The Anti-Capitalistic Mentality, Updated

Economics on Trial
Ideas on Liberty
November 2000

by Mark Skousen

“In the excitement over the unfolding of his scientific and technical powers, modern man has built a system of production that ravishes nature and a type of society that mutilates man.” -E. F. SCHUMACHER (1)

In 1956, Ludwig von Mises countered myriad arguments against free enterprise in his insightful book, The AntiCapitalistic Mentality. “The great ideological conflict of our age,” he wrote, “is, which of the two systems, capitalism or socialism, warrants a higher productivity of human efforts to improve people’s standard of living.” (2)

Unfortunately, Mises’s counterattack has done little to stem the tide of anti-market sentiments. One that continues to be popular is E. F.Schumacher’s 1973 book, Small Is Beautiful which has recently been reprinted in an oversized text with commentaries by Paul Hawken and other admirers. Schumacher has a flourishing following, including Schumacher College (in Devon, England) and the Schumacher Society (in Great Barrington, Massachusetts). Hawken hails Schumacher as a visionary and author of “the most important book of [his] life.” (3) Schumacher’s message appeals to environmentalists, self-reliant communitarians, and advocates of “sustainable” growth (but not feminists the old fashioned Schumacher cited favorably the Buddhist view that “large-scale employment of women in offices or factories would be a sign of economic failure” (4) ).

From Austrian to Marxist to Buddhist

Oddly enough, Fritz Schumacher’s background is tied to the Austrians. Schumacher was born in Germany in 1911 and took a class from Joseph Schumpeter in the late 1920s in Bonn. It was Schumpeter’s course that convinced Schumacher to become an economist. While visiting England on a Rhodes scholarship in the early 1930s, Schumacher encountered F. A. Hayek at the London School of Economics and even wrote an article on “Inflation and the Structure of Production.” (5) But his flirtation with Austrian economics ended when he discovered Keynes and Marx. He renounced his Christian heritage and became a “revolutionary socialist.” The Nazi threat forced him to live in London, where he was “interned” as an “enemy alien” during World War II. After the war, he worked with Keynes and Sir William Beveridge and supported the nationalization of heavy industry in both Britain and Germany. But his real change of heart came during a visit to Burma in 1955, when he was converted to Buddhism. “The Burmese lived simply. They had few wants and they were happy,” he commented. “It was wants that made a man poor and this made the role of the West very dangerous.” (6)

Schumacher greatly admired Mahatma Gandhi and his saying, “Earth provides enough to satisfy every man’s need, but not for every man’s greed.” Eventually he wrote a series of essays that became his classic, Small Is Beautiful, published in 1973. In the 1970s, he became passionate about trees and began a campaign against deforestation. After a successful book tour in the United States, including a visit with President Jimmy Carter, he died in 1977 of an apparent heart attack.

The Lure of Buddhist Economics

Schumacher’s message is Malthusian in substance. Small Is Beautiful denounces big cities and big business, which “dehumanizes” the economy, strips the world of “nonrenewable” resources, and makes people too materialistic and overspecialized. According to Schumacher, individuals are better off working in smaller units and with less technology.

His most important chapter is “Buddhist Economics,” with its emphasis on “right livelihood” and “the maximum of wellbeing with the minimum of consumption.” Foreign trade does not fit into a Buddhist economy: “to satisfy human wants from faraway places rather than from sources nearby signifies failure rather than success.” (7) In sum, traditional Buddhism rejects labor-saving machinery, assembly-line production, large-scale multinational corporations, foreign trade, and the consumer society.

There are two problems with Schumacher’s glorification of Buddhist economics. First, it denies an individual’s freedom to choose a capitalistic mode of production; it enslaves everyone in a life of “nonmaterialistic” values. And second, it clearly results in a primitive economy. Mises responded to both these issues: “What separates East and West is . . . the fact that the peoples of the East never conceived the idea of liberty . . . . The age of capitalism has abolished all vestiges of slavery and serfdom.” And: “It may be true that there are among Buddhist mendicants, living on alms in dirt and penury, some who feel perfectly happy and do not envy any nabob. However, it is a fact that for the immense majority of people such a life would be unbearable.” (8)

I have no objection to preaching the Buddhist value that sees “the essence of civilization not in a multiplication of wants but in the purification of human character.” Nor do I disapprove of localized markets (see my favorable review last November of the Grameen Bank, which makes small-scale loans to the poor). But none of this idealism should be forced on any society. Ultimately we must let people choose their own patterns of work and enjoyment. Clearly, whenever Third World countries have been given their economic freedom, the vast majority have chosen capitalistic means of production and consumption. As a result, poor people have been given hope for the first time in their lives-a chance for their families to break away from the drudgery of hard labor, to become educated, see the world, and enjoy “right living.”

Freedom is beautiful!

1. E. F. Schumacher, Small is Beautiful Economics as if People Mattered: 25 Years Later with Commentary (Point Roberts, Wash.: Hanley & Marks, 1999 (1973)), p. 248.
2. Ludwig von Mises, The Anti-Capiaadatie Mentality (South Holland, Ill.; Libertartan Press, 1972 [1956]),p. 62.
3. Paul Hawken, Introduction to Schumacher, p. xiii.
4. Ibid., p. 40.
5. Sec The Economics of Inflation, ed. by H, P. Willis and J. A Chapman (New York: Columbia University Press, 1935).
6. Quoted in Barbara Wood, E. F. Schumacher: His Life and Thought (New York: Harper & Row, 1984), p. 245.
7. Schumacher, p. 42.
8. Mises, p. 74.

Having Their Cake

Economics on Trial
Ideas on Liberty
October 2000

Having Their Cake
by Mark Skousen

“The duty of ‘saving’ became nine-tenths of virtue and the growth of the cake the object of true religion.” -JOHN MAYNARD KEYNES (1)

In his 1920 bestseller, The Economic Consequences of the Peace, John Maynard Keynes made a profound observation about the success of capitalism before the Great War. He lauded “the immense accumulations of fixed capital” built up by the “new rich” during the half century before the war and compared the huge capital investment of this golden era to a “cake,” noting how “vital” it was that the cake “never be consumed;” but continue to “grow.”

Keynes was intensely optimistic about the prospects of humanity, “if only the cake were not cut but was allowed to grow in the geometrical proportion predicted by Malthus for population.” Rapid capital accumulation would result in the elimination of “overwork, overcrowding, and underfeeding,” and workingmen “could proceed to the nobler exercises of their faculties.”

Alas, it was not to be. The First World War destroyed Keynes’s dream of universal progress. The cake was consumed. “The war has disclosed the possibility of consumption to all and the vanity of abstinence to many.” (2)

War isn’t the only enemy of capital accumulation. Since World War II, the greatest threat to capital formation (the growth of the cake) has been the direct and indirect taxation of capital.

Take, for example, the federal estate tax. The estate tax is often viewed as an “inheritance” tax and even a “death” tax. But it’s much worse than that. It’s also a tax on capital. An estate’s taxable property includes stocks, bonds, business assets, real estate, coins and collectibles-all after-tax, afterconsumption investments.

If your net worth exceeds $675,000, your heirs will be forced to pay at least 18 percent to the IRS. The tax rate hits a confiscatory 55 percent at a mere taxable estate of $3 million.

Capital is the lifeblood of the economy. Capital investment finances new technology, new production processes, quality improvements, jobs, and economic growth in general. When those investment funds are taxed-$28 billion in 1998-the funds are removed from the investment pool and transferred to Washington, where they are consumed. For the most part the funds are consumed through government expenditures and “transfer payments” (welfare, salaries of government workers, and so on).

The estate tax also creates economic distortions. It encourages individuals to engage in “estate planning,” expensive legal exercises to avoid the death tax. It forces individuals to buy insurance policies they would not otherwise buy and create tax-exempt trusts and foundations that they would not ordinarily create. Undoubtedly, millions of fiends are transferred every year into foundations and charities just to avoid estate taxes. Charitable giving and public foundations have become big business, but what is the price? Mismanagement and waste are common features in these nonbusiness organizations.

Another Inefficient Tax: Capital Gains Taxes

Perhaps an even more sinister tax is the capital gains tax. If you sell an asset (stock, bond, commodity, real estate, or collectible), the profits are taxed between 20 and 40 percent, depending on how long you held the asset. (If you hold for more than a year, the maximum rate is 20 percent.) This is a terrible penalty on capital. It means that every time a stock or other asset is traded outside a taxexempt vehicle, 20 to 40 percent of the profits are removed from the private economy and sent to Washington, never to be invested again. With the recent bull market on Wall Street, annual capital gains taxes have exceeded $100 billion. What a terrible drain on the economy.

