s a millionaire.” This was in the 1950s. There weren’t a lot of millionaires around in the 1950s. Only my father, who was his attorney, knew that his net worth placed him among the highest 1% of the state’s citizens.

Dad’s client was no miser. He just didn’t believe in flaunting it. Maintaining a low profile is an established American tradition. You don’t have to be a drug dealer to prefer secrecy, anonymity, unlisted telephone numbers. It saves you a lot of bother and unwanted attention. Justice Louis Brandeis once said: “The right most prized by civilized man is the right to be left alone.”

A Warren Buffett cannot preserve his privacy, no matter how hard he tries. He runs a publicly traded company that controls many household names. The same with Bill Gates and with almost anyone who heads a big public company. Donald Trump does not, of course, even want to be anonymous.

But if the stock market or the business world has been good to you and you would just as soon not attract a lot of attention, here are some suggestions.

A prominent international tax attorney (who wishes to remain anonymous, of course) told me, “I know two dozen people who have avoided The Forbes Four Hundred list by going offshore.” He’s not talking about doing it to cheat Uncle Sam–though many people try that. There are legitimate motives: becoming judgment-proof, divorce-proof, or maybe even Forbes-proof.
Here are some ways to avoid tenacious Forbes researchers, litigious relatives and greedy ex-spouses:

1. Own real estate and other assets through non-identifiable trusts or corporations. Trusts may include a revocable living trust, land trust or charitable remainder trust. Such trusts not only avoid probate, but also can hide the identity of property owners. An irrevocable trust can convey ownership of real estate to others. In addition, the corporate veil can hide ownership; Nevada bearer corporations and Delaware corporations are especially popular for this purpose. Real estate expert John Schaub of Sarasota, Fla. has written a report on the subject, “Financial Privacy and Asset Protection for Real Estate Investors” (800-237-9222, $19). In addition to owning property in the name of a trust or corporation, Schaub recommends renting with an option to buy as a way to profit from appreciating real estate without getting noticed. The main drawback with this approach is that you don’t have the same protection against competing claims to the property that you do with a recorded deed.

2. Buy coins, art and collectibles through a reputable dealer or bid at auctions–both anonymously. The right collectibles are portable, recognizable and easily transferable: gold bullion, rare coins, diamonds and other gems.

3. Use trusts and international business corporations (IBCs). This is the ultimate privacy vehicle for wealthy Americans. In addition to foreign bank accounts and real estate, foreign trusts and corporations give additional protection through the use of nominee directors and shareholders. Note: Offshore accounts must be disclosed on Schedule B of your 1040 tax return.
An excellent source for these techniques is Financial Privacy Report, a newsletter edited by Michael Ketcher (612-895-8757, $99, annually).
I recently read in The Wealthy 100 that Ben Franklin was, after taking inflation and relative values into account, among the 100 wealthiest Americans ever. Old Ben had a saying that still resonates with many Americans: “Let every man know thee, but let no man know thee thoroughly.” Though he was a patriotic American, if Ben were around today, I suspect he would keep his affairs private by going offshore–probably to Paris.

Forbes · October 20, 1997

Keynesianism Defeated

October 9, 1997 By Mark Skousen Leave a Comment

WALL STREET JOURNAL — THURSDAY, OCTOBER 9, 1997

By Mark Skousen

In 1992, Harvard Prof. Greg Mankiw was paid an unprecedented advance of $1.1 million to produce the “next Salmuelson”–a successor to Paul Samuelson’s “Economics,” the most successful economics textbook ever written, with more than four million copies sold in 15 editions and 41 foreign translations since 1948. Mr. Mankiw’s 800-page “Principles of Economics” has now been published, to great publicity. And for good reason: Mr. Mankiw has written a revolutionary–or rather, counterrevolutionary–work.

Virtually the entire book is devoted to classical economics, leaving the Keynesian model as an afterthought in the end chapters. Mr. Mankiw’s pedagogy is all the more remarkable given that he considers himself a “neo-Keynesian.” His liberal bias has allowed him to do what no other mainstream economist dares: He has betrayed Keynes.

Almost all economics textbooks published in the past 50 years have taken their cue from Mr. Samuelson, whose major influence was John Maynard Keynes’s “The General Theory of Employment, Interest and Money” (1936). Keynes’s book taught that Adam Smith’s classical model–founded on the virtues of thrift and balanced budgets, laissez faire capitalism and free trade–was a “special” case and only applied in times of full employment.

Keynes’s model portrayed the market as a driver without a steering wheel, a driver that could push the economy off the road at any time. He taught that the economy needed a large and activist government to steer it on the road of full employment. Keynesianism, or the “new economics,” became widespread–the “general” theory.

Modern economics textbooks thus focused primarily on the ups and downs of the capitalist system and how government policy could attempt to ameliorate the business cycle. They include many chapters studying cyclical fluctuations, while burying the study of economic growth and development–otherwise known as supply-side economics–in the back pages. Now Mr. Mankiw has changed all that, putting classical economics back at the forefront, where it belongs.

This is more than some free-market economists have been able to accomplish in tile past. James Gwartney and Richard Stroup, authors of “Economics: Private and Public Choice” (Dryden, 1997), don’t believe in the Keynesian model of aggregate supply and aggregate demand, or AS-AD, but they were forced to include it by their publisher’s review board, which consists of mainstream economists. Roger LeRoy Miller, author of another best-selling textbook, “Economics Today” (Addison-Wesley, 1997), told me, “AS-AD is a bunch of nonsense, but I’m required to teach it.” (One small victory: Paul Heyne refused to put AS-AD in his “The Economic Way of Thinking” (Prentice-Hall, 1997) and got away with it because he writes for a niche market.)

