Mark Skousen In the News and On the Web

Has Keynes Trumped Adam Smith?
By Mark Skousen
February 27, 2009
A nice reprint of one of my articles on a web blog. A great way to spread the word.

“Market Monitor” — Mark Skousen, Editor, Forecasts & Strategies
with Paul Kangas, Nightly Business Report, PBS, Friday, March 06, 2009

Link to transcript of the show

Steve’s Serendipities: Persuasion vs. Force by Mark Skousen
A discovery of my pamphlet on the principles of freedom. Worth a read!

With China We Trade,’ Historical Ties between China and Founding Fathers
by Jeffrey Bingham Mead, History Education Council of Hawaii
March 11, 2009, Honolulu Advertiser
This writer uses my work compiling The Compleated Autobiography by Benjamin Franklin, which revealed a lot of the great Founding Father in his later, significant years, in a fascinating new analysis of China and its trade practices. Take a look!

Plus, some nice reader reviews of Investing in One Lesson on Cheap Best Books. An important book to read in today’s investing climate.

Yours in liberty, AEIOU,

Glenn Beck puts Cleon Skousen at #1 on Amazon

Well, he did it. Glenn Beck has put my uncle Cleon’s book, The 5,000 Year Leap: 28 Principles that Changed the World (How the US Constitution Inspired America’s Greatness) #1 on Amazon.com.

The guy is incredible.

I was on his show a couple of weeks ago, and he told me between commercials, “Cleon Skousen’s book changed my life.” He has written an introduction to a new version of the book, which is expected to come out soon.

Glenn just announced his “912 Project”–go to www.the912project.com. I wonder where this will all lead.

In liberty, AEIOU,

MAS

Will we survive Obamanomics?

From the Gilroy Dispatch

Officially, President Obama’s $3.6 trillion budget is titled “A New Era of Responsibility.”

That’s false on two counts. It’s an era – not of responsibility, but of big-government taxation, spending, and regulation. And it’s not new. History is full of attempts to inflate the state to grow the economy. Virtually all have ended badly. As the recent sell-off reminds us, Wall Street’s verdict on Obamanomics has been quick and sharp.

The president’s budget is right in castigating the “troubled past” of the Bush administration, which spent money like a drunken sailor on education, healthcare, bailouts, and two seemingly endless wars in the greater Middle East, with virtually no regard for how to pay for a rapidly growing national debt.

But now we must confront the troubled future. Obama has adopted the big-spending policies of George W. Bush, with trillions more proposed for education, bailouts, and healthcare. He wants to sharply reduce (but not end) the American presence in Iraq. At the same time, he plans to deploy an additional 17,000 troops to Afghanistan, which may lead to an expanded quagmire there.

Hasn’t Obama read the bestseller “Three Cups of Tea: One Man’s Mission to Promote Peace … One School at a Time,” by Greg Mortenson and David Oliver Relin? A Pakistani general who talked with Mr. Mortenson aptly identified the real problem in Afghanistan: “The enemy is ignorance. The only way to defeat it is to build relationships with these people, to draw them into the modern world with education and business. Otherwise the fight will go on forever.”

In some ways, Obama’s plans are more grandiose than Bush’s. He wants to encourage green technology and energy independence, and move toward national healthcare. The cost is enormous. The deficit for this year alone is expected to reach $1.7 trillion.

To help pay for this, Obama proposes the largest tax increase in history. Some of this, such as new taxes on oil and gas companies, is explicit. Some of it, such as the new cap and trade program, is quite subtle. And some of it will “merely” repeal the Bush tax rates on high incomes. But all of it represents a tremendous muzzle on the economy at a time when it needs to be unleashed.

Even these huge tax hikes won’t be nearly sufficient to pay for the outlays. In fact, to pay for it in full, The Wall Street Journal pointed out, Uncle Sam would have to confiscate every penny earned by Americans making at least $75,000 a year.

