En Torno a la Funcion del Capital Joaquín Reig

(Algunas de las cosas que Mises nos enseñó)

Lo que los hombres lamentamos—sin, desde luego, la mayoría saberlo—es una capitalización insuficiente; nos quejamos de no disponer, en cuantía bastante, de aquellos medios necesarios para alcanzar los objetivos anhelados. Consumir más—a no dudar, lo deseado—exige mayor producción. Para ampliar ésta, sin embargo, preciso resulta disponer de supletorios instrumentos, merced a los cuales cabrá mejor aprovechar los recursos naturales disponibles. La obtención de tales factores presupone anterior ahorro: haber destinado parte de la previa actividad humana a la preparación de esos bienes económicos—capital—que el incremento de la producción requiere. Los problemas de nuestro tiempo, como desde el albor de la humanidad sucede, sólo a base de más capital pueden ser eficazmente abordados.

Lo dramático, sin embargo, es que el capital sólo aparece bajo una economía de mercado; en un orden social donde exista la propiedad privada de los medios de producción, los cuales, consecuentemente, pueden ser contratados, registrando así sus respectivos y correspondientes precios. El régimen colectivista tiene bienes de capital, pero no sabe qué sea capital. Porque el capital no es una cosa material, sino un concepto intelectual; es, en definitiva, el valor de mercado de los medios de producción que el sujeto económico tiene a su disposición. Y no son los factores disponibles lo importante para la producción, sino la utilidad social, el valor, en cada supuesto concreto, de aquéllos.

Hay minas, terrenos, aguas y múltiples riquezas naturales inexplotables por carecerse de los elementos complementarios necesarios para su aprovechamiento. No constituyen aquellos elementos capital; lo serán sólo cuando surjan, gracias al ahorro, los medios que permitan su explotación. El nivel de vida de un país no depende de las riquezas naturales que posea, sino de la cuantía del capital disponible. Véase el caso de Suiza, en un sentido, y el de China o la India, en el contrario.

Por eso, factores de producción, que, en cierto momento, fueron capital, pueden, después, dejar de serlo (con independencia de su desgaste). Supongamos una empresa ferroviaria, hace treinta años, con un parque de cien locomotoras de vapor, es decir, las, entonces, predominantemente empleadas. Constituían ellas, a la sazón, un capital importante. Esa misma empresa, ahora, con idénticas locomotoras, hallaríase, en cambio, totalmente descapitalizada, ya que, según todo el mundo sabe, dicho tipo de tracción resulta antieconómico, inexplotable. Las locomotoras de vapor, consecuentemente, carecen hoy de valor, de interés social, ya no son capital, aunque ayer lo fueron.

Ese instrumento mental que es el capital -basado en los precios del mercado- nos indica qué, cómo y cuánto producir, Si la organización social imperante impide recurrir a tal herramienta intelectual, la actividad económica toda se Edition: current; Page: [3] hunde en insoluble caos.

“Los empresarios -nos enseña Mises- invierten el capital, ahorrado por terceros, procurando satisfacer, del modo mejor, las más urgentes y todavía no satisfechas necesidades de los consumidores. Junto a los investigadores, dedicados a perfeccionar los métodos de producción, desempeñan los empresarios, inmediatamente después de quienes supieron ahorrar, papel decisivo en el progreso económico. Los demás no hacemos sino beneficiarnos de la actuación de aquéllos. Cualquiera que sea nuestra actividad, somo simples beneficiarios de un progreso al que en nada contribuimos.

Lo carac terístico de la economía de mercado es beneficiar a la inmensa mayoría, que recibe la parte del león de unas mejoras conseguidas gracias exclusivamente al actuar de aquellos tres grupos rectores, integrados por quienes ahorran, quienes invierten y quienes arbitran fórmulas nuevas que permiten mejor explotar los bienes disponibles.”

Estas lucubraciones en torno al concepto de capital nos hacen ver el defecto básico del socialismo. El régimen colectivista, por definición, exige que ningún factor de producción quede en manos privadas. Dichos bienes son todos propiedad del estado o de cualquier otro único ente colectivo; no pueden ser contratados en ningún mercado y, por tanto, carecen de precios que reflejen su respectivo interés social.

Plantéase, en esta situación, al rector de la comunidad socialista el azorante problema de determinar cómo producir aquello que él mismo -por sí y ante sí, car tel est notre bon plaisir- haya decidido sea lo que más conviene elaborar. Se puede, desde luego, fabricar escupideras de oro o juguetes de molibdeno para los niños, cuando se desconoce el precio del oro y del molibdeno.

Mises sitúa la cuestión con su habitual claridad:

La contabilidad de capital nos permite saber si se gana o se pierde en la actividad económica; advertimos si lo que producimos vale más o vale menos que los factores invertidos. En el primera caso, nuestra actuación tiene interés social y conviene proseguirla; en el segundo, no, y debemos orientar el esfuerzo en otra dirección.

El dictador socialista, cercado siempre por las tinieblas que el propio sistema engendra, jamás puede servirse de esas clarísimas directrices con las que el mercado, a diario, en bien de los consumidores, guía al productor capitalista. La ceguera de aquél, sin embargo, hoy en día, todavía no es absoluta, pues, mal que bien, se orienta contemplando la actuación del mundo llamado capitalista. Se entera, así, de que no debe producir agua sintética, ni utilizar locomotoras de vapor, pero ha de cometer, no obstante, errores garrafales, por buena que su intención sea -cosa que jamás se discute- pues las situaciones no son nunca idénticas y cada problema económico hay que resolverlo según el momento específico y la circunstancia particular requiera.

Esta intrínseca falla del socialismo, descubierta por Mises hace cincuenta años, aunque al principio fué ampliamente discutida, ya nadie la pone en duda. Los socialistas informados -que, por desgracia, son pocos- desde hace veinticinco Edition: current; Page: [5] años no se atreven a discutir con el maestro; pretenden simplemente escamotear el tema. Se acabó para el socialismo el blasonar de científico; se ha transformado, simplemente, en una secta religiosa, cuyos dogmas no deben ser jamás sometidos al análisis lógico. El superior no se equivoca nunca, pues es -no lo dude nadie-infinitamente sabio y bondadoso. He ahí el absurdo mito en que todo el edificio intelectual socialista se apoya.

“Las gentes -nos recuerda Mises- frecuentemente califican de religión al socialismo. Y, ciertamente, lo es; es la religión de la autodivinización. El Estado y el Gobierno al que los planificadores aluden, el Pueblo de los nacionalistas, la Sociedad de los marxistas y la Humanidad de los positivistas son distintos nombres que adopta el dios de la nueva religión. Tales símbolos, sin embargo, tan sólo sirven para que tras ellos se oculte la personal voluntad del reformador. Asignando a su ídolo cuantos atributos los teólogos a Dios otorgan, el engreído ego se autobeatifica. También él es -piensa- infinitamente bueno, omnipotente, omnipresente, omnisciente y eterno; el único ser perfecto en este imperfecto mundo.

La economía debe rehuir el fanatismo y la sectaria ofuscación. Argumento alguno, desde luego, impresiona al fiel devoto. La más leve crítica resulta para él escandalosa y recusable blasfemia, impío ataque lanzado por gentes malvadas contra la gloria imperecedera de su deidad. La economía se interesa por la teoría socialista, no por las motivaciones psicológicas que inducen a las gentes a caer en la estatolatría.”

Una vez aprehendido el concepto, fácil es percatarse de que, mediante manipulaciones monetarias, huérfanas de ahorro y simplemente ampliadoras de la masa dineraria, no se crea capital, ni por tanto riqueza. (Si ello no fuera así, lo mejor sería arrojar, con un helicóptero, toneladas de papel moneda a lo largo y lo ancho del país).

La Administración amplía la cuantía de los medios de pago, particularmente, otorgando créditos baratos, que el mercado no concedería, ya sea a través de sus organismos, Edition: current; Page: [6] ya sea induciendo a ello, por unos u otros medios, a la banca. La creación de billetes tiene importancia monetaria pero, a estos efectos, podemos pasarla por alto. La banca privada, nótese incidentalmente, bajo un régimen de libertad, no puede sino limitarse a administrar, del modo más acertado posible, los factores monetarios que encuentra dados. Su propia supervivencia le veda lanzarse a ningún boom expansionista.

El bajo interés de los aludidos créditos oficiales perturba la marcha de la economía, desembocando, al cabo del tiempo, en la temida crisis económica. Dichos arbitrismos crediticios dan, en efecto, lugar a inversiones -aparentemente lucrativas, dado el bajo interés que pagan- para las que no existen, sin embargo, los requeridos factores de producción. Los que, en las producciones alentadas por el crédito fácil, son invertidos, detráense, por desgracia, de otras, más conformes con los deseos del mercado consumidor, cuyas actividades consiguientemente quedan restringidas. Y la crisis es simplemente la purga, el correctivo, que obliga a abandonar empresas disconformes con las necesidades de los compradores. En tal sentido, aquélla, como la fiebre, constituye un bien.

Dice a este respecto Mises:

El intervencionismo provoca siempre efectos contrarios a los que los patrocinadores del sistema aspiran a conseguir. Tal acontece, como no podía ser menos, con el intervencionismo de tipo monetario que contemplamos. Se desea, al multiplicar los medios de pago, reduciendo el interés, incrementar la producción; y lo único que se consigue es malinvertir los siempre escasos factores de producción disponibles; o sea, disminuir, al final, el valor de lo producido.

Con todos los precios sucede lo mismo. Los máximos, aquéllos por encima de los cuales no se debería comerciar, precisamente porque el bien en cuestión es considerado de grande interés social, dan lugar a que las explotaciones marginales, al devenir antieconómicas, dejen de producir, con lo que no se amplía, sino que se reduce la producción y el número de quienes efectivamente consiguen disfrutar de la tan apetecida mercancía. Hay, por tanto, mayor escasez; talmente lo que se quería evitar.

Los precios mínimos operan igual, aunque con signo contrario. Hacen aumentar, ponendo en marcha ofertas marginales, la cuantía de unos bienes que, dadas las circunstancias concurrentes, ya resultaban excesivos y cuyos precios, Edition: current; Page: [8] por eso mismo, declinaban. Aparecen los indisponibles excedentes, con los que nadie sabe ya qué hacer.

“Existen y han existido siempre -afirma Misespartidarios de la regulación coactiva de los precios y que, sin embargo, de modo categórico, proclaman ser partidarios de la economía de mercado. El poder público puede, en su opinión, alcanzar los fines que se propone mediante la fijación de precios, salarios y tipos de interés, sin abolir en modo alguno ni el mercado, ni la propiedad privada de los medios de producción. La regulación coactiva de los precios constituye el mejor -o más bien el único- procedimiento para conservar el régimen de empresa privada e impedir el advenimiento del socialismo. Pero indígn anse hasta el paroxismo si se les refuta y se les demuestra que la interferencia en los precios, apar te de empeorar la situación, fatalmente conduce al socialismo.”

Y esto nos lleva al problema de los salarios. Todo trabajador por cuenta ajena, como es natural, desea aumentar sus ingresos, pues quiere vivir mejor (no importa si es en el aspecto espiritual o en el material). Para elevar los salarios han sido ideados arbitrios múltiples. Pero las rentas laborales reales únicamente aumentan cuando se incrementa la productividad del laborador y esto, a no ser que el interesado desee trabajar más, sólo se consigue poniendo a disposición del operario una mayor y mejor constelación de instrumentos de producción previamente elaborados; en otras palabras, más capital.

El capital, que el ahorro crea, abre la posibilidad de iniciar nuevas actividades; crece, con ello, la demanda de trabajadores. Los salarios tienden al alza y se financia ésta, sin perjuicio para nadie, con la supletoria producción que la mayor capitalización lleva aparejada.

“La única diferencia -dice Mises- existente entre las condiciones de trabajo de la era capitalista y de la precapitalista y, aun hoy, entre los países atrasados y los occidentales, consiste en la distinta cuantía del capital disponible. El incremento per capita de este último eleva, por una parte, la utilidad marginal del trabajo y, por otra, abarata las marcancías. Edition: current; Page: [9] Ningún adelanto técnico cabe adoptar si previamente no ha sido ahorrado el correspondiente capital. Sólo el ahorro, la acumulación de nuevos capitales, ha permitido ir, paulatinamente, desterrando la penosa búsqueda de alimentos a que se hallaba obligado el primitivo hombre de las cavernas e implantar, en su lugar, los fecundos métodos modernos de producción. Tan trascendental mutación fué posible gracias a aquellas ideas, amparadoras de la propiedad privada de los medios de producción, que, proporcionando garantías y seguridades, permitieron la acumulación de capital.”

La coactiva elevación de las retribuciones salariales no eleva, en cambio, la renta de la masa trabajadora; loque produce es paro, en las explotaciones marginales. Se be neficia a algunos laboradores, reduciéndose los ingresos de otros hermanos suyos, quedando además inactiva una parte del capital disponible, lo que supone, en la práctica, evidente descapitalización.

Para quien haya logrado percatarse de la íntima relación entre capital y salarios y advierta las desastradas consecuencias sociales que lleva aparejada la coactiva elevación de las rentas laborales, resulta en verdad entristecedora la posición adoptada en estas materias por la opinión pública, que Mises, en gráfico pasaje, bien retrata:

Lo anterior nos lleva de la mano a aludir, aunque sólo sea de pasada, al tan manoseado tema del “asociacionismo laboral” y al no menos manido del “derecho de huelga”. Dos párrafos magistrales bastan a Mises para situar ambas cuestiones en sus estrictos y exactos términos:

Incorrecto también resulta enfocar el asunto desde el ángulo del “derecho a la huelga”. No se discute el derecho a abandonar el trabajo, sino la facultad de obligar a otros -mediante la intimidación y la violencia- a holgar. Cuando los sindicatos, para justificar su actuación intimidatoria y violenta, invocan el derecho de huelga, no quedan mejor emplazados que la secta religiosa que pretendiera ampararse en la libertad de conciencia para perseguir al disidente.”

Y hablando de capital no es posible dejar de aludir a las exacciones fiscales.

Los impuestos son necesarios porque, para mantener el orden público, tal cual están las cosas, ineludible parece el Estado. La financiación del aparato estatal constituye un costo, es decir, un medio necesario para alcanzar un fin deseado. Conviene, por lo dicho, desde un punto de vista social, sufragar tal dispendio mediante contribuciones que incidan lo menos posible en el ahorro. (Los impuestos indirectos, en este sentido, provocan una tendencia al alza de los salarios y al mejoramiento del nivel de vida de las clases trabajadoras, al afectar en menor medida la creación de capital).

Que el Estado gaste lo menos posible, una vez debidamente atendido el respeto a la ley, es siempre beneficioso para todos y particularmente para quienes gozan de menores medios, pues lo que no sea consumido por la Administración se dedicará, forzosamente, a las producciones que desde un punto de vista social más interesen.

“Cuando la ley -dice a este respecto Mises- hace prohibitivo, por ejemplo, acumular más de diez millones o ganar más de un millón al año, aparta, en determinado momento, del proceso productivo, precisamente, a aquellos indivíduos que mejor están atendiendo los deseos de los consumidores. Si una disposición de este tipo hubiera sido dictada en los Estados Unidos hace cincuenta afios, muchos de los que hoy son multimillonarios vivirían en condiciones bastante más modestas. Ahora bien, todas esas industrias, que abastecen a las masas con mercancías nunca soñadas, operarían, de haberse llegado a montar, a escala reducida, hallándose, en consecuencia, sus producciones fuera del alcance del hombre medio. Perjudica, evidentemente, a los consumidores el vedar a los empresarios más eficientes que amplíen la esfera de sus actividades, en la medida que conforman con los deseos de las gentes, deseos que éstas patentizan al adquirir los productos por aquéllos ofrecidos. Plantéase de nuevo el dilema: ¿ a quién debe corresponder la suprema decisión, a los consumidores o al jerarca? En un mercado sin trabas, el consumidor, comprando o absteniéndose de comprar, determina, en definitiva, los ingresos y la fortuna de cada uno. ¿ Es prudente investir a quienes detentan el poder con la facultad de alterar la voluntad de los consumidores?”

La falta de conocimiento popular, en estas materias, es grande. Por eso, ni aun los gobernantes más ilustrados y mejor intencionados pueden, muchas veces, aplicar medidas, altamente beneficiosas para las masas, pero que éstas airadas rechazan, sin advertir que están laborando contra sus propios intereses.

Difundir información acerca de cómo, realmente, funciona la economía, acerca de cómo opera, en definitiva, la Edition: current; Page: [12] actividad toda del hombre, es lo que más urgente parece. Impuestas las gentes de tales verdades, cabría, sin dificultad, reducir el gasto estatal a aquello que el mantenimiento del orden público en cada caso exigiera; evitar la creación de medios de pago con créditos de carácter político y administrativo; fomentar la capitalización, a través de un sistema impositivo que castigara lo menos posible al ahorro; desterrando, en definitiva, un intervencionismo que sólo indeseadas consecuencias acarrea y que paulatinamente nos va entregando en manos del marxismo, la más grande aberración económica jamás ideada por el hombre. Se conseguiría, así, -y esto parece lo más importante- elevar, en el mayor grado posible, el nivel de vida de todas las clases sociales, particularmente el de las de menores medios.

Dice Mises, en el último párrafo de La Acción Humana, donde parece querer condensar todo su trascendente mensaje:

Son éstas unas pocas de las múltiples verdades con que Mises amplía nuestro conocimiento. Pero, aparte de tan invaluable ilustración, el gran legado del maestro, creo yo, consiste en habernos enseñado a muchos a pensar, es decir, a mentalmente especular con el rigor máximo y la justeza mayor que a cada uno permite su personal limitación.

N. B.—Todos los subrayados del texto son del firmante.

Reflections on the Keynesian Episode∗ W. H. Hutt

In my Keynesianism-Retrospect and Prospect, 1963, I enunciated and defended the thesis that the intellectual developments for which Keynes' General Theory appeared to be responsible had caused a setback to scientific thinking about human economic relations at a crucial epoch. In doing so, I referred (in the final chapter) to a growing tendency to abandon crucial theoretical tenets in Keynes' system. Nevertheless, I maintained that concepts, analytical apparatus, and policy-implications which had been erected on those apparently discarded tenets, were surviving in the form of a new neo-Keynesian orthodoxy.

I had expected reasoned objections to my rigorously-stated argument following the publication of my book. None has been forthcoming. Nor has a subsequent article of mine (entitled Keynesian Revisions)1 which submitted further evidence of a retreat by major exponents of the Keynesian gospel, called forth any reply.2 In the meantime the retreat has continued Edition: current; Page: [14] although, apart from Leijonhufvud's impressive and scholarly critique,1 I am aware of no further direct attack on the Keynesian system.

The purpose of the present article is not to present additional criticisms of Keynesian economics or of the actual content of the neo-Keynesian orthodoxy which has emerged. My aim is to throw light on some of the causes which appear originally to have created, and since to have been perpetuating, the hold that neo-Keynesianism has acquired in academic circles.2 I shall refer also to the prospects of early or ultimate emancipation from the consequences of the Keynesian episode.

The reasons for the extraordinary seductiveness of the notions which Keynes' disciples gradually systematized into “Keynesianism” and later rehabilitated into “neo-Keynesianism,” concern the psychology of opinion-the genesis of intellectual fashions, creeds and ideologies. The broad topic is one which began to interest me as a young man, very soon after I had entered academic life. In 1936, I recorded the results of my early endeavors to clarify my thoughts on the subject in my Economists and the Public, a Study in Competition and Opinion. While that book was in the press, The General Theory was published. I read quickly through such parts of Keynes' book as I could then follow, and I managed to insert an additional, last-minute passage in my own book, which recorded my rapidly gained impressions. Already, in 1936, although I had been bewildered by it, I had seen clearly, and predicted,3 that The General Theory would have a quite unparalleled influence by reason of what I judged to be its demerits as a contribution to thought. For its policy implications appeared to have been chosen for their political attractiveness; its misrepresentations of the “classical” economists seemed certain to have a powerful appeal (because the teachings of the “dismal science” had at all times been accepted with reluctance by those who were unable to refute them); and its obscurities (which I have since come to recognize as due, in every case, to defective thinking), expressed as they were in the language of science, appeared likely Edition: current; Page: [15] to enhance its reputation (for all too many people in all spheres-the academic sphere not excluded-are apt to accept obscurity for profundity).1

I shall never forget the extraordinary impression left on my mind by the brilliant preface of The General Theory. Keynes' previous writings had struck me as forceful and challenging but rather superficial. I had spent more time struggling with the Treatise on Money than I had devoted to any previous book. Yet, I felt that, in spite of a masterly discussion of index numbers2 and many beautifully phrased passages, it was a badly-planned, rambling and (I came to fear) an emphemeral work. Some of Keynes' works, such as The End of Laissez-Faire, had impressed me as shallow to the point of irresponsibility. Yet I could not escape the persuasiveness of that preface to The General Theory. It seemed to be announcing a critical, revolutionary contribution of great intellectual courage. I started reading, I remember, prepared for an exhilarating challenge. As I read, my attitude changed quickly to bewilderment and dismay. I had immediately foreseen that, in spite of the obscurity and the apparent muddle of the book, it would have an unprecedented impact; and I was moved to write the prophetic passage to which I have just referred.

Austin Robinson explains how the Keynesian revolution “consisted in inducing a reluctant body of dedicated but perhaps rather cautious, critical, and conservative thinkers to abandon a large part of what they had given their lives to learning and Edition: current; Page: [16] teaching, and to accept, as one complete (or virtually complete) package, a set of new and highly debatable propositions and of new ways of handling familiar problems.”1

I am only too conscious of the fact that, through the arguments I presented in previous contributions, I also was attempting to induce equally dedicated scholars to turn back and relinquish intellectual capital into which years of study and lecture preparation had been invested. In my case such a task seemed herculean-almost quixotic; for whereas Keynes (who had confidently-almost boastfully-forecast his success in a letter to G. B. Shaw shortly before The General Theory had appeared2) was well aware of how popular the policy-implications of his teachings would be, I was just as well aware of how unpopular mine were likely to be-at least for many years to come. Austin Robinson confesses that he finds it difficult to explain how Keynes managed to bring about the revolution. But although I had forecast the unprecedented influence of that book, I find myself unconfident when I try to explain to my own satisfaction the almost irresistible pressures to academic conformity which built up after 1936. Austin Robinson was, I believe, more right than he fully realized when, in his obituary article on Keynes, he compared to “the atmosphere of the revivalist meeting.... “the accelerating conversion of economists to the Keynesian creed. It was, he wrote, “a most illuminating example of the process and psychology of conversion ... not only in Cambridge or in England but all over the world....”3

In some measure this almost fantastic phenomenon probably stemmed from the personal attributes of Keynes himself. Harrod and Robinson have convincingly portrayed him as a grand person-gentle, generous, gay, a bon viveur, witty, magnetic, venturesome, scholarly and-among his friends-loyal, kindly, and modest. He was also ambitious, impatient for influence, acquisitive (from a longing for elegant living and those noble things to which wealth gives access), ruthless and casuistic. These are dangerous qualities in an economist, especially in one who, by reason of background, personal charm and knowledge of the world, moved in influential circles.

I have come to think of him as a strange combination of philosopher, economist, and adventurer. One can discern in his writings as a whole, I believe, a concern with what may be termed “intellectual tactics,” almost reminding one of his success as a gambler and poker player.1 In his campaign among economists and in his public life he was watching and calculating reactions and devising his career strategy accordingly.

As a thinker, he was original, scintillating and facile rather than profound or dedicated.2 His temperament and his burning urge to change the course of events militated against profundity. He skated brilliantly and dangerously on the surface, failing to plumb the depths. Of exceptional intellect, yet essentially a man of action, he was capable of mastering rapidly those arguments and teachings which did not clash with his settled convictions. But he treated economists who differed from him radically almost with contempt. He read their contributions hastily-if at all-and with little effort at sympathetic understanding. In his eagerness to bend policy in the direction he favored, he seems to have hidden from himself his failure really to understand what he called “classical” teaching.3 To refute that teaching he was led to dialectical tricks, recklessly imputing to the “classical” writers opinions which they could never be shown, by actual quotation, to have held.4 His references to the teachings of the “classical” or Edition: current; Page: [18] “orthodox” economists in his tract, The End of Laissez-Faire, and in the General Theory, are almost invariably flagrant misrepresentations.1 The propensity to attribute to a school of thought one is attacking opinions which any member of that school would indignantly deny is hardly a quality of the detached scholar. Yet Keynes seems to have delighted in a challenging perverseness. He seemed to revel in destroying respect for the patient achievement of sustained intellectual travail by those he felt, more or less intuitively, were somehow wrong. No man could have done more to weaken the authority of his eminent contemporaries and predecessors-to leave an impression that he was debunking them.

Supremely confident, conscious of his reputation and rhetorical skill, he appears to have been self-critical only when his previous speculations had tended to lead him away from instead of towards conclusions to which he was intuitively attached. When he discarded concepts and apparatus which he had earlier introduced, it was because he had found more convincing ways, although sometimes quite different and inconsistent ways, of stating a case which, in its essence, he had not modified. Austin Robinson thinks of him as “remarkably consistent in his strategic objectives, but extraordinarily fertile in tactical proposals for achieving them.”2 I should say rather that while his convictions about policy seem indeed to have been unshakeable, he constantly changed the arguments, assumptions, terminology and formulae which could be used to justify those convictions. In other words, his fundamental ideas were subject to change only in respect of the particular concepts, formulae or jargon in which he dressed them.

Keynes' biographer, Harrod, says that one gets the feeling, from earlier works, that “he was tentatively and no doubt hurriedly searching for arguments to support a conviction, which was itself more solidly based than the supports which he outlined. It was in fact what we have come to call a ‘hunch.’”3 I share this feeling that Keynes was “searching for arguments to support a conviction.” But I have it about the whole body of his economic writings. His “hunch” throughout was that Edition: current; Page: [19] control of expenditure, via monetary and fiscal policy, could solve the problems of maladjustment expressed in unemployment. And he seems originally to have believed that this could be done without the disastrous sociological consequences of a gradual depreciation of the currency. His intellectual speculations consisted, I think, of a groping around-with great ingenuity-for ways of thinking which appeared to support his “hunch,” selecting and eagerly clutching those which appeared to do so, and inhibiting those which did not. The process was unconscious. I do not impugn his honesty as a scholar.

Harrod tells us also that Keynes “had completed the outline of the public policy which has since been specifically associated with his name” as early as 1924, and that he put forward his proposals then, “before being in a position to give a full theoretical justification of them.” This was, continues Harrod, no doubt “because he deemed it urgently needful for Britain to act with speed. It must not be inferred”.... that his recommendations.... “were thrown out at random.... Did he in some primitive sense already know the theoretical conclusions that he was later to articulate?.... Is it possible for the mind to jump from the data which are the premises of an argument to the practical conclusions, without being conscious oneself of the theoretical conclusions, which are none the less the logical link between the premises and the practical conclusions?”1 Is not the answer that Keynes' “primitive sense” worked to frustrate, not to promote constructive thinking?

For instance, the desirability of stimulating and controlling internal investment, with public works and limitations on foreign investment, etc., formed an important part of his contribution to the influential 1928 “Liberal Yellow Book.” Even in the midst of 1928 (which some would regard as a boom year in Britain), he was continuously advocating capital expenditure on public account (to rectify the chronic unemployment which, under the paradoxical situation created, had persisted in spite of phenomena which suggested prosperity). As early as 1924, he had advocated a public works policy, and in 1928, when Lloyd George and his advisors thought that public works would be a good plank for the coming election, he gave them his full influential support.

