Adrián Ravier, a professor of economics at Francisco Marroquin University in Guatemala and the National University of La Pampa in Argentina, has just completed a major interview with me on my life and contributions to economics, finance and the freedom movement. It will appear in the third volume of “LA ESCUELA AUSTRIACA DESDE ADENTRO: Historias e ideas de sus pensadores,” edited by Adrián Ravier and to be published later this year by Union Editorial in Spain.
BETWEEN CHICAGO AND VIENNA: INTERVIEW WITH MARK SKOUSEN
Mark Skousen is an American economist, investment analyst, newsletter editor, college professor and author of more than 25 non-fiction books.
AR: Professor Skousen… Thank you for this opportunity to let us know a little more about yourself. Please, explain the context in which you grew up in Portland, Oregon.
Yes, I grew up in Portland, a great intellectual environment (Reed College, a hotbed of radical thinking, was nearby). It forced me to always be informed and ready to defend my beliefs in economics, politics and religion. My two older brothers, Royal and Joel, as well as my high school friends, constantly challenged me to debate and learn new things.
AR: I have read that your father was an FBI agent. Is this a key to understand why you have been interested in economics and politics since such a young age?
Primarily politics. Like my better-known uncle, W. Cleon Skousen, my father was an FBI agent and a lawyer involved in the anti-Communist movement and gave speeches through the Northwest on politics and the communist threat. We subscribed to publications such as “National Review” and “The Freeman” and attended events and anti-communist rallies.
AR: Was your father a libertarian? Did he introduce you to the Austrian tradition of ideas?
No, he was a strict social conservative, and most of his books in his library were written by William F. Buckley, Jr., Barry Goldwater, Fred Schwartz, Phyllis Schlafly, J. Edgar Hoover, and the like. He did have a copy of Ludwig von Mises’s “Human Action” on his shelf, so I was familiar with his name, although Austrian economics did not really capture my imagination until I read Murray Rothbard’s “America’s Great Depression,” “Man, Economy and State,” and “What Has the Government Done to Our Money?”
Economics did not become a topic of focus until I took a class in the subject in my senior year in high school. It was taught so badly that I knew I could do better and suddenly I could think of little else. My interests have always been eclectic, and economics interested me intensely because it covers my other interests in mathematics, history, finance, politics and writing. My interest was so intense that I got a B. A., M. S., and Ph.D., all in economics.
AR: Some authors do not like to be called “Austrian”, “Monetarist”, “Keynesian” or “Marxist”. Are we right if we say that you are an Austrian Economist?
I used to be of the opinion that we should all be simply “good economists” as Milton Friedman and Lionel Robbins preached, and not compartmentalize ourselves into various schools. If economics is an objective science, we shouldn’t divide ourselves in various camps, or even “left“ or “right,” terms that create more heat than light. We should all be searching for the truth, no matter what the source. Nevertheless, over time I’ve come to appreciate the biases and advantages of each school. Monetarists focus on the importance of money and the competitive marketplace; Keynesians on consumption, government spending, and institutions; Marxists on labor and management relations; and Austrians on capital and the structure of production. One can learn a great deal by studying the focal points of various schools that otherwise would be missed. But of all the schools, I’ve always found Austrian school to be the most rewarding.
AR: You have been working in the Austrian tradition for a long time, writing books and articles, teaching and giving conferences everywhere. You have even organized FreedomFest. Why? What have you found in this tradition that was absent in other schools of thought?
My first introduction to economics in college was through the popular Keynesian textbook written by Paul Samuelson, and his defense of deficit spending, the welfare state, and his anti-saving mentality (“paradox of thrift”) was a turnoff, contradicting everything I had been taught as a social conservative Mormon, and so I was immediately looking for alternative models.
I was first attracted to writings of Milton Friedman, having been introduced to the Chicago school by Professor Larry Wimmer at Brigham Young University (my alma mater) in the 1960s. Wimmer got his Ph. D. under Friedman. I was especially interested in “Capitalism and Freedom.” While I found Friedman’s writings refreshing and convincing, he could not answer all my questions and doubts about Keynesian macroeconomics and the business cycle.
It was then that I discovered Murray Rothbard in the early 1970s, and was smitten by “America’s Great Depression” and his magnum opus, “Man, Economy and State.” I even read the latter on my honeymoon in 1973 (though I didn’t get far). Here were all the answers about economic theory and policy. I was also quite taken with his booklet, “What Has the Government Done to Our Money?” It finally revealed the mystery of money. To this day, I consider Rothbard’s booklet as powerful a polemic as Marx’s and Engel’s “Communist Manifesto.”
The Austrians definitely have the upper hand when it comes to discussions of money and banking, the business cycle, the structure of production, and how the economy works. I found their macroeconomics far more sophisticated and satisfying than the standard Keynesian and Monetarist models.
However, I should add that since the Seventies, I have regained a great deal of respect for the Chicago tradition, especially their approach of looking at the data and testing various theories in micro and macro economics. Today I consider myself having one foot in the Austrian school and one foot in the Chicago school. But if I lean toward any one school, it is Austrian.
AR: You have received your Ph.D. in Economics and Monetary History from the George Washington University. How was that experience? What have you learned from mainstream economics?
It was a traditional mainstream Ph.D. program, although it did not emphasize advanced mathematics as much as other schools at the time. The professors focused more on theory, history and statistics than mathematical modeling, which I found attractive. I learned a great deal from John W. Kendrick, Arthur E. Burns, and Robert Grossfarb, among others.
They gave me plenty of leeway, and in fact, they let me chose as my dissertation “The Economics of a Pure Gold Standard,” which was heavily Rothbardian — and it sailed through with few changes. I believe I’m the only economist to write a “no compromise” Ph.D. dissertation on the 100% gold standard. At the end of my dissertation committee oral, I was asked, “You don’t really believe in a pure gold standard, do you?” Not surprisingly, Rothbard always loved my dissertation, which has been published and gone through four editions so far (published currently by the Foundation for Economic Education).
AR: And what was your contribution in that dissertation?
It was a history of economic thought about the pure gold standard, as well as a discussion of a silver standard, and its role in society. I tried to show there were strong economic arguments for gold, that monetary gold increased at a rate similar to the monetary rule and that a commodity-based system was not a burden. I was surprised to read that even Mises and Hayek rejected the economic arguments for gold, and only favored gold for political reasons. I also did a comparative study between the gold standard, a monetary rule, free banking, and the current model of central banking under fiat money, pointing out the pros and cons of each.
Ultimately, I came to the conclusion that the search for a monetary nirvana, an ideal or perfect monetary system, remains elusive. Each monetary program has its pluses and minuses. Economists have solved so many problems, but the ideal monetary system has eluded us. On a purely theoretical level, the international gold standard is probably the best of the lot. On a practical level at this point, the best we can hope for is a monetary system that minimizes structural imbalances, and I think it must include gold in some way as a monitoring device and discipline.
AR: You have been connected with most of the great Austrian economists such as Friedrich Hayek or Murray Rothbard. Any experience you would like to share with us?
I knew both of them. I met Hayek two or three times, and was one of the last people to interview him. In 1985, Gary North and I spent three hours with Hayek at his summer home in the Austrian Alps and peppered him with questions about philosophy, history of the early Austrian school in Vienna, and economics. Much of the interview showed up in “Hayek on Hayek,” in the collected works of Hayek (without attribution, strangely enough). Hayek was in delicate health, but loved every minute of the interview. Afterwards, his wife yelled at us for taking so much of his time. “He won’t be able to do any work for weeks! Get out!” she shouted as she shooed us out the door.
I spent more time with Rothbard in New York, and at conferences sponsored by the Mises Institute, back in the 1980s and early 1990s. He was one of those people who could talk for hours on any subject. It’s like you could never reach the depth of his knowledge.
Around 1980, I commissioned and paid him a handsome sum to write an alternative popular history to Robert Heilbroner’s “Worldly Philosophers.” Heilbroner had an unforgettable title, but his favorite economists were Marx, Keynes and Veblen. We deserved better, so I asked Murray to write the definitive history from an Austrian perspective. He was supposed to write around 12 chapters in 1-2 years, starting with Adam Smith. It turned out to be a much bigger project, a Schumpeterian tome, beginning with the Greeks. I kept encouraging him, but ultimately gave up. The running joke was “Are you to Marx yet?” Adam Smith was supposed to be the subject of chapter 1. Instead it was chapter 16. He finally got to Marx, but then suddenly died of a heart attack in 1995, and the publisher Edward Elgar published two volumes posthumously. Murray planned on writing two more volumes in his exhaustive history, but sadly never got to them.
A few years later, I decided to write the one-volume Heilbroner alternative myself, calling it “The Making of Modern Economics” (ME Sharpe, 2001).
AR: “The Structure of Production” (New York University Press, 1990) was your first academic book, and sometimes is described as a classic of modern Austrian macroeconomics. What can the reader find in that book?
“Structure of Production” has been viewed an the underground bible of supply-side economics; a revival of Say’s law; a tool for financial analysis; and most importantly, as an Austrian advance over the standard Keynesian and monetarist Weltanschauung.
I firmly believe that during our short sojourn in life, we should concentrate on advancing and improving upon the works of others. Why spend time in an activity that others are already carrying on satisfactorily? I saw a need to improve upon Hayek’s masterful macroeconomic model found in “Prices and Production” (1931). The Austrians needed an up-to-date macro model that countered the Keynesian and Monetary models in vogue today. I thought that Hayek’s triangles were a good starting place, but they were entirely theoretical, which was one reason it didn’t catch on. In my work, “The Structure of Production” (NYU Press, 1990), I attempted to modernize Hayek’s triangles into a universal four-stage model of the economy (resources, production, distribution, and final output) that could be integrated into national income statistics and could be tested empirically.
In addition to the universal four-stage model of the economy, the book introduces a new aggregate statistic, Gross Domestic Expenditures (GDE), which attempts to measure total spending in the economy. I show that GDE can easily be integrated into textbook national income statistics such as GDP. See below for the diagram 4-stage model of the economy, and the relationship between GDE and GDP.
The current macro model is Keynesian in nature and starts with final output (GDP), which creates distortions about the economy, overemphasizing consumption at the expense of saving and investment. My “Austrian” model creates the proper balance between the “make” economy and the “use” economy. Using GDE, I discovered that consumer spending represents only about 30% of the US economy, not 70% as is commonly reported. For more detail, see my recent article: http://www.thefreemanonline.org/columns/consumer-spending/
I’ve incorporated the 4-stage model and GDE in my own textbook, “Economic Logic” (Capital Press, 2000, 2010), and hopefully it will be adopted eventually in all textbooks. But as Max Planck once said, “science progresses funeral by funeral.”
I also seek to advance the Austrian theory of the business cycle with my introduction of Aggregate Demand Vectors (ADV) and Aggregate Supply Vectors (ASV).
It took me nearly 10 years to write the book, and it’s only now getting some recognition. New York University Press recently released a paperback edition, with a new introduction (2007). I see it was recently translated into Polish.
AR: If I am not wrong, Rothbard had read that book. Did he give you any comments? What does he thinks about so many graphs?
Murray read the entire manuscript and offered numerous suggestions. I think he recognized the breakthrough nature of my work as an Austrian advance in macroeconomics. He has some doubts about my use of graphs, but ultimately endorsed the book, and it was carried for many years by the Mises Institute.
I firmly believe that if we don’t encourage graphics and statistical work in Austrian economics, we will never get accepted by the mainstream textbook community. I wrote my textbook “Economic Logic” in order to demonstrate how it could be done without sacrificing theoretical purity. I was amazed that it could be done. And yes, there are lots of graphs and statistics in my textbook.
I remember the story Larry Wimmer told me. In the 1960s he attended a FEE seminar in New York, and when he tried to draw a supply and demand curve on the blackboard, he was severely reprimanded by the hard-core Misesians. I hope we’ve gotten beyond that kind of Misesian Puritanism. (As far as I’m aware, Mises drew only one graph in all his books, one in “Socialism”).
