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.

An Enemy Hath Done This

Economics on Trial – Ideas on Liberty – SEPTEMBER 2000

by Mark Skousen

“Government measures . . . give individuals an incentive to misuse and misdirect resources and distort the investment of new savings.”
– MILTON FRIEDMAN 1

Several months ago, I had the opportunity of speaking before a Miami chapter of Legatus, a group of Catholic business leaders organized originally by Tom Monaghan, founder of Domino’s Pizza. The topic was the outlook for the stock market, which had reached sky-high levels and by any traditional measurement appeared extremely overvalued. Even many experienced Wall Street analysts recognized that a bear-market correction or crash was inevitable and necessary. As the old Wall Street saying goes, “Trees don’t grow to the sky.” Indeed, in the spring the stock market took a well-deserved tumble. What is the cause of this boom-bust cycle in the stock market? Does capitalism inherently create unsustainable growth? Is the bull market on Wall Street real or a bubble?

The Parable of the Wheat and the Tares

To answer these questions, I applied Jesus’ parable of the wheat and the tares (Matthew 13:24-30) to today’s financial situation.

Jesus tells the story of a wheat farmer whose crop comes under attack by an unknown assailant. In the middle of the night this enemy sows tares (weeds) in his wheat fields. Soon the farmer’s servants discover that the farmer’s crop appears to be twice the normal size. Yet the master realizes that half the crop is fake-weeds instead of wheat. But he warns his servants not to tear out the weeds for fear of uprooting the good shoots; they must wait and let the wheat and the tares grow up together until harvest time. Months later, the wheat produces good grain, while the tares are merely weeds and provide no fruit. The servants pull out the weeds and burn them, and store the grain in the barn.

The parable is imminently applicable to the recent wild ride on Wall Street. In today’s robust global economy, the wheat represents genuine prosperity-the new products, technologies, and productivity generated by capitalists and entrepreneurs. It represents real economic growth and when harvested, reflects a true higher standard of living for everyone. Under such conditions, stock prices are likely to rise.

On the other hand, the tares represent artificial prosperity that bears no fruit in the end and must be burned at harvest time. Where does this artificial growth come from? The central bank’s “easy money” policies! The Fed artificially lowers interest rates and creates new money out of thin air (through openmarket operations). This new money, like regular savings, is invested in the economy and stimulates more growth and higher stock prices-higher than sustainable over the long run.

Who is the enemy who sows artificial prosperity? Alan Greenspan! (Or, to be more accurate, central bankers.) The money supply-which is controlled by the Fed-has been growing by leaps and bounds, especially since the 1997 Asian crisis.

But there is no free lunch, as sound economists have warned repeatedly. At some point, the harvest time comes and the wheat must be separated from the tares. This is the crisis stage, where the boom turns into the bust. Harvest time in wheat is fairly easy to predict, but not so in the economy. Clearly economic conditions are heating up, as measured by asset inflation, real estate prices, the art mar ket, and recently the Consumer Price Index. At some point, a “burning” of excessive asset values in the financial markets must occur. As Ludwig von Mises stated long ago, “if a brake is thus put on the boom, it will quickly be seen that the false impression of `profitability’ created by the credit expansion has led to unjustified investments..”2

Lesson: Globalization and supply-side freemarket policies have justified genuine economic growth and higher stock prices over the past two decades, but “easy money” policies have at the same time created an artificial boom and “irrational exuberance” on Wall Street. Ignore this lesson at your own peril. Remember the parable of the wheat and the tares!

1. Milton Friedman, Capitalism and Freedom (University of Chicago, 1962), p. 38.
2. Ludwig von Mises, “The `Austrian’ Theory of the Trade Cycle,” in The Austrian Theory of the Trade Cycle and Other Essays, compiled by Richard M. Ebeling (Auburn, Ala.: Ludwig von Mises Institute, 1996), p. 30.

If You Build It – Privately – They Will Come

Ideas on Liberty
Economics on Trial
August 2000

by Mark Skousen

“Government provides certain indispensable public services without which community life would be unthinkable and which by their nature cannot appropriately be left to private enterprise.” – PAUL A. SAMUELSON

If you take a course in public finance, you will invariably encounter the “public goods” argument for government: Some services simply can’t be produced sufficiently by the private sector, such as schools, courts, prisons, roads, welfare, and lighthouses.

The lighthouse example has been highlighted as a classic public good in Paul Samuelson’s famous textbook since 1964. “Its beam helps everyone in sight. A businessman could not build it for a profit, since he cannot claim a price for each user.” 1

Really? Chicago economist Ronald H. Coase revealed that numerous lighthouses in England were built and owned by private individuals and companies prior to the nineteenth century. They earned profits by charging tolls on ships docking at nearby ports. The Trinity House was a prime example of a privately owned operation granted a charter in 1514 to operate lighthouses and charge ships a toll for their use.