Again, his Treatise on Money (1930) was an attempt to find methods of eliminating cyclical fluctuations under conditions of price stability. It was an essay in intended refutation of the “classical” view that, for the prevention of depression under currency convertibility, it is essential to prevent the boom. In the General Theory, however, he quietly abandoned any suggestion that his proposals were consistent with long-run price stability, which could be broadly assumed in the Treatise. In doing so, he misdirected attention from all the issues which arise when monetary or fiscal steps taken in the interests of stability of employment have to be limited by the necessity to honor convertibility obligations.

The word “genius” has often been applied to Keynes. But his genius was compounded, I judge, of forensic and diplomatic powers, rhetoric, wit, close range logic, flair for publicity, vitality and charm of manner. He virtually hypnotized most economists who came into close contact with him. In conversation the critical abilities of those who had dealings with him seem often to have evaporated.1 He could move people by talk where he could never have moved them by the printed word. He won the devotion, indeed idolatry, of his disciples. When I think of the extraordinary effect he had upon some who were once my intellectual friends, I am inclined to feel that I also should have succumbed had I known him personally.

And he was a master of prose. When he was thinking clearly no writer could express himself more aptly, more lucidly, or more gracefully. He was capable of expressing great nobility of ideas, often with almost poetic eloquence. But in his theoretical analyses, in the prose passages which link together his passages of mechanical or mathematical exposition, there is much obscurity; and in Keynes' case, verbal obscurity nearly always meant intellectual confusion. The passages in the Treatise on Money and the General Theory which caused so many headaches to his readers are just those passages in which, I have maintained, his thinking went seriously astray-cryptic sentences or paragraphs which cannot be explained but only explained away. In the intervening passages, in which his hypotheses are largely conclusions invalidly Edition: current; Page: [21] reached, his exposition is as easy to follow as anything which has ever been written in economics.

Even those who regard The General Theory as a work of genius sometimes agree (Samuelson's words) that it “is a badly-written book, poorly organized.... arrogant, bad-tempered, polemical.... It abounds in mares' nests and confusions.”1

“Arrogant,” “bad-tempered,” “polemical”-these words do not overstate the tone of Keynes' attack on economists whose authority he wished to destroy. To “blast the classical foundations” (as T. Wilson, once put it),2 he set up (in the words of F. H. Knight) “the sort of caricatures which are typically set up as straw men for purpose of attack in controversial writing,” his writing at times being “more like the language of the soap box reformer than an economist writing for economists.”3 And his methods of ridicule and misrepresentation have at times been borrowed by his followers. Moreover, the neo-Keynesians are certainly following his example in constantly changing the grounds on which they support given policy-implications.4

During the decade following the General Theory, most of the conventional economists who discussed this work seemed to suspend their normal critical approach-almost as though they were afraid of its author. It had been known for some years that his magnum opus was on its way, and I am certain that no work on economics was ever so rapidly or eagerly purchased on its publication. Having obtained the book, economists generally endeavored patiently to find every possible new insight, every new concept, or every new and workable apparatus in his contribution. This was in spite of its distressing obscurities, its slovenly plan, its apparent resuscitation of long discarded fallacies and the indignation it aroused by its misrepresentations. If Keynes' readers could Edition: current; Page: [22] find any point of detail on which favourable comment was possible, they usually went out of their way to praise it. Even his strongest critics tended on occasion to give him unmerited credit for novelty.

Harrod refers to a “rabble of detractors” of Keynes and contends that they have falsely accused him of inconsistency.1 I wish Harrod had named the rabble. Those economists who had the intellectual courage to resist the strong pressures to conformity have never, I believe, been accused of having misrepresented Keynes' arguments when they have tried to show that they are untenable. And I do not think that any economist of the old school would ever have disparaged another for changes of intellectual conviction. The only kinds of inconsistency with which I can recall Keynes having been explicitly charged, are those which concern (a) definitions,2 and (b) changes in argument to support unchanged conclusions which disciples like Robinson and Harrod himself, have admitted (see above, pp. [Editor: illegible words]..

And other Keynesians have referred, also in emotive language, and without mentioning names, to those who have dared to criticize their leader. E.g., Seymour Harris suggested about twenty years ago that the reaction against Keynesianism then discernible consisted of “unfriendly interpretations and destructive criticisms.”3 He wrote of “Keynes' baiters.”4 I am about to examine this change. But surely, if the term “baiter” can be appropriately used of any economist it must be applied to Keynes himself. Austin Robinson describes him as “the great iconoclast.”5 And Harrod also, refers to “a streak of iconoclasm. To tease, to flout, finally perhaps to overthrow, venerable authorities-that was a sport Edition: current; Page: [23] which had great appeal for him.”1 Harrod excuses Keynes' “barbed utterances,”2 his “mischievous pleasure.... in criticizing revered names,” on the grounds that “this was done of set purpose. It was his deliberate reaction to the frustrations he had felt, and was still feeling, as the result of the persistent tendency to ignore what was novel in his contribution. He felt that he would get nowhere if he did not raise the dust....”3

But were Keynes' “novelties” ignored? Even before The General Theory no economist at any time had ever had his contributions examined with greater care and sympathy,4 and a more obvious desire to find acceptable developments in them. After a survey of the general tone of the critical literature, I am very doubtful whether Seymour Harris' charge of “unfriendly” interpretations and “destructive” criticisms can be substantiated. At any rate, the only criticisms which made any impression on my own thinking stand in the sharpest contrast to Keynes' own references to the “classical” school, in that they were sober, lenient, tactful and respectful analyses.5 Keynes' critics never hit back with his own weapons. On the contrary, they apparently strove to give every possible grain of credit to his viewpoint and that of his followers. If the exposure of error is to be regarded as “unfriendly” or “destructive,” academic discussion can hardly proceed.

On the other hand, Keynes' disciples loaded him with almost idolatrous praise. They excused the slipshod exposition of the book which is supposed to have revolutionized economic science on such dubious grounds as: “His instinct was ... to get his present thinking into the hands of readers before the policies that he was seeking to influence were crystallized. He was a phamphleteer rather than a procrastinating pedant.”1 And they explained away his extravagances with a tolerance which would never have been extended to a writer with a lesser reputation. We were told that his misrepresentation and ridiculing of orthodoxy-described by Tarshis as emphasizing “his break from the earlier doctrines, ... must be regarded as a tactic of persuasion rather than as an objective statement of the relation between his own work and conventional doctrine.”2 The offensive parts of his work are described as its “satiric aspect,” an aspect which enhances the “entertainment value” of the General Theory,3—his “showmanship,”4 mere “sport” on his part,5 his deliberate attempt to “raise the dust.”6 We are asked not to reject his “theory” because we are forced to reject his “personal opinions,” i.e., his obiter dicta.7

There was no need for Harrod to apologize for Keynes' “criticism” of revered names, or even for the “mischievous pleasure” it afforded him, had it merely been criticism. But Keynes'“deliberate reaction,” his ridiculing of disinterested scholars in order to “raise the dust” was his method of dealing with those whose writings he felt instinctively (rather than by force of reason backed by careful study) were untenable. Harrod tells us how Keynes could make the most reckless, Edition: current; Page: [25] preposterous and unjust assertions.1 Yet he is almost naive in his excuses. He describes Keynes' impetuosity and his tendency to speak beyond his book as “minor failings.”2 They are major failings in a person on whose responsibility and insight the intelligentsia are prepared to place the greatest reliance. Harrod says that Keynes, in the latter part of The General Theory, “may have allowed himself to be carried too far by the exhilaration due to emancipation from old fetters.”3 That Keynes was exhilarated is understandable. He had found arguments to support policies which he knew4 were bound to be extraordinarily popular and influential, and his small trusted group of brilliant young advisors had been unable to see serious flaws or unable to convince him of the flaws. No wonder he was exhilarated! But Keynes' attempt to “shake up” the economists, somehow led a whole generation of students of economics to despise rather than examine the great tradition which constituted “classical” economic science (as Keynes used the word “classical”).5

In his editorial introduction to a recent evaluation published about six years ago (by nine leading economists) of Keynes' General Theory, Robert Lekachman remarks quite casually, “everybody is a Keynesian now.”6 Well, the Keynesians have been claiming this, from time to time, ever since it began to be obvious that the very roots of Keynes' teachings were being Edition: current; Page: [26] cogently challenged, and in spite of the clearly observable retreat to which I referred at the outset.1 Lekachman should have added the words, “although they are no longer prepared or able to defend Keynes' revolutionary propositions from devastating criticisms.” For since 1946, Keynes' followers appear to have been spasmodically relinquishing reliance on the theoretical structure of The General Theory while mostly clinging to its terminology, to its form and to its policy-implications.

To some extent the theoretical retreat has been forced by the expression of spontaneous philosophic scepticism from within what has appeared to be the Keynesian camp. In part it has been induced by the need to answer obviously non-Keynesian objections. But in my judgement the main pressure has come through the march of events as they have seemed to contradict the Keynesian thesis. The convictions of the “classical” economists in the 1920's and early 1930's that recourse to the “cheap money” that Keynes had been advocating as a means of restoring activity was a reform in the wrong direction-their warnings that it would lead to the gradual depreciation of the measuring rod of value, the emergence of a proliferation of centrally imposed controls, and the magnification of State power-although fiercely denied at first by Keynes' disciples,2 have been justified subsequently in every detail.

For instance, in October, 1933, Roosevelt inaugurated a monetary policy which can be said to have embodied the policy recommendations of Keynes' Treatise, which had appeared three years previously. The aim, declared Roosevelt, was to “maintain a dollar which will not change its purchasing power during Edition: current; Page: [27] the succeeding generation.”1 And events continue to mock at Keynesian teachings. During 1958 cheap money and rapidly rising prices in the United States were accompanied by worsening unemployment. Thereafter, almost uninhibited reliance on every conceivable form of Keynesian apparatus, brought no success in eliminating the chronic unemployment of more than five and a half per cent of the labor force until the more rapid inflation inaugurated in 1965 and subsequently maintained. Unemployment in the U.S. had then been maintained at above this figure for nearly seven years. Yet, commented P. W. McCracken in 1964, “one can find no period in the so-called ‘boom-bust’ days, before we exercised our business-cycle taming talents, when unemployment was this high for such a long span.”2 Under Keynesian experience, “the tolerable level” of unemployment has indeed (in Lekachman's words) shown “a secular tendency to rise.”3

The failure seems to have been abject; and without a more rapid drift towards totalitarian government, it is unlikely, I suggest, that Keynesian policy will again achieve the appearance of success in the western world; for it will be necessary for government to suppress reactions to the expectation of inflation over an ever-expanding area of the economy. The suppression of such reactions ought by this time to have been clearly recognised as the ultimate raison d'être of each Keynesian “persuasion” or “control.” Let the reader ask himself whether every “success” achieved by cheap money in the past has not been due to the mass of people not expecting it, or not expecting its duration or the speed with which it has occurred; or being prevented, by authority, from behaving rationally in the light of their predictions.

It may well be that if Keynes had never lived, contemporary history-of thought and action-would hardly have differed. If he had not provided a supposed justification for the various media through which inflation can be engineered, with the whole range of “central controls” needed to make the chronic, creeping, crawling rise of prices politically acceptable, some other prophet could conceivably have provided supposedly scientific authority, with a different jargon and formulae. To retain office, governments had to compete with policies which were both plausible and not unacceptable to the more powerful pressure groups, such as labor and organized agriculture. Keynesianism has proved to be a stratagem which enabled governments to do this without early disaster. “A great change in outlook was required ...,” says T. Wilson. It was Keynes' “rhetoric and new mystique which carried the day.”1

So severely have Keynes' doctrines been treated, however, that some economists, although seemingly reluctant to renounce the Keynesian approach, have nevertheless been suggesting during the last decade that all these controversies belong to the past. We are now “well into the post Keynesian era,”2 they are apt to say. Yet others (speaking rather from the non-Keynesian camp) sometimes declare that “we are all Edition: current; Page: [29] Keynesians now.” The truth is, I think, that most economists feel themselves forced to talk and teach in what has become the modern economic language in order to retain respect and get a hearing, in spite of the unsatisfactory concepts and misleading terminology to which they are, I have tried to show, thereby committed. Through a powerful urge to follow well-worn trails in post-war academic discussion, economists have found themselves trapped in a dense Keynesian undergrowth. They mostly realize now that they have for too long followed a leader who was himself lost; but many appear to be resigned to their fate-unwilling to make the effort of hacking their way out of the conceptual jungle in which they are entangled.

The aversion to confessions of past error is understandable enough, especially when the first to confess may suffer in status and prospects. But some perhaps tell themselves that after all, however fallacious Keynesian theory may be, the policies it implies are, for political reasons, wiser than “classical” policies. Even so, if that is an economist's conviction, it is still his duty to explain why “classical” remedies must be held to be defective from the angle of political acceptability.1

We can consider the position of H. G. Johnson, who, like so many former Keynesians, appears to admit that the vital originality of the General Theory-the unemployment equilibrium thesis-is untenable. He does not argue that Keynes' economics is defensible but that his “polemical instinct was surely right....”; for, says Johnson, “neo-classical ways of thinking were then” (i.e., in 1936) “a major obstacle to sensible anti-depression policy.”2 In other words (I hope this interpretation is not unfair), in spite of the fundamental fallacy on which, he agrees, Keynes' thought was based, it did serve a beneficial purpose; for the authority of “classical” anti-depression thought, which Johnson holds had not been “sensible,” was dealt a deadly and necessary blow.

But exactly how can it be held that the policy implications of “classical” thought were not “sensible?” After all, they were never put to the test. Does Johnson perhaps mean that, although “classical” remedies could undoubtedly have restored prosperity in the thirties, it was hopeless to expect an electorate (and hence politicians) either to understand or to adopt those remedies? Certainly economists who regard pre-Keynesian teachings as not being “sensible,” may be thinking simply of the admitted difficulty or the supposed impossibility of winning political consent for the reforms to which those teachings were pointing. That being so, they may believe Keynes' polemics to have helped persuade the community to be “sensible,” in the sense (i) of acquiescing in inflation whenever unemployment or recession is threatening, as a crude means of confiscating the real gains from money wage-rates forced above the full employment value, or (ii) of acquiescing in authoritarian “incomes policies,” “controls,” “ceilings,” “persuasions” and “guide-lines” intended to curb the traditional tendency of labor unions to reduce the flow of uninflated wages, so as to render inflationary co-ordination less essential. If that is the case, the neo-Keynesians should make it clear beyond doubt.1

It is possible, however, that “classical” remedies are held not to have been “sensible” because of some radical weakness (which Keynes himself did not discern) in the abstract reasoning which inspired them. That is a quite different point. Pre-Keynesian anti-depression teachings are to the effect that unemployment (as a short-term phenomenon) and depression are due to a contraction of the flow of wages and other income through some disco-ordination of the pricing system. The most important case of this disco-ordination is thought to be caused by wage-rates (and hence final prices) being fixed too high in relation to income or inconsistently with price expectations. Labor unions and, in some countries, a form of subsidized unemployment “insurance,” are usually diagnosed as the major factors which encourage the pricing of the flow of productive services inconsistently with full or optimal use of men and other resources. More generally, “classical” thought implies that the avoidance of depression is to be most wisely achieved through (a) the avoidance of inflation which, under any system in which the money unit has Edition: current; Page: [31] some defined value (or some politically expedient value), will have to be corrected by deflationary rectifying action and (given rigidities in the wage and price system) a decline in activity; and (b) the deliberate planning of institutions conducive to market-selected price and wage-rate adjustments in response to economic change, in order to maintain or enhance the flow of uninflated wages and income. But once the persistent ignoring of “classical” precepts has precipitated chaos, and insurmountable political obstacles obviously block the way to non-inflationary recovery, only a pedant would oppose inflation.1

Now there may be one or more serious flaws in the theory which I have so briefly stated. If so, I know of no serious exposition which sets out to indicate the flaws, apart from the Keynesian unemployment equilibrium thesis, which appears now to have been discarded. Yet the neo-Keynesians seem prepared neither to provide new (non-Keynesian) criticisms of the “classical” case nor overtly to return to it.

The chief tragedy of what, I believe, will ultimately come to be regarded as the Keynesian episode in the history of academic economics, is that it has hindered the development or refinement of theory during an epoch in which institutional changes have been demanding a sharpening of the tools of analysis. What seems to have been happening since 1936 is that “fundamental economics” (which had been concerned with the devising of tools for studying the causes of observable economic phenomena) has been branching-not improperly-into “operational economics,” that is, towards formulations of economic analysis suitable for application in already-adopted governmental economic policy, making abstraction of the rationality of that policy. But the emergence of “operational economics” has degenerated all too easily-via Keynesian Edition: current; Page: [32] influences-into “economic apologetics.” By that, I mean the devising of concepts and theoretical constructions which can be used to justify policies which have the virtue (or the reverse) of being politically acceptable. Future historians of economic thought will, I predict, give Keynes chief responsibility for having inaugurated-I do not suggest intentionally-the flood of economic apologetics in which neo-Keynesian economics has become submerged.

I should be the last to decry the development of the State's sphere in the acquisition and interpretation of the data relevant to the guidance of its own co-ordinative activities and those of private entrepreneurs.1 This is the valid role of “operational economics.” Much of the effort expended in the collection of the information utilized in national accounting is of value not only to the administrators of the credit system (especially if they are contractually bound to maintain a money unit of some defined value), but to all decision-makers in whose calculations the future money valuation of income is important.

The fulfillment of this task requires a supply of economist-technicians, and not unnaturally the faculties of economics of the major universities of the western world have been under pressure to become schools for the training of such “economists” or “economist-statisticians.” But are the students who receive this training being taught to perceive clearly the co-ordinative role of the pricing system? Or are they being indoctrinated with the view that it is their task to help use the data collected to correct, through the “control of expenditure,” an inherent tendency to equilibrium with unemployment in a free market system, or to offset discoordinations caused through the pricing of labor (or other sources of output) having been exempted from the sanctions of social (i.e., market) discipline?

The defensible scope of central direction and leadership (“indicative planning”) in a free market economy cannot be perceived, nor can the techniques employed be made fruitful, as long as Keynesian notions are allowed to cloud the issues. But it seems to me that today, in almost all the universities everywhere, we find the inculcation and perpetuation of the Keynesian approach, together with the exclusion of competing ideas.

I attempted to arouse interest in this situation in 1964. I wrote: “It was about 25 to 30 years ago that most of the younger sceptics who expressed misgivings about the ‘new economics’ began to be eliminated from academic life. There was no inquisition, no discernible or intentional suspension of academic freedom; but young non-conformists could seldom expect promotion. They appeared rather like young physicists who were arrogant enough to challenge the basic validity of revolutionary developments which they did not properly understand. To suggest that Keynes was all wrong was like questioning the soundness of Einstein or Bohr. The older economists could declare their doubts without serious loss of prestige, but any dissatisfaction on the part of the younger men seemed to be evidence of intellectual limitations.”1

The position today is that a relatively small group of economists, scattered through the universities, adhere pertinaciously-not dogmatically-to the time-honoured traditions of “classical” economics. But even they tend mostly to use Keynesian terminology to the detriment (I believe) of their own and their students' thinking. Moreover, the majority of the teachers of economics of the contemporary generation seem never really to have learned, or to have forgotten, what the pre-1930 economists were explaining. For the younger economists now to question the currently fashionable approach demands not only a rare insight but intellectual courage, and I have an uneasy feeling that, for those of junior status, it may demand also a willingness to sacrifice professional prospects in the interests of scientific integrity. I do not Edition: current; Page: [34] of course imply that there are no outlets for the expression of dissenting thought. But there is no longer, I believe, anything resembling equality of opportunity in the communication of ideas in academic circles generally.

The economists of the great universities ought, I suggest, to be asking themselves whether, in their field, academic freedom is really being effectively preserved. Are they certain, for instance, that junior staff who might feel some sympathy with ideas such as I have expressed in my book on Keynesianism or even with Leijonhufvud's analysis (which is less iconoclastic than mine) could openly confess to that sympathy without damaging their academic prospects? In some cases they might well answer affirmatively. There are a few universities in which such confidence would be fully justified. But discussions with economists who share my fears convince me that, in Britain and the United States at any rate, the set-up is seldom conducive to the expression of unorthodox (i.e., non-Keynesian) ideas. Even senior economists have confessed to me that they are subject to powerful pressures to conform to fashion. Some say that they feel under an obligation to train their most promising students along lines which are likely to make them acceptable as teachers in other universities, or as public servants in administrations dominated by Keynesian convictions. Others feel that any existing consensus of opinion carries its own authority. A young British economist with whom I was discussing some of my ideas a few years ago made no attempt to answer any of the points I was making. He simply asked, “How many economists would agree with you today?” Others still are intimidated by the power-holding establishment. In 1964, I asked a distinguished middle-aged American economist who seemed to appreciate my misgivings on many issues, whether he would not express his views in writing. He answered, “I dare not. I should probably be black-listed.” And about the same time I asked a brilliant youngish economist in Britain, who, I had good reason to believe, would have been inclined to accept the heresies I have been propounding, why he did not himself openly challenge the Keynesians. He replied, “I am scared. They are much too powerful.”

Furthermore, the editors of the more important journals are, on the whole, pillars of the dominant orthodoxy. It is understandable that they should tend to reject contributions which directly challenge the currently fashionable analysis. Young economists have confessed to me that they have felt it essential, in submitting contributions to certain leading journals, carefully to exclude or rewrite passages which might Edition: current; Page: [35] suggest non-conformity. There are reasonable grounds for uneasiness here. But it is in the content of undergraduate and graduate teaching that the widespread exclusion of competing modes of thought appears to me to be having the most grave consequences.

The modern emphasis on macro-economics, the validity of which depends—as few writers in the field seem to realize—upon its reconciliation with micro-economics, aggravates the situation. For macro-economics, which is particularly amenable to mathematical enunciation, is now being taught at an early stage in the typical curriculum; and the young student tends, I fear, to spend more time grappling with mathematics than with economics, the difficulties of which are not mathematical. His attention is diverted from rigorous thought about the phenomena of scarcity and price, and the stabilizing and co-ordinative role of the price system, to the study of complex truisms. When he graduates, he may have learned very little of basic economic science. If he tries to resolve in his mind the apparent conceptual confusions which most macro-economists elaborate,1 he is likely to prejudice his academic record. Students with a lively and critical intelligence have admitted to me that they have felt it expedient (in the struggle for good symbols) to echo current texts and teachings mechanically, inhibiting all concern with their validity.

Despite my conviction that an economic creed has become entrenched within most of the universities, a Keynesian priesthood determined to retain its hold, I have no doubt that the majority of economists in all the universities are sincerely convinced that the greatest possible opportunity for the free expression of divergent ideas by those whom they regard as competent critics has been preserved. But critiques of Keynesian concepts which have appeared during the last decade do render purposeless an enormous collection of apparatus, constructed through the expenditure of formidable, scholarly effort since 1936. This alone must have created powerful Edition: current; Page: [36] motives for resistance to the expression of competing teachings which threaten to precipitate widespread obsolescence in academic capital.1

But the genuineness of the ever-present resistance to heresy does not weaken the force of my charge. And are not the dangers to academic freedom to which I have referred magnified when university economists are hoping for influence as advisers of governments? Even if we assume that there is no question of bias due to pecuniary interest, a more elusive problem remains. Governments tend notoriously to disregard economists whose advice they believe it would be politically inexpedient to follow; and in the endeavour to exercise at least some guidance on the course of events, economists may all too easily be led to a compromise which ultimately weakens the force of disinterested and expert teachings.2

A barrier to the communication of ideas needs to be broken. This might happen through initiatives from among the economists themselves; through deliberate action on the part of the governing bodies of universities anxious to avoid the slur of indoctrination; or through growing pressure from independent-minded graduate or undergraduate sceptics who recognize and Edition: current; Page: [37] resent an indoctrination which has remained too long without potent challenge.1

Ludwig von Mises and the Market Process L. M. Lachmann

Values, Prices and Statistics Bettina Bien

The Tax System and a Free Society Oswald Brownlee

Most of the modern treatises on taxation deal with the characteristics of a tax system that are of greatest advantage to the state. The canons of taxation enumerated by Adam Smith in The Wealth of Nations - certainty, convenience and economy - were defined from the standpoint of the taxpayer. But, even these terms have been redefined to refer to the certainty of the tax yield to the state treasury and the convenience and ease of collection from the point of view of the tax collector. In this short paper I want to deal with the tax system as it impinges on the taxpayer and to try to set forth some taxing practices that seem to me to impinge on the vitality of a free society.

I hope that there are many tax systems compatible with a free market economy - if we mean by a free market economy one in which there are no artificial barriers to entry into economic activity, the terms under which choices can be made are the same to all participants and are essentially unaffected by the level of activity of any one private economic unit, government does not coerce individuals with respect to their choices and the role of government as a producer is confined to the provision of goods and service which it can produce more efficiently than can private producers. Funds for the operation of government could be secured in many different ways with no important differences in the ability of a free market economy to survive.

If a free market economy could exist in only a few restricted tax environments, prospects for its survival might be dim indeed. Different tax structures will result in different production patterns and different rates of saving and may result in different degrees of income fluctuations for given autonomous disturbances. These differences are important, but they impinge on differences in the vitality of a free market economy in the same way as they would on a socialist one. Perhaps it is in the interest of supporters of the free market system to advocate a tax system which has associated with it a near minimum welfare loss, if the free market is to gain maximum support. However, even this contention would be extremely difficult to prove.

Although I will discuss some aspects of these welfare costs, let me first discuss some aspects of coercion and some tax tendencies that are inconsistent with a free market economy.

How “Should” Common-Access Facilities Be Financed?∗ James M. Buchanan

Pitfalls in Planning: Veterans' Housing after World War II Marshall R. Colberg

Von Mises called it a “paradox of planning” that socialist economic calculation could to some extent rely on prices established under a previous regime of capitalism but that as conditions changed the planners would more and more grope in the dark.1 Similarly, he pointed out that an individual socialist country can utilize market prices established concurrently in capitalist economies but that without such assistance would flounder.2 As a consequence the attempt to “reform” the world socialistically would never be successful. The necessary guideposts would be destroyed.

What about centralized planning of key production in a capitalistic country where, presumably, enough markets would remain free to furnish the guideposts which Von Mises so strongly emphasizes? United States experience with the Veterans' Emergency Housing Program in 1946 and 1947 provides our principal evidence regarding the problems and pitfalls which are inherent in such an endeavor. A somewhat similar effort is involved in such areas as the Interstate Highway Program, but the Veterans' Emergency Housing Program was unique, to date, in that central planning was utilized for a commodity where consumer sovereignty is normally relied upon as a guide to production. The present writer's firsthand experience with that program will be drawn upon to illustrate Edition: current; Page: [89] the problems that were encountered. Any future government programs of this general type would encounter the same difficulties in aggravated form, since the termination of World War II at least found the United States with a Washington bureaucracy accustomed to administering controls and with businessmen accustomed to some degree of compliance.3

Presents for the Poor R. L. Cunningham

Restrictions on International Trade: Why Do They Persist? W. Marshall Curtiss

If there is one point of fairly general agreement among economists throughout the world and throughout time, it is that trade should remain free from all sorts of governmental restrictions and interventions. It would seem unnecessary to repeat over and over why the material welfare of individuals is enhanced through the division of labor and freedom to trade; unnecessary especially among those familiar with the works of Dr. von Mises. His writings constantly emphasize this truth. Most of his friends who honor him on his 90th birthday accept the case for free-trade as self-evident.