AR: What do you think about Capital Based Macroeconomics developed in “Time and Money” by Roger W. Garrison?
Professor Garrison is a creative genius and his book offers a significant advancement in Austrian macroeconomics. He has lots of graphs! I especially like the way he integrates and contrasts the Austrian triangles with the Keynesian cross. Absolutely brilliant. I’ve used his book in my classes at Columbia University.
AR: Why do you think that most of the mainstream economists do not pay attention to the Austrian Theory of Capital and the Austrian Theory of Business Cycles?
They are still caught up in Keynes’s law (demand-side management) rather than Say’s law (supply-side management). Until the most recent financial crisis (2008), the mainstream macro models were deemed sufficient to explain the business cycle. For Keynesians, it was the deficiency in either aggregate demand (like the Great Depression) or aggregate supply (as in the case of the Stagflation of the 1970s); for the Monetarists, it was monetary disequilibrium (tight money in the Great Depression or easy money in the 1970s). Both the Keynesian and Monetary models downplayed the impact of asset bubbles because when these asset bubbles collapsed, they only had a micro effect on the economy. So for years, the Austrian model of structural imbalances was ignored.
Then along came the real estate bubble and collapse in the most recent financial crisis, and for the first time, economists had to pay attention to the macro effects of an asset bubble (real estate and mortgage securitization) that collapsed and impacted the entire monetary system. So now the profession cannot ignore asset bubbles any longer, and the Austrian theory of the business cycle can no longer be ignored. The Austrian theory is the only macro model that focuses on the structural imbalances created by below-natural interest rates and easy money, so I expect more and more economists will pay attention to it.
AR: Am I wrong if I say that even today most of the Austrian Economists still do not understand the meaning and the complexity of the structure of production?
Austrian macroeconomics is a sophisticated theory that has challenged even the best economists. Most economists desire simple, predictable models, and that’s difficult to achieve in the Austrian model with various stages of production and consumption, the structure of interest rates, and changes in savings rates, monetary policy, and technological development. I discuss a variety of scenarios using the Austrian model in “The Structure of Production” (see chapters 7-9).
I must admit I was shocked and disappointed that an Austrian economist of such stature as Walter Block would question the value of Hayek’s triangles in a recent article. It’s bad enough that Friedman and the Chicago school consider Hayek’s capital theory “obtuse and confusing,” but for Austrian economists to question it is a sad commentary on the state of Austrian economics today. Hopefully, these criticisms won’t undermine the good work that Roger Garrison and others have done to advance Hayek’s macroeconomics.
AR: Your second academic book was “Economics on Trial” (Irwin McGraw Hill, 1991). What was your contribution there? What were the lies, myths and realities?
Here again I tried to do something new, i.e., review the top ten textbooks in economics at the time, including Samuelson’s “Economics,” and categorize their sins of omission and commission. I noted how they were all pretty much Keynesian in their approach, using Aggregate Supply and Demand, perfect competition, etc. They were largely anti-saving, pro-progressive taxation, and pro-government/welfare state in their macroeconomics.
I uncovered some pretty dumb statements by textbook writers, which got some publicity, such as:
“While savings may pave the road to riches for an individual, if the nation as a whole decides to save more, the result may be a recession and poverty for all.” — William Baumol and Alan Blinder (1988)
“It is difficult to conceive of government bankruptcy when government has the power to create new money by running the printing presses!” — Campbell McConnell and Stanley Brue (1990)
“The Soviet economy is proof that, contrary to what many skeptics had earlier believed, a socialist command economy can function and even thrive.” — Paul Samuelson and William Nordhaus (1989)
The latter statement came out right before the Berlin Wall collapsed and was especially embarrassing to the Nobel Prize winning economist Paul Samuelson.
But my book isn’t entirely about sins of commission. I urged the profession to focus more on savings and economic growth (using the Asian boom as a good example) rather than the business cycle and distribution of wealth and income, and that it should look to the “next economics,” one that focuses on capital and growth — i.e., the Austrian model of Mises, Hayek, and Schumpeter. I also championed the return of Say’s law, with its emphasis on saving, investment, productivity, entrepreneurship and other aspects of the supply side as the keys to economic growth and higher living standards.
I’ve received a number of letters from readers suggesting I update “Economics on Trial.” I do think the profession has made some improvements, especially by focusing on the classical model more than the Keynesian model in the most recent textbooks (Mankiw’s textbook leads the way in this respect), but it still needs to replace the defective AS-AD in macro and the perfect competition model in micro. I’ve replaced both with better Austrian-style models in “Economic Logic,” and I encourage economists of all stripes to look at my new approach in pedagogy.
AR: Some of your books deal with the History of Economic Thought. If you have to make a list of the five most important books that have influence your own thinking on the field, what would they be?
The reason I commissioned Murray Rothbard to write a contra-Heilbroner history was out of frustration with all previous histories of thought. They were all written by either Keynesians, Marxists or socialists. One exceptional work was “The Enterprising Americans,” by John Chamberlain, an economic journalist, but it was far from complete.
In writing my on one-volume history, I benefited significantly from several recent “tell all” biographies on John Stuart Mill, Karl Marx, Alfred Marshall, Thorstein Veblen, Max Weber, Joseph Schumpeter, John Maynard Keynes, Ludwig von Mises, Friedrich Hayek, and Milton Friedman, among others.
I also like Albert Hirschman’s “The Passions and the Interests” and Mark Blaug’s “Not Only an Economist,” and his two volume work “Great Economists Before Keynes” and “Great Economists After Keynes.” Blaug is the foremost historian of economic thought, and he has recently said some positive things about the Austrians.
Of course, I found Rothbard’s two volume history of economics useful. Another helpful textbook is Ekelund’s and Hebert’s “History of Economic Theory and Method” (1990) — a graduate level text that is comprehensive, fair and balanced.
AR: Let me jump for a moment to your “The Making of Modern Economics” (M. E. Sharpe Publishers, 2001, 2009). Let´s start with your first chapter. Is it correct to conclude that “All started with Adam” Smith? What about Cantillon or Turgot?
Obviously, there were “pre-Adamites,” as I call them. But Adam Smith’s “Wealth of Nations” was the first real “fat” book that attempted to bring together the full body of theory and history of economic life, far more than any theoretical treatises of Cantillon, Turgot, or even Aristotle, Thomas Aquinas, and the Spanish scholastics. In many ways, Smith’s two-volume tome was the beginning of modern political economy. As George Stigler said, “You can find it all in Adam Smith.” Well, not quite, but it was the start of something big.
AR: By the way, what do you think of Rothbard´s criticism to Adam Smith?
When I first started writing “The Making of Modern Economics” in the late 1990s, I was still quite infatuated with everything Rothbardian, including his surprising critique of Adam Smith. According to Rothbard, Smith was a plagiarist who “originated nothing that was true, and whatever he originated was wrong.” That’s quite an indictment of the Scottish philosopher celebrated by almost all free-market economists, including Rothbard’s teacher Ludwig von Mises. Mises wrote a glowing introduction to “The Wealth of Nations” edition published by Regnery, calling it a “marvelous” and “great” book that brought together “the ideology of freedom, individualism, and prosperity, with admirable logical clarity and in an impeccable literary form.”
Who was right, Rothbard or Mises? There was only one way to find out. I decided to read the entire 1,000-page “Wealth of Nations,” page by page and cover to cover, and come to my own conclusion. Two months later, I put the book down and said to myself: “Murray Rothbard is wrong and Mises is right.” Adam Smith has written a grand defense of the invisible hand and economic liberalism.
My change of heart completely transformed my history. Suddenly, “The Making of Modern Economics” had a plot, an heroic figure, and a bold storyline. Adam Smith and his system of natural liberty became the focal point from which all economists could be judged, either adding to or distracting from his system of natural liberty. After coming under attrack by socialists, Marxists and Keynesians, the invisible-hand model of Adam Smith was often left for dead but revived from time to time and revised and improved upon by the French, Austrian, British, and Chicago schools, and ultimately triumphed with the collapse of the socialist central planning model in the early 1990s (although it is again being tested by the ongoing financial crisis).
Granted, Smith made numerous mistakes in his classic work, such as his crude labor theory of value, his attack on landlords, and his failure to recognize marginal subjective values, but French, British, Austrian and Chicago economists have done a great job improving upon the House that Adam Smith Built without destroying his fundamental system of natural liberty, and his policy prescriptions, which were largely libertarian (the classical model of limited government, free trade, balanced budgets, and sound money).
I noticed that Murray Rothbard largely ignored the strong libertarian language found in “The Wealth of Nations” and overemphasized marginal statements by Smith that were pro-government or anti-market. His attack on Smith reminds me of free-market critics who take the same parenthetical statements in Smith’s writings and make him into some kind
of social democrat. Both are wrong. Mises had the right attitude when it came to Adam Smith. Smith established the “keystone” of the market economy.
By the way, “The Making of Modern Economics” has been my most successful academic book, having been translated into five languages, including most recently a fine Spanish volume published by Union Editorial through the good support of Professor Jesus Huerta de Soto. It also won the Choice Book Award for Outstanding Academic Title in 2009. Choice is the official organ of the academic libraries in the United States. It has been adopted by dozens of history of thought classes around the United States and the world. Roger Garrison uses it at Auburn, and he tells me that the students love it. I do hope your readers will check it out either the English or Spanish edition.
AR: What do you mean saying that “Marx madness plunges economics into a New Dark Age”? Can we see in the future a revival of Socialism?
That’s my famous chapter 6 in “The Making of Modern Economics.” Marxism-Leninism has done so much harm in the world that I wanted my views unmistakably clear about Marxist doctrine and policies. This chapter has been translated into many languages and has converted many Marxists around the world into free-market advocates. The latest edition has a section of “liberation theology” that has been so popular in Latin America.
AR: In “The Big Three in Economics” (M. E. Sharpe, 2007) you talk about Adam Smith, Karl Marx and John Maynard Keynes. Was Keynes the saver of capitalism?
During the 1930s and the Great Depression, Marxism was all the rage on campuses, threatening to undermine democracies around the world. Students, academics and government officials were searching for a more moderate alternative, and rejecting laissez faire, they discovered in Keynes a “middle of the road” alternative in big government and the welfare state. If Keynes hadn’t come along, the West might have fallen into a Marxist state. Now our challenge is to dig out of the pit that Keynes has put us into.
In “The Big Three,” I came up with the idea of the totem pole of economics, ranking economists from top to bottom, rather than the pendulum approach, where economists are linked to the left, middle and right. As Ronald Reagan once said, “There’s no left or right, only up or down.” Of the big three, I rank Adam Smith on top, Keynes below him, and Marx is low man on the totem pole. I commissioned a Florida woodcarver to create the Totem Pole of Economics, which I display in my home.
AR: Are we living today a Return of the Master?
Sadly, yes. Whenever the world faces a financial crisis or downturn in the economy, the political leaders turn to the Keynesian policies of activist deficit spending, easy money, and the welfare state. As a result, we are facing an unprecedented sea of red ink in the fiscal budgets of the West. As Mises said years ago, “We have outlived the short-run and are suffering the long-run consequences of [Keynesian] policies.”
AR: Let´s talk about “Vienna and Chicago: Friends or Foes?” (Capital Press, 2005). What do you think are the four areas where both schools dissent?
You mean dissent from each other? My book looks primarily at their major differences in methodology, monetary policy, the business cycle, and antitrust.
But they also agree on many points. Both the Austrian and Chicago schools see no value in heavy deficit spending to stimulate a typical recovery. Milton Friedman demonstrated years ago (and most recently confirmed by Harvard’s Robert Barro) that the deficit spending multiplier is close to zero. The two schools also oppose any tax increases during a recession.