Samuelson went on to recommend that lighthouses be financed out of general revenues. According to Coase, such a financing system has never been tried in Britain: “the service [at Trinity House] continued to be financed by tolls levied on ships.”2

What’s even more amazing, Coase wrote his trailblazing article in 1974, but Samuelson continued to use the lighthouse as an ideal public good only the government could supply. After I publicly chided Samuelson for his failure to acknowledge Coase’s revelation,3 Samuelson finally admitted the existence of private lighthouses “in an earlier age,” in a footnote in the 16th edition of his textbook, but insisted that private lighthouses still encountered a “free rider” problem.4

Private Solutions for Public Services

The lighthouse isn’t the only example of a public good that can be provided for by private enterprise. A privately run toll road operates in southern California. Wackenhut Corrections manages state prisons. Catholic schools provide a better education than public schools. The Mormon Church offers a better welfare plan than the USDA food stamp program. Habitat for Humanity builds houses for responsible poor people.

And now, for the first time in 38 years, there is a privately built major league baseball stadium-Pacific Bell Park, new home of the San Francisco Giants. After Bay area voters rejected four separate ballot initiatives to raise government funds to replace the windy and poorly attended Candlestick Park, Peter Magowan, a Safeway and Merrill Lynch heir, teamed with local investors, to buy the club and, with the help of a $155 million Chase Securities loan, built the new stadium for $345 million. The owners also got huge sponsorships from Pacific Bell, Safeway, CocaCola, and Charles Schwab.

So far the private ballpark has been a super success, selling a league-leading 30,000 season tickets for the 41,000seat stadium. The team’s 81 home games are nearly sold out. Other team owners, whose stadiums are heavily subsidized, were skeptical, but a dozen team owners have visited the new operation to study what they’ve done. They include George Steinbrenner, who is considering a $1 billion new Yankee stadium.5

Economists Attack Public Financing

Perhaps private funding of major league sports facilities has been influenced by two recent in-depth studies by professional economists attacking publicly subsidized sports arenas. In Major League Losers, Mark Rosentraub of Indiana University (and a big sports fan) studied stadium financing in five cities and meticulously demonstrated that pro sports produce very few jobs with little ripple effects in the community, take away business for suburban entertainment and food venues, and often leave municipalities with huge losses.6

A Brookings Institution study came to similar conclusions. After reviewing major sports facilities in seven cities, Roger G. Noll (Stanford) and Andrew Zimbalist (Smith College) found they were not a source of local economic growth and employment, and the net subsidy exceeded the financial benefit to the community.7

These empirical studies confirm a longstanding sound principle of public finance: Beneficiaries should pay for the services they use. In my free-market textbook I call this “The Principle of Accountability,” also known as the “benefit principle.” It’s amazing how often politicians violate this basic concept. For example, John Henry, a commodities trader worth $300 million and owner of the Marlins baseball team, is pushing through the Florida state legislature a bill to tax cruiseship passengers to help fund a new Miami ballpark. (Fortunately, Governor Jeb Bush just vetoed the bill.)

Please, will someone send Mr. Henry a copy of my free-market textbook, Economic Logic?

1. Paul A. Samuelson, Economics, 6th ed. (New York; McGraw Hill, 1964), p. 159.
2. Ronald H. Coase, “The Lighthouse in Economics” in The Firm, the Market, and the Law (Chicago: University of Chicago Press, 1988), p. 213. Coase’s article originally appeared in The Journal of Law and Economics, October 1974.
3. Mark Skousen, “The Perseverance of Paul Samuelson’s Economics,” Journal of Economic Perspectives, Spring 1997, p. 145.
4. Paul A. Samuelson and William D. Nordhaus, Economics, 16th ed. (New York: McGraw Hill, 1998), p. 36n.
5. Peter Waldman, “If You Build It Without Public Cash, They’ll Still Come,” Wall Street Journal, March 31, 2000, p. 1.
6. Mark S. Rosentraub, Major League Losers: The Real Cost of Sports and Who’s Paying for It (New York: Basic Hooks, 1997).
7. Roger G. Noll and Andrew Zimbalist, Sports, Jobs, and Taxes: The Economic Impact of Sports Teams and Stadiums (Washington, D.C.., Brookings Institution, 1997).

