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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.

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)

Reprinted with permission

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.

Reprinted with permission

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

Keynesianism Defeated

October 9, 1997 By admin 1 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.

Keynesianism Defeated

October 9, 1997 By Mark Skousen Leave a Comment

WALL STREET JOURNAL — THURSDAY, OCTOBER 9, 1997

By Mark Skousen

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.

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)

*15th edition

It took nearly 50 years, but Paul Samuelson is changing for the better.

Forbes · September 22, 1997

Best Textbooks for a Free-Market University

August 28, 1997 By Mark Skousen Leave a Comment

Economics on Trial
THE FREEMAN

By Mark Skousen

“I don’t care who writes a nation’s laws … if I can write its economics textbooks.” –Paul A. Samuelson

When I majored in economics in the late 1960s and early 1970s, there were precious few textbooks with a strong free market bent. My introductory course required Paul A. Samuelson’s Economics, a strictly Keynesian work favoring heavy state intervention. My class in the history of economic thought relied on The Worldly Philosophers, by Robert Heilbroner, a socialist who said that Karl Marx was a good family man. My economic history book was History of the American Economy, by Ross M. Robertson, who wrote that high federal deficit spending got us out of the Great Depression. And this was at Brigham Young University, a conservative institution.

Fortunately, free-market economists have gradually filled a gap by teaching sound principles at every level of economics. There’s still much more to do, but the direction is clear–more textbook writers are producing books that teach market principles.

Here are my choices for the best textbooks in each category:

Introductory Texts: Significant Progress

There are quite a few introductory texts to choose from. Most of my colleagues select The Economic Way of Thinking, by Paul Heyne (University of Washington), now in its eighth edition (Prentice-Hall, 1997). It focuses primarily on the micro foundations of the economy and avoids defective macro concepts such as aggregate supply (AS) and aggregate demand (AD). Economics: Private and Public Choice, by James D. Gwartney (Florida State) and Richard L. Stroup (Montana State), now in its eighth edition (Dryden Press, 1997), is another favorite. It consistently applies market principles to a host of problems, including the environment, taxes, and government spending. It is the only textbook I know that spends several pages on Social Security privatization.

The only drawback is that it begins its macro section with AS-AD, a fundamentally Keynesian concept (the idea that the economy can be stuck indefinitely at equilibrium at less than full employment). Gwartney and Stroup should take a cue from Greg Mankiw’s popular new textbook, Economics (Dryden Press, 1997), which begins its macro section with the classical model (which he terms “the real economy in the long run”) and relegates the short-term
AS-AD model to the back of the book. AS-AD is introduced in chapter 8 of Gwartney and Stroup but chapter 31 in Mankiw!

Another free-market textbook that puts classical economics ahead of the Keynesian model is Principles of Economics (Addison-Wesley, 1997) by Roy J. Ruffin and Paul R. Gregory, both professors at the University of Houston. They introduce AS-AD in chapter 27. Economic growth (the long-run classical model) is emphasized over the ups and downs of the business cycle (short-run Keynesian model).

Ruffin and Gregory have many other advantages: They are the only major textbook to cite favorably the Austrian economists Ludwig von Mises, Friedrich Hayek, and Joseph Schumpeter throughout the textbook, including the first chapter. Most textbooks quote liberally from John Maynard Keynes, Milton Friedman, and Karl Marx, but Ruffin and Gregory break new ground here. The authors focus on four major historical events (“Defining Moments in Economics”) and their impact on economic thinking: the industrial revolution, the rise and fall of socialism, the Great Depression, and globalization. They also devote major sections on privatization, public choice, the gold standard, and economic success stories in Europe and Asia.

Overall, the works by Ruffin and Gregory, and Gwartney and Stroup, are quickly becoming known as the most innovative textbooks on the market today.

Breakthrough in American Economic History

Now let’s turn to economic history. Gene Smiley (Marquette) has written a first-rate textbook for American economic history classes: The American Economy in the Twentieth Century (South-Western Publishing, 1993). It is the only textbook I know that considers all the major conflicting theories for explaining the major events of the twentieth century. It even includes an Austrian interpretation of the Great Depression and the World War II economy. I just wished Smiley covered events prior to the twentieth century; his book is that good.

History of Economic Thought

Many economics teachers have wisely replaced Heilbroner’s Worldly Philosophers with New Ideas from Dead Economists, by Todd G. Buchholz (Plum, 1990). Among other things, Buchholz is much more critical of Marx and central planning. Unfortunately, Buchholz’s book says almost nothing of the Austrian school. One book that does is A History of Economic Theory and Method, by Robert B. Ekelund, Jr., and Robert F. Hebert (McGraw-Hill, 1990). Murray N. Rothbard originally intended to write a one-volume history of economics, but his work gradually developed into a series of tomes, only two of which were completed before his untimely death: Economic Thought Before Adam Smith and Classical Economics (Edward Elgar, 1995). Both books are more appropriate for advanced courses in economic theory and philosophy.

Other free-market books may be helpful in various courses. For money and banking classes, Murray Rothbard’s The Mystery of Banking (E. P. Dutton, 1983) is useful. Dominick T. Armentano’s Antitrust and Monopoly, second edition (Holmes & Meier, 1990) is an ideal supplement in classes on industrial organization. And, of course, there is a wide variety of books on free-market economics to supplement the textbooks–works by Ludwig von Mises, Friedrich Hayek, Israel Kirzner, Henry Hazlitt, George Reisman, Hans Sennholz, and a host of others.