Capital gains taxes also result in economic inefficiency. Because of the high tax on capital gains, many investors refuse to sell their assets. They may prefer to switch into a potentially more profitable investment, but they stay with their original investment because they hate the idea of paying Uncle Sam. Clearly, capital would be more efficiently allocated to its more productive use without this burdensome profits tax.

The United States can learn a lot from foreign nations. Hong Kong has a flat 15 percent personal income tax, a 16.5 percent corporate income tax, and no tax at all on capital gains. In fact, most of the New Industrial Countries in Southeast Asia do not tax capital gains.

Thus capital can move freely throughout Hong Kong and around the world without distortion. And the cake has grown rapidly because of capital’s tax-free status. Hong Kong does have an estate tax on values exceeding HK$7 million, but the maximum rate is only 18 percent. (3)

Fortunately, the U.S. government has recently recognized the negative drain these taxes have on the economy. It has reduced long-term capital gains, and Congress has even entertained a bill to abolish federal estate taxes altogether.

Eliminating taxes on estates and capital gains has been criticized as a break for the rich. Moreover, critics say, estate taxes should be kept in order to establish a level playing field. They argue, “Children and grandchildren of wealthy people didn’t earn inherited money. They should have to work for it, just as their parents did. Inheritances create disincentives to work.”

But these critics fail to understand the broader implications of a large tax-free estate and tax-free capital gains. Everyone-not just the rich-benefits from eliminating these taxes because wealthy people’s capital would be left intact, invested in the stock market, businesses, farms, banks, insurance companies, real estate, and other capital assets, thus insuring strong economic growth and a high standard of living for everyone. As Ludwig von Mises once stated, “Do they realize that every measure leading to capital decumulation jeopardizes their prosperity?” (4)

As an investment adviser, I share the concern that unrestricted inheritances to children or grandchildren can be morally corrupting, but there are other solutions besides a confiscatory tax. For example, a will can limit the use of inherited funds until a certain age of responsibility is reached, or a trust can offer matching funds as a way to encourage work and responsibility.

1. John Maynard Keynes, The Economic Consequences of the Peace (New York: Harcourt, Brace, 1920), p. 20.
2. Ibid., pp. 20-21.
3. For an excellent summary of tax policies throughout the world, see International Tax Summaries, published annually by Coopers & Lybrand (New York: John Wiley & Sons).
4. Ludwig von Mises, Planning for Freedom, 4th ed. (South Holland, Ill.: Libertarian Press, 1980), p. 208.

What Are the Bears Missing?

Forecasts & Strategies
Personal Snapshots
January 2000

What Are the Bears Missing?
By Mark Skousen

“He has been wrong about the stock market for a decade, he said, because he is a contrarian.” — The New York Times, December 26, 1999

The 1990s has turned out to be the best-performing decade of the 20th century in terms of stock market performance. Several new factors palyed a role: Unexpected low commodity and consumer inflation, fiscal restraint, increased productivity, globalization and the collapse of the Soviet communism and the socialist model of central planning.

And yet, an incredible number of bright people missed the entire bull market. Year after year, they predicted the imminent collapse in stocks, yet the Dow increased three fold and the NASDAQ 10-fold. The New York Times named names: James Grant, Marc Faber, and more recently Barton Biggs. All Ivy League graduates. Many of my gold bug friends missed the bull market, too.

How is this possible? What kind of prejudices would keep an intelligent analyst from issing an overwhlming trend?

Confessions of a Gold Bug Technician

A good friend of mine is a technical analyst who searches the movement of prices, volume, and other technical indicators to determine the direction of stocks and commodities. Most financial technicians are free of prejudices and will invest their money wherever they see a positive upward trend and avoid or sell short markets that are seen in a downward trend. But my friend is a gold bug and no matter what the charts show, he somehow interprest these charts to suggest that ogld is ready to reverse its down ward trend and head back up. Equally, he always seems to think the stock market has peaked and is headed south. As a result, throughout the entire 1990s, he missed out on the great bull market on Wall Street and lost his shirt chasing gold stocks.

Another friend uses an old-style Dow theory that requres both the Dow Industrials and the Dow Transports to hit new highs before a bull is declared. Durring the 1990s, this Dow theorist had the bear in the box more than the bull.

Over the years, I’ve encountered three kinds of investment analysts: Those who are always bullish, those who are always bearish, and those whose outlook depends on market conditions. I’ve found that the third types, the most flexible, are the most successful on Wall Street.

“What Am I Missing?”

In the financial business, the key to success is a willingness to chage your mind when you’re wrong. Stubbornness can be financially ruinous. When a market goes against you, you should always ask, “What am I missing?”

Sound “Austrian” economics has taught me two principles that can be applied to this situations. First, marginal changes in the political or economic landscape can make big differences in the markets. Economists always talk about marginal analysis. Thus, marginal tax cuts, reducing the size of government, and minimizing trade barriers can turn a bear market into a roaring bull market.

Second, beware historical data. History does not repeat itself in every cycle. It does make a difference who is president, or what the new technology is.

“The bears are transfixed by historical data,” reports The New York Times. Indeed, in bull versus bear debates over the past 10 years, the bears have always brought up the fact that stocks are vastly overvalued “on an historical basis.” No argument there! But does that mean we must be bearish? Again, we must ask ourselves the all important question, “What am I missing?” The markets have been overvalued for years — but they keep going up because of new net benefits to the economy. This is data that is not part of the past.

The Other Austrian

LIBERTY Magazine

The Other Austrian
By Mark Skousen

Swashbuckling corporate raiders take heed, here’s another Austrian economist offering advice.

Peter F. Drucker once walked into the boardroom of a major company in crisis and bluntly demanded, “Gentlemen, what is your business?” Most of the executives thought it was a sophomoric question, but Drucker kept pushing. He repeated the question over and over again. “What is your business?” It took them an hour to figure out what Drucker was getting at: they had lost their vision. Once they returned to fundamentals, they found their way back to profitability — all because Drucker asked a “dumb” question.

Drucker is eclectic, independent and unpredictable. Although he is known as Mr. Management, he is a lone wolf, operates without a secretary, and has no supporting organization. He is an outsider. In the words of one admirer, he is an “iconoclast–the smasher of idols, seeker of proof, demander of evidence, gadfly, thorn in the side, tough and hard-nosed commentator on problems faced by our society.” 1

Nearly everyone in the business world is familiar with Drucker, either through his books or his columns in The Wall Street Journal. He is a household name among MBAs, corporate executives and business students. Drucker is the world’s most sought-after business consultant. His vitae are multifarious: lawyer, journalist, political theorist, economist, novelist, futurist, and philosopher extraordinaire. Now in his eighties, with 25 books under his belt, he is still active in writing and consulting, though he does not travel much anymore.

Business students and executives have often told me that Drucker’s ideas have a certain “Austrian” streak to them. They say that his emphasis on entrepreneurship, innovation and investment capital as well as his denunciations of big government, excessive taxation and Keynesian economics, has right in harmony with the ideas of Bohm-Bawerk, Mises, Hayek and the Austrian school of economics.

So: is Peter Drucker a closet Austrian?

Viennese Roots

In the very literal sense, Drucker is an Austrian. He was born in 1909 in Vienna, during the heyday of the Austrian school. But he was too young to attend Ludwig von Mises’ famous seminar. When he graduated from gymnasium in 1927, he went to the University of Frankfurt, where he got his LL.D. in the early 1930s. But his roots remained Viennese. He refused a job offer from the Nazi’s Ministry of Information. Instead, he wrote a 32-page monograph on the 19th century German philosopher, Friedrich Julius Stahl. There is as much to learn about Drucker as there is about Stahl in this paper. Stahl was paradoxical: a Jew by birth, a Protestant by conversion, and a conservative opposed to absolute monarchy.  Not surprisingly, Drucker’s paper was banned by the Nazis. Like Mises, Hayek, and other enemies of the Nazi state, Drucker immigrated to the West before the war broke out. He traveled to England in 1933 and the United States in 1937.