So, in a Nixon-goes-to-China twist, it took a Keynesian to accomplish what the free-market economists couldn’t–relegating Keynesian models to a minor role in textbooks.

Mr. Mankiw calls his classical model “the real economy in the long run.” His textbook, published by Harcourt Brace’s Dryden Press, teaches that increases in government spending crowd out private capital, producing higher interest rates. Higher thrift and greater savings produce lower interest rates and higher economic growth. Unemployment is caused not by greedy industrialists, but by minimum wage laws, collective bargaining, unemployment insurance and other regulations that raise the cost of labor.

Mr. Mankiw even approvingly quotes Milton Friedman: “inflation is always and everywhere a monetary phenomenon”–not the product of rising labor or supply costs, as many Keynesians believe. In fact, Mr. Mankiw cites Mr. Friedman more than he cites Keynes.

This is not to say that Mr. Mankiw’s textbook isn’t without a few sins of omission. He fails to tell students about the great postwar economic miracles of Japan, Germany, Hong Kong, Singapore and Chile. He also ignores the current debate over Social Security privatization. And there are no references to the great Austrian economists Ludwig von Mises and F.A. Hayek, or to Nobel laureate James Buchanan and the public choice theory he espouses.

But these complaints are small compared with the book’s overall message, that classical economics is now the “general” theory and Keynesian economics is the “special” case. Amazingly, Mr. Mankiw doesn’t mention most of the standard Keynesian analysis: No “consumption function,” no “Keynesian cross,” no “propensity to save,” no “paradox of thrift”– and only one short reference to the “multiplier”!

That’s quite a feat for Mr. Mankiw, a man who named his dog Keynes.

Welcome back, Professor

September 22, 1997 By Mark Skousen Leave a Comment

Ideas Matter
FORBES

By Mark Skousen

Millions of college undergraduates, myself included, studied economics using Paul A. Samuelson’s famous textbook. My first economics course, at Brigham Young University, used the 7th edition (1967). Since its first edition in 1948, Economics has sold more than 4 million copies and has been translated into 41 languages. It is the most successful textbook ever written. It has made the MIT economist rich.

What were we taught, even at a conservative institution like Brigham Young? I did a study of 15 editions of Samuelson’s book in the spring 1997 issue of the Journal of Economic Perspectives. What I found was a heavy dose of Keynesian folly. For example, that saving was bad (the so-called paradox of thrift), deficits were beneficial, fiscal policy was all that mattered and Soviet central planning could work.

Samuelson spent whole chapters in serious discussion of the socialist economics of the Soviet Union and China, while writing little or nothing on the success stories of West Germany, Japan, the East Asian Tigers or Chile. As late as the 12th edition, in 1985, Samuelson still believed the Soviet Union had growth rates exceeding the U.S., Japan and Germany. He had numerous sections on “market failure,” while offering little on “government failure.” He criticized laissez-faire, favored progressive taxation and endorsed the pay-as-you-go Social Security program.

Samuelson was no socialist. He frequently declared his optimism about the future of capitalism and rejected doomsday predictions about another Great Depression or national bankruptcy. He regularly defended free trade and was critical of Karl Marx and Marxian economics.

In short, Samuelson was a fairly standard Keynesian liberal. But say this for him: Unlike a lot of his fellow liberals, Samuelson is willing to change his mind when the facts demand it. Under the influence of Yale Professor William D. Nordhaus (co-author since 1985) and recent events, Samuelson is gradually shifting back to classical economics from pure Keynesian economics. In more recent editions of his textbook, he has reversed on a number of important issues. In the 15th edition (1995), for example, Samuelson states that Soviet central planning was a “failed” model, that national savings are too low and that the national debt is excessive.

The accompanying table compares some of the old Samuelson with the new.

Samuelson’s conversion from Keynesian heresy back to Adam Smith is far from complete. While favoring a capital gains tax cut, he recommends higher progressive income taxes to reduce the federal deficit. “America is not remotely near the limits of taxation,” he told the New York Times (Oct. 31, 1993).

Nevertheless, I say, “Welcome back to classical economics, Professor Samuelson.” There’s only one problem: A lot of policy is still being made and a lot of journalism written by men and women who absorbed an earlier form of the Samuelson gospel.

A return to basics

Topic	Old Samuleson	New Samuelson*
Savings	“The attempt to save only results in the reduction of income.” (8th ed., p.225)	“The savings rate is too low to guarantee a vital and healthy rate of investment in the 1990s” (p.654)
Deficit	“Incurring debt… induces more current capital formation than would otherwise take place.” (7th ed., p. 346)	“A large public debt can clearly be detrimental to long-run economic growth.” (p.638)
Monetary policy	“Today few economists regard Federal Reserves monetary policy as a panacea for controlling the business cycle.” (3rd ed., p.316) reduction of income.”:(8th ed.. p. 225)	“Fiscal policy is no longer a major tool of stabilization in the United States…. Stabilization policy will be performed by Federal Reserve monetary policy.” (p. 645)
Soviet planning	“The Soviet economy is proof that…a socialist command economy can function and even thrive.” (13th ed., p. 837)	“The failed model: Soviet Communism.” (p. 714)