But restrictions still exist! Tariffs and other barriers to trade seem to move through cycles, relaxed at times, and then reapplied. Why, in the face of reasoned arguments by leading intellectuals, do restrictions to trade have such an appeal to lawmakers? In other words, who is it and what is it that moves the lawmakers to take such action?

It is often thought that only nations like Great Britain or other maritime nations benefit by trade, simply because there are so many things they do not produce domestically. True, the United States could close its borders to all imports and exports and still there might be a relatively high level of living for its citizens; but not as high as would be possible through trade with foreigners.

(3) Consumption is the sole purpose of production. Adam Smith explained this nearly 200 years ago. Production is to supply consumers' wants. It is not to make jobs, or to keep a business solvent, or to make one nation dependent on another. Naturally, some of these things happen as a byproduct of production and trade, but that should not be the objective.

(4) Trade ordinarily will be most satisfactory to all concerned when individuals or their agents who have something to trade deal with other individuals or their agents who want the other side of that trade. Governments should be involved as little as possible; first, because they are not concerned; and secondly, because there is always the temptation to use the trade for purposes other than satisfying consumers.

If an individual in this country wanted to trade some of his own property for something offered by a Russian citizen, we would think Edition: current; Page: [113] little about it, knowing that each party to the trade considered he was better off than before. But if government enters one or both sides of such a trade, there is often the suspicion, sometimes justified, that one party is seeking a military or political advantage.

(5) Imports require exports. Foreign trade appears complicated because it often takes an indirect or roundabout route through several nations. In addition, moneys of several nations with complex exchange rates are usually involved. But it finally boils down to the fact that a nation which imports must export something in exchange.

Many people appear to believe that we might eventually be inundated with imports to the extent that practically all production in this country, all jobs, all business firms, might be wiped out. They fail to see that foreign goods cannot continue to come into this country unless something goes out to pay for them.

(6) A popular argument in support of tariffs is that we will reduce our obstacles to trade if other nations will reduce theirs. In other words, we must do it together.

The lack of understanding of international trade and the effect of restrictions is reflected in this press release in The New York Times for March 31, 1971. “The European Economic Community decided today to give generalized trade preferences to developing countries beginning July 1.” The implication is: “If you are poor, we will let you sell to us.” The truth, of course, is that voluntary exchange, whether the participants be rich or poor, benefits the buyer as well as the seller. Had the “developing country” previously been subject to trade restrictions then, of course, it would gain from the relaxation of those restrictions. But the increased trade also would be of benefit to the “affluent” buying nation.

When diplomats from different countries discuss the reduction of trade barriers, it almost Edition: current; Page: [114] always has the appearance of a high-level bargaining session. How little can we give up in reducing our restrictions on imports in order to gain some reduction in their restrictions against our exports? It never seems to occur to them that we stand to gain by opening our gates entirely, whatever the other nation does. Certainly our consumers would stand to benefit. But, always of diplomatic concern is the effect on firms and on jobs.

A great deal of consideration is given to “most favored nation” reductions. If we give one nation the “benefit” of our reduction, then all nations are entitled to this great benefaction. Actually, unilateral action in reducing our restrictions against imports would benefit our consumers, and might end most of the seemingly endless bargaining over reduction by other countries in return.

Who knows? It might soon be discovered that trade policy should not be a political issue but that free trade between citizens of all nations, rich and poor alike, benefits all consumers.

“human action” E. W. Dykes

Human Action has often been called a “monumental work”. In truth there are not adjectives sufficiently descriptive to do it justice. The title, HUMAN ACTION, is particularly apt for economic laws actually are laws of human action. It is my hope in this tribute to Ludwig von Mises to suggest another line of research of human action.

My first and unforgettable meeting with Dr. Ludwig von Mises occurred at a cook-out at Leonard Read's Bronxville home. I was perhaps thirty-three at the time and a mere neophyte in libertarian matters. After supper, the group of a dozen or so casually divided itself into two smaller groups, the better to carry on the interesting discussions. I was in the opposite group from Dr. Mises. I had been pushing some point fairly successfully in my group when somehow there was a pause and suddenly I was projected into that pause where it became Dr. Mises versus Dykes. Practically paralyzed, I weakly defended my point. Dr. Mises said in clinching his argument, “It is right because it works”. That appeared to be as good a place as any to get out and that part of the discussion ended as suddenly as it began.

But I was happy only in the thought that I could tell my grandchildren I had once debated Dr. Ludwig von Mises. Had I not been so tongue-tied quite possibly we might have pursued the “why” of its working. I might have saved endless hours in pursuit of this question myself. On the other hand, certain things which appear clear now might not have unfolded to me, things which are part of an interesting theory.

In the physical world action and reaction are known to be governed by the laws we acknowledge to be a part of the natural order. Many of us are equally convinced that human action works within a law or set of laws as rigid, or more-so, Edition: current; Page: [119] than those that govern the planets in their movements. Quite possibly these two, the movement of planets and human action, apparently disparate things, may be responsive to the same law. A hint of this is found in the Meditations of Marcus Aurelius in which he wrote, “He who lives in harmony with his own self lives in harmony with the universe; for both the universal order and the personal order are nothing but different expressions and manifestations of a common underlying principle”.

The man able to live in harmony with himself lives also in harmony with his neighbors. Psychology likely would agree with that. Most persons would agree that coercion could hardly be called a part of harmonious action. What is less generally recognized is that coercion carries with it the seeds of destruction and the fruits of such seeds are not necessarily found in a close relationship in time or in space with their sowing. That is to say, the eventual destructive results may turn up years later and in events not easily related to the original ones. An understanding of this viewpoint is best made possible through the acceptance of the “common underlying principle” suggested by Marcus Aurelius.

In pursuit of the goal of identifying the underlying principle, I found support for a theory held by numerous libertarians to the effect that coercion is never suitable for use in creative efforts. My contribution is to add one four word phrase to it. ANYTHING THAT IS BROUGHT ABOUT THROUGH THE USE OF COERCION—INITIATED FORCE—HAPPENS BEFORE ITS TIME AND, THEREFORE, WILL INVARIABLY BE ATTENDED BY FAILURES OF EQUAL, IF NOT GREATER, MAGNITUDE. (The new phrase is underlined.) Now these failures may be a part of the particular activity or of an activity seemingly unrelated; they may be sudden or deep in the future but they always occur whether or not we are able in all cases to connect them with the initial action.

If this theory has validity its acceptance at the moment must depend on the preponderance of circumstantial evidence in its favor. Its proof must wait for a later time when science comes to recognize the electrodynamic theory of life. For it is in this force field that the common underlying principle will be found. An act of coercion sets up disharmonious relationships which become manifest in other areas of life. This is the vital point. It is not different in Edition: current; Page: [120] kind with the physical reaction of acid on flesh. Only the time factor may be different. In his “The Symphony of Life”, Donald Hatch Andrews says that when we move our hand it is felt throughout the universe because of the unseen connection between all things. Science has shown that all matter may be reduced to energy. It is not yet ready to say that mind is energy or that life is energy although many scientists hold such a view. A revolution in many lines of research will result when this is accepted, my view being that such acceptance is inevitable.

When coercive means are used in creative areas we see the benefits of the constructive “ends” but fail to see the targets of the destructive means. These latter may be hid in the fog of time or in the hustle and bustle of apparently non-related activity. All are the result of destructive “human action” the intended good ends notwithstanding.

Some of the examples of the failures of “ends” are simple to show and quite well known:

We could go on and on listing the failures for they are as long as the list of coercive actions. Viewed altogether we have a combination of results which reveal the utter futility of the use of coercion. Coercion always fails and it must always fail because it is contrary to an orderly universe. But this line of reasoning hits snags when defenders of coercive governmental action point to the “spin-off” and then easily find examples to indicate the remarkable material advances we make which diminish the apparent costs of war or outer space exploration and similar ventures. The “spin-off” unquestionably has contributed to quite remarkable peace-time uses. The use in medical research of atomic particles developed in the former and the circuitry developed in the latter are cases in point. But the things we see do not begin to compare with those we don't. Any gains in material standards will be more than “compensated” for in other areas. For we have noted a number of reactions to force and we posit that they are not just isolated examples but predictable responses to laws of a higher order not yet readily comprehended. Though we may not definitely say that today's rioting and general unrest are the results of the coercion in war work and space exploration, neither can it be proved they are not. From the examples of bad “ends” shown earlier we must credit the possibility.

A WSJ editorial of May 3rd, 1971, includes these comments: “It is a great insight of the past few years that modern changes in the world, and especially advances in technology, have given men powers which tax their humanity. Science in effect has out dated the rules by which we have traditionally conducted our affairs. Leaders who must use the new powers find themselves faced with staggering moral dilemmas no man should have to resolve.” In other words, man's technological achievements have outdistanced his moral growth. We may define wisdom as the assimilation of Edition: current; Page: [122] experience. Some of our “advances” have come too quickly to be assimilated. They have happened before their time.

Suppose that the development of the conscience is a major goal of evolution, a strong case for which can be made. Man's purpose in his present phase of existence may well be to develop moral character. He does so by becoming responsible through the exercise of conscience which requires him to make decisions. Of necessity, he must be free to make them. When prevented from doing so, by being inhibited in wide areas of societal action by governmental intervention or preemption, it is natural and predictable that things will go wrong.

All of our modern day so-called “advances” which are the result of coercion have come before their time and man's purpose—his need to make free will decisions—has been ignored. When purpose is the price of material progress, the price is too high. Ignorance of the law or ignoring of the law–the results are the same. It is a law that man must be free. Only when man is free will “human action” come to full flower.

The Genius of Mises' Insights Lawrence Fertig

Economic historians of the 21st Century will undoubtedly be puzzled by the reception accorded to economic theorists of the 20th Century. They will be particularly puzzled by what occurred in the span of years between World War I and 1970.

On the one hand the record revealed that academic honors, and in many cases substantial monetary rewards were showered on academicians whose contributions were miniscule. Their works were based on abstruse “model-building” to the delight of a coterie of fashionable economists in leading unversities. They employed intricate mathematical formulae which gave the false impression of scientific accuracy–a presumptive accuracy which disappeared on analysis of the precise meaning of the mathematical symbols employed as the basis of their equations.

Moreover, great honors were showered on economists whose major accomplishments had been to promote a major inflation which, by the end of the 20th Century, was acknowledged to be the source of tremendous social unrest and economic crises. These were the fashionable economists who were sponsored by wealthy Foundations and indeed by most of the intellectuals of Academe.

But when economic historians of the future came to evaluate precisely who had made the most significant contributions to economic theory–to those broad and fundamental principles which explain human actions in the practical world people must live in–their puzzlement increased. For they could find only a meager record of academic honors or monetary prizes by leading ivy-league universities accorded to the one economist who had discovered and formulated some of the most brilliant economic theories of that century. His name was Ludwig von Mises.

Of course Mises had a substantial following among so-called conservatives of that era (most of whom were old-fashioned liberals), who practically venerated him for his great works. But the fashionable world of the intellectuals rather paid homage to some of the most inconsequential statisticians and economists of that era.

After having researched the detailed history of economic thought in the 20th Century, historians of the 21st Century paid tribute to Mises as one of the most powerful and perceptive minds of that earlier era. They stressed the depth of his seminal thinking, and they dwelt upon his significant contributions to economic theory.

The above account may sound like a fanciful look into the future, but it could—it should—happen because the logic of Mises' analysis is being confirmed increasingly every decade and every year. The majestic sweep of his ideas, the genius of his insights, and the rigorous formulation of his theories all combine to stamp his work as of the highest order.

When Mises advanced the concept of “human action” (he terms this ‘praxeology’) as the basis of economics, he did as much to create a whole new world as did the explorers of the 15th and 16th centuries who discovered new continents. “Choosing determines all human decisions,” said Mises. “In making his choice, man chooses not only between various material things and services, all human values are offered for option.” His monumental work, HUMAN ACTION, develops this thought in a profound and wide-ranging discussion which reveals the knowledge of a philosopher, sociologist, historian and economist of the first order.

As everyone who has studied Mises knows, he makes no compromise whatever in defending the principles of the free market. Interventionism of any kind and the development of the welfare state are scourged by his searing prose. Naturally welfare statists and interventionists are not sympathetic to Mises. This accounts for the coolness of many Establishment economists towards this great figure. But the truth of his views is being demonstrated every day.

On Behalf of Profits Percy L. Greaves, Jr.

Tax Reform: Two Ways to Progress∗ C. Lowell Harriss

If Professor von Mises were rewriting HUMAN ACTION in the 1970's, he would doubtless give more space than the dozen or so pages, out of 881, to taxation. The subject has certainly multiplied in significance. Some of the developments were presaged in Professor von Mises's writings of a quarter century ago. One after another of his sentences could serve as the thesis for a full article. Yet the two subjects which I wish to examine briefly here go rather beyond any explicit discussions in HUMAN ACTION.

For one thing, it seems to me, reliance upon the taxation of “business” should be drastically reduced. For another, greater reliance ought to be placed upon the taxation of pure site or location (land) value.

Discussions of tax policy continue to reflect misconceptions whose survival power bodes ill for mankind. Widely accepted views impede improvements which would reduce the adverse effects of taxation on economic progress.

Men and women whose goodwill cannot be questioned speak and write and vote as if they believe that business taxes are not “people taxes”. Time and again we have heard that corporation and individual income tax changes ought somehow to be “balanced”.

An inferior product will not survive the competition of the market place. But ideas, such as these about taxes, cannot always be subjected to equivalent testing of relative merit. For judging them, analysis may be man's best and only instrument.

Taxes represent the use of the power of government to coerce. They force us to pay over money. And taxes do more. They influence behavior, not only by depriving us of private buying power but also because we know that the amount we must pay will depend to some extent upon how we act. The “we” includes groups—not the least being those known as businesses.

Taxes are paid by people. One may speak of taxes falling on business or corporations, on cigarettes or property, on inheritances or income. Yet it is not things, but people, who are deprived.

All of us dream of a world needing no large defense outlays. Professor von Mises's friends, I suspect, also prefer a world in which nondefense spending rises less rapidly than it does. Yet realities cannot be ignored. Budgets rise to set new peaks year after year. The necessary “tax total” will require “high” tax rates. High tax rates alter human actions.

In the market place, we must pay prices to acquire things; in competitive markets we generally get about as much in value as we pay for. But the services of government which an individual receives are largely independent of the taxes he pays. He has incentive to rearrange his affairs to avoid a tax. The same applies to business organizations.

Taxes do not meet standards of neutrality which are endorsed in HUMAN ACTION. When tax rates are low, it will not often be worthwhile to sacrifice what is otherwise one's best interest in order to save some tax. But when tax rates are high, purely tax considerations can exert a decisive influence. This is especially the case when the differences in the tax consequences of different actions are large. A basically less efficient alternative will sometimes seem best when taxes are taken into account. As taxpayers act accordingly, private benefit conflicts with the public welfare: (1) The part of the cost of government which one person escapes must generally be borne by others. (2) Resources are not used as productively as possible. For one thing, capital investment will flow to take account of alternative tax consequences as well as of productivity; skilled effort is devoted to saving taxes rather Edition: current; Page: [148] than to creating goods and services of positive value or to reducing the input needed for some specific outputs.

The Future of Capitalism Henry Hazlitt

At the present time the outlook for capitalism is far from hopeful. This is not owing to any inherent defects of capitalism considered as a system, but to the fact that great evils and injustices are attributed to it and that its merits are so little understood. As a result it is being maligned, thwarted, sabotaged, and slowly regulated to death.

But before we discuss the probable future of capitalism, we ought to be clear concerning exactly what it is. Capitalism is free enterprisè. The two terms are synonymous in what they denote, though much different in what they connote. Capitalism was originally coined as a smear word in 1854 by Karl Marx and his followers. It was intended to imply a system run by the capitalists and for the capitalists, to exploit the workers. Yet even this smear word unintentionally emphasizes one great merit of the system, which is that it tends to promote the accumulation and increased use of capital, and so tends constantly and acceleratively to increase the production of wealth.

Capitalism may be thought of as a combination of two institutions—private property and the free market. Private property means that everyone is free to keep the fruits of his labor, or to put them to any use he sees fit, as long as he does not infringe the similar rights of others.

It should be obvious that without the right of private property men would lose most of the incentive to produce anything of permanent value. If a farmer knew in advance that after he had plowed and planted and tended a field, anyone else would have as much legal right as he to harvest the crop, or to appropriate it even after he had harvested it, he certainly would not bother to plant the crop in the first place. If any man knew in advance that after he had built and furnished a house, anyone else would have as good a legal right as he to occupy it, he would not build the house in the first place. Private ownership is absolutely essential to give any incentive for sustained work and sustained production of durable wealth.

Again, the free market, the right to sell or exchange one's property for the best bargain one can make, is also essential to the maximum production of wealth. It is through the mechanism of the free market—through the search by the individual as producer for the maximum monetary profit, combined with his search as consumer for the most advantageous exchange for what he wants for his own use—that production is not only maximized but optimized—that it goes into the creation of tens of thousands of different goods and services in the amounts and proportions in which they are wanted by the great body of consumers.

Let us look closely at the way in which this productive balance is brought about. When production is in equilibrium there tends to be approximately the same profit margin, relative costs and risks considered, in the production of each of the thousands of different commodities and services. Now let us say that there is suddenly an increased demand for commodity X. The competitive bids of consumers against each other will raise the price of that commodity. This will raise the profit margin in making it above the prevailing profit margin in making other things. The firms that are already producing commodity X will tend to increase their production of it. They will hire more workers away from other producers and increase their investment in inventories or equipment. Other Edition: current; Page: [161] firms will also try to start producing X because it is more profitable than producing Y or Z. In this way the price of X, or the profit in making it, will tend to fall again to the prevailing level in other lines. Meanwhile the comparative production of X will have increased.

The opposite result will tend to happen if the demand for commodity Y declines. Comparatively less of it will be produced, until the profit margin in making it is once again at least as high, relative risks considered, as in making other commodities.

As a consequence of this market mechanism, in short, the thousands of different commodities and services tend to be produced at minimum cost and in the relative proportions in which they are socially wanted. This is the way in which a capitalist system solves the problem of economic calculation, which a dominantly socialist system is utterly incapable of solving. (The first economist to demonstrate this conclusively was Ludwig von Mises.)

We should notice in passing that the success of this capitalistic process does not require that producers or sellers earn a so-called “fair” profit. It is not the absolute height of the profit that determines the direction of output; it is the comparative profit that serves as the spur and the guide. A uniform “fair” profit would leave production without a yardstick, map, or compass. It is a mistake to call the capitalist system “the profit system.” It is a profit-seeking system, of course; and a perfectly proper name for it would be a profit-and-loss system. It is just as essentail to its proper functioning and health that under it inefficient operations or the creation of unwanted goods should be penalized by losses as that efficient operations or the creation of wanted goods should be rewarded by profits.

We may also note parenthetically here that normally profit is not something “added to the price”; it is not a cost that falls on the consumer. The bulk of profits go to those producers who Edition: current; Page: [162] are making better goods than their competitors, or producing them at less than average cost.

Many economists contend that there is no net profit at all in a stationary economy; the profits of producer A are offset by the losses of producer B.

This statement will seem startling to most laymen, but mainly because “profit” in the popular sense is a much wider term than “pure” profit as defined by economists. Profit in the popular sense includes nearly the whole return going to the entrepreneur or the capitalist, or both, whereas much of this return, according to economists, should really be counted as a form of interest on the entrepreneur's invested capital, or “rent” on his self-owned factory, or “wages” for the entrepreneur's own work of management, and therefore under a proper accounting system should be imputed to interest, rent, and wages respectively, counting only the remainder as pure profit.

In an economy that is expanding, there is presumably a net total of pure profits for the producers. But even if these are counted (as they should not be), as a net cost to the consumers, they are at most a temporary cost; for the greater part of the profit is reinvested in additional and more efficient plant that reduces costs of production (and hence prices) and increases output.

So capitalism is a system of both incentives and deterrents. This system does not maximize incentives to all production; it maximizes incentives to the more efficient production of the goods that are most urgently wanted.

Capitalism accomplishes this result in still another way. It is continually putting capital into the hands of those who have shown that they know how to make the most productive use of it. Those who exercise the best judgment in directing production into the most profitable channels, and in choosing the most efficient methods and the ablest managers, make the highest profits. This Edition: current; Page: [163] means that they obtain still more capital to reinvest wherever they think it will reap the highest returns. Those who use their capital to make unprofitable investments or who choose poor managers will lose their capital and will have less or finally none to reinvest.

Many people talk as if “production” and “distribution” were two separate processes, as they would be under socialism, and as if goods were first produced and then distributed. Nothing like this happens in a market system. Goods come on the market as the property of those who have produced them. Under a free competitive market system, as the American economist John Bates Clark was the first to point out explicitly, each factor of production tends to get the specific marginal product that it contributes to production—which means that for the most part each man tends to get what he himself produces. To quote Clark:

Let us take a very simple—indeed an oversimplified—illustration. Suppose Peter and Paul are two chairmakers, working as individuals. They turn out chairs of equal quality, but Peter, working hard and well, turns out a chair every day for a working week of six days; and Paul, working more leisurely or less efficiently, turns out only three chairs a week. Each sells his chairs for $40 apiece. Then Peter has a gross income of $240 a week, and Paul of only $120. It would be absurd for Paul to complain that he is a victim of unfair “distribution” of income. There is no “distribution”; each gets the value of what he produces.

And this happens whether we are talking of chairmakers, shoemakers, tailors, builders, or lawyers. Each gets the value that his individual Edition: current; Page: [164] customers or clients put on his product or services, multiplied by the quantity he turns out. If there are a dozen chairmakers in a town, and each decides to increase his output by taking on helpers, it will pay them to take on a helper for any amount up to what his services add to their own revenue from sales; and the competition of the employer-chairmakers for helpers will tend to bring the helpers' wages up to this amount. Each will tend to get the value that he adds to production.

We cannot indict such a system as being “unjust.” Under it, rewards are proportionate to quantity and quality of output (quality as judged by the market). The system is one which maximizes incentives to effort and production.

The free market system is also one which permits and encourages freedom of competition. Competition is often denounced by socialist writers as being duplicative and wasteful. Its effect is exactly the opposite. As we have seen, one effect of competition is to take production constantly out of the hands of the less competent managers and put it more and more into the hands of the more efficient managers. Competition constantly promotes more and more efficient methods of production: it tends constantly to reduce production costs. Competition rewards most those who reduce their production costs most; it penalizes most those who are tardiest in getting costs down. As the lowest-cost producers expand their output they cause a reduction of prices and so force the highest-cost producers to sell their product at lower prices, and ultimately either to reduce their costs or to transfer their activities to other lines.

But capitalistic or free-market competition is seldom merely competition in lowering the cost of producing a homogeneous product. It is almost always competition in improving a specific product. And in the last century it has been competition in introducing and perfecting entirely new products or means of production—the railroad, the dynamo, the electric light, the motor car, the Edition: current; Page: [165] airplane, the telegraph, the telephone, the phonograph, the tape-recorder, the camera, motion pictures, radio, television, refrigerators, air conditioning, the computer, and an endless variety of plastics, synthetics, and other new materials. The effect has been enormously to increase the amenities of life and the material welfare of the masses.

Capitalistic competition, in brief, is the great spur to improvement and innovation, the chief stimulant to research, the principal incentive to cost reduction, to the development of new and better products, and to improved efficiency of every kind. It has conferred incalculable blessings on mankind.

The free market system, finally, is a great system of social cooperation. This cooperation exists between producer and consumer, buyer and seller. Both gain from the transactions in which they engage. That is why they make them. The consumer gets the bread he needs; the baker gets the monetary profit which is both his stimulus to bake the bread and the necessary means to enable him to keep baking it. As Adam Smith put it long ago, the essence of every commercial transaction is: “Give me that which I want, and you shall have this which you want.”

And in spite of the enormous labor-union and socialist propaganda to the contrary, the relation of employer and employee is basically a cooperative relation. Each needs the other. Their relationship is essentially one of partnership. The more successful the employer, the more workers he can hire and the more he can offer them. The more efficient the workers, the more successful the employer, and the better paid the workers.

It should be pointed out here (though the idea will strike many as strange) that even economic competition is a form of economic cooperation. At least, it is an integral and necessary part of an efficient system of economic cooperation. If we look at competition in isolation, Edition: current; Page: [166] this statement may seem paradoxical, but it becomes evident when we step back and look at it in its wider setting. General Motors and Ford are not cooperating directly with each other; but each is trying to cooperate with the consumer, with the potential car buyer. Each company is trying to offer the consumer a better car than its competitor, or as good a car at a lower price. Each company is stimulating the other—one might even say compelling the other—to reduce its production costs and to improve its car. Each company, in other words, is putting pressure on the other to cooperate more effectively with the buying public. Each makes the other more efficient. And so, indirectly—triangularly, so to speak—General Motors and Ford cooperate.

Every great firm is itself a huge cooperative enterprise. A big newspaper, for example, is a cooperative organization in which every reporter, every editor, every advertising solicitor, every printer, every delivery truck driver, every newsdealer, cooperates to play his assigned part. A great industrial company, such as General Motors or General Electric—or in fact any of a thousand successful smaller companies—is a miracle of continuous cooperation.

And on a “macroeconomic” scale, the whole free world is bound together in a system of international cooperation through mutual trade, in which each nation supplies the needs of others cheaper and better than the others could supply their own needs acting in isolation. And this cooperation takes place, both on the smallest and on the widest scale, because each of us finds that forwarding the purposes of others is (though indirectly) the most effective means for achieving our own.

Thus the free enterprise system is a huge system of social cooperation which maximizes incentives to production, miraculously guides production so that thousands of goods and services are produced in the proportions in which they are Edition: current; Page: [167] socially most wanted, maximizes output, and does it by its tendency to reward people on the principle of “To each what he creates.” Our main object should be to try to perfect this great system, not to uproot or transform it.

Yet ever since the rise of socialist ideas in the nineteenth century, this great system has been under attack. It is now threatened from a score of directions. The future of free enterprise depends upon its ability to ward off these attacks, to save itself from these alleged reforms.

Let us look at the main present threats to free enterprise, beginning with the most direct and most serious.

In the first half of the present century, the most direct and serious threat to free enterprise was outright socialism—that is, socialism in the “orthodox” form of government ownership and management of the means of production. This is what we have today in rather complete form in the communist world and in a modified and partial form in most of the non-communist world. But government ownership of the means of production has lost prestige. It has proved disillusioning everywhere. It has been tried. Most of the governments of Europe own and operate their country's railroads and telegraph and telephone services. The result has been chronic poor service and chronic deficits. Even the overregulated private railroads in the United States do better, particularly with freight; and the private telephone service in the United States, though also overregulated, is still the best in the world. The service of the government post office is a joke everywhere. The socialist parties of Europe still want to keep nationalized the industries they have already nationalized, if only to save face; but few of them are actively pushing for more nationalization.

Perhaps the biggest threat to free enterprise today is the demand for more equality of personal incomes. Very few socialist or other reformers today Edition: current; Page: [168] demand absolute equality of incomes (as Bernard Shaw did or pretended to) because they sense that this would be completely destructive to all incentives to work and own. If we can imagine a society in which every adult would be guaranteed an income of, say, $4,000 a year, regardless of what kind of work he did, or whether he worked or not, and in which nobody would be allowed to earn or keep more than $4,000 a year, then we can see that if everybody acted in what seemed his immediate self-interest, thinking of himself in isolation, nobody would work and everybody would starve.