Neither Left nor Right

Economics on Trial – Ideas on Liberty - July 2000

by Mark Skousen

“Those who control the adjectives win.” — Larry Abraham

The use of the political labels “left” and “right” may be popular in today’s media, but there are several reasons why the dichotomy is a false and misleading guide to political and economic philosophy. It implies that “left” is equally as extreme as “right,” while the “middle of the road” position appears the more moderate and balanced position. I call this system the pendulum approach, where each individual is categorized along a political spectrum from “extreme left” to “extreme right.” Recently I encountered an example in an economics textbook.

Radical
Liberal
Conservative
Extreme Left Extreme Right
MARX
KEYNES
ADAM SMITH

Source: Mark Maier and Steve White, The First Chapter, 3rd ed. (New York: McGraw-Hill, 1998), p. 42.


The problem with the pendulum approach is that Adam Smith is characterized as “extreme” as Karl Marx. By implication, neither economist is sensible. Yet the evidence is overwhelming that Adam Smith’s system of natural liberty has advanced civilization far more than Karl Marx’s inexorable system of alienation and exploitation.

Moreover, in the pendulum approach, the middle-of-the-road position held by John Maynard Keynes appears to be the moderate ideal. A pendulum that experiences friction will eventually come to rest in the middle, between both extremes. But is that the best way to go?

A New Alternative: The Totem-Pole Approach

I prefer a fresh approach, which I call the top-down or “totem pole” way. Instead of left to right, I use top to bottom. In Indian folklore, the most-favored chiefs are placed at the top of the totem pole, followed by less impor tant chiefs below. Look at the next page for my rendition of the same three economists according to the totem-pole method.

In this system, I rank Adam Smith first, Keynes second, and Marx third. Of the three, Adam Smith advocated the highest degree of economic freedom. Nations that have adopted Smith’s vision of laissez-faire capitalism have fared the best. Next is Keynes. He usually favored maximum freedom in the microeconomic sphere, but frequently endorsed heavy intervention (inflation and deficit spending) in the macro sphere. His big-government formula has resulted in slower economic growth in many industrial nations. The low man on the totem pole is Marx, who advocated a command economy at both the micro and macro level. Historically, centrally planned Marxist nations have vastly underperformed the market economies.

Political and economic positions should not be divided by left and right. They are either right or wrong. As Milton Friedman has said many times, “There’s only good economics and bad economics.”

Avoid Being Close-Minded

A second reason why I avoid the left-right labels is that it puts people and ideas into boxes. When someone’s theories are labeled and compartmentalized, thinking stops and name-calling begins. There has been far too much bad blood spilt over the years between camps that spend more time shouting epithets than engaging in legitimate dialogue.

This criticism applies equally to the worn out adjectives “liberal” and “conservative.” If John Kenneth Galbraith is a “liberal,” why should conservatives listen to him’? If Milton Friedman is a “conservative,” why should liberals read his books? I try not to prejudice myself. To me, both are economists who have ideas worth examining.

The media will continue to use the hackneyed political lexicon of yesteryear and engage in character assassination. But I will resist the outdated and misleading left-wing/right-wing/liberal-conservative battlelines, and treat every scholar, candidate, and philosopher on his own merits, and not according to some arbitrary label.

What It Takes to Be an Objective Scholar

Economics on Trial
IDEAS ON LIBERTY
April 2000

by Mark Skousen

“It was the facts that changed my mind.” -Julian Simon (1)

During the 1990s we watched the Dow Jones Industrial Average increase fourfold and Nasdaq stocks tenfold. Yet there were well-known investment advisers-some of them my friends-who were bearish during the entire period, missing out on the greatest bull market in history. (2)

How is this possible? What kind of prejudices would keep an intelligent analyst from missing an overwhelming trend? In the financial business the key to success is a willingness to change 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?”

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 type, the most flexible, are the most successful on Wall Street.

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 interprets them to suggest that gold is ready to reverse its downward 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.

I also see this type of prejudice in the academic world. Some analysts are anti-market no matter what. Take, for example, Lester Brown, president of the Worldwatch Institute in Washington, D.C., who puts out the annual State of the World and other alarmist surveys and data. He gathers together all kinds of statistics and graphs showing a decline in our standard of living and the growing threat of population growth, environmental degradation, the spread of the AIDS virus, and so on. For example, despite clear evidence of sharply lower fertility rates in most nations, Brown concludes, “stabilizing population may be the most difficult challenge of all.” (3)

Too bad Julian Simon, the late professor of economics at the University of Maryland, is no longer around to dispute Brown and the environmental doomsdayers. Simon was as optimistic about the world as Brown is pessimistic. Simon’s last survey of world economic conditions, The State of Humanity, was published in 1995. That book, along with his The Ultimate Resource (and its second edition), came to the exact opposite of Brown’s conclusions. “Our species is better off in just about every measurable material way.” (4)