The Manager’s Manager

Of course, the question of whether Drucker is an Austrian is not a question about his birthplace. It is a question about his economic theory. If one limited the question to his management approach, the answer is clearly in the affirmative: Drucker’s style of management is Austrian through and through. Time, expectations, new information, and potential change in production processes–all Austrian focal points–are constantly emphasized in his writings and consultations. The manager must be an entrepreneur, not just an administrator. Innovation is essential. In 1985, he wrote an entire book on the subject, Innovation and Entrepreneurship.

He criticizes management for engaging in short-term planning, what he labels “industrial Keynesianism.” Long-term planning is more risky, says Drucker, but is essential for survival, especially for large corporations. Owners and managers must be future oriented, he stresses. “Tomorrow’s vision is today’s work assignment.” The Japanese have been so successful, Drucker asserts, because they’re so long-term oriented.

In Search of a New Social Order

It was his life in America that turned his interest to business management. During the late 1930s, Drucker began searching for a new social and industrial order. He became disenchanted with “unbridled” capitalism as the Great Depression wore on and on. But socialism, fascism, and communism seemed even worse alternatives to society’s ills.

He finally found his answer in the only “free, non-revolutionary way”–the large corporation. He was enthusiastic about his discovery: big business could provide a superior alternative to socialism and big government. According to Drucker, the large corporations should be the conduit through which economic stability and social justice would be established. Only big business could afford to assume social responsibilities such as job security, training and educational opportunities, and other social benefits. Such an alternative was absolutely critical in an age when free enterprise was on the defensive around the world.

After the war, Drucker got a consulting contract with General Motors, which gave him an opportunity to develop his thesis more fully. His exhaustive study of GM culminated in the 1946 publication of Concept of the Corporation. Drucker came to the unshakable conviction that the large corporation should be the “representative social institution” of the postwar period and that major American companies such as GM should take the lead in building the free industrial society.

Top officials at General Motors resented the book and scoffed at the idea that a large corporation should assume social responsibilities. But Drucker’s reputation as a management expert grew despite GM’s cold shoulder. By 1950, he was professor of management at New York University, and in 1973 he was appointed Clarke Professor of Social Science at Claremont Graduate School in California.

Drucker maintains that a company is more than an economic entity. “Even more important than economics are the psychological, human, and power relationships which are determined on the job rather than outside it. These are the relationships between worker, work group, task, immediate boss, and management.” 3 A company’s administrators have a moral purpose and social responsibility beyond making short-term profits. Drucker envisions the large corporation as the social institution, far superior to government in providing a retirement income, health care, education, childcare, and other fringe benefits. He argues that corporate welfarism should replace government welfarism. Drucker acknowledges that such social activity could undermine economic performance, but he rejects Milton Friedman’s admonition that business’ only legitimate responsibility is to increase its profits. A lethargic government has created a “vacuum of responsibility and performance” which big business must fill.

A Moral Dimension

Drucker’s attitudes toward business management and government may not be economic in origin, but religious. “The only basis of freedom is the Christian concept of man’s nature: imperfect, weak, a sinner, and dust destined for dust; yet man is God’s image and responsible for his actions.”‘ He calls for a return to spiritual values, “not to offset the material but to make it fully productive.”

But how far he is willing to carry this insight is open to question. Drucker has been criticized as an apologist for big business. And it is true that he has been reluctant to discuss big business as a special interest lobbying power. Drucker usually envisions business and government in an adversarial role rather than a cooperative one. In his massive volume, Management, his chapter on “Business and Government” fails to mention how big business often uses its power to gain special tax breaks, subsidies, monopoly power and restrictions on foreign competition.

Paul Weaver, a former Ford executive, describes the extent of corporate statism as follows: “From the beginning it [big business] has worked aggressively and imaginatively in this spirit, and over the years it has won a dazzling array of benefits — tariffs, subsidies, official monopolies, tax breaks, immunity from certain tort actions, government-supported research and development, free manpower training programs, countercyclical economic management, defense spending wage controls, and so on through the long list of the welfare state’s indulgences and beneficences.”6 Unfortunately, the master is oddly silent on this critical issue.

Drucker Qua Economist

Drucker is much more than a management consultant and writer. He is also a commentator on politics, economics and culture. Here Drucker is less easy to categorize.

His economic views are often in line with Mises and today’s Austrians; other times they are not. He often rejects notions that Austrians consider essential. Ludwig von Mises and he were colleagues at New York University in the 1950s, but they did not see much of each other. “Mises considered me a renegade from the true economic faith,” Drucker says, and “with good reason.”‘ Drucker became disenchanted with pure laissez faire capitalism during the Great Depression. Today he supports a Hamiltonian approach to government — small, but powerful. He believes in a strong president and a central government that plays a serious role in education, economic development, and welfare. Furthermore, he rejects the gold standard and favors a central bank.

At the same time, however, Drucker advocates many positions that free market economists would applaud.

Inflation is a “social poison.” Government has gotten bigger, not stronger, and can now only do two things effectively — wage war and inflate the currency. The state has become a “swollen monstrosity.” He continues, “Indeed, government is sick–and just at a time when we need a strong, healthy, and vigorous government.” 8 Drucker advocates privatization of government services as a way to reduce a bloated bureaucracy. Indeed, Drucker claims he invented the term, calling it reprivatization in his 1969 book, The Age of Discontinuity. 9 Social Security should be gradually replaced by private pension plans. The corporate income tax, says Drucker, is the “most asinine of taxes” and should be abolished (but replaced with a value added tax). Defense spending is a “serious drain” on the civilian economy, and should be cut sharply. The costs of “free” government services are “inevitably high.” 10 Echoing Hayek, Drucker claims that no public institution can operate in a businesslike manner because “it is not a business.”

Drucker is largely optimistic about he future. He talks excitedly about an expanding global economy and the collapse of Communism. Multinational corporations, both large and small, are far more important than foreign aid or domestic spending programs by the state, and will lead the way into a new nirvana. The more firms become “transnational,” the healthier the world economy will be.

Drucker is encouraged by events in developing countries, especially efforts to privatize and denationalize and open up domestic economies to foreign capital. The worst move a developing country can make is to adopt Marxism. “Communism is evil. Its driving forces are the deadly sins of envy and hatred. Its aim is the subjection of all goals and all values to power; its essence is bestiality; the denial that man is anything but animal, the denial of all ethics, of human worth, of human responsibility.” 11 Drucker debunks Soviet-style central planning, which only produced “disdevelopment.”  He rightly concludes that Soviet economic growth rates are largely figments of the bureaucratic imagination.

Search for the “Next Economics”

Drucker expresses a withering contempt for the economics profession, which he says is still largely Keynesian in nature. Economists are too concerned with the equilibrium theory of a closed economy rather than the growth, innovation and productivity of a global economy. Drucker claims that contemporary economics is where medical school or astronomy was in the 17th century. “There are no slower learners than economists. There is no greater obstacle to learning than to be the prisoner of totally invalid but dogmatic theories.” 12

He blames Keynesianism for an unhealthy anti-saving mythology, causing “undersaving on a massive scale” among the western nations, especially the United States. Moreover, “Keynes is in large measure responsible for the extreme short-term focus of modern politics, of modern economics, and of modern business … Short-run, clever, brilliant economics — and short-run, clever, brilliant politics — have become bankrupt.”

The management guru is also discouraged by today’s popular schools of economics, including the monetarists and the New Classical school. They too ignore entrepreneurship, uncertainty and disequilibrium. Drucker calls for the “next economics” to be “microeconomic and centered on supply,” not aggregate demand, and should emphasize productivity and capital formation.”

Contemporary Austrian economics seems very much like Drucker’s vision of the “next economics.” Somewhat surprisingly, Drucker’s writings do not mention the work of today’s Austrians, like Murray Rothbard, Israel Kirzner and Roger Garrison. When I asked him his opinion of contemporary Austrians, he told me that he was not familiar with their writings. He had not heard of Kirzner’s major work, Competition and Entrepreneurship, even though Kirzner and Drucker both taught at NYU in the sixties.15

Drucker’s favorite economist is Joseph Schumpeter, the Austrian-born Harvard economist. In a 1956 article, Drucker advocates privatization of government services as a way to reduce a bloated bureaucracy. Indeed, Drucker claims he invented the term, calling it “reprivatization” in 1969.