What’s the future for Obamanomics? The stock market’s reaction doesn’t bode well. The Dow has fallen more than 18 percent since the last trading day of Bush’s term. Clearly, Wall Street thinks that Obama’s tax, spend, and regulate policies will be a disaster.

Despite the dire headlines, the world is not coming to an end, we are not headed into another Great Depression, and free-market capitalism has not breathed its last breath.

In my book, “The Big Three in Economics,” I found that the press has frequently and prematurely written the obituary of Adam Smith and his free-market philosophy, only to see a new and more vibrant global marketplace reemerge after being savagely attacked by Keynesians, Marxists, and assorted socialists. Market capitalism survived and prospered after the boom-bust industrial revolution of the 19th century, and the Great Depression and world wars of the 20th century. It will recover from the financial panic of 2008-09 and Obamanomics.

Adam Smith, the supreme defender of market capitalism, expressed this optimism well in 1776 when he wrote in “The Wealth of Nations”:

“The uniform, constant, and uninterrupted effort of every man to better his condition … is frequently powerful enough to maintain the natural progress of things toward improvement, in spite both of the extravagance of government, and of the greatest errors of administration.”

The ideas of Adam Smith and his modern followers will make a comeback. Already, pro-market forces are gathering in Congress to defeat Obama’s ambitious and highly socialistic agenda. Charities and nonprofits are already up in arms about the proposed limits on tax deductions for wealthy donations for good causes.

I’m doing my part by holding the world’s largest gathering of free minds at FreedomFest, July 9-11, 2009, in Las Vegas.

Details: www.freedomfest.com.

Proof Is in the Dow

“The Obama budget is nothing less than an attempt to end the ideas of Ronald Reagan.” — New York Times

Adam Smith, the father of free-market economics, once stated, “There is much ruin in a nation.”  President Obama is out to prove it in his Newspeak program he calls “A New Era of Responsibility.”  It should be called “A New Era of Irresponsibility.”

And there’s no better proof than the stock market’s reaction to Obamanomics, which is big-government Keynesianism at its worst.  Since Obama took office, the Dow is down a whooping 15% — and that’s after the huge sell off in the market in 2008 by more than 30%.

And the market has continued to drop precipitously since Obama addressed Congress and announced his obscene $3.6 trillion budget for fiscal year 2010.  This budget includes:

the largest tax increase in history, including a monstrous tax on oil & gas (cap and trade) and the repeal of the Bush tax rates on incomes higher than $200,000 for individuals and $250,000 for couples.  Contrary to Obama’s claim, over 65% of tax filers in this category are small business owners and investors.

the highest level of federal spending since 1945, from today’s 21% of GDP to a whooping 27.7%.  This includes new entitlements in health care and energy.

Clearly Wall Street has spoken:  Obama’s tax, spend and regulate policies are a disaster for the nation.

And sadly Obama doesn’t get it.

What should investors do?  Play it conservative.  Be well-diversified in global stocks.  Maintain a high cash position, look for bargain opportunities, and keep squirreling away gold and silver coins.

And do not despair.  It is not time to head for the hills, although some wealthy friends are talking about moving to New Zealand, or the Bahamas.  (One friend of mine has already taken the extreme step of renouncing his US citizenship!)

In writing “The Big Three in Economics” (click here to order), I found that Adam Smith and his “system of natural liberty” have come under attack on many occasions by his sworn enemies Keynesians, Marxists and socialists, and has often been left for dead, but always makes a comeback.

As Adam Smith declared in his 1776 classic “The Wealth of Nations,”

“The uniform, constant, and uninterrupted effort of every man to better his condition . . . is frequently powerful enough to maintain the natural progress of things toward improvement, in spite both of the extravagance of government, and of the greatest errors of administration.”

In sum, the ideas of Adam Smith, and his modern followers, including Ronald Reagan, are far from dead.  They are only in hibernation.  The free-market giant will soon be awakened by our dire situation.

Hopefully pro-market forces in Congress (both Republicans and Democrats)  will filibuster the Obama tax increases and budget excesses.  Charities and non-profits are already up in arms about the proposed limits on tax deductions for wealthy donations for good causes.