One area they likely disagree is in monetary policy during a recession: Chicago economists argue that the money multiplier is significantly positive and can generate a faster recovery than doing nothing. The Austrian school is opposed to any effort to reduce interest rates below the natural rate or to artificially pump up the economy through easy money during a downturn. That can only have negative consequences down the road.
AR: The first big question is why do you think that Chicago has an advantage on methodology versus the Austrians? What about the Austrian traditional criticisms?
Chapter 4 of “Vienna and Chicago” deals with the debates over methodenstreit. Like most economists and, I might add, more and more Austrians, I reject the Misesian a priori view that theories can’t be confirmed or tested looking at historical data. One must always be cautious, but I found that one can learn a great about the value of a theory by looking at the evidence, and often studying history can reveal new theories that were previously overlooked. Stagflation is a case point. It was discovered in Austrian business cycle theory only after it appeared historically.
I reject both the “theory only” approach of the hard-core Misesians and the “history only” approach of the hard-core institutionalists. We need both theory and history to find out the truth. I’m glad to see more empirical testing of theories in the Austrian academic journals. It’s the only way Austrian economics is going to get any attention by the profession.
AR: The second big question is why do you think that Chicago has an advantage on sound money versus the Austrians? Why would a central bank system with a monetary rule be better than a free banking system?
It’s a matter of practical policy. I’m willing to give free banking a try, because I have a great deal of faith in free markets, but I doubt if the public or the legislatures are willing to take such risks. Name me a country in the world who is willing to give up central banking and adopt a free-banking regime? Even Hong Kong has a central bank or monetary authority (the Hongkong Bank). A return to the classical gold standard is also unlikely at this stage. Gold is playing a more important role, but only as a reserve asset and monitoring device. I think it’s much more likely that a central bank will adopt a monetarist rule of increasing the money supply (M2) at a steady rate than adopting free banking (no reserve requirements, giving banks the right to print their own money, etc.).
AR: What were those friendly debates you had with Professor Friedman?
Over a twenty year period, up until the time of his death (2006), I engaged in quite a few friendly fights with Milton Friedman, primarily over paper money vs. the gold standard and Austrian theory of capital and the business cycle. I keep in my wallet Milton Friedman’s torn up $20 bill as proof of one such incident in New Orleans in the late 1990s. I also challenged Friedman at a Mont Pelerin Society meeting in Vancouver on his cure (“print more money”) for Japan’s economic ills. I tell these stories and more in an article I wrote on the subject for “Liberty” magazine in late 2007: http://www.mskousen.com/2007/09/my-friendly-fights-with-dr-friedman/
AR: In the annual meeting of the Mont Pelerin Society that took place in Guatemala in 2006 I remember you gave a lecture. At the end I was allow to ask a question, and that was, “Would you accept an end to the Fed?” I thought your answer would be, Yes, but it wasn´t. Can you explain why?
I’d like to see the Fed replaced by either a computer (Friedman’s monetarist rule) or an international gold standard, or a competitive free-banking system, but it’s not likely to happen in our lifetimes. The humorist Will Rogers once said, “There have been three great inventions since the beginning of time: the fire, the wheel, and central banking.” Every developed nation has a central bank, and every developing country is adding one. Public choice economics suggests that having a monetary authority is simply too seductive and powerful to give up. Even Friedman’s simple proposal of replacing the Fed with a computer that automatically increases the money supply equal to real GDP hasn’t been adopted, because the governments want to be able to intervene at times during a crisis and inject liquidity at a faster pace than real GDP. They don’t have the faith that you and I have that capitalism will right itself and overcome these unpredictable crises. They want to maintain the power to manipulate interest rates and the supply of money and credit. They are too power hungry to give it up. They aren’t willing to accept the discipline of an international gold standard. Nor are they willing to try free banking. It’s too risky for them. So we talk all we want about what ideally we’d like to see, but it’s not likely to happen any time soon.
AR: I always remember Joseph Schumpeter starting his “Capitalism, Socialism and Democracy” (1942, p. 61) with a profound insight: “What counts in any attempt at social prognosis is not the Yes or No that sums up the facts and arguments which lead up to it but those facts and arguments themselves. They contain all that is scientific in the final result.” Are we wrong if we conclude that Chicago´s arguments are not scientific?
The Chicago school has definitely adopted a more pragmatic approach to economics, i.e., what works or what is predictable, as described in Friedman’s famous and controversial article on methodology. I think we need to use more logic and empirical studies to test our theories and knowledge. We can learn from both. For example, for years technical chartists used “guaranteed” formulas for making money in the stock market, but I was always skeptical of their logic. Eventually, they collapsed.
An old Wall Street saying applies to these fights between the Austrian and Chicago schools on theory and history: “In the land of the blind, the one-eyed is king.”
AR: What about Robert Lucas, Thomas Sargent, Robert Barro and “Rational Expectations?” Why did you ignore this New Classical Economists in your history of economic thought book?
I don’t think I did ignore them. I cover them in several chapters of my book, although not in any detail. See chapters 13, 15 and 17, inter alis.
AR: In your “EconoPower” (Wiley & Sons, 2008), you explained “How a New Generation of Economists Is Transforming the World”. Can you make a summarize of your arguments for the reader?
My main argument is that economics has moved from the “dismal science” to the “imperial” science, with economists making inroads into finance (modern portfolio theory, defined contributions plans), business (economic value added, auctions), law (capital punishment), politics (public choice and forecasting elections), history (cliometrics), environmentalism, religion, and even sports. It’s a fascinating broadening of the discipline in the past generation. I’m glad to be a part of it.
AR: There are two other academic books that I would like to talk about here. The first one is “Economic Logic” (Capital Press, 2000, 2010), which includes chapters on macroeconomics and government policy. Is this a new treatise on economics? Is this book better than Mises´s “Human Action,” Rothbard´s “Man, Economy and State” or Reisman´s “Capitalism?”
“Economic Logic” is not a treatise, but a modern-day textbook. I don’t think I can improve upon Mises’s or Rothbard’s magnum opuses, although Reisman’s captivating “Capitalism” is flawed in its defense of the Ricardian cost-of-production theory of value.
I wanted to create an Austrian-style “no compromise” textbook that could be integrated into mainstream economics and be adopted by the profession generally. So it is divided into micro and macro chapters, similar to other textbooks, but there are important additions — in micro, I start with the profit-and-loss income statement and Menger’s theory of the good, which business students can relate to and an important “missing link” in microeconomics. But my textbook is not so radical that it ignores standard microeconomics. By chapter six, I introduce supply and demand, cost analysis, the factors of production (land, labor, capital, and entrepreneurship), and the financial markets.
My macro chapters start with the Austrian 4-stage model of the economy, integrating GDE with GDP and other national aggregate statistics. In my money and banking chapter, I introduce the history of money and the international gold standard before I discuss monetary policy. I also include the pros and cons of Keynesian economics, so students become familiar with this defective macro model, AS-AD, etc.
“Economic Logic” also has a test bank, and we are working on a student manual, so it has everything a professor would want to teaching sound economics at a college level. It has been adopted by a half dozen institutions, including the business school at Universidad Francisco Marroquin, the free-market university in Guatemala.
AR: The second is “The Power of Economic Thinking” (Foundation for Economic Education, 2002). How has economics invaded and transformed politics, finance, history, law, religion and other social sciences?
This book is an earlier version of “EconoPower,” discussed above, a compilation of columns I wrote for “The Freeman” during the 1990s.
AR: What about your “Investing in One Lesson” (Regnery Publishing, 2007). Is that book as clear as Hazlitt lessons were on economics?
I have always been envious of Henry Hazlitt’s classic title, “Economics in One Lesson,” and wanted to create a similar title in finance if I could come up with the “one lesson.” I finally did in 2007 — the one lesson being “Wall Street exaggerates everything: The business of investing is not the same as investing in a business.” I explain why stocks are inherently more volatile than the underlining businesses they represent, and then in the rest of the book, I offer ways to minimize the risks of stock-market investment while increasing the chances of making money.
One reason Wall Street is not the same as Main Street is based on the Austrian concept of stages of production — the stock market is a capital good further removed from final consumption. I’ve written extensively on Austrian theory of finance in “The Structure of Production,” “Economics on Trial,” “Economic Logic,” and an essay for “The Elgar Companion to Austrian Economics,” edited by Peter Boettke.
AR: Can you say a word on Ayn Rand and the fifty years of “Atlas Shrugged?”
I’m both an admirer and critic of Ayn Rand and her philosophy. She articulated better than any other novelist the evils of totalitarianism, interventionism, corporate welfarism, and the socialist mindset. “Atlas Shrugged” describes in wretched detail how collective “we” thinking and middle-of-the-road interventionism leads a nation down a road to serfdom. No one has written more persuasively about property rights, honest money (a gold-backed dollar), and the right of an individual to safeguard his wealth and property from the agents of coercion (“taxation is theft”).
Yet her dogmatic defense of greed and selfishness hurts her cause and has created an apologetic brand of capitalism that is still viewed negatively by the general public. John Mackey, the brilliant CEO of Whole Foods Markets, offers an improved brand of “conscious” capitalism that hopefully will convert business leaders and the general public to a more positive view of free enterprise.
I’ve written an extensive review of “Atlas Shrugged” for the “Christian Science Monitor”:
AR: What about Peter Drucker? Is he an Austrian?
Like Joseph Schumpeter, Peter Drucker grew up in Austria along with Mises and Hayek, but is considered an enfant terrible of the Austrian school. He became the world’s most celebrated management guru, and his management style was definitely Austrian, with his emphasis on economy, thrift, creative destruction, and entrepreneurship. He was critical of Keynesian economics, but was not a true believer like Mises. He thought that laissez faire capitalism was defective. But rather than endorse big government, he endorsed big business as the ideal social institution.
AR: You have been the President of the Foundation for Economic Education (FEE) between 2001 and 2002. How was that experience?
It was a great experience that ended too quickly. My goal was to bring back the glory days of FEE and make it a household name like Cato or Heritage. I planned a series of events, including FEE’s first national convention in Las Vegas, which attracted over 850 attendees, and a promotional campaign to increase ten fold the circulation of “The Freeman.” I also engineered the acquisition of Laissez Faire Books. Lastly, I invited America’s mayor Rudy Giuliani to speak at our annual Liberty Ball and leased the large Hilton Hotel ballroom in New York that holds more than 2000 people.
But my plans were cut short when Rudy Giuliani proved to be a controversial choice, and I wasn’t especially adept at fundraising in my first year. I guess the board wanted someone who didn’t rock the boat and spent more time quietly raising money than creating new programs and expanding old ones. Alas, I lasted only a year as president. I’ve had a successful career in marketing, but I don’t think I was cut out to be a fundraiser, and I don’t envy those who have to do it every day.
Still, it was a thrilling time, and I continue to be a supporter of FEE and other free-market think tanks, and invite them to participate in my annual show, FreedomFest, in Vegas. (FreedomFest is a for-profit event — we don’t fundraise.)
AR: If we take your more than 25 books and all your papers, and ask which is your most important contribution to economics and finance. What would you say?
I can boil down my primary goals to three, all admittedly ambitious:
First, replace Keynes’s macro model with the universal four-stage model of the economy. This my work, “The Structure of Production;” It has application to the financial markets.
Second, write an alternative one-volume history of thought to Robert Heilbroner’s “Worldly Philosophers.” This is my book “The Making of Modern Economics,” which has now gone through two editions.
And third, develop a “no compromise” college-level textbook in economics that rivals Paul Samuelson’s “Economics.” “Economic Logic” seeks to integrate Austrian economics into the mainstream textbooks.
Professor Ken Schoolland has written a paper detailing my attempt to achieve this triathlon, published by the Cobden Centre in the UK: http://www.cobdencentre.org/?s=mark+skousen
Of the three, #2 has been the most successful so far.
AR: Please, tell us the story behind “The Mark Skousen School of Business,” in the Grantham University.