“Modern Prophets: Schumpeter or Keynes?,” he clearly sides with Schumpeter, predicting that of these “two greatest economists of this century … it is Schumpeter who will shape the thinking … on economic theory and economic policy for the rest of this century, if not for the next thirty or fifty years”16 Drucker likes Schumpeter’s emphasis on dynamic disequilibrium and innovation by entrepreneurs who engage in “creative destruction.” In his 1985 book, Innovation and Entrepreneurship, he emphasizes the impact of technological change, innovation, the unexpected and new knowledge on business and the world economy.

But, of course, Schumpeter was an enfante terrible and renegade from the Austrian school as it developed under Mises and Hayek. In this sense, Drucker fits more into the Schumpeterian mode, although he does not share Schumpeter’s pessimism about the future of capitalism.

In the final analysis, Peter Drucker is his own man.

Drucker’s mind is like a rough diamond, providing flashes of insight at every turn. He is able to analyze complex subjects so that his readers and clients catch Drucker’s vision, seeing the essential simplicity behind the apparent chaos.

Sooner or later, every student of business discovers Peter Drucker. Now it is time for economists and social scientists to discover him too.


1 Tony H. Bonaparte, Peter Drucker: Contributions to Business Enterprise (New
York: NYU Press, 1970), p. 23.

2 Peter F. Drucker, Preparing Tomorrow’s Business Leaders Today (Englewood Cliffs, NJ: Prentice Hall, 1969), p. 290.

3 Drucker, The Unseen Revolution (New York: Harper 6r Row, 1976), pp. 134-35, 168.

4 Quoted in John J. Tarrant, Drucker: The Man Who invented the Corporate Society (Boston: Cahners Books, 1976), p. 30.

5 Drucker, The Landmarks of Tomorrow, p. 264.

6 Paul H. Weaver, The Suicidal Corporation: How Big Business Fails America (New York: Simon & Schuster, 1988), p. 18.

7 See Drucker’s autobiography, Adventures of a Bystander (New York: Harper k Row, 1979), p. 50. In an interview in 1991, Drucker told me that on the few occasions they met, Mises was always depressed. “He was one of the most miserable men I ever met.”

8 Peter F. Drucker, The Age of Discontinuity (New York: Harper k Row, 1969), p· 212

9 ibid., p. 234.

10 Drucker, The New Realities (New York: Harper & Row, 1989), p. 215.

11 Drucker, The Landmarks of Tomorrow (New York: Harper & Row, 1959), p. 249.

12 Drucker, The Frontiers of Management (New York: Harper & Row, 1986), p. 13. 13 Drucker, The Unseen Revolution, pp. 114-15.

14 Drucker, Toward the Next Economics and Other Essays (New York: Harper k Row. 1981), pp.1-21.

15 Israel M. Kirzner, Competition and Entrepreneurship (University of Chicago Press, 1973).

16 The Frontiers of Management, p. 104.

The Perseverance of Paul Samuelson’s “Economics”

Journal of Economic Perspectives

By Mark Skousen

Paul Samuelson’s Economics ranks with the most successful textbooks ever published in the field, including the works of Adam Smith, David Ricardo, John Stuart Mill and Alfred Marshall. His 15 editions have sold over four million copies and have been translated into 41 languages (see Table 1). My own Econ 101 class at Brigham Young University used the 1967 (7th) edition, which turned out to be near the high water mark in annual sales (Elzinga, 1992, p. 874). Since its first edition in 1948, Samuelson’s Economics has stood the test of time. It has survived nearly half a century of dramatic changes in the world economy and the economics profession: peace and war, boom and bust, inflation and deflation, Republicans and Democrats, and an array of new economic theories. The fiftieth anniversary edition is expected to be published in 1998.

His textbook has so dominated the college classrooms for two generations that when publishers look for new authors for a principles of economics text, they say that they are searching for the “next Samuelson” (Nasar, 1995). Its legacy goes beyond sales figures; in fact, the textbook may no longer be in the top 10 sellers in the U.S. market. However, most of the existing popular textbooks borrow heavily from Samuelson’s pedagogy, both in matters of tone and in the use and exposition of diagrams, like supply and demand, cost curves, the multiplier and the Keynesian cross.

This article does not attempt an encyclopedic review of the 15 editions of Samuelson’s text. Instead, it uses the succeeding generations of Samuelson’s text as a basis for reflecting on what lessons have been emphasized in introductory economics courses over the last 50 years. In doing so, it draws upon a notion suggested by Samuelson in his introduction to the fourteenth edition (p. xi): “A historian of mainstream-economic doctrines, like a paleontologist who studies the bones and fossils in different layers of earth, could date the ebb and flow of ideas by analyzing how Edition I was revised to Edition 2 and, eventually, to Edition 14.” The discussion here will spend little time on pure microeconomics and will focus instead on macroeconomics and policy advice. The reason for de-emphasizing basic microeconomics is that this is the area where the victory of Samuelson’s early pedagogy has been most complete and where the beliefs of economists have changed least. All references to Samuelson’s 15 editions of Economics, including the 12th and subsequent editions co-authored by William D. Nordhaus, are listed according to edition followed by page number.

Table I
The Publishing History of Paul A. Samuelson’s Economics

Edition Year Author(s) Sales
1 1948 Samuelson 121,453
2 1951 Samuelson 137,256
3 1955 Samuelson 191,706
4 1958 Samuelson 273,036
5 1961 Samuelson 331,163
6 1964 Samuelson 441,941
7 1967 Samuelson 389,678
8 1970 Samuelson 328,123
9 1973 Samuelson 303,705
10 1976 Samuelson 317,188
11 1980 Samuelson 196,185
12 1985 Samuelson & Nordhaus N/A
13 1989 Samuelson & Nordhaus N/A
14 1992 Samuelson & Nordhaus N/A
15 1995 Samuelson & Nordhaus N/A

Source: Elzinga (1992, p. 874)
N/A–Not available

For members of the economics profession, looking back at Samuelson’s text is like looking into a mirror that reflects many of our past beliefs. If we are uncomfortable with some of what we see in that mirror, then we must also feel uncomfortable with the version of economics that was taught, and perhaps also uncomfortable with the impact that the teaching of economics may have had on the economy.

The Keynesian Motif

In the introduction to an early edition, Samuelson denied that his primary purpose in writing Economics was to convey any “single Great Message” (3:v). But it is clear that Samuelson intended to introduce the “New Economics” of Keynes to students. The multiplier, the propensity to consume, the paradox of thrift, countercyclical fiscal policy, and C + I + G were all incorporated into the language of Econ 101. The now-familiar Keynesian cross income-expenditure diagram was printed on the cover of the first three editions. Macro preceded micro sections of the book, a novel approach at the lime. Moreover, only John Maynard Keynes was honored with a biographical sketch in early editions, and only Keynes, not Adam Smith nor Karl Marx, was labeled “a many-sided genius” (1:253n).

In the first edition, Samuelson claimed that the Keynesian “theory of income determination” was “increasingly accepted by economists of all schools of thought,” and that its policy implications were “neutral” (1:253). For example, “it can be used as well to defend private enterprise as to limit it, as well to attack as to defend government fiscal interventions.” However, his explanation of the model emphasized that “private enterprise” is afflicted with periodic “acute and chronic cycles” in unemployment, output and prices, which government had a responsibility to “alleviate” (1:41). “The private economy is not unlike a machine without an effective steering wheel or governor,” Samuelson wrote. “Compensatory fiscal policy tries to introduce such a governor or thermostatic control device” (1:412).

In the editions that followed, Samuelson’s rhetorical strategy seemed designed to give students the impression that the economics profession had achieved a monolithic belief structure. By the fourth edition (1958), he declared that “90 percent of American economists have stopped being ‘Keynesian economists’ or- ‘anti-Keynesian economists.’ Instead they have worked toward a synthesis of whatever is valuable in older economics and in modern theories of income determination.” He labeled this new economics a “neo-classical synthesis” (4:209-10), although “demand management” model might be more accurate.

By the seventh edition, although Samuelson was no longer using the “machine minus the steering wheel” metaphor, he continued to emphasize that “a laissez faire economy cannot guarantee that there will be exactly the required amount of investment to ensure full employment.” If full employment did occur, it would be: pure “luck” (7:197-8). He argued that “neo-classical synthesis” was “accepted in its broad outlines by all but a few extreme left-wing and right-wing writers” (7.197-8), a claim that appeared in similar language in all editions until the twelfth (1985), the first co-authored by Nordhaus. When the aggregate supply and aggregate demand framework was introduced in the twelfth (1985) and subsequent editions, they also were shown intersecting at less-than-fu11-ernployment equilibrium (12:91, 186). To the question, “Is there any automatic mechanism that guarantees that saving and investment balance at full employment?” Samuelson and Nordhaus answered “No” (12:139).