I’m doing my part by holding the world’s largest gathering of free minds at FreedomFest, July 9-11, 2009, in Las Vegas, the focal point of liberty.  For details, go to www.freedomfest.com.  I hope you will join us.

I know I’m a dreamer but I’m not the only one.

Obamanomics Is Making Matters Worse

Unfortunately, the [Keynesian] balance week is unbalanced. ~ Milton Friedman

We have outlived the short-run and are suffering from the long-run consequences of [Keynesian] policies. ~ Ludwig von Mises

Last week, Treasury Secretary Timothy Geithner announced another solution to the financial crisis — his new “Financial Stability Plan.” Since the announcement, Citigroup has fallen 51 percent, Bank of America is down 46 percent, and Wall Street had its worst week in 2009.

So much for the Financial “Stability” Plan.

As John Adams once said, “Facts are a stubborn thing.”  The Obama model of Keynesian-style bailouts and massive deficits is simply failing to cure the growing financial crisis.

Despite all the bailouts President Obama has put forth — for the banks, the big 3 auto companies, and homeowners — the global economy is still reeling.

In fact, I would argue that Obamanomics (Keynesian economics in disguise) is counterproductive and making matters worse.  That’s because business and Wall Street recognize that there is no free lunch — government spending is piling up huge debts that will need to be paid back, probably through the printing presses.  And inflation — another evil — will come back with a vengeance.

Keynes is famous for the line, “In the long run, we are all dead.”  And that’s what Wall Street fears — that financially we are all going to be killed by excessive debt.

Lack of confidence in Obama, Geitner and Bernanke is why gold is going through the roof now, and is approaching $1,000 an ounce. The U.S. Mint is having a hard time keeping up with demand for American eagle gold and silver coins.

The problem is Keynesian-style policy, the darling of the establishment politicos and media giants.  Keynes has suddenly trumped Adam Smith.  And that’s dangerous.

One day last week, I walked into the largest Barnes & Noble bookstore in New York and saw a big display table up front with all kinds of books on John Maynard Keynes and Keynesian economics.  One book, The Return of Depression Economics, was written by Paul Krugman, the caustic New York Times columnist who just won the Nobel Prize.

Another book was called The Case for Big Government by Jeff Madrick, the editor of Challenge magazine.  I can understand writing a book in support of good, efficient, strong, and productive government, but “big” alone?  Most Americans prefer the motto “cheaper and better.”

The biggest surprise at Barnes & Noble was to see my own book, The Big Three in Economics, prominently displayed along side all the Keynesian and Marxist books.  It has suddenly become my most successful book.

Mark Skousen with the Totem Pole of Economics

But mine was the only book there that took a dim view of Keynes and Marx and their solutions to the financial crisis (always more government, more taxes, and more regulations).  For my money, Adam Smith and his followers (Ludwig von Mises, Friedrich Hayek, Milton Friedman, Murray Rothbard) deserve to be on top of the Totem Pole of Economics.

Unfortunately, Keynes is all the rage now.  The British economist became famous in the 1930s for advocating going off the gold standard, running deficits and bailing out troubled banks with easy money as a way to end the Great Depression.
Today’s politicians, from George Bush to Barack Obama, have suddenly become Keynesians during this financial crisis, spending money they don’t have in a vain effort to right the ship.  Even Newsweek has gone so far to say, “We are all socialists now.”  Alan Greenspan, the ex-student of Ayn Rand, now favors nationalization of the big American banks Citibank and Bank of America.

Every investor and gold bug should know the enemy: Keynes, the advocate of big government and the welfare state, and Karl Marx, the radical who advocated outright state socialism and total central control of the means of production.
After World War I, Randolph Bourne observed, “War is the health of the state.”  Today he might say, “A financial crisis is the health of the state.”