I was surprised as much as anyone when I was told in 2005 that Grantham University, an online university with headquarters in Kansas City, Missouri, was naming their business school after me. Usually you have to be a billionaire or dead to have a school named after you. They want to create a free-market brand of business, finance and management based on my free-market views, since I’ve had experience in all three fields. I have just completed a personal finance course, “Dollars and Sense,” for all the students (15,000 and growing, mainly in the US military), and will be using my “Economic Logic” textbook as the main book for their business students. I’m working closely with them to develop a new business school program for Grantham, and they have high hopes of expanding aggressively around the world.
AR: We can´t finish this interview without comments on FreedomFest.
For years, I thought that the freedom movement, broadly defined, needs to gather together once a year to learn, network, socialize and celebrate liberty, or what’s left of it. But we’ve always been too individualistic, too much like a herd of cats, and we need to come together more to show and feel a unity of support. So when I was president of FEE, we had our first national convention, and it was a big success with 850 attendees.
When I left FEE, I continued the idea by producing FreedomFest, “the world’s largest gathering of free minds.” We meet every July, a week after the 4th, in Las Vegas, the world’s most laissez faire city. It’s a “hot” conference, and we continue to set records every year. This year we had nearly 2400 attendees, with over 200 speakers and exhibitors. All the major think tanks and freedom organizations — Cato, Reason, Heritage, FEE, Goldwater, Adam Smith, PRI, Heartland, ISI, Eagle, etc. — come from around the world, and it’s quite an affair. Steve Forbes and John Mackey (CEO, Whole Foods Market) attend all three days every year and are now our official ambassadors.
I encourage everyone from around the world to join us: www.freedomfest.com.
AR: Can you conclude with some reflections or suggestions to the young students that are reading this interview?
Let me say something controversial. If you want to change the world and the economics profession, learn from the great Austrians at Hillsdale, GMU, Grove City, etc., as an undergraduate, and then apply to the top ivy-league graduate schools (Harvard, Chicago, Princeton, Yale, Stanford, etc.). With your Ph.D. in hand, apply to teach at these top ivy league schools, and if you get a position, start teaching Austrian economics to the next generation of students. Don’t write academic articles for Austrian journals. Write for the top economic journals — AER, JEP, etc. That way the best and the brightest will finally know about Mises and Hayek.
One of my regrets is that I got my Ph.D. at George Washington University, a second-tier graduate program. As a result, I found it difficult to teach at the top schools. I taught two years at Columbia, but that was it.
When I wrote “The Making of Modern Economics,” I decided to have it published by a non-market publisher, M. E. Sharpe. It proved to be a good move, because it has exposed a large group of social democrats to Austrian and Chicago economics.
Back when I got started as a student in the 1960s, there were virtually no free-market textbooks, few free-market economics departments, and only a handful of treatises and publications you could read that introduced your to market principles — Friedman, Mises, Hayek, Rothbard, Hazlitt, and the like. Now there are hundreds of professors, books, think tanks, organizations and conferences to teach free-market principles and the heroes behind the marketplace. I encourage you at attend these seminars and become involved with the various think tanks and websites.
Be sure to check out several resources and think tanks in free-market economics. Every institution has its biases and its favorite writers, and sometimes even suppresses scholars they don’t like. It’s unfortunate but a fact of life in the freedom movement.
I invite you to visit my website at www.mskousen.com and check out my articles and books that may advance your knowledge of free-market economics and finance. I’m also starting an Austrian-oriented business undergraduate and MBA program online at Grantham University, if you are so inclined to pursue a business degree.
AR: Professor Skousen, thank you so much for your time and effort!
Un placer! It was a honor, and I wish you the best of luck in your work and your interviews. And remember, A. E. I. O. U.
The Cobden Centre is the world’s largest international website devoted to “honest money and social progress” based in London and founded by Toby Baxendale, the libertarian businessman who funds the annual Hayek chair at the London School of Economics.
They have just published a paper by Prof. Ken Schoolland (Hawaii Pacific University) on my contributions to economics: “Mark Skousen’s Contributions to Economics.”
And on my mother’s birthday!
It’s SuperBowl Sunday…..
It’s Ronald Reagan’s 100th birthday…..
….and I just returned from a triumphal appearance at Ben Franklin at the CNP (Council for National Policy) meeting in Palm Beach, Florida.
I was afraid it could bomb because I had to stay in character for three hours, including an hour at the cocktail reception, where I entertained some 300 guests with quizzes, anecdotes, giving away Franklin half dollars, etc. I worked long and hard to develop some funny questions, quotes and stories.
For example, I approached several people this way: “I have heard a rumor that my image is on the face of a dollar bill. This surely flatters my vanity. Does anyone have such a dollar bill to prove this rumor to be true?”
A few times a man would reach into his pocket and pulled out a $100 bill and show it to me. I took it in my hand, and then placed it in my pocket, and said, “I just want to see if Poor Richard is still right when it says, ‘A fool and his money are soon parted’!” Then of course I would return the $100 bill….but it got a lot of laughs.
Be free, AEIOU,
Here’s a list of my favorite articles that I’ve written over the years. I hope you enjoy them, too!
11. Me and Bill Buckley: A True Story (okay, make it 11!)
Dr. Mark Skousen’s Five Questions for President Obama and How Free-Market Thinking Can Build a Better Future
The Daily Bell is pleased to publish an exclusive interview with the distinguished free-market scholar and economist Dr. Mark Skousen
Introduction: Dr. Skousen taught economics at Columbia University’s Graduate School of Business in 2004. In 2001- 02, he was president of the Foundation for Economic Education (FEE) in New York. Since 1980, Dr. Skousen has been editor in chief of Forecasts & Strategies, a popular award-winning investment newsletter published by Eagle Publishing in Washington, D.C.
Mark Skousen: He is also editor of his own website, www.mskousen.com, and editor of three trading services, Skousen Hedge Fund Trader, Skousen High Income Alert and Skousen Turnaround Trader. He earned his Ph.D. in economics and monetary history from George Washington University in 1977. Since then he has written over 20 books, including Economics on Trial (McGraw Hill, 1991), Puzzles and Paradoxes in Economics (Edward Elgar Publishers, 1997), and The Making of Modern Economics (M. E. Sharpe, 2001). Dr. Skousen is the creator and producer of Freedom Fest, an annual gathering of the freedom movement from around the world, held every July in Las Vegas (www.freedomfest.com). Mark Skousen was interviewed on Board the Ship Veendam, in Port Montt, Chile. This is his second interview with the Bell. The first can be seen here.
Daily Bell: Thanks for joining us again.
Mark Skousen: Happy to be here.
Daily Bell: You wanted to interview President Obama. Here’s you chance, before we move into more general questions.
Mark Skousen: I came up with five questions. They are what I call hardball questions. If he does not answer, I will answer for him.
Daily Bell: Sounds like you may have to.
Mark Skousen: Mr. President, do you support the repeal of the invasive requirement that all business report a 1099 of all sales of goods, services or assets of $600 or more during the calendar year?
President Obama does not answer …
Mark Skousen: All right, then. You say all the time that you are pro business, pro-small business, but how could you possibly support this part. It was added on at the last minute to what is now called the ObamaCare bill. It’s another example of pushing through legislation that nobody has read. It’s going to have a terribly retardant effect on the economy.
Daily Bell: Maybe you will have more luck with number two.
Mark Skousen: Another government agency that has run amuck is the TSA. Do you support their decision to install full body scanners and full pat downs for travelers that refuse to subject themselves to nude photographs of their body?
President Obama does not answer …
Mark Skousen: Has America come to the point where the US government is officially sanctioning sexual harassment? That question has been asked in a softball way….”well what do you think President Obama, what do you think of these scanners?” You defended it by saying that this was the only way they could capture somebody like the Christmas day bomber who had a bomb in his underpants and so now we have to subject ourselves to this kind of indignity. At what point is this going to end.
Another point is the aggressive nature of the TSA. There must be something like Murphy’s Law when it comes to government agencies that inevitably they go over board and no longer fulfill their basic function. I really feel that this is a travesty of the worst kind. I am really glad to see there is a group that’s forming a kind of Tea Party protest for this decision. It is on the web called, www.wewontfly.com, and I recommend that everybody go to that, wewontfly.com.
This is an egregious example of government run amuck and it reminds me of in the 80s when the Federal transportation agency, in order to encourage seat belt wearing, actually required a new device to be attached to the ignition of all new cars. You had to have your seat belt on before the car would start. Americans were so incensed by this, there were protests and they stopped buying cars and they started finding ways around the device and eventually the government backed off.
I am very hopeful that this will be the case but as Doug Casey says, American’s today are spineless, they are whipped dogs as he says and there are only a small minority of libertarians protesting this. I think it’s a sad. Apparently 80% of Americans supported full body scanners, it’s just a total invasion of privacy. Of course, I have been at the forefront of this battle all my life having written a book called; The Complete Guide to Financial Privacy in the early 80s.
It was a bestseller and sold over half a million copies, kind of an underground best seller. It wouldn’t make sense that it would make the New York Times list considering the topic is privacy but I feel this is very sad. We never lose our freedoms all at once, we lose them gradually. It’s like the frog in the warm water – we turn the heat up and eventually he croaks.
Daily Bell: Onto number three.
Mark Skousen: Given that you are deeply concerned about the high level of unemployment, would you favor elimination or at least reduction of the minimum wage law in order to boost employment among black male and teenagers in general?
President Obama does not answer …
Mark Skousen: Many economists believe there is a strong correlation between the rise in the federal minimum wage and teenage and minority unemployment rate in the United States. Are you aware that when the new minimum wage was imposed in the summer of 2009 during the first year of your administration, there was a significant increase of joblessness among teenage male blacks. Do you think there is any correlation? Can you deny it?
Daily Bell: The silence is deafening.
Mark Skousen: Was it really necessary to take 2,000 government employees on your recent trip to India and around the world costing tax payers millions of dollars? Is this appropriate at a time when there are record deficits and Americans suffering financial stress? Isn’t this an example of the Imperial Presidency?
President Obama does not answer …
Mark Skousen: This is how you get an image problem. You begin to be perceived as an imperial president, like one of these famous dictators, a Caesar type of person. What we need right now – in terms of attitude anyway – is a Jimmy Carter type. Carter may have been a failed president, but he understood something about humility. That seems totally lacking in your administration. It’s like the First Lady going on that expensive trip to Spain, going to all these ritzy places. It would be nice to see a president who maintained a low profile. It’s just a question of sending the wrong message at a time when Americans in general are struggling.
Daily Bell: Your points seem to be falling on the proverbial deaf ears.
Mark Skousen: We’ll give him another chance. Is it really necessary Mr. President to run a 1.3 trillion dollar deficit and threaten the bankruptcy of the United States and our AAA rating? Can’t you admit all this “stimulating” is ending up in bankruptcy rather than a healthy economy?
President Obama does not answer …
Mark Skousen: Since you went to the Chicago law school, certainly you were exposed to the great Chicago School of Economics and the free market economic perspectives of Milton Friedman, George Stigler and so forth. Are you aware Mr. President, that Friedman’s study of the Keynesian spending multiplier, in other words, the positive impact of federal deficit spending, is bound to have a multiplier of zero, in other words, no positive impact what so ever? The trillion or so you have spent on “stimulus” has been wasted. There are no shovel-ready projects, and if there were, they wouldn’t add net jobs.
Daily Bell: He’s ignoring you. Good to remind him about the Friedman study, though.
Mark Skousen: Last one. If Europe recovers with their low deficits and an expansionary monetary policy, will this not disprove the Keynesian model?
President Obama does not answer …
Mark Skousen: Europe is cutting back on government spending while engaged in monetary expansion. Here we will have a perfect natural test to see if the Friedman results will be reconfirmed. Of course, libertarians do not believe in managing the economy through central banking, but we are stuck with the system we have. Within the parameters of this system, monetary expansion is likely to be more effective than government spending, which just aggravates the problem. Don’t you understand that now after two years of failed economic policies?