In reading Samuelson’s earlier editions, a student might reasonably conclude that there are no other schools of thought, at least in the mainstream. In fact, cf course, Keynesian thought was the subject of furious debate in economics departments across the country through the 1940s and into the 1950s, as young economists steeped in Keynesian thinking entered professorial jobs and collided with the old guard. In the late 1950s and 1960s, as economists explored how certain modeling structures could express either Keynesian or monetarist insights, it was fair to claim broad acceptance of the “neo-classical synthesis” as a modeling strategy. But Samuelson often seemed to imply that widespread acceptance of the formal models also implied an equally widespread belief that there was no mechanism to lead the macro-economy toward full employment, that consumption was too low and saving too high, that macroeconomic stability should be emphasized more than economic growth, and that government intervention was the only hope, points on which the degree of consensus was markedly lower.

This slide from Keynesian theory to particular policies was well illustrated in his seventh edition (1967),when Samuelson cited a statement by Milton Friedman, “We are all Keynesians now.” However, at the end of chapter 11, Samuelson (7:210) then referenced the full quotation from a 1966 interview of Friedman in Time magazine: “As best I can recall it, the context was: ‘In one sense, we are all Keynesians now; in another nobody is any longer a Keynesian.'” Friedman (1968, p. 15) would later put it this way: “We all use the Keynesian language and apparatus, none of us any longer accepts the initial Keynesian conclusions.”

Anti-saving Views

One way to see how nonpartisan Keynesian modeling shaded into explicit policy conclusions is to follow the anti-saving bias that appeared until the: most recent editions of Samuelson’s text. At less than full employment, there existed a “paradox of thrift,” when “everything goes into reverse” (1:271). In this case, a higher savings rate shrinks the economy, and one is left with the paradoxical result that a higher savings rate may not even increase the quantity of savings. Thus, Samuelson expressed the fear that an increased propensity to save may cause money to “leak” out of the system and “become a social vice” (1:253). To be sure, Samuelson would be pro saving when the economy was at full employment. “But full employment and inflationary conditions have occurred only occasionally in our recent history,” he wrote. “Much of the time there is some wastage of resources, some unemployment, some insufficiency of demand, investment, and purchasing power” (1:271). This paragraph remained virtually the same throughout the first eleven editions (for example, 11:226).1

These anti-thrift leanings extended to Samuelson’s discussion of progressive taxation and the “balanced-budget multiplier.” One “favorable” effect of progressive taxation was: “To the extent that dollars are taken from frugal wealthy people rather than from poor ready spenders, progressive taxes tend to keep purchasing power and jobs at a high level–perhaps at too high a level if inflation is threatening” (1:174; 7:162; 11:161). In his discussion of the “balanced-budget multiplier,” Samuelson stated, “Hence, dollars of tax reduction are-almost as powerful a weapon against mass unemployment as are increases in dollars of government expenditure” (7:234; 11:232). Why “almost”? Because only a portion of the tax cut would be “spent” (the rest would be saved) by the public, wherein all of government expenditures would be spent. In both cases, the implication is that greater consumption, not saving, is the key to prosperity.

Samuelson’s views on saving evolved over the years, with the major changes appearing in the thirteenth edition (1989). In this edition, the diagram showing savings leaking out of the economic system disappeared. The “paradox of thrift” doctrine, which had been a principal feature in all the editions until then, was made optional in the thirteenth edition (13:183-5) and removed in the fourteenth. However, it returned in 1995 in the fifteenth edition (15:455-7). Samuelson wrote:, “Disappearing to zero was, in my reconsidered judgment, an overshoot.” He argued that Japan in 1992-94 could be viewed as a modern-day example of the paradox of thrift. Nordhaus has pointed to Europe in the early 1990s and America in the early 1980s as other potential examples of the perversity of saving.2 Then, in the thirteenth edition, the authors added a major section bemoaning the gradual decline in the U.S. savings rate (13:142-4). Samuelson and Nordhaus list several potential causes of low savings: federal budget deficits, Social Security high inflation and high taxes. They also assert a strong correlation between the race of savings and economic growth: “[V]irtually all [macroeconomists] believe: that the savings rate is too low to guarantee a vital and healthy rate of investment in the 1990s” (13:144).

Samuelson’s evolving view on saving is also reflected in his discussion of government budget deficits. In the first edition, Samuelson pointed out: “According to the countercyclical view, the government budget need not be in balance in each and every month or year…. Only over the whole business cycle need the budget be in balance” (1:410-1). But remember that Samuelson argued (until the twelfth edition) that unemployed resources almost always existed; thus, this countercyclical view justified very common federal deficits (1:271; 7:228; 11:226), with less guidance as to when or how the offsetting surpluses were likely to occur.

Although Samuelson issued a series of warnings and caveats regarding the burgeoning national debt, the prevailing sense of the first 10 or so editions was that deficit spending was not a significant problem. The first edition favors the “we owe it to ourselves” argument: “The interest on an internal debt is paid by Americans to Americans; there is no direct loss of goods and services” (1:427). In the seventh edition (1967),  after  raising  the  specter  of  “crowding  out”  of private investment, he went on to say: “On the other hand, incurring debt when there is no other feasible way to move the C + I + G equilibrium intersection up toward full employment actually represents a negative burden on the intermediate future to the degree that it induces more current capital formation than would otherwise take place!” (7:346). At the end of an appendix on the national debt, Samuelson compared federal deficit financing to private debt financing, such as AT&T’s “never-ending” growth in debt (7:358; 11:347). By implication, government debt could also grow continually, rather than necessarily being balanced over the business cycle.

In this spirit, Samuelson offered a favorable reaction to the burgeoning deficits in the early 80s: “As federal budget deficits grew sharply over the 1982-1984 period, consumer spending grew rapidly, increasing aggregate demand, raising GNP and leading to a sharp decline in unemployment. The torrential pace of economic activity in 1983-1984 was an expansion, fueled by demand-side growth, in the name of supply-side economics” (12:192). But in that same edition, The AT&T comparison disappeared, the Reagan deficits were labeled as “skyrocketing” (12:349-50), and the crowding out of capital became “the most serious consequence of a large public debt” (12:361). By the fifteenth edition, Samuelson and Nordhaus were declaring “a large public debt can clearly be detrimental to long run economic growth. … Few economists today have words of praise for America’s large and growing debt” (15:638-9).

Evolving: Views on Monetary Policy

Samuelson used to emphasize fiscal policy over monetary policy as a tool for stabilization; now the reverse is true. The transition is unmistakable. In 1955 he wrote, “Today few economists regard federal reserve monetary policy as a panacea for controlling the business cycle” (3:316). In 1975, after labeling monetarism as “an extreme view,” he declared, “both fiscal and monetary policies mactc:r rrlrcc:h” (9:329). In 1995, Samuelson and Nordhaus reversed this traditional view, observing, “Fiscal policy is no longer a major tool of stabilization policy in the United States. Over the foreseeable future, stabilization policy will be performed by Federal Reserve monetary policy” (15:645).

This evolution of the perceived role of monetary policy can also be seen in the treatment of money. Early editions spent considerable space, more than most other textbooks, on the classical gold standard and the origin of money and banking. Samuelson’s preference in the earlier editions seemed to be for a government-managed monetary system, but not one based on gold. While recognizing gold’s role as a rein on monetary authorities’ ability to inflate the money supply, Samuelson was sharply critical of gold as a monetary standard. A strict gold standard was historically deflationary, Samuelson argued, because “The long term supply of gold cannot possibly keep up with the liquidity needs of growing international trade”(8:697). Deflation was dangerous because “falling price levels tend to lead to labor unrest, strikes, unemployment and radical movements generally” (8:629). Gold was an “anachronism” (8:700).

But after the United States officially left the gold standard in August 1971, Samuelson warned that the world was “in uneasy limbo” (9:652). He gradually warmed to the idea of flexible exchange rates, especially as futures markets developed (9:724-5). By 1995, Samuelson and Nordhaus were no longer deeply concerned about an international monetary crisis or breakdown in trade under a pure fiat money system. They declared that international currency management and central bank coordination in the last half-century was “one of unparalleled success” (15:736). Gold’s role had become so moribund that by the fifteenth edition, only two pages were devoted to the yellow metal.