It looks like modern-day statists are getting their wish.  We’re getting big government, good and hard.  Adam Smith and Milton Friedman are out of favor, while John Maynard Keynes, the patron saint of bailouts, inflation, and the welfare state, is making a comeback with a vengeance.

The tentacles of the leviathan state are growing by leaps and bounds.  In 2009, global governments will be the largest shareholders in commercial banks, reversing 20 years of retreat by the state.  The costs of entitlements are exploding upwards, and Congress hasn’t had the courage to address future liabilities.  Social Security and Medicare are government-sponsored Ponzi schemes that will make Bernie Madoff’s embezzlement look like a picnic.

The late management guru Peter Drucker said, “Government is better at creating problems than solving them.” In fact, wrote a cynical Ducker, government has gotten bigger, not stronger, and can only do three things well — taxation, inflation, and making war.  According to Drucker, the state has become a “swollen monstrosity….Indeed, government is sick — and just at a time when we need a strong, healthy, and vigorous government.”  (He said all this in 1969.)  If you want to solve problems, he counseled, you must turn to business and the private sector.

But where does one get the straight scoop on Keynes, Marx, and their nemesis, Adam Smith and the followers of free-market capitalism?

I have no apologies for where I stand on the issue.  In writing The Big Three, I commissioned a Florida woodcarver, James Sagui, to create “The Totem Pole of Economics.”  (The Tolem Pole of Economics is shown on the back cover of the book.)  Clearly, my hero is Adam Smith, the author of The Wealth of Nations, published in 1776, a declaration of economic independence.

Adam Smith, the 18th century philosopher, is on top of the Totem Pole for his advocacy of a revolutionary new doctrine which he called a “system of natural liberty,” what we might call laissez faire or free-market capitalism.  He used the “invisible hand” to symbolized how the private actions of individual entrepreneurs would lead to the public good.

Today’s advocates of Smithian economics have real solutions to the crisis, as I’ve outlined in previous HUMAN EVENTS columns:  suspend “mark to market” accounting rules, make the Bush tax cuts permanent, slash the corporate tax rate, and mostly importantly “do no harm.”  Also, it wouldn’t hurt to take a look at the Canadian banking system, ranked #1 in the world in soundness (US is #40) for its conservative reserve requirements and nationwide branching.  (Not a single Canadian bank has failed in either the Great Depression or now.)

Keynes is ranked below Adam Smith, because he supported big government and the welfare state as a way to stabilize the crisis-prone capitalist economy, the “middle ground” between laissez faire and totalitarian socialism.  But as we have seen, Keynesian activism has led to much mischief in the world today, and countries that have adopted his bureaucratic, regulated mindset have witnessed “slow growth” and “stagflation” style economies.

And Marx is the “low man” on the Totem Pole.  His radical solution, government ownership and control of the production, distribution and consumption of goods and services, would be, as Hayek says, “the road to serfdom.”

Adam Smith and his “system of natural liberty” have come under attack many times by his arch enemies, the Marxists and Keynesians.  But Smithian economics has nine lives, and has always managed a comeback.  With your help, Adam Smith will return.

Click here for a copy of The Big Three in Economics.

Interview with Dan Quayle

What a pleasant conversation we had when I had dinner with Dan Quayle earlier this year. Quayle didn’t dominate the conversation as my wife Jo Ann and I might expect from a former Vice-President; he was gracious and a good listener.

Dan talked about his support for some form of private Social Security accounts for younger workers, under the age of 40.

He also said he was planning to pursue the presidency in the year 2000, but didn’t want to announce that publicly yet. (Quayle quit his bid for the presidency in the 2000 election after the Iowa Strawpoll in 1999.)

Jo Ann and I had met Dan Quayle 10 years earlier at a Howard Ruff conference, and we talked about those days and what Howard was up to these days.