The reason for this ought to be clear. Everybody who had been getting less than the $4,000 guarantee (and who would now get just that whether he worked or not) would not need to work productively at all. And no one who had been earning more than the $4,000 guarantee and limit would find it worth while to continue to earn the excess, because it would be seized from him in any case. More, it would soon occur to him that it wasn't worth while earning even the $4,000, for it would be given to him in any case, and his income would be that whether he worked or not. So if everybody acted under an income equalization program merely in the way that seemed most rational in his own immediate self-interest considered in isolation, almost nobody would do any sustained or disagreeable work, and the nation would soon be destitute.

A less extreme equalization would, of course, have less extreme results. But any program to take from those who earn and give to those who don't earn must reduce working incentives to a certain degree. I don't know whether it is possible, or whether it will ever be possible, to determine exactly what levels of income guarantee, or exactly what percentages of income taxation, will reduce incentives and production by exactly what percentages. But it is probably a good prima facie rule of common sense that any income-tax rate above 50 per cent, overall or marginal, must reduce incentives and production and be counter-productive even of government revenue in the long run. The Edition: current; Page: [169] empirical studies of Colin Clark and others suggest that any income-tax rate even over 25 to 35 per cent must in the long run cut very seriously into the growth of national income.

Any program that supplies income to people who don't work must reduce incentives to a certain extent; and all taxes, considered by themselves, must discourage production, depending both on their level and their nature. (Grossly excessive as our progressive personal income tax rates are at present, our excessive corporation tax is probably doing even more to retard our potential growth.)

If excessive government spending is in itself a threat to the free enterprise system, such spending not paid for by taxation, but financed by deficits and inflation, is still more of a threat. A mild inflation in its early stages may seem to be a stimulus to production, but inflation is always a false stimulus; it leads to malinvestment, malconsumption, gambling, waste, cynicism, and corruption, and is as debilitating to a nation as the drug-habit is to an individual.

What is even worse than inflation is price controls which attempt to mask or suppress the consequences of inflation. Price controls, wage controls, rent controls, and interest-rate controls always misdirect, reduce, unbalance and disrupt production. They are nearly always more harmful than the inflation they try to conceal.

A very serious threat to free enterprise today is the excessive coercive “bargaining power” given to the labor unions by present labor laws and bureaucrats. Contrary to the century-old myth, labor unions cannot increase real wages for the whole body of the workers. At best they can increase the money wage-rates of their own members at the cost of reducing employment or reducing the real wages of non-union workers. Whatever gains the unions make by strikes or strike-threats are at best short-run gains even for themselves; for Edition: current; Page: [170] if they gain excessive wage-rates and diminish or even wipe out profit margins and profit expectations, they discourage and reduce new investment. In the long run there is then less production, less employment, and less real income for everybody. If free enterprise is to be preserved, present labor laws simply must be modified.

Still another threat to the free enterprise system, which has increased in recent years, is outright hostility to business. We might divide this hostility for convenience into two types: (1) hostility to public utilities, such as railroad, telegraph and telephone companies, power companies and the like; and (2) hostility to any large and successful business whatever.

The first kind of hostility has been with us for a longer time; it leads to overregulation, to chronic charges of dishonesty and gouging, and to the fixation by governmental regulatory bodies of rates so low that they do not allow sufficient funds for research and development, for improvement and expansion of services, and for reinvestment.

The second kind of hostility has recently grown more frequent and intense. It leads to opposition to mergers of all kinds, to prosecution under the anti-trust laws on so many grounds that no company knows when and for what practice it will be sued. It leads particularly to an immense growth of laws ostensibly designed to “protect the consumer.” These laws now attempt to dictate in detail how goods should be labeled and packaged, how automobiles should be made, what interest rates should be charged and how the charges should be stated, etc. Since 1962 new pharmaceuticals have had to surmount so many hurdles before they can be put on the market that there has been a dramatic fall in the number and importance of new life-saving drugs discovered and introduced. When the drug companies are not attacked for their products they are attacked for charging exorbitant prices. And so it goes.

The saddest part of all this is that big business has lost the courage to defend itself even from direct attack. The late Joseph A. Schumpeter commented upon this acidly a generation ago, in his pessimistic book, Capitalism, Socialism, and Democracy published in 1942. He maintained the thesis that “in the capitalistic system there is a tendency toward self-destruction.” And as one evidence of this he cited the “cowardice” of big businessmen when facing direct attack:

So here is the outlook. Capitalism, the system of private property and free markets, is not only a system of freedom and of natural justice—which tends in spite of exceptions to distribute rewards in accordance with production—but it is a great cooperative and creative system that has produced for our generation an affluence that our ancestors did not dare to dream of. Yet it is so little understood, it is attacked by so many and intelligently defended by so few, that the outlook for its survival is dark.

It may still be saved, but only if its merits come to be understood by the masses before it is too late. The world is now in a race between true economic education and catastrophe.

Prices and Property Rights in the Command Economy Arthur Kemp

Of the many discussions to which Ludwig von Mises has contributed over his long and productive career, few are more famous or of greater importance than the question of pricing and production in a command economy or, as Mises phrased it, the problem of rational economic calculation in a socialist state. The classic Mises article was titled, “Die Wirtschaftsrechnung in Sozialistischen Gemeinwesen,” in Archiv fur Sozialwissen-schaften, Vol. XLVII, No. 1 (April, 1920), and which he subsequently expanded in Gemeinwirtschaft (Jena, 1922; 2d. ed., 1932). An English translation of the original article appears in F. A. Hayek, ed., Collectivist Economic Planning (London, 1935). Gemeinwirtschaft appears in English translation as Socialism (London, 1936) and later as Socialism: An Economic and Sociological Analysis (New Haven, 1951).

Although it may not be true to say that Mises was the first to turn his attention to the problem, the original article together with its subsequent additions became, as Hayek expressed it, “the starting point from which all the discussions of the economic problems of socialism, whether constructive or critical, which aspire to be taken seriously, must necessarily proceed.”1/

Mises argued, in essence, that in the absence of market price determination and private ownership of the factors of production such as land and capital, a rational and efficient allocation of productive resources was not possible. This forms the heart of a dispute between socialist economists and market economists which has endured for a long period of time and has produced a very sizeable literature that is still expanding.2/ Examples of it, Edition: current; Page: [173] from both sides, are included in most of the important books of readings concerned with the study of comparative economic systems.3/ Most socialist economists have rejected the Mises criticism dogmatically and categorically, although one should probably except Oskar Lange, A.P. Lerner, and a few others, but none have been able to ignore it.

Indeed, the inter-relationship of prices and the productive process—the problem of rational calculation—could, and perhaps should, be employed as the central theme for a discussion of the differences and similarities among variant economic systems and societies. Prices provide a mechanism facilitating the choices necessary under all economic systems: choices involving the balancing of scarce means against competing ends. We are prone, understandably, to regard prices primarily as a phenomenon of markets and money, but this is a self-imposed limitation for convenience in order to focus attention on measurable, objective prices. In a more fundamental sense, price behavior is not confined to monetary manifestations alone, and in some societies or systems the non-monetary, non-market price behavior may be the most interesting and the most significant.

It also seems clear that, even in economic systems essentially market-oriented, non-market prices may be of considerable economic interest. Each of us would be willing to accept, for example, a lower wage (salary? money income? price?) for better working conditions, or more leisure, or more beautiful (stimulating? provocative? soothing? cooperative?) colleagues with whom we associate. Prices, in this broad sense, are pervasive in the economic process and, whether or not monetary market expressions of price are also employed, the price phenomenon continues to exist and to be worth careful study by economists. Sometimes, of course, even economists overlook the obvious as evidenced by an American economist who once interviewed several hundred British medical doctors in their respective surgeries (offices) during the early years of the National Health Service. He kept careful notes of the conversations but no record of the time he waited to see each doctor, thus losing a potentially significant piece of empirical evidence.

A very large part of modern economic analysis is, at base, price theory relating to an explanation of how goods are priced and how the remuneration of the factors of production (prices) are determined. The former is usually called price theory; the latter distribution theory—although clearly both have to do with price. Even the currently popular terminology contrasting micro-economics and macro-economics is a division of convenience rather than substance. The aggregates of macro-economic analysis without price theory could not be studied intelligently.4/ It may also be worthwhile reminding the reader that true prices are ex post by nature; true prices are past prices at which an exchange has taken place, or a choice made, or a decision reached. Price theory also attempts to provide a meaningful explanation of the factors determining the process of price formation (and in this sense is ex ante). Empirically, price theory is testable by examining the extent to which its principles are successfully predictive.

Certain kinds of price behavior imply certain institutional arrangements of property rights. Imposing a minimum wage law, for example, alters property rights by forbidding a person to offer his services at less than the specified wage, and forbidding others to purchase these services at less than the specified wage. Prohibition alters property rights by preventing a person from using his resources and abilities to manufacture, transport or sell alcoholic beverages. Similarly, if there is abolition of private property rights in capital equipment, different pricing arrangements are induced than where such private property rights exist. Indeed, as Armen Alchian has pointed out often and eloquently,” ... Every question of pricing is a question of property rights. We could have asked: What system of property rights shall be used? The existing system of property rights establishes the system of price determination for the exchange or allocation of scarce resources. In essence, economics is the study of property rights over scarce resources. Without scarce resources, property rights are pointless. The allocation of scarce resources in a society is the assignment of rights to uses of resources. So the question of economics, or of how prices should be determined, is the question of how property rights should be defined and exchanged, Edition: current; Page: [175] and on what terms.”5/

If this statement is correct, it might be supposed that a system aimed consciously at the virtual elimination of private property rights would mean, at the same time, the elimination of all prices. In point of fact, the first flush of victory of the “dictatorship of the proletariat” in the Soviet Union brought with it a short-lived, idealistic attempt to do away with prices. The necessary condition of doing away with prices, as Alchian points out indirectly, is the elimination of scarcity. In such ordinary, day to day services as street cars and other forms of transport, for example, the Soviets tried zero prices with the predictable results of unbelievable over-crowding. When confronted with the cold facts of reality, the “priceless” experiment had to be abandoned. Of course, there are still some zero prices in the U.S.S.R. (some doctors and other medical care, for example), but this results not in a no-price system but rather a kind of price system that is greatly attenuated.

Two of the several major functions performed by prices can be described as the rationing function and the allocation function. The former is essentially a short run function, serving to adjust consumption to production over short periods—shorter or longer depending on the length of the production process for the particular good. Allocation of resources involves both long run and short run considerations. Both these functions can be performed by prices. Under a pure price system, both functions would be performed by autonomous price movements reflecting both relative price changes within price levels and changes in general price levels. No existing system can be said to be a pure price system. This is another way of saying that property rights are never absolute. But the functions performed by prices are more attenuated in some systems than in others.

As an illustration, let us look at the Soviet “price system” although the functions ordinarily associated with the phrase are so attenuated in the U.S.S.R. that there may be some question whether the term is at all applicable.6/

Prices in the Soviet Union can be considered conveniently in three general categories: (1) agricultural prices; (2) industrial or producer goods prices; and (3) consumer goods prices. Several kinds of agricultural prices are employed, and only one of these can be regarded as determined essentially by market forces of demand and supply. These are prices paid to collective farmers by consumers for produce raised on small private plots. Other agricultural prices are: (1) those imposed upon the collective farms for compulsory deliveries of foodstuffs to government firms; (2) prices paid to state owned farms by state owned marketing organizations; and (3) prices paid for raw or processed foods of the state owned marketing organizations or processing plants by state owned retail stores. All three of these categories of agricultural prices are officially fixed. They are supposed to reflect the average cost of production. In fact, the prices paid to collective farms by the government seem unrelated to cost, and the difference between these prices and those charged to consumers may be regarded as a major form of taxation from which the government obtains funds for the accumulation of real capital.

Industrial prices or producers' goods prices are also fixed prices. In theory, these are also based on the average costs of production in each branch of industry. But in practice these can be altered in various ways by determination of surcharges, allowances, and delivery terms so as to provide the state with an important tool for implementing the basic physical decisions of the central planners. Discretionary changes in producers' goods prices can be used to discourage particular applications, to promote specific techniques, to encourage or discourage use of particular raw materials, to favor particular industries and areas, and in a myriad of other ways. Prices, of course, are essential for accounting and bookkeeping purposes even if their functions as rationing devices and allocative instruments are less important than their function as a supplementary tool in basic planning and distribution.

Consumer prices are also fixed prices except for the foodstuffs sold directly to the consumers Edition: current; Page: [177] by collective farm workers. They include a variety of taxes, such as excises on salt, matches and vodka, as well as sales or turnover taxes. Indeed, these comprise a major source of governmental revenue in direct contrast to the importance of income taxation in most western countries. Consumer prices are not intended as rationing devices, although they do provide the Soviet family with some degree of choice among ways to spend the family income. Overall, consumer prices do perform (somewhat imperfectly, of course) the equilibrating function of adjusting total purchasing power to total value of consumer goods produced. They do not, however, reflect meaningful changes in relative prices of specific goods, nor do they perform a rationing function with regard to specific goods. Rentals of apartments, for example, are very low relative to the prices of clothing. At the official rate of exchange, this might translate to $10 per month for an apartment (if one is lucky enough to get one) as compared with $500 for a woman's coat or $150 for a man's suit. Nor is the relative difference changed by using a more realistic rate as the black market rate for the ruble. The low price of housing apparently is considered a political necessity for the image of socialist society. It also seems probable that certain groups of individuals—such as party personnel, athletes, musicians, literary figures or artists—can be controlled or favored by the exercise of the rationing function on a political basis.

In describing the Soviet price structure, one scholar noted that their practices reverse the usual price behavior in underdeveloped countries. Low real wages in such nations seem normally to be associated with relatively high prices for capital goods; the prices of capital goods are relatively higher than the prices of consumer goods. Professor Jasny remarks that, “the peculiarity of the Soviet price system is that the means of production have become very cheap relative to wages and still cheaper relative to the prices of consumers' goods. This very peculiar type of relationship between the prices of producers' and of consumers' goods is indeed the feature which makes the Soviet price system unique.7/

This may be unique, but it is not difficult to Edition: current; Page: [178] understand why it developed. The overwhelming objective of Soviet economic policy was to force industrialization at a rapid rate. The price structure, enforced by state ownership of the means of production and by centralized dictatorship, brought into being a sort of compulsory saving that channeled a large part of the national product into industrial capital investment. This forced the rate of growth of the industrial sector at the expense of both the agricultural sector (by compulsory deliveries at low prices) and the current consumption sector (by prolonged scarcity of consumer goods).

This emphasis upon real investment in producers' goods—on heavy industry, military hardware and space activity, to be more precise—is a key to an understanding of the Soviet economy. In terms of success or failure as measured by the intent of the central planners, it achieved a substantial degree of success, even after allowing for the tendency of official statistics to overstate the case. Professor Nutter, for example, estimates that total Soviet industrial output increased by between 500$ and 600$ between 1913 and 1955.8/ This cannot but be regarded as a substantial accomplishment. From a truly underdeveloped nation, Soviet Russia has become one of the major industrial powers of the world.

In general Soviet production results from central planning in physical units by commands handed down from above. One exception to this general rule is agricultural production. The U.S.S.R. operates (1) large state owned farms; (2) collective farms; and (3) permits production and sales from privately owned plots. Both ideology and political power preferences would seem to invite complete elimination of private agricultural production and, as well, the complete transformation of the collective farms into state owned farms. This has not proved feasible. In contrast to the success of forced industrial growth by central direction, the poor performance of the agricultural sector has remained one of the most difficult problems for the Soviet economy. As early as 1928, Stalin called for the elimination of the peasant farmer as a class. He attempted to bring this about by a forced collectivization of farms during the nineteen thirties. In effect, Edition: current; Page: [179] his objective was accomplished but at a cost of direct or indirect deaths of perhaps 10 million peasants who resisted; at the cost of forced shifting of 20 or 25 million people to other activities; and at the cost of forcible combination of most of the remainder into collective farm units.

It should be noted that this forced collectivization had a logical basis. Industrialization required food for the favored group of factory workers. The forced collectivization, brutal as it was, prevented the peasant farmers from scuttling the entire program. The previous industrialization program of the twenties was followed by the so-called New Economic Policy—an adaptation forced upon the central planners by the failure of the peasants to furnish sufficient food. Since the thirties, the output of state owned farms has increased but the total output of the collective farms is larger still by far. Except for the output of the privately owned plots, this has been accomplished by forced production of compulsory deliveries at artificially low fixed prices.

The Soviet agricultural sector, in effect, has been forced to pay for the industrial real capital necessary for the growth of the industrial sector. As one scholar states it, “the differences between the prices the state pays for agricultural products and the prices it charges consumers have represented the main source of the state's capital accumulation. The prices of most compulsory deliveries remained virtually unchanged from 1928 to 1955, while consumer retail prices rose approximately eight times during the same period.”9/

Such a peculiar price structure reflects an equally peculiar property right structure. Agricultural performance is spotty, discontinuous and admittedly unsatisfactory. There is an element of private property in agriculture in privately worked acreage and privately owned livestock. In terms of total cultivated land, private acreage is small—something near 3$. In terms of total agricultural output, however, these private works account for between 30$ and 50$ depending upon the vagaries of nature, prices, measurements and biases. Even after Edition: current; Page: [180] allowances are made for the fact that grains for feeding livestock and poultry are not grown on the private plots, and for the artificiality of some prices, there still seems to be a substantial difference in output attributable to an incentive factor based on property rights.

Another feature of the altered property right structure is that the individual peasant is not free to leave the collective farm of his own volition. Permission to leave must be granted by the collective, and internal passports for physical movement can be made difficult to obtain if the authorities so desire. As a result, there seems to be a gradual but continuing deterioration of those remaining in agriculture as the young, presumably better educated, are drawn to the factories. Expert opinion seems to believe that urban workers' real incomes are something near twice those of agricultural workers. In the absence of effective barriers, one would expect a movement away from the farms and toward the more remunerative and rewarding employment in the cities. Evidence drawn from daily papers supports the conclusion.

The underpricing of Soviet agricultural products to obtain state capital recalls the half-facetious comment made a few years ago to the effect that you can tell a developed country from an under-developed country by examining agricultural pricing practices: under-developed countries pay their farmers too little; developed countries pay their farmers too much! No one should read too much into such a statement but it is remarkable how high the biserial correlation seems to be between the degree of industrialization and two kinds of price interference: (1) fixing agriculture prices below the market; and (2) fixing them above the market. Full industrialization may not be reached by the Soviets until they pay their farmers too much!

In brief, the Soviets have used prices as political tools and means for controlling the economy. The practical details to which Mises' original criticism applied in general have not gone unnoticed. Since Stalin's death increasing attention has been paid to alterations of incentives, to some recognition of the applicability of the profit motive Edition: current; Page: [181] to state owned enterprise but not to individuals, to suggestions for decentralization of the planning function, and to somewhat more flexible powers to set prices by the state owned plant manager rather than by central planners. The most widely noted discussions of pricing policies in recent years seem to have stemmed from the writings of Yevsei G. Liberman of Kharkov Engineering and Economic Institute.10/ Liberman proposed a measure of profitability expressed as a percent of capital employed to replace, as a measure of incentive, the fulfillment of assigned plan physical quotas. He also suggested increased autonomy for plant managers in setting prices, and advocated recognizing interest as a cost of production. The literature available in English has come to call these proposals “Libermanism,” although the basic ideas have been much discussed and extended by others. One eminent Soviet economist, V.S. Nemchinov, now deceased, forcefully criticized planning techniques in the U.S.S.R. as too centralized and unwieldy, inflexible in practice, and increasingly inapplicable to a world of ever growing complexity. He advocated decentralization, much greater price flexibility, payment of interest by factories on capital employed, and a system of bids and tenders by factory managers.11/

This seemingly significant abandonment of some of the positions long considered basic Marxist-Leninist idology and dogma has led some to suppose that the U.S.S.R. and its satellites may be moving in the direction of capitalism, and that this may make more probable some kind of rapprochement between planned economies and market-oriented economies. One scholar writes, “When Communists of high rank advance profit as the main measure of economic success and the main regulator of economic activity in lieu of planning, this indeed is something new, for it seems to constitute an admission that self-interest is the most important driving force in economic accomplishment. Such an admission may be the beginning of a deviation straight into the camp of capitalism, although they insist that this is not the case.”12/

On the other hand, many voices have been raised to caution against interpreting economic liberalization in pricing and production as part of a deliberate, conscious policy aimed at increasing the freedom Edition: current; Page: [182] of Soviet society and of the Soviet citizen. In the Swiss Review of World Affairs (Zurich), Dr. Willy Linder expressed doubt that there is a growing tendency toward a free market economy in the U.S.S.R. and concluded that the need to achieve some degree of economic rationality in “certain limited areas” is stronger than ideology.13/ Writing in 1960, Professor Wassily Leontiev noted that,” ... what the Soviets are about to adopt is Western economic science, not Western economic institutions.”14/

For fairly obvious reasons, those who have advocated price and other reforms in the U.S.S.R. and in the satellite countries try to avoid being classified as proponents of capitalism. Yet it seems clear that, by raising questions about the functions of a price mechanism, they are also raising serious questions about individual motivations and incentives and, indeed, private property rights.15/ But Marxism-Leninism in practice as well as in theory involves the abolition of property rights and the centralization of power in the state. The movement toward “market socialism” observed in some eastern European economies is a movement in the direction of market prices and, therefore, away from centralized control. But, automatically, then the question becomes political as well as economic.

Vested interests within the Soviet “establishment” cannot but be subjected to alterations in the distribution of power even if price reforms resulted only in some decentralization rather than major dispersal of power. How far will it be possible to twist and alter dogma so as to permit some market pricing, without forming a political threat to the existing regime? To suppose that an alteration of use rights to the means of production—a recognition of private property rights, perhaps by some other name like socialist use rights—can be reached without a major power clash seems like wishful thinking. Nor does the experience of Soviet armed intervention in Czechoslovakia provide much comfort.

Whatever the outcome (and since the future is always uncertain one is not entitled to predict it with confidence), a steady, rapid movement toward a market system either in the U.S.S.R. or the satellites Edition: current; Page: [183] seems unlikely. In addition to the myth of the disappearance of scarcity to which socialist economists seem forever addicted, there is also the fond hope expressed over and over again that modern electronic computers will provide, in the future, the key element for solving the problems of economic calculation and rationalization in a socialist society. Such a belief, even if it turns out to be as patently impossible as Mises originally asserted, or as impracticable as both Vilfredo Pareto and Enrico Barone believed, cannot help but to delay movements toward markets and market data experiments within the socialist camps.

The Inevitable Bankruptcy of the Socialist State Howard E. Kershner

Socialism teaches that a higher standard of living may be attained if the state owns and operates the means of production and distribution. To prove its case a Socialist government must continually spend more money to do more things for more people. Appropriations for welfare are increased. Subsidies for renters as well as home owners tend to grow ever larger. More money is spent for public housing. Social Security, Medicaid and Medicare payments grow larger. Pensions and scholarships rise while qualifying conditions for all of these are made easier.

Wages are increased. Hours are shortened. Fringe benefits are liberalized. There are more holidays, longer vacations and earlier retirement. The state must do all this to try to show that the people live better under Socialism than under free enterprise.

One group gets something. Other groups are unhappy unless they get as much or more. So, group after group, we go leapfrogging up the ladder to higher and higher costs of living. This is true because wages, direct and indirect, account for possibly 90 percent of the cost of goods and services. When they are determined by group or political pressure, they keep on rising year after year.

The Socialist politician who promises the most keeps himself in office. He is quite ready to tax ten people and distribute the proceeds to 20 people. Indeed, he will sacrifice ten votes if he is pretty sure of getting 11 or 12 in return. Once we concede to government the power of taking money from some and giving it to others, the process will not stop until the last bone of the last taxpayer is picked bare and we are all reduced to something approaching a common denominator. That is to say, under Socialism all except the top bureaucrats, their favorites and essential technicians are headed for the poverty line.

Alternatively, under the free market where each one is paid in accordance with the value his fellows place on his contribution to society, each one gets all he earns. This is the just and equitable way to determine wages. When wages are decided by political pressure, as is true under Socialism, large groups that can control many votes or strategic groups controlling essential services are always able to get more than other citizens. That's what drives the cost of living higher and higher under Socialism, leading to more debt, inflation and eventually to bankruptcy.

Many people like Socialism. An increasing number have learned how to live from the labor of others. They get but do not give. They enjoy benefits to which they do not contribute. Others know that Socialism will cost them something, but they think they will get more than they must pay. As long as they believe that, they will continue to vote for more Socialism. Almost any Socialist will vote for his neighbor to get more if the “more” he, himself, expects to get, is a little larger than that of his neighbor. There is almost no limit short of bankruptcy to the amount that Edition: current; Page: [189] can be filched from the treasury by the log-rolling process of approving benefits for others in return for their support of benefits for one's self.

Socialist regimes usually come into power after a long period of prosperity under freedom. As long as the Socialist government can distribute wealth accumulated under free enterprise, it can make a show of conferring benefits upon the public.

No Socialist system has ever shown itself to be the equal, or anywhere near the equal, of free enterprise as a producer of wealth. When wealth accumulated under freedom is all used up, life under Socialism becomes increasingly hard. It is so in all Socialist countries.

One reason why Socialist governments cannot produce abundantly is the difficulty they have of obtaining the necessary capital. There being little incentive to save, the Socialist regime soon finds itself short of capital. As capital investment declines, production declines, and scarcities become the rule rather than the exception.

Under pressure to do more things for more people, the Socialist state increases its indebtedness more and more until inflation brings on partial or complete repudiation.

As the Socialist state taxes its productive citizens more heavily for the benefit of its less productive class, it eventually crushes their initiative and incentive. Their production declines and they, one by one, join the ranks of the less thrifty and less responsible.

Taxes have removed them from the small class of highly productive citizens and have transferred them to the more dependent class. As this takes place, the Socialist state finds it harder and harder to keep up its production. It goes deeper and deeper into debt until bankruptcy, usually through inflation, takes place.

With increasing socialization the state itself is responsible for financing the expanding number of business activities which it takes over. The state is dependent for its tax revenues mainly on businesses operated by itself. These may not be well run and may be losing money, but for political reasons the state cannot permit them to fail. Since there is no private capital involved, there is no possibility of bankruptcy, and the state must continue to finance them by increasing subsidies drawn from tax revenue.

When private industries are improperly managed, the owners go bankrupt and lose their capital. When the state owns the business enterprises, politicians cannot admit this degree of failure and remain in office. They cannot resort to bankruptcy. Because the state owns the businesses, there is no private capital to be lost. All the state can do is to continue meeting growing deficits by the use of tax revenues and by increasing debt. Therefore, the taxing power of government is of necessity dedicated to the maintenance of the mathematical fallacy of long-term, compound interest.

To demonstrate this fallacy let us assume that one million dollars had been loaned at five percent interest, compounded annually, on the day Columbus discovered America in 1492. There would not be enough money in the world today to repay the loan.

At five percent compounded annually, money doubles in a little less than 15 years, or about seven times in one century.

At the end of the first century after Columbus arrived, that is, 1592, the loan would amount to $128 million. At the end of the second century, 1692, it would have grown to $16 billion. By 1792, it would amount to $2 trillion. At the end of the fourth century, 1892, it would have totaled $256 trillion, and by 1970, the total would be above $8 quadrillion.

Obviously, long-continued compound interest is impossible and any government dedicated to maintaining it will bankrupt itself.

Society has devised three ways of attempting to correct this error. The first was the ancient Hebrews' year of jubilee. Every fiftieth year all debts were to be cancelled and real estate returned to the original owner.

What happened under this ancient system is not clear, but it did not last long. It proved inequitable and, administratively speaking, impossible.