Daily Bell: You were obviously over-optimistic in expecting responses.
Mark Skousen: (laughing). Somehow even if he were here, I don’t think we would have gotten any straight answers. But those are the questions he should be asked, among many others. Maybe one day at a town meeting, someone will get to ask them.
Daily Bell: OK, we’ve had our President Obama interview. Let’s turn the tables and ask you a few general questions. Quite a lot has happened since our last interview with you over a year ago. One of the most puzzling occurrences is the return in the US of discredited Keynesian economic policy – and with a vengeance. How did that happen?
Mark Skousen: Somehow President Obama chose the same policies that didn’t work in the 1930s and didn’t work in the 1970s. The United States has decided to spend its way out of recession and has adopted this typical Keynesian policy of running huge deficits. Europe is rejecting this sort of policy outright. Germany, and even the UK in its post-Brown recovery, are rejecting this notion and cutting back. My best example is Canada. In 1995, Canada had a fiscal crisis, runaway government spending of 53% of the economy and the Canadian dollar was collapsing. The Liberal Party of Canada, which got them into trouble in the first place, said enough is enough. There was a general consensus that Canada was moving in the wrong direction.
They fired a bunch of federal workers, and in two years eliminated the deficit, so the Canadian debt started declining. Then, even better, they had 11 straight years of surpluses. They also started cutting taxes; and they’ve had some pretty good success with their economy, even during a tough time worldwide. They still have some problems with their medical, single payer system but, overall, a supply side approach has proven successful in Canada. I would like to think that there are countries that are rejecting the standard Keynesian model. It’s hasn’t happened in the US, but I am hopeful that we will learn examples abroad.
Daily Bell: Let’s move to central banking and fiat money. Do you think we will ever return to a gold standard?
Mark Skousen: I have written a book called The Economics of a Pure Gold Standard. It was actually my dissertation of my PhD at George Washington University in 1977 and I was heavily under the influence of Murray Rothbard who favored a return to the gold standard.
Since then, I have argued that once you have gone off the gold standard it is very difficult to go back on it because it would cause a major redistribution of wealth to the gold holders who tend to be speculators and wealthier individuals. So there would be this redistribution problem that could be pretty serious, especially if gold has to go to $20,000 an ounce in order to really cover that.
I have often said the only way to return to a gold standard is with a major financial crisis, so you we are basically forced to do it. We may be headed in that direction but I think if we automatically did it that would create problems in itself. I like the idea of using gold as a tool. Supply-siders like using gold as an indicator of inflation; if we can control inflation and stabilize our inflation, the price of gold will come back down and that will be the best indicator that we can use. It is interesting that central bankers are net buyers of gold now rather than net sellers like they were. They are holding on because they know it’s the only asset that has any real value.
Daily Bell: What about the EU? Is it going to survive?
Mark Skousen: Robert Mundell, the free market economist, the father of the Euro, has made the case for its survival. I know there are a lot of skeptics out there but who wants to go back to all these individual currencies. It was madness and extremely inefficient when you moved from one country to another, losing money on every currency exchange. The euro has two great benefits: It encourages the free movement of goods and services and it increases competition. You can price everything in the euro and you can see what’s expensive and what’s not; that makes competition much more effective. You also have labour mobility you did not have before; you don’t require work permits, so you can work anywhere inside the EU.
England now has much better restaurants, as the French and Germans have moved there and brought palatable cuisine. You can move investments around as well. So I like the one currency, a United States of Europe concept if you like and from an economic point of view I think it is very good. It also, eventually, acts as a brake on these profligate governments. Yes, there are some problems with it right now but it’s basically sending a very strong message, you’ve got to get your act together because you are going to pay a heavy price. You can’t simply default; you are part of the European system so you can’t engage in these irresponsible spending, tax policies.
Daily Bell: Do you foresee a 3rd party in the United States ever?
Mark Skousen: A third party has never been effective in the United States. I think it is much smarter to work within the Democratic or the Republican Party to make change. All the laws favor the two party systems in the United States. They make it much more difficult for third parties to get on the ballot and really have any influence. Traditionally, third-parties have only been beneficial as a protest and forcing the major parties to make changes. If you go back to the Civil War era, the South was all Democratic because they hated the Republicans so much. Later on, that totally reversed itself; the electorate is fungible. Times change and so do opinions. I think Libertarians should infiltrate both political parties, not just the Republicans or the Tea Party.
Daily Bell: Do you think the US’s police and military will ever be turned against the people? In the current environment that is being suggested as a possibility.
Mark Skousen: It’s already happening. You have the FBI, a federal police force, virtually everywhere. It is just a monstrous agency and I speak for having been the son of an FBI Agent and the nephew of an FBI Agent; both my father and uncle were top FBI people. My father shot one of the top-ten most wanted men back in 1950. But that was back when the FBI had extremely limited roles to play. The FBI is involved with bank fraud and with almost everything else. You name it; it’s classic mission creep. It amazes me. It’s not just kidnapping and stuff like that.
And of course there is the army and now the army can come in whenever there is a natural disaster. The National Guard is called in as well. There’s so much power available, and the powers-that-be are increasingly showing a willingness to use it. It’s definitely something to be concerned about. Just take a look at the vast power the TSA has over travel. It’s beyond belief! The other thing I fear is the movement away from the fourth amendment of unreasonable searches. They have these roadblocks that they keep justifying. Every car that goes by, they can stop at these random checkpoints. They can literally just pull you over for no good reason. National ID cards are constantly being pushed as well. There are many examples of “real time” threats to the freedoms of American citizens these days.
Daily Bell: What about the US and China? Military issues in the future?
Mark Skousen: The Chinese are currently building up a huge military complex; I think they have 3 million troops or something. It’s a huge number; we’ll never know the exact number. But, certainly, they are increasing their technology capability and they are going to flex their muscles, much more so than North Korea or Iran. I think China is the elephant in the room as far as the military is concerned. They haven’t really gone after Taiwan, yet. It’s all saber rattling but that doesn’t mean it can’t turn into something more.
Have you ever seen the picture of how much water is surrounding the China sea and how much they consider is theirs? It’s not 200 miles – it just keeps going and going. I think there is some imperialism there. I think, in fact, it’s a very dangerous situation. The industrial sector has grown and it’s allowing them to spend more and more on their military objectives. There’s the potential for real conflict there.
Daily Bell: Strange times. What advice would you offer for the people to protect themselves financially?
Mark Skousen: I do think we should play the trends and when the market recovers we should take full advantage of that, I certainly have. In my newsletter I have taken advantage of the good times, the recovery that you see from time to time. A lot of the doomsday, gold bugs completely missed their recovery in the stock market. I like to play that because a lot of investors feel more comfortable with stocks I don’t recommend investing too much in commodities, which is a non-traditional investment area.
So my subscribers tend to be more traditional investors. What I try to do is introduce to them investing in commodities, gold and silver and so on, but only a 10% position, it’s an insurance policy against bad times, so that includes gold and silver. So I am always educating people that way. I encourage them to buy gold and silver coins and to aware of the bad news that can come down the road. But the majority of my investments are in foreign markets or in US markets and in dividend paying stocks and income producing investments and so forth.
We have had a very good track record the last few years with beating the market and doing well for them. But the tide can change and right now we are seeing a lot of problems developing. It’s funny how everybody feared that September and October which are traditionally tough months in the market and those did really well and now we are heading into December and now seeing all kinds of problems surface – the Irish debt situation, China raising interest rates, the North Koreans fighting the South Koreans; there’s a lot of geo-political events which are keeping the markets from going higher, despite the Federal Reserve’s efforts to inject all this liquidity.
So, I have always believed in that old biblical refrain: know the signs of the times. I’ve tried to follow that advice in my newsletter called “Forecasts and Strategies.” My philosophy basically is that problems come and go, but I have always been more of an optimist rather than not. There is an old saying on Wall Street: “bears make headlines and bulls make money.” The majority of time Americans are problem solvers; the sun eventually comes out again. Traditional bond and stock markets perform better. It would be sad commentary if we didn’t have that kind of situation. It would be like being a millionaire on a sinking ship. Who wants to be a millionaire on the Titanic? So, I am optimistic that we will get new leadership, reasonable policies and sound economics. It has happened in the past, as I mentioned. Canada is the most recent example and I would hope that it can happen again.
Daily Bell: That sounds like your book Econopower, do you want to talk about it?
Mark Skousen: Yes, the Korean edition. They paid me $100,000 in advance for Econopower. That book was about solving problems. Whatever problems are out there, economists can add to the solution. The South Koreans are very strong on economics and how to use them to their advantage. I have a chapter in the back that Robert Shiller of Yale University really liked and it’s called “Is US Economy Depression Proof?” I wrote this right before the financial crisis of 2008, in which I argued that it’s not depression proof and that we are vulnerable. We have a monetary system that is broken and it’s not really a good one and it needs to be fixed. Sure enough we had a financial crisis and the whole system came close to collapsing. The only thing that kept it from total collapse was massive government intervention again. The establishment had always argued that we were depression proof; that the system was the best of all worlds. Doesn’t seem to be the case, obviously.
Daily Bell: What else have you written lately?
Mark Skousen: I’ve written a textbook called Economic Logic. It’s always my hope that the US will get leaders with an understanding of real economics. President Obama needs a course on free market economics. Economic Logic takes a logical approach; it mixes business with economics. It starts with an income statement, a profit and loss statement, and then develops into supply and demand analysis.
I use the best of Austrian and Chicago economics and now it’s being used in a number of colleges and universities around the country. It’s encouraging. You will not change the politicians until you educate the people who elect them. It’s kind of my anti-Samuelson textbook. Samuelson was this Keynesian economist at MIT, who at the end of WWII wrote his economic text book that introduced Keynesian economics and this anti-savings mentality – this pro big government, welfare state, pro-progressive taxation kind of zeitgeist from which we still suffer. So we need a new textbook for the 21st century to reverse that trend and get us back to sound economics. The reality is free-market economics is not taught to children or even to older students. We need to start somewhere.
Daily Bell: What is out there for students who want to get a general idea about economics besides college text books?
Mark Skousen: There is a website run by Steve Marriotti called Network for Teaching Entrepreneurship (NFTE). They teach entrepreneurship and how to create your own businesses and business models. They have a text book that’s geared toward minorities. It’s a great program. I am hoping this can be another area where we can spread the word to students.
Daily Bell: Closing words?
Mark Skousen: Do not despair. Do not think that our current mess is irreversible, that our economy is headed for total destruction, which is a constant message from gold bugs and doomsayers. I am trying to counter that view and I am trying to do something through education. As you know, we have created FreedomFest and it’s not my conference alone, though I created it. It’s the “movement’s” conference. You bring together all the best and the brightest in Las Vegas, the world’s greatest libertarian city. We have this great celebration and learn from each other; we celebrate liberty; we warn each other about the dangers to liberty and we do business and make deals and walk away and say WOW, we can make a difference. So, come on down! It’s an open forum. We like new people and new speakers. We have Steve Forbes (Forbes Magazine) and John Mackey (CEO of Whole Foods) who both work tirelessly to spread the word. It’s a great opportunity to meet and greet and there are others out there who feel the same. So, go to www.FreedomFest.com and learn more. Hope to see you there.
Daily Bell: On that note, now would be an appropriate time to announce our first conference, scheduled for the last weekend in April in the Appenzell region of Switzerland. The conference is the being hosted by The Foundation for the Advancement of Free-Market Thinking and has several Platinum level sponsors, of which Appenzeller Business Press AG (publisher of the Daily Bell) is one. It will be a great European-based opportunity to provide similar opportunities for like-minded folks to gather with a view to seeking private solutions to the more egregious public problems facing us all. To date, several top thinkers have committed to speaking and we would like to include you in that group. Can we count on your support with our conference efforts and would you travel to Switzerland to share your views at the event?