The quantity theory of money was discussed in the first edition, although Irving Fisher, frequently cited as the modern founder of the quantity theory, was not mentioned (1:290-7). (Fisher was cited in earlier editions regarding capital theory, but not for his quantity equation.) No one expected Samuelson to cite Milton Friedman in the early editions–after all, Friedman’s studies in monetary theory and history did not gain wide credence until the early 1960s–but Samuelson soon made up for lost time. Friedman began to be quoted in 1961 (5:315), and Irving Fisher was given some credit by 1970 (8:264).

Defender of an Activist Government

Through 15 editions, Samuelson has appeared to favor a substantial role for the state. In an early edition, he forecast that while the growth in government was not “inevitable,” there was no end in sight (4:112). In a later edition, he observed, “No longer does modern man seem to act as if he believed ‘That government governs best which governs least'” (8:140). In keeping with the Keynesian motif, a large government provided “built-in stabilizers” to the economy, such as taxes, unemployment compensation, farm aid and welfare payments that tend to rise during a recession (8:332-4).

In discussing the overall U.S. tax burden, Samuelson has argued that to a large extent, higher taxes are a byproduct of economic and social development. Several editions displayed a chart showing that “poor, underdeveloped countries show a persistent tendency to tax less, relative to national product, than do more advanced countries” (4:113). In a later edition, Samuelson added, “With affluence come greater interdependence and the desire to meet social needs, along with less need to meet urgent private necessities” (14:300). Samuelson also pointed out with international comparisons that the United States lags behind most Western nations in terms of tax burden. Thus, “our government share is a modest one” (8:140n; 12:698; 15:278).

On the subject of cutting taxes, Samuelson has supported Keynesian oriented tax cuts, though not supply-side tax cuts. In the seventh edition, he argued in terms reminiscent of the Laffer curve thesis that a tax cut may pay for itself in increased government revenues: “To the extent that a tax cut succeeds in stimulating business, our progressive tax system will collect extra revenues out of the higher income levels. Hence a tax cut may in the long run imply little (or even no) loss in federal revenues, and hence no substantial increase in the long run public debt” (7:343). However, after marginal tax rates were reduced in the 1980s during the Reagan administration, Samuelson and Nordhaus wrote: “Laffer-curve prediction that revenues would rise following the tax cuts has proven false” (14:332).

What about the supply-side argument that high tax rates discourage work, saving and risk taking! The answer was “unclear.” Samuelson suggested that progressive taxes might actually make some people “work harder in order to make their million” (10:171). He argued, “Many doctors, scientists, artists, and businessmen, who enjoy their jobs, and the sense of power or accomplishment that they bring, will work as hard for $30,000 as for $100,000″ (10:171), a sentiment repeated in later editions (15:310).

In keeping with this sentiment, Samuelson has been a strong supporter of the welfare state and antipoverty programs as a response to inequality. “Our social conscience and humanitarian standards have completely changed, so that today we insist upon providing certain minimum standards of existence for those who are unable to provide for themselves,” he wrote early on (1:158).  He  denied  that welfare expenditures were “anti-capitalistic” (7:146). Moreover, “Contrary to the ‘law’ enunciated by Australia’s Colin Clark–that taking more than 25 per cent of GNP is a guarantee of quick disaster–the modern welfare state has been both humane and solvent” (8:140). Although welfare assistance was “indeed costly” and “often inefficient” (11:761), there was little choice, since private charity has always been inadequate” (11:760). His discussion of welfare reform focused on an endorsement of Milton Friedman’s proposed “negative income tax” (11:761 -3). But by the 1995 edition, Samuelson and Nordhaus seem less certain and are asking: “Have antipoverty programs helped…[or] produced counterproductive responses?” (15:372).

For society’s retirement programs, Samuelson has been a strong supporter of a pay-as-you-go Social Security system. Earlier editions contained a chapter on “Personal Finance and Social Security,” which called the pay-as-you-go system “a cheap, and sensible way” to provide retirement benefits to individuals.” Samuelson argued “It is one of the great advantages of a pay-as-you-go social security system that it rests on the general tax capacity of the nation; if hyperinflation wiped out all private: insurance and savings, social security could nonetheless start all over again, little the poorer” (4:179). But this statement–along with the chapter on personal finance and Social Security–was dropped after the fifth edition. His recommendation to buy U.S. savings bonds earning 3 percent, which were “a very great bargain,” was removed after the third edition.’

Samuelson has spent little space on Social Security since then, other than reporting higher payroll taxes with each edition. For example, in the 1985, edition, Samuelson and Nordhaus noted, “The payroll tax has been the fastest growing part of federal revenues, rising from nothing in 1929, to 18 percent of` revenues in 1960, to 36 percent in 1985″ (12:732). The 1995 edition mentions in one paragraph that Social Security taxes may contribute to a decline in thrift (15:432-5). There are several reasons why Social Security may deserve more attention. More than half of American workers pay more in payroll taxes than in income taxes. Social Security is in the center of an argument about intergenerational equity. And there are a number of interesting proposals revising the system, including privatization.

The role of government extends into a debate between market anti-government failure. Mainstream economic wisdom, as embodied by the Samuelson text, has tended to emphasize numerous examples of “market failure” (15:30-5, 164-l77, 272-3, 280-2, 291-2, 329, 347-52), including imperfect competition, externalities, inequities, monopoly power and public goods. Samuelson pointed out that the government could take of “an almost infinite variety of roles in response to the flaws in the market mechanism” (15:30-1). At one level, this is all fair enough. But for several decades, there has also been a line of thought, perhaps best embodied in the work of Ronald Cease, that points out that actors in markets may be quite creative in finding ways to address market failures.

Consider the example of lighthouses as a public good. Since 1961, Samuelson has used the lighthouse as an example of a public good, one that private enterprise could not run profitably because of the non-excludable, non-depletable nature of the service. But Cease (1974) wrote an article pointing out that numerous lighthouses in England were built and owned by private individuals and companies prior to the nineteenth century, who earned profits by charging tolls on ships docking at nearby ports.5 To be sure, some of these lighthouse organizations had more the flavor of private voluntary organizations than of perfectly competitive markets; nonetheless, an introductory economics class might well be interested in the fact that free economic actors can work out practical ways of building and paying for certain public goods without explicit government provision.

Explanations of market failure often deserve a counterbalancing discussion of government failure, lest the unwary student assume that economists believe in imperfect markets but perfect government. Various editions of the text do argue that governments should follow market-oriented policies when addressing a market failure. In the most recent edition, for example, the U.S. health-care debate was analyzed in terms of a list of “market failures” in the health-care industry, together with a market-oriented criticism of Clinton’s proposed price controls and nationalized health services in foreign countries (15:289-96). Similarly, market failures and market-oriented solutions also are stressed in the environmental arena (15:351-3).

The argument that certain types of government action are preferable to others would seem to open the door to a discussion of whether government can be counted on to enact appropriate policies. Some textbooks now have substantial sections on “government failure,” but the broad possibility of such failures has been downplayed in the Samuelson texts. In the 1955 edition, he cited a Herbert Hoover study indicating “very little” waste in federal spending, only $3 billion (3:119). Since the twelfth edition, the subject index has numerous listings under “market failure,” but none under “government failure.” Surely Samuelson’s criticism of price controls would fall under this category (1:463-6; 8:370-3; 15:66-71). Apart from price fixing, Samuelson and Nordhaus offered only two brief mentions of government failure in the fifteenth (1995) edition, a question at the end of chapter 2 on “Markets and Government in a Modern Economy” (15:37) and a mention in their discussion of “public choice theory,” which claims that “harmful” government policies are “probably rare” (15:285).

The Family Tree of Economics: The Mainstream and Marxism

Samuelson’s desire to homogenize mainstream economics into one grand “neo-classical synthesis” is evident in his “family tree of economics.” Beginning with the fourth edition (1958, flap), the author created a genealogical diagram of economic thought from the Greeks to the present. By the time the twentieth century was reached, only two schools of thought remained-followers of Marxist-Leninist socialism and those of the Marshall-Keynes “neo-classical synthesis.” In this chart, Adam Smith and the classical school were claimed as ancestors of the neoclassical synthesis by way of Alfred Marshall. The Chicago monetarists and the Austrians do not appear on the chart until the twelfth edition (1985), when “Chicago Libertarianism” and “Rational-Expectations Macroeconomics” surface alongside “Modern Mainstream Economics.” Samuelson and Nordhaus include the Austrians, Friedrich Hayek and Ludwig von Mises, in the “Chicago Libertarianism” category (13:828). This categorization is questionable. The Austrians, with their emphasis on subjectivism and microeconomics, consider themselves neither followers of the Chicago school nor philosophical descendants of Walras and Marshall. Then, in the fourteenth and fifteenth editions, the other schools again disappear from the family tree, apparently subsumed by the single category of “Modern Mainstream Economics.”