The second attempt to correct the error of long-continued compound interest was made by the private enterprise system. Under it, corrections are provided by the bankruptcy of the people who make mistakes; by compromise settlements, scale-downs and other adjustments as between creditor and debtor.

This has the merit of penalizing not the whole public, but only the people who prove their inability to use money wisely. The public is unharmed while the individual alone must atone for his mistakes. If he uses poor judgment, his wealth disappears. If he seeks to produce something or render some service that cannot be marketed, he loses his capital. By such means the accumulation of impossible debt is prevented. Corrections are made at the point of error. Compound interest continues to function only in that portion of the economy which has not resorted to unsound practices, but has earned the interest on its borrowed funds from year to year plus at least a small profit.

Socialism makes no provision for bankruptcy or adjustments of impossible debt. Under it there is little private capital and the State is forced to increase its debt more and more. Under Socialism old debts are rolled over and serviced by new debts. New money is borrowed to pay interest on old debt. Indebtedness mounts higher and higher.

Private enterprise is flexible. Adjustments are being made everywhere all the time. This is not done under Socialism which can only resort to moratoria and to adding accrued interest to principal as debt rises into the stratosphere.

Indebtedness of the Federal government, our states and our cities rises continuously. No knowledgeable person Edition: current; Page: [192] expects that it ever will be paid. This is the way Socialism operates and it leads eventually to progressive devaluation of the monetary unit through inflation.

Public and private debt, plus contingent liabilities of our Federal government, now exceed $3 trillion, or about 50 percent more than the total value of all our public and private property.

The people of this country are now paying out possibly one-sixth or more of their income for interest on various kinds of debts. Under Socialism, as debt increases, an even larger portion of the earnings of the people will be required to pay interest. How long will it be until interest takes half—then still more! What then becomes of the standard of living?

A city, a state or the Federal government borrows at, say five percent. In the course of 20 years it pays out as much in interest as the amount borrowed, and still owes the principal sum. This happens in the various units of government, that is, the Socialist sector. It does not happen to private business organizations. Under continuing abuse of credit they go bankrupt and disappear. Governments go on, with the amount of indebtedness forever growing greater.

A third way of attempting to offset this fallacy has been devised by the USSR. The Kremlin simply declares that one who has, say 100 rubles, now has only ten. This is partial repudiation and, if practised from time to time, will keep the state solvent though the people are robbed of their savings.

By penalizing the individuals who are incompetent or who make mistakes, private enterprise eliminates the less competent and brings to the fore the more competent. Under Socialism, on the other hand, the less competent continue in control and the public pays the bill through increased taxation to service ever-mounting debt.

Only the politicians who control the government, their Edition: current; Page: [193] favorites, and the technicians whose services they desire, can escape the penalties that Socialism imposes upon its citizens.

Entrepreneurship and the Market Approach to Development Israel M. Kirzner

It is beginning to be realized that the vast literature on growth and development conceals a yawning gap. This void refers to an understanding of the role of the entrepreneur in economic development, both at the theoretical level, and at the level of past and prospective economic history. The entrepreneur, Professor Baumol remarks1, has “virtually disappeared from the theoretical literature.” In a penetrating essay on the entrepreneur's role in economic development, Professor Leibenstein discovers that “received theory of competition gives the impression that there is no need for entrepreneurship.”2

In the literature dealing more narrowly with growth models3, this hiatus is almost complete and hardly surprising in view of its predominant concern with macroeconomic relationships.4 In contrast, the literature dealing with development proper gives some attention to entrepreneurship, although little effort has been devoted to formulating a clear theoretical understanding of the entrepreneurial role. Edition: current; Page: [195] Discussion has revolved primarily around the possibilities of an “entrepreneurial climate” emerging in hitherto primitive economies; around whether the motivation to seek profits is as weak in underdeveloped countries as frequently assumed; around the feasibility of relying upon foreign entrepreneurs, and similar issues.1 However valuable, these discussions appear either to lack an explicit theoretical framework within which to examine the relevant issues, or, at best, to be founded rather shakily on the theory of entrepreneurship in development as expounded by Schumpeter in his justly famous work.2 Frequent, somewhat vague references to Schumpeterian innovators and entrepreneurs are apparently considered sufficient to indicate the theoretical background that is being assumed. Consequently, the real function of the entrepreneur in a developing market economy seems often to have been poorly understood, and the plausibility of rapid development under alternative economic systems to have been accepted uncritically.

This paper will attempt to reconsider the role of the entrepreneur in the theory of the developing market economy. Schumpeter's approach, for all its brilliant and valuable insights, will be criticized at a fundamental theoretical level, both to the notion of entrepreneurship itself and to capitalusing production. Finally, I will attempt to outline Edition: current; Page: [196] the far-reaching implications of these criticisms for the economic policy of developing nations.

The New Science of Freedom George Koether

“While other sciences have advanced, that of government is at a stand; little better understood; little better practiced now than three or four thousand years ago.” Thus wrote John Adams to Thomas Jefferson in 1813.

“What is the reason?” Adams asked, and then proceeded to answer his own question:

Were Adams living today he would be even more dismayed. He would see the progress of most sciences accelerated to an awesome degree, while the “science” of government is worse than “at a stand”—it is in the hands of a spendthrift democratical assembly and a growing mob in the streets. In fact, there is no “science” of government, for government is Force not Knowledge.

There may be a science of politics—a political science—which seeks to establish the principles on which a stable polis can be founded. Government, however, is politics in action—polis in praxis. And government can never become a science, in my belief, until it embraces the praxeological Edition: current; Page: [210] principle which Ludwig von Mises has shown to be necessary to social order.

That principle is simply free choice—maximized for the individual and minimized for the government. As Mises states it:

If this is the true definition of freedom—and I believe it is—then freedom has a scientific basis. No longer does its definition depend upon the value judgments of philosophers, theologians, historians, political scientists or politicians.

Freedom, thanks to Ludwig von Mises, and the other economists upon whose efforts he founded his own great work, now rests upon the certitude of praxeological science. It does not depend upon the contradictory claims of parties or factions.

And if freedom can be thus scientifically defined, then on this foundation it may be possible to build a new Science of Freedom. As praxeology lifted economics out of the limited confines of “economizing scarce means” and broadened it to a general theory of choice embracing all human action, so can praxeology, with the aid of economics, develop a Science of Freedom.

Do we need a Science of Freedom?

Certainly, the human condition cries out for one. The sciences are advancing, yet freedom is declining. We gain in knowledge as we lose our liberty.

It is as if we had been mining the world of Ignorance and digging deep into one vast vein of science after another, one shaft of knowledge penetrating, at one time, more deeply than others, only to be reached and passed by other shafts as they dig deeper seeking Truth.

But each shaft is only partial Truth. And all the while, during this digging, there has been no great supporting structure of Understanding to relate one science to another—to serve as a crossbrace and prevent a cave-in. Meanwhile, the accumulated ores of wisdom are brought to the surface and piled higher and higher—until their weight overwhelms the weakened pillars of knowledge as each shaft goes deeper. Suddenly the whole structure of Knowledge collapses and society comes crashing down into Ignorance and ruin.

Our dilemma results from the failure of philosophy, science and history to find the “unifying principle” for which men have been searching for centuries. For, as Merz says in his History of European Thought, we have not met “the necessity of arriving at some firm and consistent view of the world and life—what we term a reasoned creed.”

Early ethical, political and religious philosophy had been trying to find that “reasoned creed”—by seeking to change man from what he was to what they thought he ought to be. History, by trying to derive immutable laws for man's development from a reading of past events, told man what he had to be. Religion tried to displace Reason in man's loyalty, or to explicate it by Revelation. And Reason, in its turn, failed to displace Religion.

Merz described the flagging efforts of thinkers to find “unity of thought” early in the 19th century:

In todays' crisis of Western Civilization the need is more than “felt.” Western man must find it quickly, if he is to save himself from annihilation.

The crisis of our times is the crisis of science. As Ernst Cassirer describes it:

And what is even worse: “Everyone pretends to speak not only for his own department of knowledge but for the whole of science, which he believes himself to represent and embody in an exemplary fashion. Thus arise ever new discords and constantly sharper conflicts, and there is no tribunal that can compose these quarrels and assign each party to its respective rights.”

Certainly science needs no tribunal. For a tribunal is Force. Nor does science want “unity.” For unity implies conformity. What science needs is the cohesive power of a principle.

And the only principle acceptable to all of science is the principle of freedom. It is ironic that Science, which has always stridently proclaimed the necessity for freedom for itself, has done so little to search for a Science of Freedom.

Without the cohesive power of a generally accepted idea, science, like society, loses its cement. It begins to disintegrate.

As Hayek says, in The Constitution of Liberty, “we must show that liberty is not merely one particular value but that it is the source and condition of most moral values.” And he states as his aim “the interweaving of the philosophy, jurisprudence and economics of freedom which is still needed.”

But nowhere in his interweaving does the eminent author of The Constitution of Liberty, as far as I can recall, define freedom as a law instead of a value—a law of human action.

He does refer to Christian Bay's definition of freedom as “the soil required for the full growth of other values”. And he cites W. H. Auden's statement that “Liberty is not a value, but the ground of value.”

If freedom is the “ground” of all values, then, it seems to me, freedom can be called a General Principle—a Law. For freedom, certainly, is not a “value” in the same sense that summer is valued over winter, or blue is preferred over red, or release from drug addiction is preferred over slavery to a drug habit. Freedom—the instinct to resist physical restraint, the hatred of coercion, the drive to what one wills—these traits of human character are inborn. They are akin to the instinct for survival.

Of course people, whole nations, give up their freedom ignorantly. But how many people choose, knowingly, to give up their freedom? How many prefer slavery? To a human being—if he is to remain human in the true sense of the word—freedom is a necessity. One cannot have a scale of values unless one has the freedom to choose.

“Nature is inexorable necessity” says Mises, “in nature there is nothing that could be called freedom.” So, “man has to adjust his conduct to the world as it is.”

But man exists in nature, is a part of necessitous nature, and subject to the laws of his own nature. He is the only “animal” who possesses choice. It is part of his nature. In fact, the necessity to choose is the one thing over which he has no choice. For a man to cease choosing he would have to make his final choice. He would have to commit suicide. Or, he would have to be killed by others.

Mises comes closer, perhaps, to defining freedom as a Law than does Hayek. He says, in Human Action, “the scale of values or wants manifests itself only in the reality of action.” Could one assume that “reality of action” is, by definition, a Law?

And he also says “Liberty and freedom are the conditions of man within a contractual society.” Can we add that freedom is a “condition of man in any society in the sense that it is an end he desires and a means he must have if he is to attain his end? Or, to satisfy the logician who objects that a means cannot be an end, might we say that one must have freedom in the praxeological sense if one is to enjoy freedom in the metaphysical sense? The first being the means and the second the end.

Perhaps we can say, since choice is immutable in man's nature, and since choice implies freedom, that “freedom is a law of man's nature”—i.e. a law of human action.

We do not say that the Law of Freedom has anything to do with so-called “natural rights” or “natural law.” We do not say that the Law of Freedom dictates modes of conduct or that it has anything to do with arbitrary, abstract ideas of “absolute justice”—all of which Mises fulminates against in Human Action.

“Concepts are tools of reasoning” says Mises, “they must never be considered as regulative principles dictating modes of conduct.” True. But concepts themselves occur after freedom. They are made possible by freedom. To create a concept a man must think. When thinking he chooses. When choosing he exercises freedom. The concept of freedom as a Law of human action imposes no dictation upon anyone or any idea. It merely states, a priori, what is self-evident, but what is too seldom said or too little realized.

Mises says, “praxeology as a science cannot encroach upon the individual's right to choose and act.” In a Science of Freedom we might say: praxeology defines the individual's freedom to choose as given. This may seem like hair-splitting. But from the standpoint of a Science of Freedom the distinction could be important.

The difference between a “right” and a Law—and the ability and willingness of leading thinkers in all sciences to accept that fact—could, quite possibly, open the way to that “integration” of thought so desperately needed to bolster the ideological defenses of Western civilization.

At least (and perhaps most important) it might lead to the necessary study of economics by thinkers in the social and natural sciences. It might, conceivably, awake them to the fact that—since there is a Science of Freedom, and since they wish to defend freedom in their own disciplines,—they must, then, master at least the essentials of the Science of Freedom and the science of economics on which it rests.

I doubt that we can expect them to make that effort until they have become convinced that Freedom is a Law based upon science, and not on a metaphysical mirage blown here and then there by the winds of opinion.

If they do make that effort, they will be confronted, immediately, with the question: whose economics will they study—Mises or Marx, Hayek or Keynes, Hazlitt or Friedman, Rothbard or Samuelson?

Hopefully, they will find time to study all of them and more. They will study the great ideas in economics as they would study them in their own disciplines. And if their minds are truly scientific—and not scientitic as Hayek defined the word in his important Counter-Revolution of Science—we need have no fear of the conclusions they will reach.

And in the science of economics, they will be guided by the test of the free market.

Should there be a Federal Reserve System? Obviously not; there should be free banking. Should money be paper and its supply regulated by the State? Certainly not; money should be specie and its quantity “regulated” by the market. Should there be price Edition: current; Page: [216] and wage and exchange controls? Of course not; there should be a free market. Should there be subsidies and quotas and tariffs? Obviously not; there should be free trade—and so on.

We may hope that their study of economics will give them the same humility in their outlook toward the complexities of human action that they seem to possess in their outlook upon the firmament they are studying, or the history and philosophy they are pursuing.

Certainly we have reason to hope that the great natural scientists and philosophers will arm themselves to avoid such embarrassing errors as this:

Also, we may hope, that scientists who have not studied human action will gain the insight of Lecomte du Nouy; “We have overlooked, behind the codified and conquered material forces, the directing forces that alone characterize man.... We did not wait to understand the nature of electricity before building dynamos and factories. Had we done so, we would have no electric force, light, or telegraph today. It is no longer a question of increasing our comfort but of saving the house built with so much labor—that house whose very foundations are tottering. To accomplish this, there is only one method: it is to consider man, in his complexity, as a single problem and to cease separating instruction from moral education.”

As for the Science of Freedom, we may hope that social philosophers from all disciplines may contribute to it. Although its main content will be economic its main contributors need not be economists.

It is impossible to foresee the content of the Science of Freedom in anything but the dimmest outline. Economics will pervade it because economics Edition: current; Page: [217] pervades all of life. But highly important contributions will come from masters of other sciences who know economics.

One thinks of Prof. Sylvester Petro whose Labor Policy for a Free Society stands as a keystone in the science of freedom related particularly to the fields of labor and law.

Another example of the “interweaving” of scientific expertise in more than one discipline is the work of Martin Anderson in his Federal Bulldozer, a remarkably effective application of economic understanding to a problem in social philosophy, economic policy and economic history.

And, from the standpoint of pure theory applied to the Science of Freedom, we have the brilliant contribution of Prof. Murray Rothbard, Power and Market.

One can say, with Sylvester Petro, that “if we are to understand the proper excellence of the free society, careful analysis of the unity and harmony of the concepts of freedom ... is indispensable.”

And fortunately, one can say, with Eric Vogelin, “that at least the foundations for a new science have been laid.”

The new Science of Freedom will, it is hoped, achieve the “interweaving” which Hayek started. It will “open the doors for future development rather than bar others,” as he promised. It will remove the materialistic stigma from the word “economics” and reveal the economist as the most humane of all scientists.

And it will offer to every brilliant mind that does not know economics the great opportunity to make the scientific world whole, by interweaving the knowledge of all other sciences with the indispensable science of economics—to the extent that epistemology permits, and that may be a far greater expanse than we can now envision.

Hayek has pointed the way:

Whether the Law of Freedom—as formulated here upon the foundation of the Mises definition of freedom—is a valid concept or not is, at the moment, unimportant. It is only one more humble attempt—of many which must be made—to build that “harmony” of science which will provide the “unity of thought” required to face the destructive, monolithic ideology now challenging Western civilization.

At least we can start with a simple proposition that may merit general assent:

To use the powers of nature for his own purpose, man must act in accordance with nature's physical laws—“man commands nature only by obeying her.”

Likewise, says the New Science of Freedom, man can use the powers of his own mind to his own benefit only by obeying the praxeological law of his own nature—i.e. the Law of Freedom.

If we can show that praxeology (including economics) is the only scientific explication of freedom, let us hope that, from now on, any man who claims to speak for Science will have mastered the essentials of economics and the essentials of the Science of Freedom.

And let us hope that Eric Vogelin's prophecy of twenty years ago will someday come to pass:

If Science succeeds in such a reconstruction, the eminent role of Ludwig von Mises in that reconstruction will—perhaps even more than his towering contributions to the advancement of economic theory—place him on the pinnacle of fame with the very few of the greatest social philosophers in history.

Financing, Correcting, and Adjustment: Three Ways to Deal with an Imbalance of Payments Fritz Machlup

I am going to try again. I did not succeed in convincing all those whom I wanted to convince on my first try.1 The issues require conceptual clarification, since this is a matter on which governments make decisions of great importance.

For years economists have distinguished two ways of dealing with imbalances—surpluses or deficits—of foreign payments: financing and adjusting. I suggested that it would be more helpful to distinguish three ways: financing, correcting, and adjusting. These are not, of course, mutually exclusive alternatives: financing will be required while certain processes of adjustment are going on or while some correctives may be at work. Before I start defending my conceptual scheme, I should like to embark on a preliminary exercise: to find out whether similar conceptual problems exist regarding the payments balance of an individual household or firm.

On Protecting One's Self from One's Friends Don Paarlberg

There is an old proverb that expresses a truth known to Professor von Mises and all others who participate in the intellectual forum: “Heaven protect me from my friends; I know how to deal with my enemies.”

It is an open question as to whether the brand of economics espoused by Professor von Mises has suffered more from its many avowed opponents or from certain of its professed friends.

∗ ∗ ∗

First, let us be sure we know the essential nature of the particular kind of economics Professor von Mises is talking about. It is variously known, with differing degrees of accuracy (and inaccuracy!) as “the market system,” “the price system,” “the profit system,” “the open system,” “the free system,” “capitalism,” “free enterprise,” “the enterprise system,” “the competitive economy,” “entrepreneural economics,” and “laissez-faire.” In this short essay we shall refer to it as the enterprise system.

In this system, the profit motive is the engine and price the steering wheel. The function of government is: to formulate the rules of the game; to keep the system open; and to protect the public and the private interest from each other's excesses.

Professor von Mises' brand of economics is intent on capturing, to the maximum possible extent, such benefits, public and private, as can be made to flow from individual endeavor. He sees the enterprise system as the economic counterpart for political democracy.

Cornerstones of von Mises' economics are: private ownership of the means of protection; freedom to choose one's vocation; and freedom to enter (or not to enter) the market. While not absolute, these institutions are Edition: current; Page: [240] generally favored.

By this system, the immense problems of supply are left largely to individuals, who follow the signals given by price. Whether a manufacturer produces black-and-white or color television depends on price. Whether a young man chooses to be a farmer, a coal miner, or an electrical worker is strongly influenced by relative returns. By differential rewards, resources are shifted as between the production of food, television, and space technology.

Prices guide not only production but distribution as well. Whether milk should be consumed in its fluid state, churned into butter, pressed into cheese, evaporated, condensed, or dried, depends on relative prices. Whether steel is imported or exported depends on price. Whether laboring people move into Mississippi or California depends on wages, a form of price. The consumer chooses goods largely on the basis of price: turkey or ham, Chevrolet or Cadillac, metal or wood.

This system has built-in incentives for efficient production. The man who puts resources together efficiently and who correctly anticipates the needs of the market is handsomely rewarded. If a man wrongly judges the needs of society or is wasteful in his use of resources, he suffers a loss.

The philosophical and ethical concepts which incline a man to favor von Mises' brand of economics may be described as follows:

∗ ∗ ∗

This is what von Mises' economic system in fact is. We should be sure we know what it is not.

Obviously it is not socialism, which centralizes decision-making and advocates public ownership of the means of production.

Nor is it the welfare state, which resists differential rewards and greatly modifies the relationship between one's actions and the consequences thereof.

The socialists and the advocates of the welfare state are clearly enemies of von Mises' system. He knows how to deal with them; he opposes them.

Whom can von Mises count on as friends? Those who are philosophically at one with him, in terms previously outlined. These friends are true, lasting and loyal. They are like the “remnant” from whom, according to the Old Testament, the Lord repeatedly revived His People Israel.

These are the true friends. But there are other “friends,” professed rather than real, who, through ignorance or design, claim to be supporters and defenders of the enterprise system. Chief among these are people whom we might call “neo-mercantilists,” modern counterparts of the eighteenth century elitists and protectionists whom the enterprise system originally overthrew. These people have a philosophy quite different from that embraced by the enterprise economists. The main difference is that they would restrict access to the market, in their own self-interest, and would use the power of government to accomplish this purpose. Another group, much less numerous and more recently arrived on the scene, consists of the new apostles of uninhibited, irresponsible freedom, who want to “do their own thing” and wrongly see in enterprise economics a rationale for license. These people depart philosophically from the enterprise economists in that they do not see the linkage between freedom and responsibility.

Here we introduce a digression, intended to show why it is that enterprise economists resist the labels, such as “reactionary” and “conservative,” that are sometimes thrust upon them. Political labels are usually attached to persons or organizations on the basis of issues. Certain positions are known as “liberal” and others as “conservative.” The difficulty with this form of labeling is that with the passage of time the meanings change. For example, “liberals” once favored liberty; more recently they favor restrictions.

The fundamental and continuing attribute which underlies political issues is the attitude toward change. Some people welcome it and others oppose.

The model with respect to attitude toward change may be presented in the form of a circle. At one point on the circle is the reactionary, who wishes to reinstate what formerly was. Moving toward the left (and the choice of direction is deliberate!) we next encounter the conservative, who looks somewhat askance at change but in certain cases may be persuaded to accept it. Then there is the moderate, a lukewarm individual, to whom change is neither of itself good or bad. Moving still in a leftward direction we encounter the activist, whose presumption is in favor of change and who will embrace it despite considerable risk. Yet further to the left is the revolutionary, for whom abrupt and violent change has merit in itself.

If we consider the moderate as the beginning point in this model, we range toward the right until at the extreme we find the reactionary; we range toward the left until at the extreme we find the revolutionary. The fascinating thing is that the reactionary and the revolutionary are positioned side by side. The reactionary right and the revolutionary left both have deep quarrels with the status quo and advocate precipitate action in order to change it. They are sisters under the skin, in mood if not in specific objective.

Where is the enterprise economist in this model? He is not really in the model at all. He is neither basically pro-change nor anti-change. “Conservative” and “activist” are labels to which the enterprise economist has little direct orientation. His reference point is the fixed idea of individual worth. He may, on a number of current issues, find himself at once conservative, moderate, liberal and Edition: current; Page: [243] revolutionary.

So here is the enterprise economist whose case has been put so well by Professor von Mises, surrounded by his true and professed friends. To the casual observer they all look alike. All are asking for change. All profess to believe in the worth of the individual. All laud enterprise. All see a limited role for government.

The special cross the enterprise economist must bear is the support given him, often vociferously, by his professed friends whose self-serving motives are readily noted by the public, if not by themselves. To be specific:

To the average citizen, the motives of these “friends” of the enterprise economy are as transparent as window glass. The low esteem in which enterprise economics is now held may result not so much from effective arguments made against it by its enemies as from hypocritical arguments made in its behalf by its professed friends.

∗ ∗ ∗

What to do? Those who both understand and support enterprise economics are relatively few in number, enough to keep the idea intellectually alive but not enough to bring about political change. How deeply should one inquire into the credentials of those who offer to help? Should one insist on purity of thought, word and act as a qualification? If so, the numbers will indeed be few.

The problem is typical for a minority group. It involves a delicate balancing act. It is necessary:

• 1. To keep the intellectual core of thought true and honest.
• 2. To incorporate new and improved ideas and practices that are in harmony with the essential nature of the concept.
• 3. To accept allies in the accomplishment of some political objective even though these allies may be opportunists.
• 4. To avoid being captured by these allies.

How well have the enterprise economists done on these various counts?

On point number one, intellectual integrity on the part of the leaders, we have done very well indeed. Professor von Mises' contribution has been primarily in this area. He has been intellectually honest and faithful to the central idea of enterprise economics. Using the tools of economic analysis, he has cut through the error and superficialities that might otherwise have misled us.

On point number two, innovation, the record is somewhat uneven. Some, overcautious by nature, have limited themselves Edition: current; Page: [245] to the concepts and forms of earlier times. Others, like Professor von Mises, have been innovative enough to build up the body of economic principle. Professor von Mises has been an educator as well as an innovator, and has avoided the oversimplification and dramatization that so often mislead. He has recruited many.

But not enough to bring about significant institutional change. That calls for use of the political process. Numbers are needed. So those who participate politically have sought to bring in the increased numbers. How well have we done on point number three, bringing in allies? Not so well. Enough have been recruited to pass a piece of legislation now and then, bearing the enterprise label. But these allies have often been the “friends” referred to earlier, who have supposed their natural desire for a protected market to be the stirring of the spirit of enterprise. Or, worse, clever lobbyists who have confused us with misleading slogans. Or, worse still, political charlatans whom we have knowingly embraced in order to get a majority.

These compromises have led to a dismal record in accomplishing the last of the four purposes, to keep from being captured by our allies. For, in large measure, we have been captured, not by an enemy, but by our professed friends. The result is that enterprise economics has an erroneous image.

In the minds of many citizens, an enterprise economist is one who believes in some form of economic Darwinism, who carves out a protected market for himself, who shackles his opposition, and who provides a rationale for the exploitation of his fellows. It is not difficult to see how an observer, noting what is done rather than what is said, would come to that conclusion.

The temptation, in view of all these things, is to confine enterprise economics to the classroom and the textbook, where it can be kept true, and to forego all efforts to bring about political change until such time as, by education, an absolute majority has been brought into being, whereupon, without need for allies, we would march to the polls and bring about the needed reform. Needless to say, this would take forever. Enterprise economics would become irrelevant. There is no real alternative to participation Edition: current; Page: [246] in the world of affairs, making alliances, accepting compromise, bringing about incremental change, experiencing the humiliation of defeat, and returning at intervals to the body of principle, happily kept alive and vigorous for us by Professor von Mises and his associates.

∗ ∗ ∗

Is enterprise economics viable in our modern industrial world? A chorus of voices responds in the negative. Von Mises' brand of economics, it is said, appeared in England during the early stages of industrialization, when life was simple, when individual entrepreneurs were numerous, when wide disparities of wealth were tolerated. The ethic of the day came from the Protestant Reformation, not from Sigmund Freud or Karl Marx. Now all this is changed, it is said, and the economics of enterprise is outmoded.

If by this argument one means that the form of enterprise economics in the Twentieth Century must differ from its form during the late Eighteenth Century, then the contention is valid. Any effort to restrict enterprise economics to its original form is certain to fail. But the essence of enterprise economics is that while the central concepts are persistent, the form is fluid. Here again we are in danger of a multitude of ancient errors, each stoutly defended by our professed friends: the mistaking of form for substance, the disciple holier than the Pope, an undue reverence for things past. We must break out of these errors if enterprise economics is to be relevant.

There is one special danger to be avoided. This is to use the rate of growth in the Gross National Product as the criterion for judging various economic systems. Many sincere friends of the enterprise system propose this criterion, confident that, thus judged, their system will prove superior. And indeed it might. But on the other hand, it might not. If rate of growth has been chosen as the criterion and a centrally-directed economy should show the higher rate of growth, logic would lead to adopting the centrally-directed system. Sacrificed would be the true merit for the enterprise system, its concern for the individual and its emphasis on freedom.