Yet Julian Simon was not simply a Pollyanna optimist. He let the facts affect his thinking. In the 1960s, Simon was deeply worried about population and nuclear war, just like Lester Brown, Paul Ehrlich, and their colleagues. But Simon changed his mind after investigating and discovering that “the available empirical data did not support that theory.” (5)

Scholars Who See the Light

The best scholars are those willing to change their minds after looking at the data or discovering a new principle. They admit their mistakes when they have been proven wrong. You don’t see it happen often, though. Once a scholar has built a reputation around a certain point of view and has published books and articles on his pet theory, it’s almost impossible to recant. This propensity applies to scholars across the political spectrum.

We admire those rare intellectuals who are honest enough to admit that their past views were wrong. For example, when New York historian Richard Gid Powers began his history of the anticommunist movement, his attitude was pejorative. He had previously written a highly negative book on J. Edgar Hoover, Secrecy and Power. Yet after several years of painstaking research, he changed his mind: “Writing this book radically altered my view of American anticommunism. I began with the idea that anticommunism displayed America at its worst, but I came to see in anticommunism America at its best.” (6) That’s my kind of scholar.

1. Julian L. Simon, The Ultimate Resource 2 (Princeton, N.J.: Princeton University Press, 1996), preface.
2. See the revealing article, “Down and Out on Wall Street,” New York Times, Money & Business Section, Sunday, December 26, 1999.
3. Lester R. Brown, Gary Gardner, and Brian Halweil, Beyond Malthus (New York: Norton, 1999), p. 30.
4. Julian L. Simon, The State of Humanity (Cambridge, Mass.: Blackwell, 1995), p. 1.
5. Simon, The Ultimate Resource 2, preface.
6. Richard Gid Powers, Not Without Honor: The History of American Anticommunism (Free Press, 1996), p. 503.

What It Takes to Be an Objective Scholar

Economics on Trial
IDEAS ON LIBERTY
April 2000

What It Takes to Be an Objective Scholar
by Mark Skousen

“It was the facts that changed my mind.” -Julian Simon (1)

During the 1990s we watched the Dow Jones Industrial Average increase fourfold and Nasdaq stocks tenfold. Yet there were well-known investment advisers-some of them my friends-who were bearish during the entire period, missing out on the greatest bull market in history. (2)

How is this possible? What kind of prejudices would keep an intelligent analyst from missing an overwhelming trend? In the financial business the key to success is a willingness to change 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?”

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 type, the most flexible, are the most successful on Wall Street.

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 interprets them to suggest that gold is ready to reverse its downward 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.

I also see this type of prejudice in the academic world. Some analysts are anti-market no matter what. Take, for example, Lester Brown, president of the Worldwatch Institute in Washington, D.C., who puts out the annual State of the World and other alarmist surveys and data. He gathers together all kinds of statistics and graphs showing a decline in our standard of living and the growing threat of population growth, environmental degradation, the spread of the AIDS virus, and so on. For example, despite clear evidence of sharply lower fertility rates in most nations, Brown concludes, “stabilizing population may be the most difficult challenge of all.” (3)

Too bad Julian Simon, the late professor of economics at the University of Maryland, is no longer around to dispute Brown and the environmental doomsdayers. Simon was as optimistic about the world as Brown is pessimistic. Simon’s last survey of world economic conditions, The State of Humanity, was published in 1995. That book, along with his The Ultimate Resource (and its second edition), came to the exact opposite of Brown’s conclusions. “Our species is better off in just about every measurable material way.” (4)

Yet Julian Simon was not simply a Pollyanna optimist. He let the facts affect his thinking. In the 1960s, Simon was deeply worried about population and nuclear war, just like Lester Brown, Paul Ehrlich, and their colleagues. But Simon changed his mind after investigating and discovering that “the available empirical data did not support that theory.” (5)

Scholars Who See the Light

The best scholars are those willing to change their minds after looking at the data or discovering a new principle. They admit their mistakes when they have been proven wrong. You don’t see it happen often, though. Once a scholar has built a reputation around a certain point of view and has published books and articles on his pet theory, it’s almost impossible to recant. This propensity applies to scholars across the political spectrum.

We admire those rare intellectuals who are honest enough to admit that their past views were wrong. For example, when New York historian Richard Gid Powers began his history of the anticommunist movement, his attitude was pejorative. He had previously written a highly negative book on J. Edgar Hoover, Secrecy and Power. Yet after several years of painstaking research, he changed his mind: “Writing this book radically altered my view of American anticommunism. I began with the idea that anticommunism displayed America at its worst, but I came to see in anticommunism America at its best.” (6) That’s my kind of scholar.