Mark Skousen: I would be pleased to support your efforts and you can pencil me in to speak at your conference. Thank you for considering me.
Daily Bell: Thank you Mark, it has been a pleasure as always and we look forward to seeing you in April.
Mark Skousen: Thanks, same here.
(See this article in its original publication here)
The Naked Truth About “Porno” Scanners
“Those who give up essential liberty to purchase a little security deserve neither liberty nor security.”
There must be a law like Murphy’s Law that states that government agencies with excessive authority inevitably go overboard in their regulations. Remember the year in the 1980s when the Federal Transportation Agency imposed an ignition device on new cars so that the engine wouldn’t start unless the driver wore his seat belt?
Citizens objected so vociferously that the government quickly reversed itself.
Let’s hope the same thing occurs with the Obama administration’s decision to install invasive “full body” scanners at airports in the United States, and to impose invasive pat-downs for those who uphold their Fourth Amendment rights against “unreasonable searches.” Americans need to stand up and say, “Enough is enough.”
As long-time subscribers know, I’ve been in the forefront of defending the right to personal and financial privacy, having written “The Complete Guide to Financial Privacy” in the early 1980s.
I find it appalling that the government, after pushing through numerous laws against sexual harassment, has adopted an official policy of sexual harassment against its citizens with the introduction of “full body” scanners and pat-downs that are patently offensive. The whole process is now appropriately referred to the use of “porno” scanners.
Sadly, the majority of Americans seem to support this new attack on privacy. A recent poll found that 80% of citizens go along with the “full body” searches, a clear violation of the Fourth Amendment (no matter what the courts decide). In this regard, I’m reminded of Doug Casey’s reference to today’s spineless Americans: “You’re all a bunch of whipped dogs.” Ben Franklin’s warning could apply here: “Those who give up essential liberty to purchase a little security deserve neither liberty nor security.”
I salute the freedom fighters who recognized that this latest action is just one more example in the gradual loss of our freedoms. ”Freedom is never lost all at once,” stated Edmund Burke. Indeed. If we don’t stand up now, when will we?
To see how you can help protest this attack on liberty, go to www.wewontfly.com. Tea partiers, unite!
Finally, it is a sad commentary that TSA agents and government officials are supportive in this attack on fellow citizens. I was shocked to read that a federal security director instructed his agents as follows: “I want them to think Abdulmutallab [the Christmas Day bomber who was thwarted from blowing up a Detroit-bound airplane] with every pat-down.” Tell that to the elderly and kids getting pat-downs.
For those TSA agents who say, “It’s my job,” remind them of these words from the great libertarian film “Cool Hand Luke”: “Just because it’s your job doesn’t make it right.”
Next up: TSA is now pushing for the random “secondary screening,” in which you are taken to “the cage” and subjected to even further invasions of privacy. When will this idiocy end?
Foundation for Economic Education
May 17, 2010
“Consumer spending makes up more than 70 percent of the economy, and it usually drives growth during economic recoveries.” –“Consumers Give Boost to Economy,” New York Times, May 1
Every quarter, when the government releases its latest GDP figures, we hear the familiar refrain:
“What the consumer does is vital for economic growth.”
“If the consumer starts saving and stops spending, we’re in big trouble.”
“Consumer spending accounts for 70 percent of the economy.”
The latter “fact” is repeated regularly in the news reports from the Associated Press, the Wall Street Journal, and the New York Times.
The truth is that consumer spending does not account for 70 percent of economic activity and is not the mainstay of the U. S. economy. Investment is! Business spending on capital goods, new technology, entrepreneurship, and productivity are more significant than consumer spending in sustaining the economy and a higher standard of living. In the business cycle, production and investment lead the economy into and out of a recession; retail demand is the most stable component of economic activity.
Granted, personal consumption expenditures represent 70 percent of gross domestic product, but journalists should know from Econ 101 that GDP only measures the value of final output. It deliberately leaves out a big chunk of the economy — intermediate production or goods-in-process at the commodity, manufacturing, and wholesale stages — to avoid double counting. I calculated total spending (sales or receipts) in the economy at all stages to be more than double GDP (using gross business receipts compiled annually by the IRS). By this measure — which I have dubbed gross domestic expenditures, or GDE — consumption represents only about 30 percent of the economy, while business investment (including intermediate output) represents over 50 percent.
Thus the truth is just the opposite: Consumer spending is the effect, not the cause, of a productive healthy economy.
The Importance of Say’s Law
This truth prevails in the marketplace: It’s supply — not demand — that drives the economy. Savings, productivity, and technological advances are the keys to economic growth. This principle was discovered and developed by the brilliant French economist Jean-Baptiste Say in the early nineteenth century and is known as Say’s law. In fact, he invented the word “entrepreneur” to describe the primary catalyst of economic performance.
Is retail sales a leading economic indicator? Each month the Conference Board releases its Leading Economic Indicators for the United States and nine other countries. The ten U.S. leading indicators are:
- manufacturers’ new orders
- building permits
- unemployment claims
- average weekly manufacturing hours
- real money supply
- stock prices
- the yield curve
- new orders for nondefense capital goods
- vender performance
- index of consumer expectations
As you can see, almost all of the indicators are linked to the early stages of production and business activity.
Misleading Consumer Confidence Index
What about the Consumer Confidence Index that the media highlights every month? It turns out that the title is misleading. The questions asked consumers are more about business conditions than spending attitudes. Here are the questions consumers are asked to determine their “expectations”:
- Are current business conditions good, bad, or normal?
- Do you expect business conditions to be good, bad, or normal over the next six months?
- Are jobs currently plentiful, not so plentiful, or hard to get?
- Do you expect jobs to be more plentiful, not so plentiful, or hard to get over the next six months?
- Do you plan to buy a new/used automobile/home/major appliance [note: these are all durable consumer goods, not unlike durable capital goods] within the next six months?
- Are you planning a U.S. or foreign vacation within the next six months?
In other words, the much-touted “consumer” confidence index is more a forecast by consumers for business, employment, and durable goods than “retail sales” and consumer spending. It does not ask any questions about food, clothing, entertainment, and other short-term buying, because these expenditures seldom change from month to month.
The reality is that business and investment spending are the true leading indicators of the economy and the stock market. If you want to know where the stock market is headed, forget about consumer spending and retail sales figures. Look to manufacturing, capital expenditures, corporate profits, and productivity gains.
Beware of Keynes’s Law
The reason we hear so much about the consumer is because the media and political pundits still live under the spell of Keynesian economics, which teaches that demand creates supply. Keynes’s law is just the opposite of Say’s law (supply creates demand). According to Keynesians, consumer spending drives the economy and saving is bad when the economy is in a short-term contraction.
In reality, increased savings can actually stimulate the economy, even if consumer spending is anemic. A recent study by the St. Louis Fed concluded that in the short run, “a higher saving rate in the current quarter is associated with faster (not slower) economic growth in the current and next few quarters” (Daniel L. Thornton, “Personal Saving and Economic Growth,” Economic Synopses, St. Louis Fed, December 17, 2009).
How is this possible? When people save more, interest rates fall and business can afford to replace their old equipment with new tools, spend more on research and development, or develop new production processes. So while consumer spending may stay low, business spending can pick up the slack. Remember, in a dynamic economy the decision by businesses to spend more investment funds and hire more workers is a function of both current consumer demand and future consumer demand. And don’t forget, during a recession corporate profits often recover first, without an increase in customer demand, because companies can boost profits by cutting costs and downsizing.
In the long run new business strategies and spending patterns increase productivity and lower prices to consumers, which in turns means the consumers’ purchasing power increases. As the St. Louis Fed concludes, “A higher saving rate does mean less consumption [in the short run], but it could also result in more capital investment and, ultimately, a higher rate of economic growth…. [T]he growth rate of real GDP has been higher on average when the personal saving rate is rising than when it is falling.”
Granted, the ultimate function of business activity and entrepreneurship is to fulfill the needs of consumers, and the most successful firms are those that satisfy their customers. But more important, who discovers the new, improved products that consumers desire? Who is the catalyst that determines the quantity, quality, and variety of goods and services? Did the consumer come up with the idea of personal computers, SUVs, fax machines, cell phones, the Internet, and the iPhone? No, these technological breakthroughs came from the genius of creative entrepreneurs and the savers/capitalists who funded their inventions.
The Rational, The Relentless – Liberty Magazine – September 2007
by Mark Skousen
“To keep the fish that they carried on long journeys lively and fresh, sea captains used to introduce an eel into the barrel. In the economics profession, Milton Friedman is that eel.”— Paul A. Samuelson
Milton Friedman, the intellectual architect of the free-market reforms of the post-World War II era, was a dear but prickly friend. We constantly argued over a variety of issues, but remained friends throughout. I was probably the last person to go out to lunch with him before he died of a heart attack on Nov. 16, 2006.
It was a privilege to know him, despite our policy differences. The triumph of free-market reforms introduced by Thatcher, Reagan, and other leaders in the post-Berlin Wall era (reforms such as lower taxes, deregulation, and privatization that showed the collapse of the Keynesian and Marxist paradigm) can be laid at the feet of a single giant figure: Milton Friedman. Other free-market economists made their mark, but Friedman was the most influential.
Founder of the modern-day Chicago school of economics, Milton Friedman was the force behind many new and exciting ideas: policies such as monetarism, privatization of Social Security, school choice, and futures markets in currencies, and also scholarly pursuits that transformed the economics profession from the “dismal science” to the “imperial science” of today. He was the first economist to counter effectively the Keynesian monolith and its myths: that capitalism is inherently unstable, that money does not matter, that there is a trade-off between inflation and unemployment. Friedman debunked them all. He demonstrated that money mattered a lot: “Inflation is always and everywhere a monetary phenomenon.”
His most important work is his 1963 magnum opus, A Monetary History of the United States, 1867–1960, with co-author Anna J. Schwartz. This book carefully demonstrates a close correlation between monetary policy and economic activity. Friedman and Schwartz demonstrated beyond doubt that ineptitude by a government body, not free-enterprise capitalism, caused the Great Depression, when the Fed allowed the money supply to contract by over a third. This book marked the beginning of a counterrevolution, away from the Keynesian view that big government and the welfare state were beneficial. Now government was seen as the cause of our problems, not the cure, as Reagan used to say. Textbooks replaced market failure with government failure. And Friedman made it happen.
He was able to succeed where other free-market economists failed because he had impeccable credentials within the economics profession — earning his Ph.D. from Columbia University, becoming president of the American Economic Association, being published by Princeton University Press, teaching at the University of Chicago, and winning the Nobel Prize in Economics (in 1976, appropriately on the 200th anniversary of America’s Declaration of Independence).
After establishing himself as a top-ranked economist, he wrote for the general public, especially in Capitalism and Freedom (1962) and Free to Choose (1980), co-authored by his wife and fellow economist, Rose Friedman. (Rose was his beloved companion in life — they traveled and worked together, reared two children, and wrote the memoir “Two Lucky People.”) Milton told me that he always regarded Capitalism and Freedom as his best book for the intelligent layman. I recommend it as an ideal libertarian document.
On a personal level, Milton was unique. He had an “open door” policy toward people of all walks of life. Always intelligent and demanding of evidence, he kept his secretary busy with a huge correspondence with friends and strangers. When I met him in the early 1980s, he didn’t know me from Adam, but he was willing to talk with me and answered my questions seriously. I kept up our friendship by letters, emails, telephone calls, dinners, and lunches over the past dozen years. In 1988, he invited me to my first meeting of the Mont Pelerin Society, and through his influence, I became a member in 2002. He generously wrote blurbs for my recent books and was a big fan of FreedomFest, my annual gathering of freedom lovers. When I had the opportunity to teach at Columbia Business School, he wrote a favorable letter to the dean, which helped me win the position.