Chicago Gun Show

Economics on Trial The Freeman OCTOBER 1999

by Mark Skousen

“According to the economic approach, criminals, like everyone else, respond to incentives.” -GARY BECKER(1)

The Chicago boys are at it again. This time the economists at the University of Chicago are making headlines in today’s hotly disputed debate about gun control. Milton Friedman set the general standard a generation ago by insisting on rigorous empirical work to support sound (though often unpopular) theory and policy. More recently, Gary Becker extended Chicago-style economic analysis into contemporary social problems such as education, marriage, discrimination, professional sports, and crime.

Now John R. Lott, Jr., until recently the John M. Olin Law and Economics Fellow at Chicago, is making the case that a well-armed citizenry discourages violent crime. Lott analyzed the FBI’s massive yearly crime statistics for all 3,054 U.S. counties over 18 years, the largest national surveys on gun ownership, and state police documents on illegal gun use. His surprising conclusions, published in his recent book, More Guns, Less Crime:

  • States now experiencing the largest drop in crime are also the ones with the fastest-growing rates of gun ownership.
  • The Brady five-day waiting period, gun buy-back programs, and background checks have little or no impact on crime reduction.
  • States that have recently allowed concealed weapon permits have witnessed signif- icant reductions in violent crime.
  • Guns are used on average five times more frequently in self-defense than in committing a crime.(2)

According to Lott, recent legislative efforts to restrict gun ownership may actually keep many law-abiding citizens from protecting themselves from attack. (There’s that Law of Unintended Consequences again.)

The Incentive Principle Underlining

Lott’s findings is a basic eco- nomic concept, the law of demand: If the price of a commodity goes up, people use less of it. In the case of criminal activity, if the cost and risk of committing a crime rises, less crime will be committed. This is often referred to as the market’s incentive principle.

Gary Becker has showed that increasing the cost of crime through stiffer jail sentences, quicker trials, and higher conviction rates effectively reduces the number of criminals who rob, steal, or rape.(3)

Similarly, Lott argues that state laws permitting concealed handguns deter crime. “When guns are concealed, criminals are unable to tell whether the victim is armed before striking, which raises the risk to criminals.” (4) He produces a variety of statistics and graphs to support his case. For example, the following graph compares the average number of violent crimes in states before and after the adoption of a concealed-handgun law.

Lott’s crime figures also remind me of Frederic Bastiat’s brilliant essay “What Is Seen and What Is Not Seen.” In 1850, this great French journalist wrote, “In the economic sphere,. . . a law produces not only one effect, but a series of effects. Of these effects, the first . . . is seen. The other effects emerge only subsequently; they are not seen.”(5)

According to Lott, Bastiat’s principle applies in crime statistics. “Many defensive uses [of guns] are never reported to the police.”(6) Lott gives two reasons. First, in many cases of self-defense, a handgun is simply brandished, the assailant backs off, and no one is harmed. Second, in states that have stringent gun laws, cit- izens who use a gun for protection fail to report the incident for fear of being arrested by the police for illegal use of a weapon. Thus, Lott confirms (through extensive surveys) the initial work of Gary Kleck, professor of criminal justice at Florida State University, that guns are used far more frequently in self-defense than in committing crimes. Kleck, by the way, used to have a strong anti-gun bias until he uncovered this revealing statistic.

All this confirms a long-standing constitutional principle: People have the right to own a gun for self-protection.

1. Gary S. Becker and Guity Nashat Becker, The Economics of Life (New York: McGraw-Hill, 1997), p. 143.
2. John R. Lott, Jr., More Guns, Less Crime (University of Chica- go Press, 1998).
3. Becker and Becker, p. 137.
4. Lott, p. 5.
5. Frederic Bastiat, “What Is Seen and What Is Not Seen,” Selected Essays on Political Economy (Irvington-on-Hudson, N.Y.: Foundation for Economic Education, 1995 [1850]), p. 1.
6. Lott, p. 5.

Las Vegas: America’s Playground

Forecasts & Strategies
Personal Snapshots

by Mark Skousen

“Americans are, above all, a problem-solving people.”
–Paul Johnson, A History of the American People

The transformation of Las Vegas is a perfect example of why the United States of America is still the greatest country in the world. After World War II, developers created in the middle of the Nevada desert a sleazy, tacky town devoted to gambling, shows and sex. But in the past few years, entrepreneurs have created a brand-new Vegas.