Over the years, Samuelson has gradually given more space in his textbook to non-Keynesian schools. By the eighth edition (1970), Milton Friedman was cited a half dozen times. In the ninth edition (1973), he recommended Friedman’s Capitalism and Freedom as a “rigorously logical, careful, often persuasive elucidation of an important point of view” (9:848). The ninth edition also adds a significant chapter, “Winds of Change: Evolution of Economic Doctrines,” which summarizes the spectrum of warring schools, including institutionalists (Veblen and Galbraith), the New Left and radical economics.

References to Marx and international socialism are scarce and random in the early editions. In the first edition, Marx was declared “quite wrong” in his prediction that the “poor are becoming poorer” (1:67). Samuelson expressed suspicion of Soviet central planning, and he considered the U.S. brand of “mixed-enterprise superior (1:603). Attacks on Marxism expanded with each edition. Marx’s prediction of falling real wages had been proven “dead wrong” (4:757). Lenin had been wrong in his charge that Western nations practiced imperialism for economic gain (4:756-7). The profit rate had “stubbornly refused to follow” the Marxist law of decline (7:707).

But starting with the ninth edition, references to the ideas and followers of Karl Marx and Friedrich Engels expanded dramatically, including a biography of Marx and a nine-page appendix on Marxian economics. In the preface to that edition, Samuelson wrote: “It is a scandal that, until recently, even majors in economics were taught nothing of Karl Marx except he was an unsound fellow” (9:ix). Samuelson added in the tenth edition that “at least a tenth of U. S. economists” fell into the “radical” category (10:849). However, this expanded coverage did not mute his criticism of Marxist beliefs. With the fall of the Soviet Union, the discussion of Marx shrank from 12 pages in the fourteenth edition to three pages in the fifteenth (1995) edition, including a two-paragraph biography of Marx, and no appendix on Marxian economics.” Typical of the tone: “Marx was wrong about many things–notably the superiority of socialism as an economic system–but that does not diminish his stature as an important economist” (15:7)

Central Planning and Soviet Growth

In very early editions, Samuelson expressed skepticism of socialist entral planning: “Our mixed free enterprise system … with all its faults, has given the world a century of progress such as an actual socialized order–might find it impossible to equal” (1:604; 4:782). But with the fifth edition (1961), although expressing some skepticism statistics, he stated that economists “seem to agree that her recent growth rates have been considerably greater than ours as a percentage per year,” though less than West Germany, Japan, Italy and France. (5:829). The fifth through eleventh editions showed a graph indicating the gap between the United States and the USSR narrowing and possibly even disappearing (for example, 5:830). The twelfth edition replaced the graph with a table declaring that between 1928 and 1983, the Soviet Union had grown at a remarkable 4.9 percent annual growth rate, higher than did the United States, the United Kingdom, or even Germany and Japan (12:776). By the thirteenth edition (1989), Samuelson and Nordhaus declared, “the Soviet economy is proof that, contrary to what many skeptics had earlier believed, a socialist command economy can function and even thrive” (13:837). Samuelson and Nordhaus were riot alone in their optimistic: views about Soviet central planning; other popular textbooks were also generous in their descriptions of economic life under communism prior to the collapse of the Soviet Union.7

By the next edition, the fourteenth, published during the demise of the Soviet Union, Samuelson and Nordhaus dropped the word “thrive” and placed question marks next to the Soviet statistics, adding “the Soviet data are questioned by many experts” (14:389). The fifteenth edition (1995) has no chart at all, declaring Soviet Communism “the failed model” (15:714-8). To their credit, Samuelson and Nordhaus (15:737) were willing to admit that they and other textbook writers failed to anticipate the collapse of communism: “In the 1980s and 1990s, country after country threw off the shackles of communism and stifling central planning–not because the textbooks convinced them to do so but because they used their own eyes and saw how the market-oriented countries of the West prospered while the command economies of the East collapsed.”

Where are the Economic Success Stories?

While Samuelson overplayed the economy of the Soviet Union, he underplayed the successful postwar economies of Germany and Japan, and the newly developing countries in Europe, Asia and Latin America. From the second to the fourteenth edition, Samuelson briefly mentioned the dramatic story of West Germany’s post war recovery to elucidate the benefits of currency reform and price freedom (2:36; 14:36). Various editions also discuss Germany’s bout with hyperinflation in the early 1920s. But his one-paragraph account offers little space to convey the magnitude of the subsequent German economic recovery from a devastating world war. The same could be said of Japan’s postwar economic miracle. In 1945, Japan was desperate, starving, shattered; half a century later, it was an economic superpower. Yet Samuelson barely mentioned Japan. In 1970, he offered a sentence in his chapter on economic growth, with no further comment: “Japan’s recent sprint has been astounding” (8:796). In the 1980s and 1990s, even as many textbooks offered a more global approach, Samuelson and Nordhaus still practically ignored Japan. In the twelfth edition, they asked, “For example, many people have wondered why countries like Japan or the Soviet Union have grown so much more rapidly than the United States over recent decades” (12:798). They spent many pages discussing the Soviet Union, but except for a brief reference to “rapid technical change,” they were silent on Japan. The same pattern holds for the fifteenth (1995) edition.

What about the other high-performing economies in East Asia? They were not mentioned until the thirteenth edition (1089), at which point Samuelson and Nordhaus devoted two paragraphs to Hong Kong and other East Asian miracles (13:832, 886). In the fifteenth edition, they touched briefly on the causes of East Asian development, including the newly industrialized countries of Korea, Singapore, Taiwan, Indonesia, Malaysia and Thailand (15:712-3).The economic success stories of Latin America (Chile, Mexico, and so on) receive no mention at ail. Privatization, a rapidly growing phenomenon around the world, is virtually ignored in Samuelson’s and most other American textbooks.

Why such a dearth of economic success stories? Space limitations must have played a role. Another reason is that Samuelson’s rhetorical approach, like that of many textbooks, is to paint with a broad brush, to discuss concepts and problems in general, but seldom to focus on specific examples. Free-market economists might point out that some policies adopted by many of these high-growth countries–high savings rates, a general reliance on free markets, relatively low government spending and budgets often in surplus, little or no taxation on savings and investment–do not mix well with Keynesian biases. On the other hand, other policies–public education, land reform, import protection and export promotion, targeted government investment subsidies and close government/industry ties–favor Samuelson’s approach.

The Impact of Samuelson’s Textbook

It is hard to gauge the influence of Samuelson’s textbook, or in general the impact of introductory courses in economics, on U.S. policymakers or corporate executives. Samuelson has been willing to claim, with tongue only slightly in check, a considerable impact. He has made a well-known comment: “I don’t care who writes a nation’s laws–or crafts its advanced treaties–if I can write its economics textbooks” (Nasar, 199,5, C1). He has also expressed hope that his textbook would be a reference guide for former students. “Where the election of 1984 rolls around,” he wrote in 1967,”all the hours that the artists and editors and I have spent in making the pages as informative and authentic as possible will seem to me well spent if somewhere a voter turns to the old book from which he learned economics for a rereasoning of the economic principle involved” (7:vii).

The hope is worth raising not only for Samuelson’s text, but for all those students who once took an introductory economics course. To the extent that Samuelson’s text has been a much-imitated leader among all principles textbooks, it is reasonable to ask how helpful these texts would have been in thinking about the issues of public debt, inflation, foreign competition, recession, unemployment and taxes that have challenged the public over the past 50 years.

On the positive side, Samuelson must be congratulated for his optimism about the future of the American economy. Although he anticipated a deep recession following World War II (Sobel, 1980, pp. 101-2), he did not succumb to the lure of fellow Keynesian Alvin Hansen’s stagnation thesis (1:418-23). He wisely rejected the doomsayers’ frequent calls for another Great Depression or imminent bankruptcy due to an excessive national debt. “Our mixed economy–wars aside–has a great future before it” (6:809), he wrote. To his credit, Samuelson has been willing to update his textbook in keeping with new events and new theories. The virtues of monetary policy, savings and markets have received more emphasis in recent issues.