In short, free-market economics is back in the college classroom.

Economics in One Page

January 2, 1997 By admin 3 Comments

Economics on Trial – THE FREEMAN – JANUARY 1997

By Mark Skousen

“What makes it [economics] most fascinating is that its fundamental principles are so simple that they can be written on one page, that anyone can understand them, and yet very few do.”1
–Milton Friedman

The above statement by Friedman got me thinking: Is it possible to summarize the basic principles of economics in a single page? After all, Henry Hazlitt gave us a masterful summary of sound principles in Economics in One Lesson. Could these concepts be reduced to a page?

Friedman himself did not attempt to make a list when he made this statement in a 1986 interview. After completing a preliminary one-page summary of economic principles, I sent him a copy. In his reply, he added a few of his own, but in no way endorses my attempt.

After making this list of basic principles (see the next page), I have to agree with Friedman and Hazlitt. The principles of economics are simple: Supply and demand. Opportunity cost. Comparative advantage. Profit and loss. Competition. Division of labor. And so on.

In fact, one professor even suggested to me that economics can be reduced to one word: “price.” Or maybe, I suggested alternatively, “cost.” Everything has a price; everything has a cost.

Additionally, sound economic policy is straightforward: Let the market, not the state, set wages and prices. Keep government’s hands off monetary policy. Taxes should be minimized. Government should do only those things private citizens can’t do for themselves. Government should live within its means. Rules and regulations should provide a level playing field. Tariffs and other barriers to trade should be eliminated as much as possible. In short, government governs best which governs least.

Unfortunately, economists sometimes forget these basic principles and often get caught up in the details of esoteric model-building, high theory, academic research, and mathematics. The dismal state of the profession was expressed recently by Arjo Klamer and David Colander, who, after reviewing graduate studies at major economics departments around the country, asked, “Why did we have this gut feeling that much of what went on there was a waste?” 2

On the following page is my attempt to summarize the basic principles of economics and sound economic policy. If anyone has any suggested improvements, I look forward to receiving them.

ECONOMICS IN ONE PAGE

1. Self-interest: “The desire of bettering our condition comes with us from the womb and never leaves till we go into the grave” (Adam Smith). No one spends someone else’s money as carefully as he spends his own.

2. Economic growth: The key to a higher standard of living is to expand savings, capital formation, education, and technology.

3. Trade: In all voluntary exchanges, where accurate information is known, both the buyer and seller gain; therefore, an increase in trade between individuals, groups, or nations benefits both parties.

4. Competition: Given the universal existence of limited resources and unlimited wants, competition exists in all societies and cannot be abolished by government edict.

5. Cooperation: Since most individuals are not self-sufficient, and almost all natural resources must be transformed in order to become usable, individuals–laborers, landlords, capitalists, and entrepreneurs–must work together to produce valuable goods and services.

6. Division of labor and comparative advantage: Differences in talents, intelligence, knowledge, and property lead to specialization and comparative advantage by each individual, firm, and nation.

7. Dispersion of knowledge: Information about market behavior is so diverse and ubiquitous that it cannot be captured and calculated by a central authority.

8. Profit and loss: Profit and loss are the market mechanisms that guide what should and should not be produced over the long run.

9. Opportunity cost: Given the limitations of time and resources, there are always trade-offs in life. If you want to do something, you must give up other things you may wish to do. The price you pay to engage in one activity is equal to the cost of other activities you have forgone.

10. Price theory: Prices are determined by the subjective valuations of buyers (demand) and sellers (supply), not by any objective cost of production; the higher the price, the smaller the quantity purchasers will be willing to buy and the larger the quantity sellers will be willing to offer for sale.

11. Causality: For every cause there is an effect. Actions taken by individuals, firms, and governments have an impact on other actors in the economy that may be predictable, although the level of predictability depends on the complexity of the actions involved.

12. Uncertainty: There is always a degree of risk and uncertainty about the future because people are often reevaluating, learning from their mistakes, and changing their minds, thus making it difficult to predict their behavior in the future.

13. Labor economics: Higher wages can only be achieved in the long run by greater productivity, i.e., applying more capital investment per worker; chronic unemployment is caused by government fixing wage rates above equilibrium market levels.

14. Government controls: Price-rent-wage controls may benefit some individuals and groups, but not society as a whole; ultimately, they create shortages, black markets, and a deterioration of quality and services. There is no such thing as a free lunch.

15. Money: Deliberate attempts to depreciate the nation’s currency, artificially lower interest rates, and engage in “easy money” policies inevitably lead to inflation, boom-bust cycles, and economic crisis. The market, not the state, should determine money and credit.

16. Public finance: In all public enterprises, in order to maintain a high degree of efficiency and good management, market principles should be adopted whenever possible: (1) Government should try to do only what private enterprise cannot do; government should not engage in businesses that private enterprise can do better; (2) government should live within its means; (3) cost-benefit analysis: marginal benefits should exceed marginal costs; and (4) the accountability principle: those who benefit from a service should pay for the service.

Endnotes:
1. Quoted in interview, Lives of the Laureates, William Breit and Roger W. Spencer, eds. (Cambridge, Mass.: MIT Press, 1986), p.91.
2. Arjo Klamer and David Colander, The Making of an Economist (Boulder, Colo.: Westview Press, 1990), p. xiv. See also David Colander and Reuven Brenner, Educating Economists (Ann Arbor: University of Michigan Press, 1992).