Last month, I spent two fun-filled days at the Mirage Resort without gambling. The new Las Vegas offers a wide variety of services for the non-gambler: sports and swimming facilities, great restaurants and buffets, giant IMAX theatres, excellent golf courses, Wet’n Wild water theme park, several spectacular roller-coaster rides, shopping malls (including the sumptuous Forum Shops next to Caesar’s Palace), and a myriad of other forms of entertainment. As a result, Las Vegas is becoming America’s playground.

Another example of urban renewal is New York’s Times Square and 42nd Street. corporations such as Walt Disney have joined with the city to tear down the seedy side of Times Square and re-create a safe environment for local New Yorkers and tourists.

I’m reminded of one other example: Chicago’s Rush Street used to be a crime-infested section of town. Over the past few years, the city fathers have cleaned up the district, and now it’s a hot spot for night life for young people and college students.

PAUL JOHNSON’S NEW BOOK ON AMERICA

The eminent British historian Paul Johnson says, “Americans are, above all, a problem-solving people.” The transformation of Las Vegas, New York’s Times Sauare and Chicago’s Rush Street proves it. It’s our nature to solve problems. Under Reagan, U.S. fought to reduce interest rates, inflation and marginal tax rates.

Under Clinton, the deficit has come down, welfare has been reformed, and crime fallen. And much more can be done. As Johnson states, Americans “will attack again and again the ills in their society, until they are overcome or at least substantial redressed.”

If you want to read an upbeat, one-volume history of the U.S., there is no better source than Paul Johnson’s new book, A History of the American People ($35 or less, available at all major bookstores, on the Internet at www.Amazon.com or through Laissez Faire Books, 800/326-0996). It is a sheer delight to read. Johnson does not hide his admiration, his “labor of love,” of this “most remarkable people,” “this greatest of human adventures,” and this “human achievement without parallel”–the United States of America.

This one-volume history is fresh and exciting to read, not the stale history you may have read when you were a student. Johnson covers material not normally found in the history books, such as the impact of religion and art on American life. Johnson makes you proud of being an American again.

Johnson says, regarding the history of America, “We need to retell it.” Equally, we Americans need to reread it!

Y2K and Entrepreneurial Error

ECONOMICS ON TRIAL
The Freeman

March 1999

by Mark Skousen

“No businessman in the real world is equipped with perfect foresight; all make errors.”
–Murray N. Rothbard (1)

Over the past year, I’ve been involved in a series of debates over the impact of the Year 2000 Problem, the potential collapse of computers–and perhaps the economy–owing to the fact that since computer programs use two digits instead of four to indicate years, the year 2000 will be treated as 1900. On the one extreme is Gary North, who claims that the Y2K problem is so serious that it will gravely disrupt society for years. On the other end is Harry Browne, who says that enlightened entrepreneurs will avert a worldwide disaster.

What’s interesting about the debate is that free-market advocates are found on both sides. North and other naysayers focus on the propensity of market players to make entrepreneurial errors and engage in shortsightedness. Browne and other optimists stress the entrepreneurs’ ability to solve problems, especially when so much is at stake. (Some businesses could go bankrupt if they don’t address the Y2K problem.) In short, the market works.

My concern is that the “market always works” camp comprises true believers who blindly think the market can solve all problems almost automatically. They seem to fit into the rational equilibrium-always school of economics where entrepreneurial misjudgment, imperfect knowledge, and uncertainty play little or no role.

MARKETS ARE NOT PERFECT

The Austrian economists teach otherwise. Israel Kirzner, noted for his studies on entrepreneurship, attacks the model of perfect efficiency as “wholly unsatisfying.” He adds that, “It is most embarrassing to have to grapple with the grossly inefficient world we know with economic tools that assume away the essence of the problem with which we wish to deal.” (2)

The market is characterized by profit and loss, success and failure, certainty and uncertainty. There is always room for improvement, and the entrepreneur’s role is to eliminate errors and inefficiencies. Thus, it should come as no surprise that many businesses and financial institutions are making significant headway in fixing their computer programs to avert the Y2K problem.