Friedman loved to debate, and took on all comers. Unlike many erudite libertarians, he suffered fools gladly and, to my knowledge, never excommunicated anyone over intellectual disagreements. He disagreed sharply with Keynesian economists such as Paul Samuelson and John Kenneth Galbraith, yet he remained friends with both. At times, my own disputes with him were so intense that I thought our relationship was threatened, but my friendship with this happy warrior continued to the end.
Friedman and I were friend and foe on many issues, to the point where I was criticized for being both too sympathetic and too critical. In 2001, at my first board meeting as president of the Foundation for Economic Education, I was approached privately by Bettina Greaves, a long-time FEE employee and devotee of Misesian (“Austrian”) economics. She said, “Mark, I support you in every way as the new president of FEE, but please be more critical of Milton Friedman.” I thanked her for the suggestion. Then, half an hour later, another board member, Muso Ayau, past president of the Mont Pelerin Society and founder of the Universidad Francisco Marroquin in Guatemala, pulled me aside to give me some advice. He whispered, “I support you in every way, but could you do me a favor? Please stop being so critical of Milton Friedman!” When I told Milton this story, he had a belly laugh.
I first met Milton Friedman at the San Francisco Money Show. I approached him with a question about Murray Rothbard’s book, America’s Great Depression, and he willingly engaged me. At the time, I was quite enamored with Rothbard’s Austrian-school explanation of the depression — his argument that it was caused by an inflationary boom in the 1920s that had to collapse, and that the 1930s was actually a good cleaning for a defective financial system. Friedman quickly disparaged Rothbard’s scholarly work, saying that the Fed’s policies during the 1920s were not the problem and that Rothbard had artificially inflated the money supply figures to justify his Austrian position. “The Great Depression was caused by inept Fed policy in the 1930s, not the 1920s,” he told me.
Afterwards, we continued our correspondence by mail, arguing largely about Austrian vs. Chicago economics. This correspondence eventually culminated in my book, Vienna and Chicago, Friends or Foes? (2005). When I asked Milton about the title of this book, he answered, “We’re both friends and foes!” Once I made the mistake of referring to Anna Schwartz, co-author of Monetary History, as his “researcher,” and he blew up. He accused me of being “narrow-minded” and “intolerant” in a way he termed “typical of Austrian economists.” He urged me to look at the background papers and letters dealing with Monetary History at the Hoover Institution, where I would quickly realize that Schwartz was clearly a bona fide “co-author” and not just a “researcher.” This letter is still burning in my files. Funnily enough, a month later, I saw a picture of Anna Schwartz in the American Economic Review, and the short summary of her professional career listed the terms “researcher” and “research” seven times! But I dared not write him back with this comment for fear of retaliation.
A few years after the Money Show I was back in California for a meeting of political conservatives where Friedman was a speaker. I called his hotel room and invited him to lunch, just the two of us. He agreed, and we had a delightful two-hour luncheon overlooking the California coastline. I showed him a chart of M1, the narrowly defined money supply, noting that it had declined sharply in the mid-1980s. I interpreted this to mean that another economic collapse was imminent. He disputed my interpretation. “You can’t rely on M1 anymore — it’s out of date due to the deregulation of the banking system. If you look at M2, which includes money market funds, the money supply is growing. There isn’t going to be any collapse.” He was right. The Reagan era was booming.
When the lunch was over, the bill came and I insisted on paying. As I was signing the credit card bill, I turned to him and said, “Dr. Friedman, one of your favorite sayings is ‘There’s no such thing as a free lunch.’ Well, I’m here to disprove it today because I’m paying for yours.” Quick as a flash, he retorted, “Oh, no, no, Mark, that wasn’t a free lunch. I had to listen to you for two hours!”
When my book Economics on Trial (1991) was published, I prepared an advertisement with the headline: “Japan and Germany Win World War III,” followed by these words: “Their formula multiplies wealth so rapidly that they will achieve their goal of world domination by the year 2000.” In the ad, I referenced the sound economic model that had transformed war-torn Germany and Japan into economic powerhouses and strengthened their stock markets in one generation. The principles were high savings rates, low taxes on capital and investment, low inflation, balanced budgets, and free markets.
I sent a copy of my ad to Friedman, and he took no time debunking it. “This prediction is a bunch of nonsense,” he scribbled over the ad copy. “I will not live long enough to see it falsified, but you will. In the year 2000, the U.S. standard of living will be higher than the Japanese.” He was, of course, proven right.
Friedman’s anger flared again in the late 1990s, when we gathered in Vancouver for a Mont Pelerin Society meeting. Milton and Rose Friedman were in charge of the conference program. Its title was “Can Creeping Socialism Be Stopped?” In one of the breakout sessions I asked Friedman about his easy-money solution to Japan’s economic problems. I held up an article he published in The Wall Street Journal, “Rx for Japan,” in which he advocated a massive printing of yen to jumpstart the Japanese economy, while ignoring such free-market solutions as cutting taxes, deregulating, or opening up the Japanese economy. “Isn’t printing more money another example of creeping socialism?” I asked. He was not amused, and noted that, historically, increasing the money supply has stimulated economic recovery, and that fast monetary growth was necessary, given Japan’s fragile condition. I countered, “Ah, so there is a free lunch, after all, Dr. Friedman?” “A free disaster!” he interjected with high emotion. Afterward, Professor Jim Gwartney came up to me and said, “You attacked God today!” Indeed. Yet even free-market icons can make mistakes.
A year later, Milton and Rose were invited to speak at the New Orleans Gold Conference, an annual gathering of hard-money investors. After Milton spoke, he took questions from the audience. I tempted him with the question, “Who’s the better economist, Ludwig von Mises or John Maynard Keynes?” I knew Milton would answer straight; he didn’t care what gold bugs thought. “Keynes,” he proclaimed to a shocked audience. When asked who was the greatest economist ever, he didn’t say Adam Smith, but settled on Alfred Marshall, the British economist who invented supply and demand curves.
Rose dissented. I had never seen her disagree with her husband in public, but she stood up and said that Marshall was infamous for treating his wife poorly and refusing to support her professional career as an economist. In all my private meetings with the Friedmans, Rose was always graciously reserved and seldom if ever argued with her husband. I had heard a rumor that she differed with Milton on Austrian capital theory, and one time I asked her if this was true. She simply smiled and winked.
My most embarrassing moment with the Friedmans came later that evening when I invited them to dinner at the best restaurant in New Orleans, Commander’s Palace, along with two friends, Gary North and Van Simmons. After we ordered and exchanged greetings, Milton turned to me and asked in a serious tone, “Mark, why are gold bugs so passionate about gold?” It was a perfect opportunity to talk about the importance of “honest money,” a theme that Ludwig von Mises, Henry Hazlitt, and other Austrian economists have taught for years. I pulled out of my jacket pocket a large oversized $20 banknote, a “gold certificate” issued in the 1920s. Together we read the words spelled out on it: “This certifies that there has been deposited in the Treasury of the United States of America TWENTY DOLLARS IN GOLD COIN payable to the bearer on demand.” I then explained, “Milton, we’re passionate about gold because under the gold standard, there’s a contract between the government and its citizens. For every gold certificate issued, the government had to back it up with a $20 gold coin. Under a genuine gold standard, the Treasury can’t just print up money to pay their bills. It’s honest money.”
All along, I felt that Friedman was simply playing along, since after all, he was the world’s foremost monetary historian. I went on, “So, what kind of contract exists today between the government and its citizens? Milton, do you have a $20 bill?” He reached into his pocket and handed over a $20 bill. “See, the contract has completely disappeared. Now it only says ‘Federal Reserve Note.’ And the Fed doesn’t even pay interest!” I paused and said, “Milton, this $20 bill isn’t worth the paper it’s printed on.” And I tore it up! I ripped Milton Friedman’s $20 Federal Reserve Note into a half-dozen pieces.
Suddenly, the atmosphere changed. He turned to me and said angrily, “Mark, you had no right to destroy my property!” Rose chimed in, “Yes, Mark, you shouldn’t have done that. That was Milton’s private property.” Gary North and Van Simmons stared in horror and didn’t say a word. Milton’s voice rose, and other dinner guests looked over at us and could see emotions rising. At this point, I was worried. My relationship with the Friedmans seemed to be ending that very night. Finally, I said, “Well, I suppose you want your money back?”
They assented heartily. So I reached into my pocket and pulled out a $20 St. Gaudens Double Eagle gold coin, handed it to Milton, and said, “Okay, here’s your $20!”
He looked startled and stared at the coin. I thought he would be pleased, but I was wrong. Suddenly, he handed it back to me. “I don’t want it!”
I gulped, struggling for words. “But Milton, it’s a gift. Here, take it. It’s a $20 gold coin, worth a lot more than a $20 Federal Reserve Note.”
“No,” he repeated emphatically. “I don’t want it.”
After an agonizingly pregnant pause, I finally figured out a solution. Setting the coin aside, I reached into my pocket, pulled out a fresh new $20 paper note, and handed it to him. “There, okay, will this help?”
He calmed down and took the $20 bill. Gathering up some courage, I brought out the gold coin again. “Look,” I said, as I handed it over to him, “look at the date.” He examined the coin again. “Oh, 1912 — my birth year!” He laughed haltingly. Rose looked on and smiled.
I explained that the entire evening was a set-up, an opportunity for me to give him a St. Gaudens Double Eagle gold coin minted in the year he was born. The coin was in a PCGS certificated plastic container with the words, “To the Golden Milton Friedman.” I told Milton and Rose that my friend across the table, Van Simmons, was a coin dealer and had gone to great lengths to find a 1912 Double Eagle, which was rare. Van added that it had been shipped overnight from Switzerland and had arrived only an hour before dinner. I think that only then did the Friedmans recognize what was going on. The next morning they came up and thanked me for the coin and my gesture of appreciation.
Throughout the evening Gary North — a well-known economic historian and gold bug — said nothing. But in the morning, he came up to me at the conference and said something profound. “Mark, I’ve thought all night about what happened at dinner at Commander’s Palace. You and I have an ideology of gold. And Milton has an ideology of paper money. Mark, last night you attacked his ideology!”
Milton and I never discussed the coin incident again. (I keep his torn-up $20 bill in my wallet as a keepsake.) We met on many other occasions, but I shall never forget our last lunch together in San Francisco. There for the Money Show, I took the opportunity to call him. We met at his favorite Italian restaurant, the North Beach. For the past few years he had walked with a cane and traveled only on cruises or in private jets. At age 94, he had weak legs, a serious heart condition (after two open heart surgeries in the 1980s), and was losing his eyesight. Yet his mind was still sharp.
We discussed the latest Nobel laureates in economics. “We’re running out of good names,” he said. I showed him a Photoshopped picture I had created of him standing next to the 6 foot 10 inch John Kenneth Galbraith, the premier Keynesian and welfare statist of the 20th century. Galbraith towered over the diminutive Friedman. Beneath the picture* was a funny line from economist George Stigler: “All great economists are tall. There are two exceptions: John Kenneth Galbraith and Milton Friedman.” Milton was so pleased with the photo and caption that he sent it to all his friends.
As we left, I asked him, “Do you think you’ll live to be 100?” He answered quickly, “I hope not!” But he was almost always upbeat about life, even to the end. He was not a religious man, but he expressed interest in religious topics near the end of his life. His favorite poem was Keats’ “Ode on a Grecian Urn” which ends, “ ‘Beauty is truth, truth beauty’ — that is all / Ye know on earth, and all ye need to know.” He discovered both in a full and complete life. I consider it a privilege and honor that I knew him.
Friedman’s Less Familiar Quotations
Milton Friedman was not only a great economist, but a memorable quotesmith. Besides the standard-bearers, such as “Inflation is always and everywhere a monetary phenomenon” and “There’s no such thing as a free lunch” (which he popularized), here are some others less well known:
“If a tax cut increases government revenues, you haven’t cut taxes enough.”
“I favor tax reductions under any circumstances, for any excuse, for any reason, at any time.”