The free or entrepreneurial economic system relies for its functioning on some of the most persistent of human attributes:

These attributes are rooted in human nature. They are found in Twentieth Century man, as they were in Eighteenth Century man. They will be present in the Twenty-first Century. The task is to develop institutional arrangements, suited to the modern day, that will permit their flowering. This calls for some changing concepts. For example, one of the precepts of enterprise economics has been a limited role for government. We must rid ourselves of the erroneous idea, propagated by certain of our “friends,” that any act of government is an invasion of individual freedom and is therefore to be resisted. On the contrary, government can be used to restrain those who would abuse individual rights. Government can be used to create free institutions, as it was in the early days of the United States. Government can be used to improve the functioning of the enterprise system, to place a floor over the pit of disaster, to help the individual prepare himself better for his task as a decision-maker, and to see that the market functions as an enlightened institution. In brief, the proper objective for government participation in economic life is to strengthen the process of individual decision-making, not to substitute public for private action.

Many earnest believers in enterprise economics allow themselves to be backed into a corner and forced to defend a system which is not at all what they propose. They unintentionally take on the defense of, not a free market, but a caricature thereof. They are maneuvered into advocating the free market not as it is or as it could be but as it once was or as its adversaries contend it would be. Or, more tragic still, they get maneuvered into defending the free market as some of its professed friends conceive it.

What is needed is a concept of enterprise economics, of the free market, that is free in a modern rather than in an archaic sense. This means a market free from manipulation, free from misrepresentation, free from gross ignorance, and free from senseless gyrations as well as free Edition: current; Page: [248] from government domination. It means the kind of market that intelligent people are capable of creating in the modern day.

This argument against the competitive system often runs like this: “If we were to accept a competitive market and dismantle the protective devices that have been built up during the past third of a century, we would experience dislocation of such magnitude as to bring about disaster.” This is true. The argument is unassailable. It would be quite an accomplishment for the competitive market if it were to cope adequately with the current run of economic problems; our present mixed system leaves much to be desired in this respect. It would be asking far too much to expect the competitive market to handle not only the current run of problems, but the accumulated dislocations of 35 years of government interference as well. One does not indict the free market if he hesitates to put it, abruptly, to such a test. The substitution of market forces for centralized decision-making must be a gradual process, though some “friends” would impose it overnight.

Advocacy of enterprise economics should not be a doctrinaire position that renounces all the enlightened institutions that have developed since the turn of the century, though certain “friends” take this position. Those who believe in enterprise economics should claim as part of their system all developments that lift the capacity for wise individual decision-making.

Must an enterprise economist hold true to the central core of principle unique to his persuasion, despite the entreaties of his professed friends? He must if he is intent on refining the body of economic thought consistent with his values. If one is an educator and wishes to propagate his free enterprise ideas he must reach out to others and help them to reformulate their views. If one is a politician and wishes to move the country in the direction of freedom, he must make alliances and expose himself to the danger of being captured by his allies. Whatever his role, he must know the difference between his true and professed friends. In this day of contrived images, it gets harder all the time.

∗ ∗ ∗

Recollections Re a Kindred Spirit William A. Paton

I didn't have the good fortune to be a pupil of that great scholar and teacher, Ludwig von Mises, but it was my privilege to study under a master logician, a superb critic, an outstanding instructor, and an unexcelled expositor of the neoclassical position: Fred Manville Taylor. Professor Taylor never achieved the world-wide renown of von Mises, partly because of the paucity of his writing, but he was a kindred spirit in breadth of background, thoroughness of analysis, and devotion to the “automatic” mechanism of the free competitive market as the major means of directing man's economic activities. Hence it does not seem to be inappropriate to include some notes on Taylor in a volume designed to honor the foremost living economist.

Brief of Taylor's Education and Career. Professor Taylor, born in Northville, Michigan, July 11, 1855, received his bachelor's and master's degrees from Northwestern University (1876 and 1879). He did graduate work at Johns Hopkins and abroad, and later (1888) received the Ph. D. from Michigan. His brilliant doctoral dissertation was entitled “The Right of the State To Be”—an interesting subject for a scholar devoted to the view that an economic order characterized by individual initiative and freedom of exchange, with government playing a limited role, is more productive and more conducive to the advancement of all classes of citizens, and especially the poor, than any form of socialism or communism.

In 1892, after a period of teaching history at Albion College, Professor Taylor joined the Department of Economics of the University of Michigan, where he was in charge of the basic course in principles, as well as of the advanced work in economic theory, until his retirement in 1929, at the age of seventy-five. He died in South Pasadena, California, Edition: current; Page: [250] on August 7, 1932.

Professor Taylor's writing was limited, as already mentioned, partly because of his conservative evaluation of his own contribution to economic thinking, his passion for thoroughness, his devotion to teaching, and also because of his high regard for the writings of his predecessors in the field, particularly in Austria and England. Aside from his “Principles of Economics” (discussed later) his major written work was his “Chapters on Money”, appearing in 1906.

Taylor as Teacher—His “Principles” Course. As a teacher Professor Taylor was truly outstanding. His main concern, always, was to provide a well-organized, meaty, and sound body of subject matter for the student, but he also gave much attention to teaching methods, especially in his beginning course in principles. He took great care in preparing assignments, problem material, and examinations, and had no patience with the view that the in-charge professor should not be troubled by such prosaic chores. To an unusual degree he had the knack of telling his students what was what and at the same time stimulating them to express their understandings and raise questions. He also showed much skill in adjusting his teaching techniques to the level of attainment represented by those in a particular class. Thus there was a marked contrast between the rather rigid program of the basic course, and the exciting breadth of outlook encountered by students in his graduate seminars.

There was never another course in principles of economics like Taylor's, which he operated for many years as a rigorous five-hour, one-semester foundation in theory. (I won't undertake to tell about the departmental complications which led to this somewhat unusual arrangement.) There was a joint meeting once a week for all hands, at which the three or four hour-tests for the term were given. (The lectures were excellent, and entertaining, from the standpoint of graduate students and assistants sitting in the back row, but finding ways of holding the attention of 500 or more sophomores was a problem that Professor Taylor—like most other teachers in similar situations—never solved to his Edition: current; Page: [251] complete satisfaction.) For the other four hours the class was divided into “quiz” sections, as we called them. Size was strictly limited to twenty per section, in part because this would facilitate participation by each class member every session and in part to assure active control by the instructor. The twenty-five or more sections (in a typical term) were manned by a corps of assistants, recruited largely from graduate students, but Professor Taylor kept a tight rein on the over-all operation, in part by taking charge of every section once or twice during the course. (He was also suspected of occasionally listening through an open transom to check on what was going on.) A great believer in graphic presentation, he saw to it that each classroom was provided with an array of large charts. I recall particularly those showing illustrative demand and supply schedules, under various assumed conditions, in which the increments were displayed in squares, with appropriate labeling and shading for those that were crucial. I liked these charts, and have always considered them superior to the typical intersecting curve presentations. Another feature of the program was the requirement that students turn in written answers—once a week or oftener—to particular assigned problems and pointed questions. These papers were read by another group of assistants, also graduate students as a rule but somewhat less far along than the instructing staff, who noted major errors and limitations before returning the papers—promptly—via the section teachers.

Examination procedure in the principles course was unique, and deserves a brief description. Professor Taylor prepared the questions, generally without consultation with the assisting staff (although he did not object if some enterprising instructor proposed a question that might be included). The assistants did not see the examination questions until going on duty to hand out the exam sheets and an accompanying series of numbered cards, and to help with proctoring. Students were previously directed not to write their names on their “blue books” (used for exams in those days). At the exam period each student wrote his name on his card, in the space provided, and put the number of his card on the front cover of his “blue book”. The cards were then collected Edition: current; Page: [252] by the assistants. The purpose of this arrangement was to render the examination papers anonymous as they were graded. (The practice was to have each participating instructor grade the results of a particular question, on a numerical scale decided upon, for all students taking the exam.) Professor Taylor was a stickler for this feature. In his view recognition of a name by a grader was likely to have some impact on his judgment of the writer's performance, regardless of how determined he might be to remain strictly impartial. He also stressed the importance of very careful grading of exam papers, in fairness to our students, since final marks for the course were based almost entirely on examination performance. This was not quite the whole story. It was Taylor's practice to compute separately the combined showing of all the students of each instructor, in the hour-tests and final examination, as well as the level of performance of all the students in the course, and we all knew that he considered this evidence important in his appraisal of the accomplishments of the several instructors. I don't think he was unduly suspicious of the integrity of his young men, but he may well have decided that it was desirable to keep them free of the temptation to be too generous—or perhaps too severe—in grading their own students.

The Taylor Text. Early in his teaching career at Michigan Professor Taylor prepared reading material for the principles course, which he revised annually. For some years this was in loose-leaf form, and later was issued in a paper-bound volume. Printing was done by the University and the excess of the fees charged to the students over the cost of printing was accumulated in a fund to be used in improving instruction in the courses in economics. Not until 1921—when he was past sixty-five—was Taylor persuaded to have his “Principles of Economics” published commercially, on a royalty basis. The last major revision of this book, I believe, appeared in 1925, although it remained in print for another twenty years or more.

Not a best seller in the field, the Taylor book was nevertheless highly regarded by many teachers and had a substantial use through the twenties and early thirties. In Edition: current; Page: [253] my view it is the best basic textbook in economics ever written—assuming that careful organization, clear and precise statement, and thoroughgoing analysis, are desired earmarks. Among the noteworthy features is the penetrating discussion of “immediate” and “normal” price determination, and the pricing of the “primary factors”. Especially in his probing of the pricing of labor Professor Taylor stresses the importance of “disutility” as well as marginal “significance”. Mention may also be made of the clarity and insight displayed in his treatment of the nature and function of “capital as capital”, and the distinctive role of the entrepreneur. He doesn't make the common mistake of including the function of day-to-day management (a “labor” activity) in the “ultimate responsibility” assumed by the capital-furnisher and risk-bearer. Sprinkled throughout the book are terse, italicized “principles” and “corollaries”, and stimulating “problems” are included at the ends of chapters. We teachers under Taylor also liked the brief chapter summaries provided.

Professor Taylor considered that the essential purpose of the principles course was to give the student an understanding of the “present economic order”. Here and there he has a comment that might appear to the strict libertarian to be unduly friendly to government meddling in economic affairs, but a careful reading of his “Principles” makes it very clear that his judgment of socialism is unfavorable. The book abounds with statements such as: “In general, industrial efficiency is greater under a regime of freedom, noninterference, laissez faire, than under one of much government regulation”. One of his favorite admonitions, indicating the danger that interference would impair the function of the price system, resulting from the free market, was: “Don't monkey with the thermostat”. He concludes his “critique” of the prevailing market system with:

It is probably fair to add that if Taylor were writing now, nearly a half-century later, his appraisal of the current state of affairs would presumably be quite different. I think he might object to the continuing references by business leaders, politicians, and others to “our free enterprise system”, in view of the degree to which this system has been eroded.

The Graduate Theory Courses. As I have taken pains to point out Professor Taylor was justly noted, among discerning teachers, for his thoroughgoing course in principles. From time to time he also taught an effective intermediate course in theory. But it was in his graduate seminars that his leadership and instruction reached the level of brilliance, and it was his performance in this area that attracted able students from all over the country and on which his great reputation as a “teacher of teachers” was founded. In this graduate program it was his practice to tether the work of the particular seminar to some general concept or issue, such as “value”, “interest”, “capital”, “wage theory”, “foreign trade”, “money”, “business cycles”, and so on. Taylor generally set a limit on seminar enrollment of ten or twelve students. I attended six such classes over a three-year period and I wouldn't trade the experience for all my other schooling put together. As I remember it these seminars met for a two-hour session weekly throughout a semester. The reading assignments per course were heavy—perhaps three or four books and a dozen articles—and if anyone neglected the assigned reading this fact was shortly exposed by our teacher. He had an extraordinary talent for probing the mental make-up and the understanding of each of us with pointed questions, and keeping us on our toes, while at the same time doing a major part of the talking himself, Edition: current; Page: [255] and directing and dominating the discussion, throughout the session. Written work during the term was seldom required and rating in the course depended almost entirely on a rigorous final examination.

As in the basic course in principles, Professor Taylor maintained a down-to-earth point of view in his seminars. He saw little merit in mystical speculation or wheel-spinning analysis that had no relation to the “real world”. He regarded each course in theory as dedicated to a thoroughgoing and critical exploration of actual—not imaginary—problems and issues. A point he always emphasized was the need to sort out the truly salient and significant factors from the trivial and unimportant—bring to light the wheat and discard the chaff.

Professor Taylor was a great reader and student himself, all through his career, and he was amazingly well acquainted with the writings of all economists of any stature in the western countries from the Physiocrats on through the ranks of his own contemporaries. He gave a top rating to Carl Menger and other early leaders of the “Austrian School”, and of course there was careful consideration—in one or more seminars—of the works of Eugen Boehm von Bawerk, especially “Capital and Interest” and “The Positive Theory of Capital” (William Smart's translation). Much less time, as I recall it, was spent on the work of Friedrich von Wieser. Close behind the Austrians in his appraisal were the major English economists. In addition to the famous trio of Adam Smith, David Ricardo, and John Stuart Mill, whose principal works, beginning with “An Inquiry into the Nature and Causes of the Wealth of Nations”, appeared in the seventy-five years prior to 1850, Taylor thought well of a number of the later English writers, including William Stanley Jevons (noted as both logician and economist, and remembered—if not honored—for his speculations about the relation of commercial crises and sun-spots). And it is hardly necessary to say that Professor Taylor regarded Alfred Marshall's “Principles of Economics”, first appearing in 1890, as a truly outstanding treatment of the subject, and that references to Marshall were a commonplace in the seminars. Edition: current; Page: [256] Dennis H. Robertson appeared on the scene much later, but he had started his brilliant writing while Taylor was still teaching and came in for strong praise.

In his seminars Professor Taylor often took note of the special contributions by particular writers, even if their writings were not intensively covered. Thus he did not overlook the stress laid by N. W. Senior on “abstinence”, in connection with capital formation and interest, the famous “Essay on Population” by Thomas R. Malthus as well as his contributions to value theory, the emphasis on “Gresham's law” by H. D. Macleod, and—along with all his contemporaries taking the neoclassical stance—did not fail to credit J. B. Say for his notable contribution to an understanding of the fundamental identity of over-all supply and demand. Among French writers Frederic Bastiat received attention from time to time, and Taylor often recommended “Histoire des Doctrines Economiques”, by Charles Gide and Charles Rist, to those who wanted to improve their skills in reading French. Frederich List was not forgotten but was awarded no great praise for his protectionist position. He introduced us to Gustav Cassel's excellent “The Nature and Necessity of Interest”, and one term—as I recall it—a bit of time was devoted to reviewing Arthur C. Pigou's “Wealth and Welfare”.

Professor Taylor was quite willing to expose his advanced students to the writings of leading socialists, notably Sidney (and Beatrice) Webb and Karl Marx. I remember struggling to read “Das Kapital”, in German, and my initial aversion to Marxist theory was perhaps partly due to the difficulty I experienced in this chore. In trying to fortify my German, I might add, I made some poor choices. In addition to tackling Marx I read “Soziale Theorie der Verteilung” by Michael Tugan-Baranowsky (a small book, fortunately), and I spent many weary hours on Johann H. von Thünen's “Der Isolierte Staat”. I must admit, however, that Thünen was an illustrious Austrian economist, skilled in mathematics and sometimes referred to as the founder of econometrics. And the book I read was his most widely known work.

On the whole Professor Taylor did not hold American economists of his time in very high esteem. He regarded Frank W. Taussig as worthy of respect, but did not place John Bates Clark on a pedestal. For two or three years he assigned Thomas N. Carver's “The Distribution of Wealth” for study in an intermediate theory course. He occasionally referred, not unfavorably, to the work of Francis A. Walker. In our discussion of rent Henry George had his innings and was disposed of. We were of course required to dig into Irving Fisher's work, especially “The Nature of Capital and Income”, in the days before this able man became something of a crank. He found points to commend in Henry R. Seager's textbook. Taylor assigned for review “Economics of Enterprise”, by H. J. Davenport, when this book was published, but his appraisal was not favorable. Wesley C. Mitchell came in for some study—and praise—for his monumental work on business cycles. Not a few well-known professors and writers got scant attention in the seminars because Taylor did not view them as theorists in any legitimate sense; examples were John R. Commons, Richard T. Ely, Thorstein B. Veblen, and Henry Carter Adams, a colleague at Michigan. Professor Taylor had some favorites among the younger American economists coming into prominence in the twenties, including Frank H. Knight, whose excellent “Risk, Uncertainty and Profit” appeared in 1921, and Howard S. Ellis and Edward Chamberlin—both students of Taylor's for a time.

Not reluctant to bestow praise where he considered it due, Professor Taylor was a critic par excellence. Of the many writers whose books were dealt with intensively in his graduate courses there were few if any who were not found wanting at some point in accuracy, consistency, and thoroughness. Undoubtedly his tactics helped us to develop our own critical powers. Occasionally, however, the thought would occur to some of us students that perhaps he overworked his talent for discovering weak spots.

How would Professor Taylor react to the models, diagrams, and mathematical arrays that dominate current presentations Edition: current; Page: [258] in the field of economics? Would he, for example, assign to a graduate group such a book as Kenneth E. Boulding's “A Reconstruction of Economics”, with its more than eighty complex diagrams? Professor Taylor was well grounded in mathematics, and—as I've already noted—relied heavily on graphic presentation in his basic course, but he did not resort to the types of figures now widely used. Sometimes it seems as if the modern theorists are in a contest to see who can produce the most obscure and recondite displays of charts and equations. I recall one seminar in which we were taking a look at a somewhat elaborate chart in one of Francis Y. Edgeworth's books. After, with our teacher's guidance, we had decided what Edgeworth was driving at Professor Taylor leaned back in his chair and remarked, meditatively: “I wonder if he couldn't have told us that in four or five well-written sentences”. It is noticeable that our brilliant Milton Friedman, although fully capable of matching diagrams and mathematics with anybody, generally leans heavily on language as the means of presenting the results of his researches and analyses. And the master economist whom we are honoring with this volume finds writing a quite adequate means of expression.

More on the Personal Side. Professor Taylor was recognized by his associates as a man of the most precious intellectual and social gifts. Some appreciation of the esteem in which he was held may be indicated by recalling the circumstances of a banquet in his honor held at the Michigan Union the evening of August 1, 1925. On that memorable occasion some 150 of his colleagues and friends gathered to pay their respects and express their affection. His portrait—recently completed—was presented to the University (it now hangs in the library of the Graduate School of Business Administration at Michigan), and a new Buick was presented to him as a personal gift. The following is a free rendering of the remarks of a member of the Department of Economics:

Even to his intimates Professor Taylor's breadth of scholarship and range of interests were a continuing revelation. He was equally at home in history, philosophy, and economics, and was solidly grounded in many other fields. The accuracy of his information and the penetration of his thought were noteworthy. But he was entirely lacking in ostentation, in intellectual matters as in all others. He was noted for the hobbies and avocations which he pursued with the intensity and thoroughness which characterized his academic work. Whether devoting himself to golf, boating, fishing, Edition: current; Page: [260] cycling, dancing, rose culture, or some other interest or activity he found opportunity for the application of analytical power and for the achievement of high standards of performance. As I recall it, he usually dropped a particular hobby after two or three years, but he never abandoned his roses, and I suspect he knew more about this field than anyone else in Ann Arbor or even in the state of Michigan.

Although not prominent in social activities, Professor Taylor was an expert in friendship. In addition to his contacts with students and colleagues he made a host of friends in his own community and in other parts of the country—especially in the various areas in which he spent the mid-summer months, in an effort to escape the attacks of hay fever. Inclined to shun formal occasions such as faculty meetings and commencement exercises he was nevertheless recognized as one of the most potent members of the faculty—one who was able to marshal his case so clearly and convincingly as to silence the opposition. He was not active in politics (a field which he regarded as outside the professorial province) but he was drafted in the critical campaign of 1896 and made a number of effective addresses in Michigan in support of the maintenance of a sound monetary system (and he published several short articles in the monetary field in the late nineties). He loved his teaching, and never asked for a leave of absence. His conception of the position of the scholar and teacher was a bit on the ivory-tower side. Thus he never undertook a consulting job of any kind throughout his long career.

I mustn't forget to mention Professor Taylor's kindliness. Although exacting in the management of his staff of instructors and readers, he was both fair and friendly, took a keen interest in the progress and personal welfare of his helpers and went out of his way on many occasions to give us a pat on the back, or some good advice. To illustrate in my own case, I remember walking across the campus shortly after taking the final examination in my first advanced theory course. Professor Taylor passed me on his bicycle, then slowed down and called back to me over his shoulder: “That was an excellent paper you wrote, Mr. Paton”. I Edition: current; Page: [261] walked on air the rest of the day and I truly believe that this was the marginal factor in starting me in the direction of a teacher of economics.

Son of a devout Methodist minister, Professor Taylor as I knew him was not theologically inclined, although he was well acquainted with the writings of religious leaders and philosophers from the ancients to those of his own time. Like Mises, he didn't find it necessary to drag the Deity into an examination of price determination either in the broad view or in a particular set of circumstances. When in the mood, however, he enjoyed metaphysical discussion. He always emphasized the basic point that the ultimate raw stuff of the universe, whatever it is, like time and space has neither beginning nor end (“from everlasting to everlasting”), and he rejected the running down theory of the whole, which had some support in my student days, as well as the notion of a contracting or expanding totality. He accepted what might be called a cyclical view of what was going on, over-all, with respect to the temperature, size, density, and other properties of the stars and other bodies making up the galaxies scattered through space.

Taylor's AEA Presidential Address—and the Sequel. Professor Taylor never sought honors or preferment, and was not active in national or international societies (although holding membership in several), and it was not until 1928, not long before he retired, that he was elected president of the American Economic Association. At that time each president of the several organizations meeting together for their annual conventions was given a half-hour for his presentation at the joint evening meeting devoted to presidential addresses. It was characteristic of Professor Taylor that he took this allotment of time seriously, and he worked hard at condensing and polishing his prepared paper until he could read it in twenty-eight minutes. The subject he selected was “The Guidance of Production in a Socialist State”. It was a closely-reasoned statement of the position that those in charge in such a state must employ value judgments, akin to the determinations afforded by a free market, and founded on trial and error procedure, if efficiency in utilization of available Edition: current; Page: [262] resources were to be a major objective in directing production. The address appeared in print in the March, 1929, issue of The American Economic Review.

There is an interesting sequel that should be considered here. In 1938, a decade after Taylor's address was delivered, the University of Minnesota Press published a small volume under the title “On the Economic Theory of Socialism” and authored, according to the title page, “by Oskar Lange and Fred M. Taylor”; Benjamin E. Lippincott (an assistant professor of political science at Minnesota) was listed as editor. Actually the book consists of an “Introduction” by the editor (38 pages), followed by a reprint of Taylor's address (14 pages), and then Lange's essay which gives the book its title (85 pages), including an appendix dealing with “The Allocation of Resources under Socialism in Marxist Literature”, and a selected bibliography. (The references include writings by F. A. Hayek, F. H. Knight, Ludwig von Mises, and Lionel Robbins, as well as pieces from the pens of Enrico Barone, A. F. Lerner, A. C. Pigou, A. R. Sweezy, and others.)

Before commenting further on this volume, a few words on Oskar Lange's career are needed. Lange came to this country from Poland in the thirties and taught at several major universities. He held a post at the University of Michigan in 1936 and was later a full professor at the University of Chicago. He was an able scholar and instructor (although not a pleasant person); I can testify as to his ability, especially from hearing him speak more than once while we were both on the economics faculty at the University of California, in 1937–1938. He became politically active with the onset of World War II, underground to begin with, gave up his U. S. citizenship, was recalled to Poland, and became heavily involved in the communist cause. From 1946–1949 he was Poland's delegate to the United Nations.

To couple Fred Taylor with Lange in the authorship of “On the Economic Theory of Socialism” was nothing short of literary knavery, and both Lange and Lippincott were undoubtedly aware of this. The “editor” does indeed refer to Edition: current; Page: [263] Taylor as “an orthodox economist”, but his lengthy introduction is full of bias and misinterpretation.

A primary object of both Lippincott and Lange is to discredit “Professor von Mises, the well-known Viennese economist, and the leading opponent of socialism among economic thinkers”, and also to shoot down “Professors Hayek and Robbins of the London School of Economics”, whom they rank next to Mises as supporters of the view that rational allocation of resources is impracticable in a socialist state. Professor Taylor—no longer around to defend himself—is then pushed forward as a successor to Barone and his brief presidential address is glorified, particularly for the purpose of demolishing the position taken by Hayek and Robbins.

In Lange's essay, which is essentially the framework and content of the book, the first half-dozen pages are devoted to Professor Mises. To indicate the flavor of his comments on this truly great thinker and writer I will quote from the first paragraph:

The main body of Lange's essay is aimed at undermining the view that under socialism there is no workable method of securing a reasonable allocation of resources. As Lange puts it: “It is, therefore, the purpose of the present essay to elucidate the way in which the allocation of resources is effected by trial and error on a competitive market and to find out whether a similar trial and error procedure is not possible in a socialist economy”.

As a student and colleague of Professor Taylor for a period of fifteen years, and quite intimately acquainted with him for a considerable part of this period, I can say with confidence that he was firmly and consistently committed to the position that an economy regulated through the price system resulting from a free competitive market is superior on all counts to any form of collectivism or socialism. And I have long resented the misinterpretation and misuse of his AEA presidential address by the unscrupulous Oskar Lange, aided and abetted by B.E. Lippincott and the University of Minnesota Press.

Defining the Marginal Producer. I have already referred to some of the areas in which Professor Taylor's analyses were noteworthy. In my judgment his total contribution was substantial, particularly in clarifying and sharpening concepts that have been dealt with inadequately, or confusedly, by many writers. But I don't want to conclude Edition: current; Page: [265] these “recollections” without considering an example of his acute insights and formulations, with some comments on its present-day application. For this purpose I have selected the problem of the definition of the marginal producer or firm.

One reason for selecting this topic for brief attention is the popularity nowadays of stressing break-even points and “analyses” at both business management and economic theory levels. I am getting very tired of looking at breakeven charts and noting the persistent preoccupation with this subject. In particular I'm annoyed by the view, frequently encountered, that the break-even producer or firm is in the marginal position. This is sheer nonsense. To paraphrase Professor Taylor, from recollection rather than quoting written material (and I unfortunately threw away my extensive seminar notes years ago): The marginal producer is the one who is just barely induced to stay in the field by the existing conditions and circumstances, and who is so situated with respect to volume of production that his dropping out will influence the price-determining forces and tend to bring about a change in product price.

In pondering this definition perhaps the first point to observe is that producers who are operating at a loss often hang on for years. This is particularly true in the case of relatively small or medium-sized operators with ownership and control residing in a family or small local group. But the condition is not unknown among large concerns. As long as revenues cover current expenditures, including salaries for executives and wages for other employees, immediate management has a tendency to continue operations, even if the outlook is gloomy or not particularly promising. This accounts for the phenomenon of corporations that are worth more dead than alive. There are numerous examples of substantial companies whose shares have been quoted for long periods at less than net liquidation value (that is, at less than could be realized if the concern disposed of all assets for what they would bring, paid all liabilities, and distributed the balance to shareholders). And there are not a few examples of cases where the announcement of a program Edition: current; Page: [266] of liquidation by the directors has caused a sharp advance in the price of the outstanding shares. I recall one example where the price of the stock moved from $1 ½ to $16 per share when liquidation was decided upon and announced. The low price of $1 ½ was of course predicated on the assumption—by those trading in the company's stock—that the management would continue to fritter away the company's resources in unsuccessful operation. (These observations do not deny, of course, that there are many examples where tenaciously staying in there has resulted in a turnabout.) Thus we find that even a producer suffering persistent losses may not be in the marginal, price-influencing position.