On the other hand, it would be folly to ignore that many businesses have budgeted insufficient time and money to fix or replace their computers. Evidence is growing that most firms, especially small businesses, are not doing enough. Many major corporations and government agencies, both here and abroad, admit that they only have time to fix critical systems. The rest will fail on January 1, 2000.

Free-market advocates sometimes place too mcuh faith in the market’s ability to solve problems and ignore ubiquitous error in an entrepreneurial economy. Think about all the ways people make mistakes every day in the marketplace: Investors buy the wrong stock. Businessmen declare bankruptcy. Marriages break up. Consumers over-spend and over-eat, especially during the holidays. Kids fail to do homework. Drivers have accidents. Ships sink. Builders don’t meet deadlines. Economists make false predictions. Entrepreneurs cut corners, deceive customers, and embezzle funds. Economic failure, stupidity, and incompetence are common to human nature. As Ludwig von Mises noted, “To make mistakes in pursuing one’s ends is a widespread human weakness.” (3)

The decision by computer programmers in the early 1950s to use two digits instead of four is a classic example of individual shortsightedness. To save space, they cut corners, and now, a generation later, the whole world is paying a heavy price for their blunder.

CLUSTER OF ERRORS

In most cases, entrepreneurial error is random, unpredictable, and self-correcting. As Murray Rothbard states, “As a rule only some businessmen suffer losses at any one time; the bulk either break even or earn profits.” (4)

There are, however, cases of widespread error–mistakes that affect virtually every part of an industry or economy. Rothbard, in standard Austrian school fashion, explained depressions in terms of “a sudden general cluster of business errors.” (5) Of course, the Austrians attribute those errors and the business cycle in general to monetary inflation by government.

Yet can’t error with far-reaching harm occur in the market without government being responsible? Austrian economists don’t normally discuss this possibility, but it undoubtedly exists. Market decision-makers have made shortsighted blunders that have had universal consequences. Examples of such errors include asbestos in construction, pesticides in agriculture, and air and water pollution in manufacturing. The Y2K computer glitch is a particularly tough challenge because it is universal and time-sensitive. In most cases, the deadline cannot be postponed.

THE MARKET’S SELF-CORRECTING MECHANISM

Fortunately, the market has a built-in mechanism to minimize mistakes and entrepreneurial error. The market penalizes mistakes and rewards correct behavior. Business leaders know that computer problems can destroy their business; fixing the Y2K bug will avoid losses and may even be profitable. They are willing to pay the price. As Kirzner has said, “Pure profit opportunities exist whenever error occurs.” (6) At the same time, the market will severely penalize businesses that have ignored the Y2K problem or have procrastinated.

Followers of free markets should take note: markets may be self-correcting, but they are not all-seeing.

FOOTNOTES

1. Murray N. Rothbard, Man, Economy, and State (Nash Publishing, 1970), p. 746.

2. Israel M. Kirzner, “Economics and Error,” in Perception, Opportunity, and Profit (University of Chicago Press, 1979), p. 135.

3. Ludwig von Mises, Theory and History (Yale University Press, 1957), p. 268. Mises adds that “Error, inefficiency, and failure must not be confused with irrationality. He who shoots wants, as a rule, to hit the mark. If he misses it, he is not ‘irrational'; he is a poor marksman.”

4. Murray N. Rothbard, America’s Great Depression, 4th ed. (Richardson & Snyder, 1983 [1963]), p. 16.

5. Ibid.

6. Kirzner, op. cit., pp. 132-33.

The Exuberant Wade Cook

Ideas Matter
FORBES

By Mark Skousen

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

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

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

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

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

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

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

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

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

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

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

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

Forbes, December 1, 1997