Samuelson offered a balanced brand of economics that found mainstream support. While Samuelson (especially in the earlier editions) favored heavy involvement in “stabilizing” the economy as a whole, he appeared relatively laissez faire in the micro sphere, defending free trade, competition and free markets in agriculture. He was critical of Marx, weighed the burdens of the national debt, denied that war and price controls were good for the economy, wrote eloquently on the virtues of a “mixed” free-enterprise economy, suggested that big business may sometimes be benevolent (1:132; 15:172-4) and questioned whether labor unions could raise wages (2:606; 1.5:238). This advice could often be summarized as an injunction to rely broadly on markets, hut also to be aware that markets might fail in many cases, thus creating a situation where government intervention could be justified.

Samuelson was unable to foresee many of the major economic events and crises, but this is surely no criticism. After all, most mainstream economists failed to foresee the stagflations and dollar devaluations of the 1970s or the S&L crisis and trade deficits of the 1980s. To some extent, introductory textbooks will always play catch-up to events. For example, in writing about the effects of federal deposit insurance and central bank authority, Samuelson confidently predicted in 1980:

“In the 1980s, the only banks to fail will be those involving fraud or gross negligence” (11:282). By the 1992 edition, after the collapse of hundreds of saving and loans, Samuelson and Nordhaus wrote, “Many economists believe that the deposit insurance system must be drastically overhauled if this sad episode is not to be repeated in the future” (14:535).

But although it would be unfair to criticize anyone for not being clairvoyant about events, it is surely fair criticism of a principles of economics course to point out that some of its advice seems questionable in light of current knowledge. Indeed, Samuelson has hinted in later editions that he would no longer agree with some of his analysis in earlier editions. Today, he probably would be comfortable saying, as he did in the preface of the eighth edition, that his textbook contained “nothing essential being omitted” or “nothing that later will have to be unlearned as wrong.” By the fourteenth edition, he confessed, “What was great in Edition 1 is old hat by Edition 3; and maybe has ceased to be true: by Edition 14″ (14:xiv).

When faced with such rueful comments by an author of Samuelson’s stature, a certain degree of modesty seems warranted for the rest of the economics profession. The successive editions of Samuelson’s textbook illustrate that the profession’s view of both principles and facts can shift substantially with recent experience, whether the point is the Keynesian lessons that came out of the Great Depression or the speed of Soviet economic growth. An introductory course requires some natural simplification, but it should aim to avoid false certainty.

Samuelson’s textbook has delivered a great deal of economic wisdom. For many economists, the positive side of the balance sheet has outweighed the negative. Indeed, his defenders might ask: Might the United States and the West have suffered another Great Depression if Samuelson had not emphasized the need for “automatic stabilizers”? Did not Samuelson’s heralding of the “mixed” economy curb the appetite of third world countries for national socialism?

We will never know, of course, but it is humbling to speculate on whether alterations in principles textbooks might have led to a different U.S. economy. Might the United States have experienced higher rates of saving, investment and growth if Samuelson had moderated his anti-thrift tone sooner? Would the U.S. economy and financial system have been less volatile if textbook writers had given earlier credence to monetarism? Would the United States and developing countries be growing more rapidly if textbook writers had emphasized long-term growth (as characterized by West Germany, Japan and the East Asian economic miracles) over macroeconomic stabilization policies (inflation-unemployment tradeoffs)? Would attitudes toward the Soviet Union and markets have been different if principles texts had been more critical of central planning and Soviet growth statistics? In my judgment, it is difficult to sidestep the conclusion that as the teaching of introductory economics has followed in Samuelson’s footsteps, its advice has contributed to certain of the economic problems that the United States faces today.

Thanks to Paul Samuelson, William Nordhaus, Milton Friedman, Roger Garrison, Kenna C. Taylor, Larry Wimmer, Michael Betterman and Jo Ann Skousen for comments and background materials. Special appreciation to Paul Samuelson and Ken Elzinga for locating hard-to-find early editions of Economics. I would also like to thank the editors, Alan H. Krueger, J. Bradford De Long and especially Timothy Taylor, for their many helpful changes and suggestions.


Cease, R. H.,”The Lighthouse in Economics.” In The Firm, the Market, and the Law. Chicago: University of Chicago Press, 1988, pp. 3R7-215; originally published in Journal of Law and Economics, October 1974, 17:2, 35776.

Elzinga, Kenneth G., “The Eleven Principles of Economics,” Southern Economic Journal, April 1992, 58:4, 861-79.

Friedman, Milton, “Why Economists Disagree.” In Dollars and Deficits: Living with America’s Economic Problems. Englewood Cliffs, N.J.: Prentice-Hall, 1968, pp. 1-16.

Lipsey, Richard G., Peter O. Steiner, and Douglas D. Purvis, Economics. 8th ed., New York: Harper & Row, 1987.

Nasar, Silvia, “Hard Act to Follow?,” New York Times, March 14, l995, C1, C8.

Samuelson, Paul A., Economics. New York: McGraw-Hill, 1948 and various years.

Skousen, Mark, Economics on Trial. Homewood, Ill.. Irwin, 1991.

Sobel, Robert, The Worldly Economists New York: Free Press, 1980.


1 Here is all area in which contemporary Keynesians (Heller, Solow, Okun, Ackley, et al.) might not be so anti-saving as was Samuelson. The 1962 Economic Report to the President, issued at the high tide of  orthodox Keynesianism, reflected an implicit faith that the economy would always be running near full employment. The business cycle had been tamed and any downturns would he quickly countered. Such a belief meant that savings could then play a positive role. Apparently, Samuelson was not as optimistic about the government’s ability to maintain full employment equilibrium.

2 The Samuelson quotation is taken from personal correspondence dated January 20, 1995. The Nordhaus sentiment was also expresed in private correspondence, February 4, 1995.

3 Samuelson was prescient in his first edition about the prospects for programs along the lines of Medicare and Medicaid: “It is not unlikely that in the next generation payments for sickness and disability, and a comprehensive public health and hospital program, will have been introduced” (1:222).

4 Based on his Keynesian philosophy, Samuelson also tended to argue that people should avoid saving in difficult economic times.  “Never again can people be urged in times of depression to tighten their belts, to save more in order to restore prosperity. The result will be just the reverse–a worsening of the vicious deflationary spiral” (1:272; 6:238-9; 10:239). In the third edition, Samuelson denounced families who “hysterically cut down on consumption when economic clouds arise” (3:339) He echoed the advice of Harvard economist Frank W. Taussig, who during the Great Depression went on the radio “urge everyone to save less, to spend more on consumption” (7:226) Whatever the merits of this advice as macroeconomic wisdom, it would surely increase the financial risk for the individuals involved. ‘I wrote to Samuelson about this issue. His response was: “If you read carefully the Coase article on lighthouses, you will see that the historical examples he described are not about the ‘free rider’ problem. When scrambling devices become available to meet the problem, there still remains the deadweight inefficiency intrinsic to positive pricing for the marginal use of something that involves only zero or derisory marginal cost” (personal correspondence, August 9, 1995). Without disputing these points, one can continue to hold the conclusion expressed in the text, that rather than implying that governments are the only agencies that can provide lighthouses, it would be interesting to discuss the method of lighthouse provision that actually occurred.

6 The reduction in space allocated to Marxist economics has been accompanied by less discussion about the Austrian economists Ludwig von Mises and Friedrich Hayek, who warned earlier that soviet central planning could not work and could not calculate prices and costs accurately. Samuelson and Nordhaus mention the role of Mises and Hayek in the socialist calculation debate from editions nine through 12 (9:620; 12:693), but have dropped them from the most recent editions.

7 For example, in their eighth edition, Lipsey, Steiner and Purvis (1987, pp.885-6) claimed, “The Soviet citizen’s standard of living is so much higher than it was even a decade ago, and is rising so rapidly, that it probably seems comfortable to them (cf. Skousen, 1991, pp.213-15).

Getting Published–An “Austrian” Triumph

Economics on Trial — THE FREEMAN

By Mark Skousen

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

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

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

Dethroning the King of Keynes

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

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

Samuelson’s Economics: From Keynes to Adam Smith

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

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

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

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

Past Prejudices Against Austrians

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

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

Future Is Brighter

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

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

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

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

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

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