1. Julian L. Simon, The Ultimate Resource 2 (Princeton, N.J.: Princeton University Press, 1996), preface.
2. See the revealing article, “Down and Out on Wall Street,” New York Times, Money & Business Section, Sunday, December 26, 1999.
3. Lester R. Brown, Gary Gardner, and Brian Halweil, Beyond Malthus (New York: Norton, 1999), p. 30.
4. Julian L. Simon, The State of Humanity (Cambridge, Mass.: Blackwell, 1995), p. 1.
5. Simon, The Ultimate Resource 2, preface.
6. Richard Gid Powers, Not Without Honor: The History of American Anticommunism (Free Press, 1996), p. 503.

A Much-Deserved Triumph in Supply-Side Economics

Economics on Trial
IDEAS ON LIBERTY
February 2000

by Mark Skousen

“After occupying center stage during the 1980s, the supply-side approach to economics disappeared when Ronald Reagan left office.” – Paul Samuelson (1)

Until Robert Mundell won the Nobel Prize in 1999, supply-side economics had been a school without honor among professional economists. Established textbook writers such as Paul Samuelson (MIT), Greg Mankiw (Harvard), and Alan Blinder (Princeton) frequently condemned the supply-side idea that marginal tax cuts increase labor productivity, or that tax cuts stimulate the economy sufficiently to increase government revenues.

The Laffer Curve — the theory that when taxes are too high, reducing them would actually raise tax revenue — is dismissed. “When Reagan cut taxes after he was elected, the result was less revenue, not more,” reports Mankiw in his popular textbook.(2) Never mind that tax revenues actually rose significantly every year of the Reagan administration; the perception is that supply-side economics has been discredited. Arthur Laffer isn’t even listed in the 1999 edition of Who’s Who in Economics, although the Laffer Curve is frequently discussed in college textbooks.(3)

Now that is all about to change with Columbia University economist Robert A. Mundell’s Nobel Prize in economics. According to Jude Wanniski, Mundell, 67, is the theoretical founder of the Laffer Curve.(4) In the early 1970s he told Wanniski, “The level of U.S. taxes has become a drag on economic growth in the United States. The national economy is being choked by taxes–asphyxiated.”(5)

Mundell offered a creative solution to stagflation (inflationary recession) of the 1970s: impose a tight-money, high-interest rate policy to curb inflation and strengthen the dollar, and slash marginal tax rates to fight recession. Mundell’s prescription was adopted by Reagan and Fed chairman Paul Volcker in the early 1980s. “There’s been no downside to tax cuts,” he told reporters recently.

Yet, oddly enough, Mundell isn’t accorded much attention compared to supply-siders Laffer, Paul Craig Roberts, and Martin Anderson. In their histories of Reaganomics, Roberts and Anderson mention Mundell only once.(6) Two major studies of supply-side economics in 1982 don’t cite his works at all. Nevertheless, Mundell has accomplished a great deal worth lauding. In fact, he is considered the most professional scholar of the supply-siders.

Robert Mundell has had an amazing professional career. A Canadian by birth, he has attended, taught, or worked at over a dozen universities and organizations, including MIT, University of Washington, Chicago, Stanford, Johns Hopkins, the Brookings Institution, Graduate Institute of International Studies in Geneva, Remnin University of China (Beijing), and the IMF. Before going to Columbia in 1974, he was a professor at the University of Chicago and editor of The Journal of Political Economy. Thus the Chicago school can once again claim a Nobel, although Mundell differs markedly from the monetarist school.

Monetary vs. Fiscal Policy

Famed monetarist Milton Friedman says, “I have never believed that fiscal policy, given monetary policy, is an important influence on the ups and downs of the economy.”(7) Supply-siders strongly disagree. Cutting marginal tax rates and slowing government spending can reduce the deficit, lower interest rates, and stimulate long-term economic growth.

Mundell counters, “Monetary policy cannot be the engine of higher noninflationary growth. But fiscal policy-both levers of it can be. . . . The U.S. tax-and-spend system reduces potential growth because it penalizes success and rewards failure.”