“A society that puts equality ahead of freedom will end up with neither equality nor freedom.”
“Competition is a tough weed” (George Stigler). “Freedom is a rare and delicate flower” (Milton Friedman).
“Nothing is so permanent as a temporary government program.”
“Inflation is taxation without legislation.”
“The economy and the stock market are two different things.”
“If government is to exercise power, better in the county than in the state, better in the state than in Washington.”
“The great advances of civilization, whether in architecture or painting, in science or in literature, in industry or agriculture, have never come from centralized government.”
“The minimum wage law is one of the most, if not the most, anti-black laws on the statute books.”
“Nobody spends somebody else’s money as carefully as he spends his own.”
“The government solution to a problem is usually as bad as the problem.”
by Mark Skousen
“How many a man has dated a new era in his life from the reading of a book.”— Henry David Thoreau, Walden
Would you do me a favor? Find an easy chair, or better yet, go outside to a secluded spot and read this essay at your leisure.
Ever since my family and I lived in the Bahamas for two years,1 I’ve had an interest in leisure, the lure of breaking away from business and just relaxing, wandering, and letting my mind go. It seems like a very libertarian thing to do. Along with a photo of my family in the Bahamas, I have on my bookshelf a whole list of titles to remind me to walk away from work: The Idle Thoughts of an Idle Fellow; Leisure: The Basis of Culture; and Bertrand Russell’s In Praise of Idleness.
But before I go on, would you mind indulging me? As I write this, it’s a beautiful sunny day here in New York, and my wife has just beckoned me to join her at the swimming pool along the Hudson River. I’ll be back in a not-so New York minute . . . (While you wait, go ahead and read the rest of this issue of Liberty, or just listen to the birds sing.) There’s nothing like an opportunity to think, meditate, and relax with friends on a balmy summer day.
In my travels, I make a point of wandering aimlessly around the city or neighborhood I’m visiting, and usually end up at some used-book store. In the mid-’80s, I happened to be in Durango, Colo., a small college town, and came across a first edition of a book called The Importance of Living by Lin Yutang. I’d tried to read Chinese philosophers before, but never found them appealing until this book came along. What makes Lin Yutang so different from Confucius, Mencius, and Lao Tzu? He lived in both the East and the West, and consequently does an extraordinary job of contrasting the cultures. His book was so refreshing and shocking, so charming and witty, that I found myself underlining something on practically every page. And though Lin wrote in 1937, he sounds very modern.
Lin was a 20th-century Taoist known for his philosophy of leisure and “letting go.” He was also a libertarian who despised all forms of government control, especially Marxism-Leninism and Maoism in Red China. Born in southeastern China in 1895 to Christian missionaries, he learned English at St. John’s University in Shanghai and pursued a doctoral degree at Harvard University. He left Harvard early and went to France and then Germany, where he earned a Ph.D. at the University of Leipzig. After 1928, he lived most of his life in New York, where he translated Chinese texts and wrote prolifically. His objective was to bridge the gap between East and West, teaching Westerners about the old Chinese culture in such bestsellers as My Country and My People (1935) and The Importance of Living (1937). Refused permission to return to China by the Communists, Lin moved to Taipei, Taiwan, where he died in 1976.
The Age of Busy-ness
To understand Lin’s Chinese philosophy, I begin by quoting his most famous line, a line that mystifies workaholic Americans: “Those who are wise won’t be busy, and those who are too busy can’t be wise.”
I made the mistake of writing this statement on the blackboard on my first day of class as a professor at Columbia Business School. A third of the students immediately left, and dropped the class. (Fortunately, the majority had an open mind about pursuing interests other than a 24/7 lifestyle, and later rated my class highly.)
Yet there is wisdom in Lin’s statement. If you are too busy in your work, you don’t have time to learn new ideas, to discover new truths, to enjoy life’s little pleasures, or perhaps to pick a winning stock! Beating the market requires you to look down untrodden paths, and you need the free time to do it.
Lin Yutang criticizes most Americans for being too busy, and therefore slaves to the business culture and the old ways. They worry themselves to death. In another startling statement, Lin writes, “The three American vices seem to be efficiency, punctuality and the desire for achievement and success. They are the things that make the Americans so unhappy and so nervous.”2 Gee, I thought they were American virtues!
Life in the West, according to Lin, is “too complex, too serious, too somber, and too involved.” He would agree with Henry David Thoreau: “Our life is frittered away by detail. Simplify, simplify.” Following Taoist philosophy, Lin warned against “over doing, over achieving, over action . . . of being too prominent, too useful, and too serviceable.” The “perfectly square” house, the “perfectly clean” room, and the “perfectly straight” road rankle in him. He goes on to say, “O wise humanity, terribly wise humanity! How inscrutable is the civilization where men toil and work and worry their hair gray to get a living and forget to play!”
The Art of Loafing
Lin says not to worry: “The Chinese philosoph[er] . . . is seldom disillusioned because he has no illusions, and seldom disappointed because he never had extravagant hopes. In this way his spirit is emancipated.”
Culture, says Lin, is essentially a product of leisure. “The art of culture is therefore essentially the art of loafing. From the Chinese point of view, the man who is wisely idle is the most cultured man.” He likes a messy room, a crooked road, and a leaky faucet!
Lin offers the secret to success for the businessman (busy man?) in this statement: “Actually, many business men who pride themselves on rushing about in the morning and afternoon and keeping three desk telephones busy all the time on their desk, never realize that they could make twice the amount of money, if they would give themselves one hour’s solitude awake in bed, at one o’clock in the morning or even at seven. There, comfortably free, the real business head can think, he can ponder over his achievements and his mistakes of yesterday and single out the important from the trivial in the day’s program ahead of him.”
But the West won the cultural war. Today, 70 years after Lin’s critique of the three American vices, it is the Japanese, the Chinese, the Koreans, and the Indians who dress in Western business suits and spout the Western philosophy of efficiency, punctuality, and goal-setting, and who work 14-hour days and forget to play. In the new China, the roads are straight, the houses are perfect, and everything works. I suspect Lin Yutang would not like the new Asia, especially the regimented Singapore. It’s a paradise lost.
The Individual and the State
Lin Yutang is a champion of the individual and “its unreasonableness, its inveterate prejudices, and its waywardness and unpredictability.” But in today’s society, warns Lin, the individual free thinker is being replaced by the soldier as the ideal. “Instead of wayward, incalculable, unpredictable free individuals, we are going to have rationalized, disciplined, regimented and uniformed, patriotic coolies, so efficiently controlled and organized that a nation of fifty or sixty millions can believe in the same creed, think the same thoughts, and like the same food.” Lin goes on to warn, “Clearly two opposite views of human dignity are possible: the one believing that a person who retains his freedom and individuality is the noblest type, and the other believing that a person who has completely lost independent judgment and surrendered all rights to private beliefs and opinions to the ruler or the state is the best and noblest being.”
I daresay which of the two applies to Liberty readers! Lin dislikes the popular trend of sorting people into groups and classes. “We no longer think of a man as a man, but as a cog in a wheel, a member of a union or a class, a ‘capitalist’ to be denounced, or a ‘worker’ to be regarded as a comrade. . . . We are no longer individuals, no longer men, but only classes.”
Lin Yutang experienced the brutality of Chinese communism and the heavy-handed bureaucracy of Washington durng the New Deal era. Needless to say, he had a low opinion of government: “I hate censors and all agencies and forms of government that try to control our thoughts.”
Favoring persuasion over force, Lin distrusts laws and law enforcement. Quoting Lao Tzu, Lin says government regulation “represents a symptom of weakness.” Lin adds, “the great art of government is to leave the people alone.” Quoting Confucius, Lin suggests that if you regulate people by law, “people will try to keep out of jail, but will have no sense of honor.” But if you regulate the people by moral teaching, “the people will have a sense of honor and will reach out toward the good.” War is never ideal, even when your side is right. Again Lin quotes Lao Tzu: “Where armies are, thorns and brambles grow.”
Lin opposed Mao and the Communists because they placed society above the individual. The Soviet model was “disastrous” and Maoism “the worst and most terroristic regime.” Lin favored a “silent revolution, of social reform based on individual reform and on education, of self-cultivation.”3
He also questioned the establishment economist and forecaster:
“Perhaps I don’t understand economics, but economics does not understand me, either. The sad thing about economics is that it is no science if it stops at commodities and does not go beyond human motives . . . It remains true that the stock exchange cannot, with the best assemblage of world economic data, scientifically predict the rise and fall of gold or silver or commodities, as the weather bureau can forecast the weather. The reason clearly lies in the fact that there is a human element in it, and when too many people are selling out, some will start buying in. . . . This is merely an illustration of the incalculableness and waywardness of human behavior, which is true not only in the hard and matter-of-fact dealings of business, but also in the shape of the course of history.”
He was probably unfamiliar with the one school of economics that does take into account human behavior: the Austrian school of Ludwig von Mises and Friedrich Hayek. Undoubtedly Lin would like the title of Mises’ magnum opus Human Action.
Lin Yutang has many more things to say about our culture and how to live a happy and fulfilling life: about growing old gracefully (“The East and West take exactly opposite points of view. In China, the first question they ask is, ‘What is your glorious age?’ ”); the need for women at dinner (“the soul of conversation”); the evils of Western wear (“inhuman”); the only way to travel (“buy a one-way ticket”); and his controversial views on smoking (“one of the greatest pleasures of mankind”). I’ve only scratched the surface of this brilliant Chinese philosopher.
On Buddhism and Christianity
For Lin, Buddhism’s outlook (“life is suffering”) was too pessimistic and its path to happiness (“suppress one’s desires”) too austere. In a chapter called “Why I am a Pagan” in “The Importance of Living,” Lin renounced his parents’ Christianity, which in his age forbade enjoying sex, dancing, food, smoking, drinking, and the good life, in favor of an ascetic lifestyle that suppressed all sinful pleasures to obtain salvation.
Although Lin approved of the Christian emphasis on technology and education, and its banishment of foot binding and drug use in China, he rejected the austerity and social isolationism. “Chinese Christians virtually excommunicated themselves from the Chinese community,” he wrote. While at college, Lin discovered “the vast world of pagan wisdom.” His personal philosophy: “If I had to make a choice between contemplating sin exclusively in some dark, cavernous corner of my soul, and eating bananas with a half-naked girl in Tahiti, entirely unconscious of sin, I would choose the latter.”
Yet in the 1950s, he returned to his Christian roots, although it was a liberal, tolerant, forgiving Christianity. What reconverted him? Not the catechism, but Christian charity, the showing of love, kindness, and good works toward his fellow man as Jesus proclaimed in the Sermon on the Mount. “Once this original emphasis is restored and Christians ‘bear fruit’ in their lives, nothing can withstand the power of Christianity.”4
But for now, it is Lin Yutang and his works that are bearing fruit. There is a growing hunger for leisure in a speedy world and for individualism in a conformist globalization. As if speaking today, Lin states, “I am quite sure that amidst the hustle and bustle of American life, there is a great deal of wistfulness, of the divine desire to lie in a plot of grass under tall beautiful trees of an idle afternoon and just do nothing.”
While enjoying that idle afternoon, may I suggest you take along a copy of Lin Yutang’s “The Importance of Living”? In the United States, a Little, Brown edition came out in 2003, although I’m disappointed that it is without Chinese art on the cover or running heads inside the book. Lin would not approve of such an austere edition! A Singapore edition by Cultured Lotus recaptures the beauty of the original and is far superior. Yet I personally prefer the 1937 edition by John Day Company, available by wandering through any dusty, dank, disorganized bookstore.
1. See “Easy Living: My Two Years in the Bahamas” (Liberty, December 1987).
2. Lin Yutang, “The Importance of Living” (John Day and Company, 1937), p. 150.
3. Lin Yutang, “From Pagan to Christian” (World Publishing, 1959), p. 78.
4. “From Pagan to Christian,” p. 236.