The basic difficulty with the so-called break-even approach, from the standpoint of good economic theory, lies in an improper conception of what it means to “break even”. If capital-furnishing is a primary, essential factor in the productive process it shouldn't be ignored in the computation of total cost, in the broad sense of price-influencing cost, and if in a given situation this cost is omitted the producer is not really breaking even. Instead he is operating at a loss (even if this is not the way the accountants look at it). Here is a crucial point in the case for the free market economy as opposed to socialism, and those of us who strongly prefer control by the market to authoritarian directives shouldn't use terms and concepts that play into the enemy's hands.

It follows that the producer who regards an earning rate of 10$ per annum as the necessary lure for capital in a particular field, in view of all the conditions, and who finds that he is consistently achieving a return of only 4$ on the capital employed (computed in terms of current value of resources less liabilities) may well decide to terminate his operations—as fast as practicable—and thus be in the position of the marginal producer.

In practice, of course, the identification of the marginal producer in a given industry and time period may be difficult if not impossible. But this does not justify an improper concept of adoption of an unsound method of identification. We can be almost certain, indeed, that the marginal Edition: current; Page: [267] position is seldom occupied by the concern whose capital-furnishers are willing to continue operations if there is even a trace of compensation for capital above the zero point.

If I were not running out of alloted space I would add a brief statement of my own views on a related but broader subject, the relation of interest and profits. I have long been dissatisfied with the analyses in this area of economists, in so far as I know them, including the work of my revered mentor, Fred M. Taylor. I object, in the first place, to the tendency to treat interest and profits as distinct and separate phenomena. By discussing “profits” as a special factor, apart from interest, the door is opened to the view that this factor is hardly necessary, scarcely justified, and will probably disappear when we once get rid of exploitation and “profiteering” (whatever this widely used term may mean). I prefer to substitute the single concept of the market “price” of capital-furnishing (recognizing—of course—that both decision to save and act of investing are included). This price or cost of capital, varies with the package—the conditions and circumstances under which the commitment of funds is made. One major group of cases includes all the “hired” or contractual money—bonds, notes, current payables (where the capital compensation is often implicit), installment accounts, and so on—plus the subdivision of senior stocks in corporate enterprises. In all these cases there is some legalistic shelter for the fund furnisher, although the risk element is never completely absent, and often is substantial. The second major class of fund furnishers are found in the owners (so-called) in unincorporated enterprises, and the stockholders in corporations who occupy the exposed or buffer position (but in many enterprises having a more secure status than their contractual brethren in other concerns). In this situation the pricing is done by the over-all fabric of the market, which provides a prospect, a lure, sufficient to attract the capital-furnisher. And in high risk situations the lure may be in the form of the possibility—if not probability—of a jackpot type of reward. These few comments, needless to say, do nothing more than suggest an alternative approach.

Ludwig von Mises William H. Peterson

A generation of students at New York University's graduate business school who took the economics courses of Ludwig von Mises remember a gentle, diminutive soft-spoken, white-haired European scholar—with a mind like a steel trap.

Mises, who celebrated his 90th birthday on September 29, 1971, is an uncompromising rationalist and one of the world's great thinkers. He has built his philosophical edifice on freedom and free enterprise and on reason and individuality. He starts with the premise that the concept of economic man is pure fiction—that man is a whole being with his thought and action tightly integrated into cause and effect. All this is subsumed under the title of his 900-page magnum opus, Human Action, first published in 1949.

Mises, a total anti-totalitarian and Distinguished Fellow of the American Economic Association, was a professor of political economy at New York University for a quarter-century, retiring in 1969. Before that he had a professorship at the Graduate Institute of International Studies in Geneva. And before Geneva he had long been a professor at the University of Vienna—a professorship which the Nazis' “Anschluss” take-over of Austria, understandably, terminated. Among his students in Vienna were Gottfried Haberler, Friedrich Hayek and Fritz Machlup. Professors Haberler of Harvard and Machlup of Princeton each have been president of the American Economic Association; Hayek is an economic scholar of world renown.

Starting right after World War II, Mises gave three courses at NYU: Socialism and the Profit System, Government Control and the Profit System, and Seminar in Economic Theory. In each course he carefully established the primacy of freedom in the marketplace. He stated that the unhampered Edition: current; Page: [269] pricing mechanism, ever pulling supply and demand toward equilibrium but never quite reaching it, is the key to resource optimization and, indirectly, to a free and creative society.

Mises believes in choice. He believes that choosing determines all human decisions and hence the entire sphere of human action—a sphere he designates as “praxeology.” He holds that the types of national economies prevailing across the world and throughout history have been simply the outcome of various means intellectually, if not always appropriately, chosen to achieve certain ends. His litmus test is the extent of the market; accordingly, he distinguishes broadly among three types of economies: capitalism, socialism and the socalled middle way—government intervention in the marketplace.

Mises believes in government but limited, noninterventionistic government. He wrote: “In stark reality, peaceful social cooperation is impossible if no provision is made for violent prevention and suppression of antisocial action on the part of refractory individuals and groups of individuals.” He believes that while the vast majority of men generally concurs on ends, men very frequently differ on governmental means—sometimes with cataclysmic results, as in the various applications of extreme socialism in fascism and communism or of extreme interventionism in other types of economies, “mixed” or socialist.

Mises reasons that regardless of the type of economy the tough universal economic problem for the individual in both his personal and political capacities is ever to reconcile ends and choose among means, rationally and effectively. Free, i. e., noncoerced, individual choice is the key to personal and societal development if not survival, he argues, and intellectual freedom and development are keys to effective choices. He declared: “Man has only one tool to fight error—reason.”

Mises, well aware of the unlearned lessons of history, thus sees something of an either-or human destiny. While man could destroy himself and civilization, he could also ascend undreamed-of cultural, intellectual and technological heights. In any event, thought would be decisive. Mises believes Edition: current; Page: [270] in the free market of ideas as well as of goods and services—in the potential of the human intellect.

The nature of this leader of the Austrian School of Economics can be seen in an incident during a conference of the Mont Pelerin Society, an international group of scholars dedicated to the principles of a free society, meeting in Seelisburg, Switzerland in the 1950's. Mises expressed fear that some of the members were themselves becoming inadvertently infected by the virus of intervention—minimum wages, social insurance, contracyclical fiscal policy, etc.

“But what would you do,” it was put to him, “if you were in the position of our French colleague, Jacques Rueff,” who was present and at the time responsible for the fiscal administration of Monaco. “Suppose there were widespread unemployment and hence famine and revolutionary discontent in the principality. Would you advise the government to limit its activities to police action for the maintenance of order and the protection of private property?”

Mises was intransigent. He responded: “If the policies of nonintervention prevailed—free trade, freely fluctuating wage rates, no form of social insurance, etc.—there would be no acute unemployment. Private charity would suffice to prevent the absolute destitution of the very restricted hard core of unemployables.”

The failure of socialism, according to Mises, lay in its inherent inability to attain sound “economic calculation.” He argued in his 1922 work, Socialism, published five years after the Bolshevik Revolution that shook the world, that Marxist economics lacked an effective means for “economic calculation”—i. e., an adequate substitute for the critical resource-allocation function of the market pricing mechanism. Thus is socialism inherently self-condemned to inefficiency, unable to expeditiously register supply and demand forces and consumer preferences in the marketplace.

Some years later, Oskar Lange, then of the University of California and later chief economic planner of Poland's Edition: current; Page: [271] Politburo, recognized the challenge of the Mises critique on socialist economic calculation. So he in turn challenged the socialists to somehow devise an allocative system to duplicate the efficiency of market allocation. He even proposed a statue in honor of Mises to acknowledge the invaluable service the leader of the Austrian School had presumably rendered to the cause of socialism in directing attention to this as yet unsolved question in socialist theory. However, notwithstanding some slight shifts of the Polish, Soviet and other Eastern European countries toward freer economies, a statue of Mises has yet to be erected in Warsaw's main square.

But probably to Mises the more immediate economic threat to the West is not so much external communism as internal interventionism—government ever undermining if not outrightly supplanting the marketplace. Interventionism from public power production to farm price supports, from pushing minimum wages up to forcing interest rates down, from vigorously expanding credit to contracting, however inadvertently, capital formation. Citing German interventionist experience of the 1920's climaxing in the Hitlerian regime and British interventionism of the post-World War II era culminating in devaluations and economic decline, he holds such so-called middle-of-the-road policies sooner or later lead to some form of collectivism, whether of the socialist, fascist or communist mold.

He maintains economic interventionism necessarily produces friction whether at home or, as in the cases of foreign aid and international commodity agreements, abroad. What otherwise would be simply the voluntary action of private citizens in the marketplace becomes coercive and politicized intervention when transferred to the public sector. Such intervention breeds more intervention. Animosity and strain if not outright violence become inevitable. Property and contract are weakened, militancy and revolution are strengthened.

In time, inevitable internal conflicts could be “externalized” into warfare. Mises wrote: “In the long run, war and the preservation of the market economy are incompatible. Capitalism is essentially a scheme for peaceful nations.... Edition: current; Page: [272] To defeat the aggressors is not enough to make peace durable. The main thing is to discard the ideology that generates war.”

But what if a peaceful nation is nonetheless plunged into inflation-inducing war? Surely then it should clamp on wageprice and other production-allocating controls. No, says this adamant champion of the unhampered market economy; if interventionism is foolish in peacetime, it is doubly foolish in wartime when the nation's very survival is at stake. All the government has to do is to raise all the funds needed for the conduct of the war by taxing the citizens and by borrowing exclusively from them—not from the central or commercial banks. Because the money supply would not then be swollen and everybody would have to cut back his consumption drastically, inflation would not be a great problem. Public consumption, through a greatly augmented inflow of tax revenues and borrowed funds, would advance while private consumption would fall. The upshot would be the absence of inflation.

By the same token, Mises has no stomach for the idea that a nation could simply deficit-spend its way to prosperity, as advocated by many of Keynes' followers. He holds such economic thinking is fallaciously based on governmental “contracyclical policy.” This policy calls for budget surpluses in good times and budget deficits in bad times so as to maintain “effective demand” and hence “full employment.”

But Mises regards the “G” in Keynes' “full employment” formula of Y = C + I + G (National Income = Consumption Spending + Investment Spending + Government Spending) as about the most unstable, politics-ridden and unscientific balancing wheel that the economic managers could employ. For one thing, the formula ignores the political propensity to spend, good times or bad. And for another, it ignores marketsensitive cost-price relationships and especially the proclivity of trade unions and minimum wages to price labor out of markets—i. e., into unemployment.

Thus he holds Keynesian theory in practice proceeds through fits of fiscal and monetary expansion and leads to inflation, controls, and ultimately stagnation. Further, “G” Edition: current; Page: [273] so used, generally means the secular swelling of the public sector and shrinking of the private sector—a trend that spells trouble for human liberty. In a way, he anticipated and rebutted the Keynesian thesis a quarter-century ahead of Keynes in his 1912 work, The Theory of Money and Credit, in which Mises contended that uneconomic wages and forced-draft credit expansion and not capitalism per se carried the seeds of boom and bust.

To be sure, many economists and businessmen have long felt that Mises is entirely too adamant, too unyielding. If that is a fault, he is certainly guilty. But Ludwig von Mises, the antithesis of sycophancy and expediency, the intellectual descendant of the Renaissance, believes in anything but moving with what he regards as the errors of the times. He has long sought the eternal verities. He believes in the dignity of the individual, in the sovereignty of the consumer, in the limitation of the state. He opposes the planned society, whatever its manifestation. He holds that a free society and a free market are inseparable. He glories in the potential of reason and man. In sum, he stands for principle in the finest tradition of Western Civilization. And from that rock of principle, during a long and fruitful life, this titan of our time has never budged.

The Economic-Power Syndrome Sylvester Petro

Nature goes its own way, following laws of its own, shaped by forces in which human action—passion, will, thought—is irrelevant. Man's laws and man's societies are something else. The works of Ludwig von Mises, summed up in the monumental Human Action, demonstrate more powerfully than those of any other writer the role played by human will and human thought in the universe which affects and is affected by human action.

Not everything is possible to human action. Nature goes its own way. In the generous realm of the possible, however, man's laws, his rationally directed values, make a difference; perhaps the difference. As a part of nature we share the universal conatus, the striving to be. But our conatus is generic and undefined; we are more than the birds and the bees, or perhaps less, but different, anyway. And our intelligence is correspondingly different. We can kill ourselves, and we can err.

More strangely still, we are capable through intellectual error of killing ourselves by policies which we believe necessary to our survival. I believe that what I call here the “economic-power syndrome” constitutes one of the most destructive combinations of moral and intellectual error that mankind has ever suffered, and I propose to disperse this dark syndrome with the aid of one of Professor Mises' most brilliant contributions to the formulation of sound social policy: his insistence upon a central role for the concept of consumer sovereignty.

Ownership as a Social Function Paul L. Poirot

If one were obliged to list a single cause of our age of revolution, it might be this: the irresponsible use of private property.

Serious enough is the problem of stewardship and responsibility for disposition of one's own property. Infinitely greater are the problems created in the so-called charitable disposition of other people's property, when one votes to tax others for funds to be distributed to the “worthy” poor.

By this process, whole classes of “beneficiaries” may be deprived of their human dignity and of the opportunity to live as responsible, mature individuals:

Even so, to speak of the irresponsible use of private property immediately calls to mind the widely publicized charges of misbehavior leveled against “merchant princes” and “robber barons” of an earlier century. And it well may be true that some individuals in those days made some mistakes.

In his definitive history of property rights (In Defense of Property, Regnery, 1963), Professor Gottfried Dietze points out that: “In the nineteenth century, private property enjoyed greater protection than ever before ... property rights received far-reaching protection through legislation, adjudication and juridical science.” In other words, the full force of law and order and government protection had been mustered in support of the absolute right of the owner to do with his property as he pleased. That was the juristic attitude toward property rights, nor should it be altogether surprising to find such property-protecting governments occasionally granting to various owners or groups a bit of special privilege and political power. In any event, it is clear that individualism generally was favored over collectivism in America and much of Europe during the nineteenth century—and that the tide now runs strongly in the other direction.

The point at issue here is whether or not the owner's right to his property carries with it any corresponding duty or responsibility toward others. And the tendency of the law in the nineteenth century was to say no; let the Edition: current; Page: [295] owner do with his property as he pleases so long as he doesn't interfere with the property rights of others.

While such a view toward property may be economically and morally sound, it probably reflects poor political strategy. There is every logical reason, in a market-oriented economy, why decisions concerning the use of property are best left to the owner. But the owner may properly be accused of negligence if he relies heavily upon the government to defend his title and does not try to explain to others the general blessings of private ownership and open competition. Without that explanation, and understanding by the people, the same governmental force used to protect property can be perverted into a weapon for plundering, a perversion well advanced in the twentieth century. Owners who would protect private property are now obliged to explain to plunderers why property rights should not thus be violated.

The term “private property” often is narrowly used to signify only the material possessions of the wealthier members of society. But in a broader and more constructive sense, “property rights” are synonymous with “freedom,” and include the individual's right of self-control, self-respect, self-responsibility, and personal choice as to how he'll use his own life. A man without property rights—without the right to the product of his own labor and without respect for the equal right of every other person—is not a free man.

How, then, does one explain to would-be plunderers that their own and the public interest are best served by private ownership rather than public ownership of scarce resources? Perhaps the most likely point of agreement would be this: one does not use a club to explain a good idea to a reasonable person. The point is of great importance: the general welfare is served by reducing violence and fighting to a minimum. Once men agree to stop plundering one another, they are in a position to consider and to act in other ways to satisfy their wants.

When reasonable persons give thought to the ever-lengthening list of unsatisfied human wants, the impressive fact comes clear that resources are scarce. It is of utmost importance that resources be used efficiently, Edition: current; Page: [296] rather than wasted, if the satisfaction of wants is to be maximized. The reasonable person also must realize that the maximum satisfaction of human wants involves thought for the morrow as well as provision for immediate consumption. This means that some resources must be saved today and used as the tools and raw materials of further production for the optimum ultimate service of consumers. The important question, then, among reasonable men, concerns who should own the scarce resources of the world in order to assure the best possible service of the needs of the sovereign consumer, each the judge of his own needs. And the most reasonable answer, in the light of experience to date, is that an unhampered competitive market economy most effectively and efficiently places the ownership of scarce resources in those hands that best serve consumers.

A word about ownership may be appropriate here. Is the owner a producer or a consumer; are we speaking of production goods or consumption goods? As far as the goods are concerned, it doesn't matter. What matters is the owner's purpose, the reason why he wants possession. And the inevitable answer is that he is trying to satisfy his wants. The person who trades or participates in the market economy is both producer and consumer, nor is there any way he can be more one than the other in an open competitive society. A king or dictator or slave master might pretend to be all consumer, leaving the production to others, but that situation does not spell freedom.

Instead of dividing the ownership of all land and tools and other factors of production equally among all men, the general welfare depends upon directing such ownership and control into the hands of the most efficient producers of the goods and services wanted by consumers. Day in and day out, in the market place, consumers are expressing their latest preferences, handsomely rewarding some producers and letting others know they have failed. In the market economy, every owner is continuously obliged to justify, through service, his right to retain control of the resources he claims. Otherwise, consumers peacefully transfer the ownership and control into more capable, more productive, more serviceable hands. How is such transfer effected? Through the market system of recording supply and demand conditions in terms of prices that may be relied upon for the economic calculation of profit or loss. Consumers thereby direct the production Edition: current; Page: [297] of what best serves their needs, placing the ownership of property in the most capable hands.

Not all consumers, of course, are aware of the economic power they can effectively wield in their own interest through the open market. Some of them, forgetful or unaware of the inevitable scarcity of resources and the terrible cost of waste, are forever looking toward a political redistribution of property in the expectation of having more for themselves for immediate consumption. They fail to see that any such political redistribution thwarts the production they had ordered by way of prices bid in the market. Nor is this displacement of economic or market power by political power a simple quid pro quo—a foot gained for a foot lost. The tools of production are like a lever or a pry pole. It is possible to cut off a stove length from the lever for immediate use as firewood, but at a tremendous loss of leverage. It is rarely, if ever, in the consumer's best interest to destroy the tools of production.

As previously mentioned, governments of the nineteenth century may have been somewhat overzealous in the protection of property, trying to maintain the prevailing pattern of ownership even if the market indicated the desirability of change. Producers, once they have served the market demand and acquired title to a considerable block of resources, are not necessarily pleased to see a competitor come forth with a better idea to serve consumers. Established owners sometimes seek governmental protection, to exclude would-be competitors from the market. Such protectionism also curbs production and distorts or weakens the signals consumers send to market. A conservatism on the part of property owners that would use governmental force to frustrate consumer demand in the market is a socialistic form of conservatism, not in the general welfare.

In other words, the market affords no permanent security to the owner. Rather, it obliges him to prove himself over and over and over—endlessly. Consumers entrust property to his use, reward him handsomely if he serves them well, ruthlessly abandon him and reallocate the property the moment he fails to serve them. The market simply will not countenance the idea of property as an exclusive privilege of the owner. The market Edition: current; Page: [298] insists that property rights belong to those who best use the property to serve consumers.

The point for which we are striving here is that the present owners of property are not necessarily the ones one might expect to uphold and defend the competitive open economy—the market system. They are only human, and might well prefer the sort of protectionism nineteenth-century government gave property owners. So, it behooves the least of the property owners to protect his own interest in the market economy—his interest as a consumer. The man who brings his goods or services to market, in trade for property he would consume, is interested in the mobility of property for easy conversion to his purposes, not protectionism and stagnation in formerly profitable uses—and not a political diversion of property to uses no one is willing to pay for.

The market has been severely, and unjustly, condemned of late for allowing or even encouraging the waste of natural resources and the serious pollution of air, water, morals, and other requisites for clean living. But closer inspection will reveal that the properties thus polluted are those not clearly subject to private ownership and control: the atmosphere, rivers, lakes, oceans, parks, streets, schools, Appalachia, the body politic. They have been treated as public property, the responsibility of government, nobody's business in particular. Hopefully, it may be realized in time that such things as air and water and human virtue are scarce and valuable resources, that they should be subject to private ownership and control, and that government's sole responsibility is to protect the owner against robbers and vandals and at the same time hold him responsible if he uses his property in ways injurious to others. Private ownership is a social function.

Dr. Mises is cited as the text for this paper. The elaboration here is intended to be in strict accord with his teachings.

To Abdicate or Not Leonard E. Read

Life is a process of selection and rejection; knowing what to renounce in life and what to embrace are distinguishing marks of a wise man. My theme is Mises and his exemplary achievements in this respect—as much to be noted and honored as the economic enlightenment on which his fame so solidly rests.

Professor Ludwig von Mises arrived in America during 1940. My acquaintance with him began a year or two later when he addressed a luncheon meeting of the Los Angeles Chamber of Commerce of which I was General Manager. That evening he dined at my home with renowned economists Dr. Benjamin M. Anderson and Professor Thomas Nixon Carver, and several businessmen such as W. C. Mullendore, all first-rate thinkers in political economy. What I would not give for a recording of that memorable discussion!

The final question was posed at midnight: “Professor Mises, I agree with you that we are headed for troublous times. Now, let us suppose you were the dictator of these United States. What would you do?”

Quick as a flash came the reply, “I would abdicate!” Here we have the renunciation side of wisdom: man knowing he should not lord it over his fellows and rejecting even the thought.

Few among us are wise enough to know how little we know. Ignorance of limitations is to be expected from every one who does not see beyond himself. The wise man, on the other hand, achieves a measure of self-transcendence: he sees beyond himself, even beyond his environment. Knowing far more than the mill run of us, he measures his knowledge against what might be known and confesses to knowing nearly nothing. Such a rare individual weighs his finite knowledge on the scale of infinite truth, and his awareness of his limitations tells him never to lord it over others. Such a person would renounce any position of authoritarian rulership he might be Edition: current; Page: [300] proffered or, if accidentally finding himself in such a position, he would abdicate—forthwith!

Really, no one ever rules another. The most that is achieved by a Simon Legree, a Hitler, Stalin, or any of our own little dictators of economic affairs, is to keep others from being themselves. True, there is a role for a societal agency to play in keeping others from being themselves if it be their nature to commit theft, murder, deception, violence, and the like. I am not alluding, however, to the retarding of wrongdoing but, rather, to a person's freedom to be himself creatively. The authoritarian mentality is concerned not with inhibiting destructive actions but with the control and direction of creative actions. This no dictator can do; he can only suppress, deaden, destroy such actions. Creative actions can never be ruled but only ruled out!

The wise man, regardless of his superiority among men, realizes that his knowledge is but infinitesimal; that his light, however bright, is but a wee candle in the overall luminosity; that were all others to be made precisely in his image, all would perish.

To illustrate the fractional nature of one's knowledge, sit behind the wheel of your automobile and ask yourself, what part have I had in the making of this remarkable gadget? The answer, be you the President of the United States or of General Motors, is that you have played very little part, if any. Ask next, what do I know how to do that might have played any part in the making of this machine? Your answer remains substantially the same. To my point: Last year several million automobiles were manufactured in the U.S.A. How come? From whence came the knowledge that does not exist, even incipiently, in any discrete human being? It had to come from somewhere.

The knowledge that makes the automobile possible exists in what I choose to call the overall luminosity. This is composed of trillions times trillions of tiny illuminations, discoveries, inventions, insights, intuitive flashes, think-of-thats—an accumulation that had its beginning with the dawn of mankind. The cave man who discovered how to harness fire played his part. So did the Arab who invented the concept of zero. Without each of these, the automobile is inconceivable. These men, whoever they were, had as much a part as Charles Goodyear did in 1839 when he invented the hot vulcanization of rubber. Or those men who treated paper with Edition: current; Page: [301] a mixture of ferricyanide and ammonium ferric citrate and brought forth blueprint paper. Or those who found out how to make paper!

The overall luminosity that makes possible our automobiles, stoves, pencils, and a million or so other things by which we live and thrive is handed down or, better yet, made available to us in countless ways: memory, teaching, books, tradition, folklore, to mention a few. It is a storehouse of unimaginable enormity; no individual can perceive a trillionth of it!

The wisdom in knowing that we know not is sometimes glimpsed in relation to things. For instance, it is easily demonstrable that no single person has the knowledge to make a simple pencil, let alone a jet plane or that fantastic windshield through which the pilot peers. Even so, the realm of things is pestered with know-it-alls, persons who seem unable to relate their tiny glimmers to the overall luminosity and cannot therefore keep themselves in their place.

However, it is when we move from the realm of things to the realm of humanity—man and society—that authoritarians proliferate. Even many who would confess to an ignorance of how to make a dynamo will, with no hesitancy whatsoever, boast of knowing how man and society should be made to perform. Failing to discern that men and their relationships are vastly more complex than any thing or things, they entertain no doubts about their competency to rule mankind.

In the realm of humanity, as in the realm of things, an overall luminosity presides or rules. In social affairs, this may be referred to as “the consensus.” Professor Hayek uses, “Knowledge in society”; Edmund Burke called it “Immemorial heritage”; others refer to it as “Culture” or “Custom.” By whatever name, it is a body of underlying assumptions, of ideas taken for granted and held more or less in common; it is the residual legatee of mankind's history or, as James Coolidge Carter phrased it, “... the imperishable record of the wisdom of the illimitable past reaching back to the infancy of the race ...” It is what is handed down to us plus what we, who live on its growing edge, put into it.

Professor Mises knows that he does not or cannot rule; thus, he abdicates from even the idea of rulership. Knowing what phase of life to renounce is one side of wisdom.

But knowing what phase of life to embrace—to get ever deeper into, from which never to abdicate—is the other side of wisdom. And in this phase, as in the former, we have no exemplar who excels Mises.

This being my analysis, I shall use my own rather than Mises' phrasing: the ruling consensus, I repeat, is what is handed down to us, plus what we put into it.

What we put into it is the key. The improvement of the ruling consensus by you or me requires that our own thoughts and actions be, at the very least, a confirmation of the best that has been handed down to us or, hopefully, an improvement on what the consensus already contains.

We who live on its growing edge can put nothing into the consensus that is not within ourselves. It follows, if we would put anything into it, that life must be devoted to the improvement of what is within us, rather than wasted on the futile attempt to reform others.

I am unaware of any individual who is less the reformer or propagandist than Mises. To the contrary, his life is and always has been distinguished by a search for truth. His remarkable and unmatched economic works are testimony to many virtues but especially to his two-sided wisdom: knowing what phase of life to renounce and what phase of life to embrace.

There are numerous examples in history that lend credence to my prophecy. The seminal thinking of Mises—the improvements he has added to the consensus, manifested in his works over a span of seventy years—gives a light with so much radiance that it will penetrate the centuries—mirror itself through the ages.

The Book in the Market Place Henry Regnery

Few would deny that any more profound, complete or persuasive exposition and defense of the free market has been written than Ludwig von Mises' Human Action. It is no reflection on Professor von Mises nor the market economy, however, to say that no human institution is perfect and that no system of ideas, no matter how well conceived, is without exceptions or contradictions. I would like to make some comments about what seems to me to be a flaw in the workings of the free market system, a flaw which has been mentioned by many others, and which creates a problem which is constantly becoming more critical—the problem of the serious book.