Mundell favors spending on education, research and development, and infrastructure rather than government welfare programs. He advocates reducing top marginal income tax rates, slashing the capital gains tax, and cutting the corporate income tax. Such policies would sharply raise saving rates and economic growth-“an increase in the rate of saving by 5% of income (GDP), say from 10% of income to 15%, would increase the rate of [economic] growth by 50%, i.e., from 2.5% to 3.75%.”(8)

Mundell as Gold Bug

Supply-siders also take a different approach to monetary policy. They go beyond the monetarist policy of controlling the growth of the money supply. Unlike the monetarists, supply-siders like Mundell resolutely favor increasing the role of gold in international monetary affairs. “Gold provides a stabilizing effect in a world of entirely flexible currencies,” he told a group of reporters in New York in November 1999. According to Mundell, gold plays an essential role as a hedge against a return of inflation. He predicted that the price of gold could skyrocket in the next decade, to as high as $6,000 an ounce, if G7 central banks continue to expand the money supply at 6 percent a year. “I do not think this an outlandish figure. Gold is a good investment for central bankers.” He did not foresee central banks selling any more gold. “Gold will stay at center stage in the world’s central banking system,” he said.

In awarding Mundell the prize, the Bank of Sweden recognized him as the chief intellectual proponent of the euro, the new currency of the European Community. He considers the euro a super-currency of continental dimensions that will challenge the dollar as the dominant currency. The benefits of a single currency include lower transaction costs, greater monetary stability, and a common monetary policy. Mundell advocates an open global economy, expanded foreign trade, and fewer national currencies. Ultimately, he envisions a universal currency backed by gold as the ideal world monetary system. Under a strict gold standard, “real liquidity balances are generated during recessions and constrained during inflations.”(9)

Mundell is an optimist as we enter a new century. He’s bullish on the global stock markets, the gold standard, globalization, and downsized government. He’s my kind of economist.

1. Paul Samuelson and William D. Nordhaus, Economics, 16th ed. (Boston: Irwin/McGraw-Hill. 1998) p. 640.
2. N. Gregory Mankiw, Principles of Economics (Fort Worth, Tex. Harcourt/Dryden Press, 1998), p. 166.
3. Mark Blaug, compiler of Who’s Who in Economics (Northampton, Mass. Edward Elgar, 1999), determines the top 1,000 names in the book based on frequency of citation in scholarly journals. Among the famous economists missing the cut are Arthur Laffer, Paul Craig Roberts, and Murray N. Rothbard.
4. Jude Wanniski, The Way the World Works, rev. and updated (New York: Simon and Schuster, 1983), p. x.
5. Wanniski, “It’s Time to Cut Taxes,” Wall Street Journal, December 11, 1974.
6. Paul Craig Roberts, The Supply-Side Revolution (Cambridge, Mass.: Harvard University Press, 1984) and Martin Anderson, Revolution (Stanford, Calif.: Hoover Institution Press, 1990).
7. Milton Friedman, “Supply-Side Policies: Where Do We Go from Here?” Supply-Side Economics in the 1980s Conference Proceedings (Federal Reserve Bank of Atlanta, 1982), p. 53.
8. Robert A. Mundell, “A Progrowth Fiscal System,” The Rising Tide, ed. Jerry J. Jasinowski (New York: Wiley, 1998), pp. 198, 203-204.
9. Mundell, The New International Monetary System (New York: Columbia University Press, 1977), p. 242.

Economics for the 21st Century

Economics on Trial
IDEAS ON LIBERTY
January 2000

Economics for the 21st Century
by Mark Skousen

“Nature has set no limit to the realization of our hopes.” — Marquis De Condorcet

Recently I came across the extraordinary writings of the Marquis de Condorcet (1743-94), a mathematician with an amazing gift of prophecy in l`age des lumieres. Robert Malthus (1766-1834) ridiculed Condorcet’s optimism in his famous Essay on Population (1798). Today Malthus is well known and Condorcet is forgotten. Yet it is Condorcet who has proven to be far more prescient.

In an essay written over 200 years ago, translated as “The Future Progress of the Mind,” Condorcet foresaw the agricultural revolution, gigantic leaps in labor productivity, a reduced work week, the consumer society, a dramatic rise in the average life span, medical breakthroughs, cures for common diseases, and an explosion in the world’s population.

Condorcet concluded his essay with a statement that accurately describes the two major forces of the twentieth century — the destructive force of war and crimes against humanity, and the creative force of global free-market capitalism. He wrote eloquently of “the errors, the crimes, the injustices which still pollute the earth,” while at the same time celebrating our being “emancipated from its shackles, released from the empire of fate and from that of the enemies of its progress, advancing with a firm and sure step along the path of truth, virtue and happiness!”(1)

As we enter the year 2000, the public has focused on the history of the twentieth century. Condorcet’s essay reflects two characteristics of this incredible period. First, the misery and vicious injustices of the past hundred years, and second, the incredible economic and technological advances during the same time.

The Crimes of the Twentieth Century

Paul Johnson’s Modern Times, by far the best twentieth-century history of the world, demonstrates powerfully that this century has been the bloodiest of all world history.* Here is a breakdown of the carnage:

Civilians Killed by Governments (in millions) Years
Soviet Union 62 (1917-91)
China (communist) 35 (1949- )
Germany 21 (1933-45)
China (Kuomintang) 10 (1928-49)
Japan 6 (1936-45)
Other 36 (1900- )
Total 170 million
Deaths in War (in millions)
International wars 30
Civil wars 7
Total 37 million

Economists use a statistic to measure what national output could exist under conditions of full employment, called Potential GDP Imagine the Potential GDP if the communists, Nazis, and other despots hadn’t used government power to commit those hateful crimes against humanity.

Another great French writer, Frederic Bastiat (1801-50), wrote an essay in 1850 on “What Is Seen and What Is Not Seen.”(3) We do not see the art, literature, inventions, music, books, charity, and good works of the millions who lost their lives in the Soviet gulags, Nazi concentration camps, and Pol Pot’s killing fields.

The Economic Miracle of the Twentieth Century

Yet the twentieth century was also the best of times, for those who survived the wars and repression. Millions of Americans, Europeans, and Asians were emancipated from the drudgery of all-day work by miraculous technological advances in telecommunications, agriculture, transportation, energy, and medicine. The best book describing this economic miracle is Stanley Lebergott’s Pursuing Happiness: American Consumers in the Twentieth Century (Princeton University Press, 1993). Focusing on trends in food, tobacco and alcohol, clothing, housing, fuel, housework, health, transportation, recreation, and religion, he demonstrates powerfully how “consumers have sought to make an uncertain and often cruel world into a pleasanter and more convenient place.” As a result, Americans have increased their standard of living at least tenfold in the past 100 years.

What should be the goal of the economist in the new millennium? Certainly not to repeat the blunders of the past. In the halls of Congress, the White House, and academia, we need to reject the brutality of Marxism, the weight of Keynesian big government, and the debauchery of sound currency by interventionist central banks. Most important, ivory-tower economists need to concentrate more on applied economics (like the work of Lebergott) instead of high mathematical modeling.

As far as a positive program is concerned, the right direction can be found in an essay on the “next economics” written by the great Austrian-born management guru Peter F. Drucker almost 20 years ago: “Capital is the future . . . the Next Economics will have to be again micro-economic and centered on supply.” Drucker demanded an economic theory aiming at “optimizing productivity” that would benefit all workers and consumers.(4) Interestingly, Drucker cited approvingly from the work of Robert Mundell, the newest Nobel Prize winner in economics, who is famed for his advocacy of supply-side economics and a gold-backed international currency.

Beware the Enemy

Market forces are on the march. The collapse of Soviet communism has, in the words of Milton Friedman, turned “creeping socialism” into “crumbling socialism.” But let us not be deluded. Bad policies, socialistic thinking, and class hatred die slowly. Unless we are vigilant, natural liberty and universal prosperity will be on the defensive once again.

We need to deregulate, privatize, cut taxes, open borders, stop inflating, balance the budget, and limit government to its proper constitutional authority. We need to teach, write, and speak out for economic liberalization as never before. Let our goal for the coming era be: freedom in our time for all peoples!

1. Marquis de Condorcet, “The Future Progress of the Human Mind,” The Portable Enlightenment Reader, ed. Isaac Kramnick (Penguin Books, 1995), p. 38. Several of Condorcet’s writings can be found in this excellent anthology.
2. Paul Johnson, Modern Times: The World from the Twenties to the Nineties, rev. ed. (New York: Harper, 1992). The best survey of the horrors of communism is The Black Book of Communism: Crimes, Terror, Repression (Cambridge, Mass.: Harvard University Press, 1999), written by six French scholars, some of whom are former communists.
3. Frederic Bastiat, Selected Essays on Political Economy (Irvington-on-Hudson, N.Y.: Foundation for Economic Education, 1995 [1964]).
4. Peter F. Drucker, Toward the Next Economics, and Other Essays (New York: Harper & Rowe, 1981), pp. 1-21.

One Graph Says It All

Economics on TrialTHE FREEMAN

By Mark Skousen


“But the free market is not primarily a device to procure growth. It is a device to secure the most efficient use of resources.”
-Henry C. Wallich
1

In celebrating fifty years of service by the Foundation for Economic Education, we observe one overriding lesson of history: Freedom is, on balance, a great blessing to all mankind.

Now, this may seem to be obvious; today we all nod our heads in agreement with this conclusion. But not everyone concurred during the post-war era. In fact, for much of the past fifty years, supporters of economic liberty were on the defensive. After World War II, laissez faire was an unwelcome phrase in the halls of government and on college campuses. Governments both here and abroad nationalized industry after industry, raised taxes, inflated the money supply, imposed price and exchange, controls, created the welfare state, and engaged in all kinds of interventionist mischief. In academia, Keynesianism and Marxism became all the rage, and many free-market economists had a hard time obtaining full-time positions on college campuses.

The big-government economy was viewed by the establishment as an automatic stabilizer and growth stimulator. Many top economists argued that central planning, the welfare state, and industrial policy lead to higher growth rates. Incredibly, as late as 1985, Paul Samuelson (MIT) and William D. Nordhaus (Yale) still declared, “The planned Soviet economy since 1928 … has outpaced the long-term growth of the major market economies.” 2 Mancur Olson, a Swedish economist, also stated, “In the 1950s, there was, if anything, a faint tendency for the countries with larger welfare states to grow faster.” 3

Henry C. Wallich, a Yale economics professor and recent member of the Federal Reserve Board, wrote a whole book arguing that freedom means lower economic growth, greater income inequality, and less competition. In The Cost of Freedom, he concluded, “The ultimate value of a free economy is not production, but freedom, and freedom comes not at a profit, but at a cost.” 4 And he was considered a conservative economist!

The New Enlightenment

Fortunately, the attitudes of the establishment have gradually changed for the better. In recent years the defenders of the free market have gained ground and, since the collapse of the Berlin Wall and Soviet central planning, have claimed victory over the dark forces of Marxism and socialism. Today, governments around the world are denationalizing, privatizing, cutting taxes, controlling inflation, and engaging in all kinds of market reforms. And free-market economists can now be found in most economics departments. In fact, almost all of the most recent Nobel Prize winners in economics have been pro-free market.

Furthermore, new evidence demonstrates forcefully that economic freedom comes as a benefit, not a cost. Looking at the data of the 1980s, Mancur Olson now concludes, “it appears that the countries with larger public sectors have tended to grow more slowly than those with smaller public sectors.” 5 Contrast that with his statement about the 1950s.

Now comes the coup de grace from a new exhaustive study by James Gwartney, economics professor at Florida State University, and two other researchers. They painstakingly constructed an index measuring the degree of economic freedom for more than 100 countries and then compared the level of economic freedom with their growth rates over the past twenty years. Their conclusion is documented in the following remarkable graph:

If ever a picture was worth a thousand words, this graph is it.

Clearly, the greater the degree of freedom, the higher the standard of living (as measured by per capita real GDP growth).

Nations with the highest level of freedom (e.g., United States, New Zealand, Hong Kong) grew faster than nations with moderate degrees of freedom (e.g., United Kingdom, Canada, Germany) and even more rapidly than nations with little economic freedom (e.g., Venezuela, Iran, Congo). The authors conclude, “No country with a persistently high economic freedom rating during the two decades failed to achieve a high level of income.”

What about those countries whose policies changed during the past twenty years? The authors state: “All 17 of the countries in the most improved category experienced positive growth rates…. In contrast, the growth rates of the countries where economic freedom declined during 1975-95 were persistently negative.” 6

If all this is true, what of the data that seemed to demonstrate a positive correlation between big government and economic growth in the 1950s and later? In the case of the Soviet Union, most economists now agree that the data were faulty and misleading. In the case of Europe, perhaps the economic incentives of rebuilding after the war overshadowed the growth of the welfare state. In other words, Europe grew in spite of, not because of, government. Once rebuilding was complete by the late 1950s, the weight of government began to be felt.

After fifty years of hard work, it is high time for FEE and the other free-market think tanks to celebrate their untiring efforts to educate the world about the virtues of liberty. Their work is finally paying off. Let me be one of the first to say congratulations-a job well done!

Endnotes:
1. Henry C. Wallich, The Cost of Freedom (New York: Collier Books, 1990), p. 146.
2. Paul A. Samuelson and William D. Nordhaus. Economics, 12th ed. (New York: McGraw-Hill, 1985), p. 776.
3. Mancur Olson, How Bright Are the Northern Lights? (Lund University, 1990), p.10.
4. Wallich, The Cost of Freedom, p. 9.
5. Olson, How Bright Are the Northern Lights?, p. 88.
6. James D. Gwartney, Robert A. Lawson, and Waiter E. Block, Economic Freedom of the World: 1975-1995 (Washington, D.C.: Cato Institute, 1990), p. xvii.

THE FREEMAN