All of us who believe in the efficacy of the free market, who believe, with Professor von Mises, that no system is able to regulate the production and distribution of goods more justly or efficiently, must nonetheless face the fact that the market is not an infallible guide, that other considerations must be taken into account, even in matters which might appear to be entirely of an economic nature. In this connection it is not amiss to point out that Human Action itself was originally published by a university press, by a publishing organization, therefore, neither subject to the disciplines of the market nor to the restrictions that purely market considerations impose. A university press is subsidized in various ways—by free or much Edition: current; Page: [304] reduced rent; by services supplied without charge by the university, services commercial publishers must pay for; by remission of taxes; by being free of the necessity of paying interest or a return on capital. The fact that Human Action was originally published by a university press may, of course, be purely accidental, but I think it quite likely that the size of the book, and particularly the unorthodox position taken by the author—a position many critics and reviewers would certainly not have approved of, might very well have frightened the commercial publishers at the time, 1948, the manuscript was offered for publication.

A manufacturer of shoes, of furniture, of fabrics, or any one of the thousands of every day articles that society wants can rely on the direction provided by the market with a good conscience—what the market demands the producer supplies and no one expects him to do otherewise. For the publisher of books the situation is not quite so simple. It is true, as Professor von Mises says, that “publishers cater to the majority by publishing detective stories,” but I am not at all sure that the minority interested in “lyrical poetry and philosophical tracts” comes off quite so well.

As publishing has become more commercial, from having been a “profession for gentlemen” to have become big business, with its shares traded on the stock exchange and all the rest, the demands of the market, not surprisingly, have tended to overwhelm purely literary and intellectual considerations. The typical publishing firm of the nineteenth century, as continued to be the case into the 1930's, was a small business as businesses go, was often run by its owner, whose personality and point of view it reflected, and who took pride in being able to consider himself at least an associate member of the Republic of Letters. He had to operate at a profit, of course, and to do this required skill and business judgement, but overhead, production costs and capital requirements were a fraction of what they are today, profit margins were higher, and, perhaps most important, the whole process of producing and distributing books, from publishing through book reviewing to the book seller, was more attuned to the book as something unique, as the work of the mind rather than as an article of commerce produced to sell. A publisher, of course, had to consider Edition: current; Page: [305] the market, but it wasn't the only consideration. No responsible publisher, even in the 1920's, would have accepted such a hoax as Naked Came the Stranger nor would the reviewers have given it serious attention, nor would a book of the quality and intellectual distinction of Human Action have had to be published by a subsidized press.

When Alfred Knopf, who was a successful and astute publisher, but very much in the old style, took over the publication of Henry Mencken's American Mercury, he didn't do it, I am sure, with the expectation of a large profit. He no doubt hoped to cover his costs, but couldn't be sure even of that, but it was his decision and taken at his risk, and the prospect of association with Mencken in such a venture was certainly attractive to him. Now his old firm is a subsidiary of Random House, which, in turn, is owned by RCA. The considerations that motivated Knopf can play no part in the decisions of a huge corporation which must, by its very nature, operate completely in accordance with the demands of the market and the profit and loss statement.

We must, it seems to me, accept the rather unpleasant fact that as publishing becomes more commercial, its output is increasingly determined by those who wish detective stories or such masterpieces as Naked Came the Stranger or The Love Machine. What happens, then, to the “lyrical poetry and philosophical tracts?” The university presses come immediately to mind, but they can't be relied on, for obvious reasons, to publish books that don't fit the orthodoxy of the academy, although there are exceptions—not only Human Action, but Hayek's Road to Serfdom and Weaver's Ideas Have Consequences were published by university presses. But these, I think, were accidents. In the case of Human Action, the editor of the press possessed a degree of intellectual courage and independence not common in the academy; after his dismissal, the press let the book go out of print and was glad to cede the rights to a commercial publisher. The Road to Serfdom was originally published in this country, quite accidentally and in a very small edition, as an import from England, and the director of the press who brought out Ideas Have Consequences was soon after fired. So not much of a case for university presses can be made on the basis of these three books.

H. G. Wells, in a letter to Wyndham Lewis written shortly after the publication of the latter's great satire Childermass, remarked that the books that make a lasting impression, that move men's minds, are necessarily written not for the masses but the few, and how, in the future, he went on to say, will such books be written and published at all? There will doubtless continue to be individual publishers who, within the limits imposed by the market, will publish books which are written neither to meet the requirements of the reviewers, those stalwart defenders of the orthodoxy of liberalism, nor the demands of the masses, but a publisher's freedom of action is far more limited now than it was in the days when Knopf could publish the American Mercury, or Faber and Faber T. S. Eliot's Criterion, which was one of the most distinguished and influential journals of its day, although it never had more than 800 subscribers. The foundations, if they would, could do something about this situation, but it requires intelligence and imagination as well as money, and intelligence and imagination, as always, are in short supply. If we are to have a vigorous and creative intellectual life, however, we can't, it seems clear, rely on the market alone to provide the impetus and direction.

In conclusion, may I say that Professor von Mises' own career demonstrates his loyalty to values higher than those of the market. Not one of the great American universities, I understand, ever gave itself the honor of offering him a professorship. If, however, he had been willing to adjust his views to the liberal orthodoxy demanded by the academic community, the universities, I am sure, would have felt quite differently about him. For his achievements as a teacher, economist and defender of the free society he deserves our respect and admiration, but perhaps even more for his integrity and unswerving devotion to principle.

Lange, Mises and Praxeology: The Retreat from Marxism Murray N. Rothbard

Most economists are familiar with the controversy on the possibility of economic calculation under socialism, and with the fact that Ludwig von Mises and Oscar Lange were the two major protagonists of that debate.1 Many are also familiar with Lange's ironic gibe that, for having posed the problem which Lange believed that socialism could readily solve, “a statue of Professor Mises ought to occupy an honorable place in the great hall of the Ministry of Socialization or of the Central Planning Board of the socialist state.”2 In the light of the rapid retreat from socialist central planning and toward a free market in the Eastern Europe of recent years, it seems that Lange's irony might well have boomeranged.

Far less known, however, is a parallel retreat from Marxist economic theory in Oskar Lange's last years, a retreat, furthermore, made in long strides toward the economic theory and the methodology of none other than his old opponent. Mises' most distinctive contribution to economics was his concept and elaboration of economic theory as praxeology (or praxiology), the formal, general logic of human action, of human purposive activity using scarce means to achieve the most preferred ends.3 As a leading Polish economist, Lange was very familiar with the praxeological theories of the distinguished contemporary Polish philosopher, Tadeusz Kotarbinski. While Kotarbinski's specific conception of praxeology differs considerably from Mises, stressing analysis of efficient as well as hostile action, they unite in emphasizing the essence of praxeology as a general theory of rational action.45 In his final, posthumous work, designed as the first of a multi-volume treatise on economics, Oskar Lange devoted a great deal of time to the painful acknowledgement that economics must encompass Edition: current; Page: [308] praxeology as well as Marxism. The particular irony is that Lange devoted a great amount of attention to an economic theory of his old antisocialist rival which still remains almost unknown in conventional Western economic thought.

Lange entitled Chapter 5 of his posthumous Political Economy, “The Principle of Economic Rationality. Political Economy and Praxiology.” He begins the chapter with the decidedly un-Marxist but praxeological statement that “Human economic activity is conscious and purposive activity”, that “consists in the realization of given ends by the use of certain means.”6 He proceeds to point out that the capitalist market economy had not only developed gainful activity, but that this gainful activity was a rational one, quantifying ends and means through a calculation in terms of money. Here Lange is implicitly harking back to the old calculation controversy. The economic calculation made possible by money and the invention of double-entry bookkeeping in the capitalist market, enabled action toward the maximizing of money profit and income, and thereby toward the most efficient realization of man's ends. In this way, maximization of profit under capitalism is accomplished by following the economic principle or principle of economic rationality, a principle enabling the maximum degree of realization of one's ends per given outlay, as well as the minimal outlay of means for a given degree of realization of one's ends. The former variant is the “principle of greatest efficiency”; the latter, the “principle of minimum outlay, or economy, of means”, or mimimum cost.7 The rational use of means, according to these criteria, is their optimum use; any other use of means Lange agrees to consider a waste. In support of these economic principles, Lange cites Kotarbinski's general praxeological concept: “The more valuable the product of a given experience the more productive is behavior; on the other hand, the less the outlay in the achievement of a given aim, the more economical is behavior.”

Lange proceeds to pay tribute to the great achievement of the capitalist market economy in arriving at this rational economic principle. Despite the prevailing private rather than “social” rationality, Edition: current; Page: [309] and despite such problems as the business cycle, Lange declares that “the rationalization of economic activity within the capitalist enterprise, the practice of proceeding according to the principle of economic rationality, and especially the consciousness of this principle in human thought, all constitute an achievement of historic significance ... on a par with the imposing advance in material technique made within the capitalist mode of production ... itself closely connected with the application of the principle of economic rationality in enterprise.”8

After rather perfunctorily asserting that socialism will proceed to expand this rationality to social planning, and to such areas of action as input-output analysis, technology, and military strategy and tactics,9 Lange goes on to identify this study of the rational principles of action as praxeology, the logic of rational activity, and details the history of this concept. From Mises, Lange had discovered that the term “praxeology” was first used by the French historian Alfred Espinas in 1890.1011

Proceeding to the more developed praxeological work of Kotarbinski, Lange criticizes the Polish philosopher's narrow and technological treatment of the concept as the science of effective or efficient activity; instead, notes Lange, praxeology is really a broader “methodological rationality”, a doing of one's best according to one's knowledge, so that it is better to define praxeology as the science of rational activity. In opting for this broader, more formal, and more general concept, Lange goes a long way from the Kotarbinskian and toward the Misesian formulation of the theory. Praxeology, adds Lange, encompasses under this rubric of rational activity such categories as: ends and means, method, action, plan, efficiency, and economy. Praxeological principles of behavior comprise the relations between the praxeological categories, and the principle of economic rationality (or the “economic principle”) is one of these praxeological principles of behavior. In this way, Lange agrees with Mises that the Edition: current; Page: [310] economic principle is itself embedded in the wider praxeological principles of general human action. Furthermore, he agrees that the praxeological principles had until now been elaborated only in the field of economics, as Mises affirms, and in ethics as well.

Lange, however, now found himself at the brink of a precarious position: the Mises thesis that praxeology had so far been elaborated only in economic theory, and that therefore economics and praxeology, while conceivably of different scope in the future, are now virtually identical. To take such a position would mean, for Lange, being close to becoming a Misesian and an Austrian School economist. Drawing back from this precipice, Lange hastens to add that praxeology includes, not only Mises-type economic theory, but also the general theory of statistical decisions, operations research, programming, input-output analysis, and cybernetics. Lange did not seem to realize that by rushing to include these disciplines, along with economic theory, in the rubric of praxeology, he was returning to the very different technological concept—the technological manipulation of means to reach a given end—that Lange had already rejected in Kotarbinski.12 Remembering suddenly to pay his respects to Marxism, Lange adds as an afterthought that dialectical materialism partly bases its cognition on the “praxeological principle” of proceeding according to the “criterion of practice.”13

From the praxeological principles of behavior, and especially the economic principle, adds Lange, a considerable edifice of economic laws can be deduced: such as a general attempt to maximize profit and investing capital at the highest rate of profit, thereby leading to a tendency toward a uniform rate of profit throughout the economy. In this way, Lange accepts the essential deductive Misesian methodology for economic theory: beginning with broadly general praxeological principles as axioms, and from these elaborating necessary laws by logical deduction. While Lange attempts to qualify this agreement by stating that empirical testing is needed to see whether various economic actions are “rational” or “customary-traditional”, Edition: current; Page: [311] his basic alignment with Misesian methodology still remains.

Later in the book, Lange returns to grapple with praxeology through a critique of subjective utility theory, itself a topic that usually rates little or no space in Marxian works.14 He begins with a history of value theory, and of the basis of economics in the nineteenth century, that is perfectly acceptable to any modern economist: from the classical “economic man” to Benthamite utilitarianism and hedonism to Bastiat's exchange of services and on to the subjective, marginal utility school. The latter began with Jevonian hedonism and then developed into the Austrian, praxeological interpretation of utility not as “pleasure”, but as the realization one's aim of economic activity, regardless of the nature of that aim. The aim may be pleasure, money, power, health, or whatever; the Austrian view simply states that economic activity has some aim, or preference, that forms the goal of action. As Lange correctly concludes: “In this praxiological interpretation, the subjectivist trend leaves aside all psychological considerations and transforms itself into a logic of ‘rational choice’ aimed at the maximization of preference.”15

Lange then proceeds to a history of the development of this general, formal theory of utility as ordinal preference. He sees that the Austrian School (Menger, Wieser, Böhm-Bawerk) was far more thoroughgoing in its application of subjective marginal utility theory than the currently far more influential Lausanne School (Walras, Pareto) or than Alfred Marshall. For the Austrians applied marginal utility theory to all gainful activity, whereas the latter applied it only to consumers. In the Austrian and praxeological view, both the consumers' aim of maximizing utility and the producers' aim of maximizing money income or profit fall under the single rubric of maximizing preferences and of marginal utility. Lange's history here is deficient in identifying Pareto partially with the Austrian approach while totally neglecting the praxeological role of Pareto's Italian opponent Benedetto Croce. Moreover, he also neglects Edition: current; Page: [312] the adoption of a general and purely ordinal concept of marginal utility by the Czech Austrian School economist Franz Čuhel, and following Čuhel by Ludwig von Mises in 1912, long before the famous Hicks and Allen article of 1934.16 Lange is correct, however, in citing a praxeological interpretation of utility by Max Weber as early as 1908, in which Weber stated that marginal utility should be formulated, not in such psychological terms as pleasure, but in such “pragmatic” categories as ends and means.17

Thus far our Marxian was willing to go with praxeological economics. But here Lange confronted a precipice even steeper than before: for just as it was important for him to deny that praxeology might be confined to economics, so it was still more important for him to deny that all of economic theory is a subset of praxeology. For if that were really the case, where would that leave Marxism? And so Lange separates himself from the final step in the development of praxeological economics: the transformation of economics into a branch of praxeology. Separated now from concrete objects, economic analysis became a formal science of rational behavior, of the maximization of magnitudes. Conversely, the formal aspects of all rational behavior became analyzable by the economic principle.18

For this transformation of economics into a branch of praxeology, Lange cites Lionel Robbins and his well-known depiction of economics as a certain aspect of all activity, namely the relation between scarce means and alternative ends, and the choice among those ends.19 He also devotes attention to the Austrian economist Hans Mayer, and to Max Weber, who had originated the Robbinsian distinction between economics as choice of means between ends and technology as the choice of means to realize a given end.20 While this distinction is rather simplistic - neglecting, for example, the point that economic as well as technological considerations enter even into the choice of means toward a single end - Lange is incorrect in charging that the distinction is meaningless because the hierarcy of alternative ends are all aimed toward Edition: current; Page: [313] one principal end: the maximization of utility. Lange does not realize that “utility”, for the praxeological school, is not a thing or an entity in itself, but is simply the label placed upon the preference rankings which everyone makees among his vrious ends. “Maximizing utility” simply means the formal principle that a man attempts to attain his highest ranking, his most preferred, rather than his less preferred end.21

Lange than points out that this transformation of economics into a branch of the universal science of praxeology culminated in Ludwig von Mises' Human Action in 1949. Classical political economy was now fully transformed into a general theory of human action, of the acts of choice. Economics becomes no longer an empirical science with “real” phenomena, but a formal logic of choice, where the only criterion of truth is agreement with the original axioms. The economic theory becomes empirically true insofar as any concrete action is governed by the economic principle. Lange is particularly critical because all of the laws of praxeological, subjective economics are considered by Mises and the preceding Austrians to be applicable to Crusoe economics as well as to the exchange economy. Lange's hostility to this “unrealism” stems precisely from the fact, as he points out, that application to Crusoe economics implies that the laws of economics are universal and apodictic for every time and place, regardless of the concrete content of social relations or economic activity. By means of praxeology, economics, like the natural sciences, has transcended the concrete and changing data of history and has assumed the character of a universal and apodictic science. As Lange characterizes this position: “Historically conditioned social relations may influence the concrete form in which these laws manifest themselves but they cannot change their basic character.”22 While Lange is willing to concede this universal and trans-historical character to praxeology, he is not willing to concede economics to be only a subset of praxeology and therefore to take on the same timeless character. For if he were, Marxism, with its proclaimed laws of historical determinism, would have Edition: current; Page: [314] to be completely abandoned.

The characteristic method of the praxeological economists in developing their analysis, Lange points out, is to begin with the economics of an isolated Robinson Crusoe, an analysis which elucidates the basic laws of men in relation to things. Then, other people are brought in, and exchanges between these individuals explained as each person choosing to give up something he wants less in order to obtain something he wants more. Exchanges thus become the resultants of the subjective attitudes and preferences of the participating individuals. Lange complains that this process of beginning with man vis à vis nature is the opposite of the Marxian conception, which concentrates on “economic relations among men - relations of production and relations of distribution.” He further quotes from the Marxist Rudolf Hilferding, in his charge that the Austrian School economics of Böhm-Bawerk “takes as the starting point of its system the individual relation of man to things. It conceives relations from a psychological point of view, as subject to natural invariable laws; it excludes socially determined relations of production, and ... development of the economic process according to definite laws is quite foreign to it.”23 This, to be sure, is the liquidation of the classical “political economy.”

But while Lange accuses subjectivist economics of ignoring real economic relations between men, he also correctly asserts that this school of thought treats the economic categories of capitalism “as general praxeological categories, categories of rational human activity ...”24 Wages, capital, profit become universal categories independent of the historical shaping of society, and therefore capitalism becomes a universal requirement of rational economic activity. Lange sees that this leads to the heart of the Mises-Lange calculation controversy on whether rational economic activity requires the private ownership of the means of production.25 But then Edition: current; Page: [315] Lange can hardly be correct in charging that praxeological economics ignores concrete social and economic relations; on the contrary, his real complaint is that from these abstract, universal economic laws may be deduced the very real necessity for market capitalism in order to sustain a rational economy.

Thus, while Lange is willing to concede the universality of the economic principle, and the achievement of subjectivist economics in discovering a praxeology that can be applied to political economy and to other fields, he is of course not willing to concede that economics is exclusively praxeological. The remainder of Lange's discussion is an unsatisfactory attempt to outline what Marxism or any other economic theory might add to praxeology in the formation of economics. He mentions institutional discussions of the social organization of production, of the State, labor, national income, etc., but the unanswered question is the role of these categories in economic theory as compared to an accumulation of institutional data to which that theory can be applied. Lange also approvingly cites the attack on the subjectivist Austrian School by the Polish economist Stanislaw Brzozowski, who charged that the Austrians merely analyzed the relations between man and given things, and comprised a theory of consumption rather than a “complete theory of society.” In the first place, this contradicts Lange's previous insight that the Austrians, in contrast to Marshall and the Lausanne School, had extended their subjectivist analysis from consumption to production and the productive factors; the “given things” constituted only the first step in their complete analysis. Secondly, why should it be a defect of praxeological economics that it does not offer a “complete theory of society?” Is physics to be condemned because it is not chemistry? Has a complete and correct theory of society been offered by any sphere of economics or social science?

Lange proceeds to unworthy and rather absurd Edition: current; Page: [316] attempts to subject the Austrian School economists to a Marxian “sociology of knowledge.” The Austrian School, he asserts, is the economics of pensioners and tax officials, because it discusses only consumption and not production; and Nikolai Bukharin is cited in asserting that the Austrian School, with its concentration on consumption, is the “rentier's political economy.”26 Not only does this contradict Lange's own previous concession to the Austrian integration of production and consumption, but it also leaves us with the puzzle of how to “explain” such consumption-oriented economics as that of John A. Hobson or J.M.Keynes? Are they too to be dismissed as “rentiers”, even the Keynes who called for the “euthanasia” of that very class? Lange's second attempt is to “explain” the abstract and unrealistic Austrian methodology as the product of the professionalization of economics in the universities in the late nineteenth century, which thereupon developed in “isolation from the productive process.”27 But while the earlier classical economists may not have been as professionalized, they were also - apart from Ricardo - not businessmen, and thus were equally “cut off” from the productive process. Neither the university professor Adam Smith nor the civil servant Mill were any closer to the productive process than Menger or Böhm-Bawerk. Furthermore, a bit later in the book Lange turns around and salutes the professionalization of all scientific research in the past century as leading to an autonomy of science, a critical attitude toward the social system, and a science that “becomes independent of the social milieu which produces” it.28

Lange declares that since the bourgeoisie had to know what was actually happening in the economy, they couldn't pursue completely the Austrian path of liquidating political economy. Therefore, the more “realistic” Anglo-American neo-classicists continued to study such important economic problems as money, business cycles, growth, and international trade. What Lange ignores here is that the Austrian subjectivists have studied and come to a position on all of these important questions, so that what he sees as their abstract “isolation” applies Edition: current; Page: [317] only to the fundamental laws and not to the more developed and applied branches of the theory. One need only mention the Mises-Hayek “monetary malinvestment” theory of the business cycle to see how praxeological economics has been applied to vital and realistic economic problems. The problem, however, is that Lange cannot be very happy with the policy conclusions of the Austrians in these areas: ultra hard money, the gold standard, laissez-faire capitalism. Again, the problem is not so much the relevance of the method as the kind of conclusions that are obtained.

Lange's remarkable adoption of Misesian praxeology as the major base for economics, onto which Marxian and other approaches were then hastily grafted, met predictably mixed reaction in Marxian circles. Most striking was the laudatory critique of Lange by Ronald Meek, the distinguished English historian of economic thought.29 Professor Meek, summarizing Lange's lengthy chapter on the Principle of Economic Rationality, notes that “significantly, the references to Marx's work become purely incidental.”30 Meek considers it “interesting and paradoxical” that praxeology, which “has now become an indispensable adjunct to Marxian economics”, was the culmination of a violently anti-Marxist subjectivist trend in “bourgeois” economics.31 The paradox might well be put the other way round: that of a leading Marxian economist adopting the economics of his own and Marxism's major opponents, and then rather desperately trying to insist that there is still room for Marxian and institutional approaches in the wider rubric of political economy.

To Marxian “fundamentalists”, on the other hand, the Lange-Meek movement is seen for what it genuinely is: a massive “revisionist” retreat from Marxism. In his review of Meek, Ben Brewster despairingly writes: “... for if the relations of production is a general principle governing society the latter becomes merely the totality of human social interaction; there is no specificity of the Edition: current; Page: [318] economic level at all and the distinction between base and superstructure breaks down. The result is that in the last essay in the book (the title essay), Meek apparently falls for the most general principle of society and the most bourgeois ideology of them all, von Mises' “Praxiology” (the principle of all rational action) in Lange's purely ideological attempt to graft Marxist and Neoclassical economics.”32

And so, as Marxian economic thought joins the actual economies of Eastern Europe in a headlong flight from Marxism and socialist central planning to Western and capitalistic modes of thought and economic systems, Oskar Lange's original irony is truly beginning to boomerang: Perhaps the freemarket, capitalist economy of a future Poland will erect a statue of Lange alongside the monument to his old antagonist?

The Production and Exchange of Used Body Parts Simon Rottenberg

When failure occurs in human organs and tissues it is sometimes possible to prolong life and cure illnesses by transplanting parts from one body to another.

This paper will discuss the market, as an alternative to a system of voluntary donation, as an instrument for bringing forth a supply of organs and securing their storage and their appropriate distribution in space and time.

Transplants, or grafts, as they are sometimes called, are either cellular or structural. If cellular, they are of living organs (for example, kidney, liver, spleen or skin); if structural, they are of extracellular tissues (for example, artery, bone or cornea).

G.E.W. Wolstenholme reports that the first transfer of blood (from one dog to another) was done at Oxford by R. Lower in 1666. J. F. Nuboer says that the first recorded article on organ Edition: current; Page: [323] transplantation was published in the Wiener Klinische Wochenschrift in 1902 when Ullmann described the transplantation of a dog's kidney to its neck.

Skin was transplanted experimentally in the 1920s and 1930s by E. Holman and H. L. Smith reports that the first successful kidney transplants in humans was done in 1954 by J. E. Murray in Boston.

According to P.V. Rycroft, the first human graft of the cornea was done in Reisinger in 1817.

Organ and tissue transplantation is not a new medical procedure. The very large resources devoted to bio-medical research in recent years has, however, greatly enlarged the stock of knowledge about transplantation. It has been reported that there are some thirty different body parts that have been transplanted with more or less success. These include, in addition to the parts already mentioned, bone marrow, bones, pancreas, lungs, livers and hearts, blood vessels, cartilage, ovaries, testes, various glands and the intestinal tract.

Not all of these transplants have been executed in humans; some have been done only in animals. Some are still experimental in the sense that the probability sets associated with possible outcomes are unknown. Some are standard (non-experimental) procedures; the probability sets are known.

Transplants are, in some cases, unique therapeutic instruments; the patients will expire if they are not done. In other cases, transplantation is a therapeutic substitute for other procedures as when treatment consists of either renal transplantation or periodic dialysis.

Transplants may be autografts (from one to another part of the same body), or homografts (from one to another body of the same species), or heterografts (from one to another body of different species).

Parts may be taken from living suppliers or from cadavers. If taken from living suppliers, it Edition: current; Page: [324] may be virtually risk-free to them, as when blood, skin, or bone marrow is taken. The risk may be positive, but small, as in the case of paired organs like kidneys when, if one is taken, the suppliers remaining kidney takes up the whole burden previously shared by both kidneys and the risk consists of a certain (small) probability of failure of the remaining kidney and, of course, the risk associated with surgery in the taking of the supplied kidney, itself; in the same subset are ovaries, testes, nerves and small blood vessels. Or the risk may be positive and large, as in the case of unpaired organs essential to life like hearts, livers and pancreas; the taking of such an organ will cause the life of the supplier to come to an end.

There are three phenomena that affect the supply schedules of organs and tissues.

Some organs deteriorate rapidly if preservation techniques are not quickly administered. A kidney must be excised from a cadaver within about an hour after death and quickly perfused and cooled thereafter, if it is to be useful for transplantation. A liver will suffer damage, if it is without a blood supply for more than twenty minutes at 37° C.

Some parts can be stored for longer periods and others for only short periods. Bone, preserved for storage by freezing, has been successfully used for transplantation over a year after excision, but whole blood must be discarded after three weeks or a month have passed.

Nuboer reports that Humphries was able to preserve kidneys for five days by means of perfusion, cooling and hyperbarbic oxygen. R. C. Lillehei reports that unpaired organs can retain their vitality for seventy-two hours, if stored in vitro, but that optimal organ function is impaired after about twenty-four hours. The viability of all tissues is said by F.D. Moore to be a function of the time they have been without a blood supply and the temperature during that time.

Long period inventories can be constructed for some body parts and not for others.

The body tends to reject grafts of “foreign” cellular parts made upon it. K. Landsteiner already pronounced in his Stockholm Nobel Lecture in 1930 that “the success of transplantation stood in a reciprocal relation to the degree of consanguinity”. The survival of the recipient of a renal transplant will be most highly probable if the supplier is an identical twin (these are called iso-transplants); somewhat less probable if the supplier is a parent or sibling of the recipient; less probable still if it is a more distant blood relative; still less probable, if it is another, unrelated human; and, finally, least probable if the supplier is of a different species.

The antigenicity of organs (the property of rousing an antagonistic response in the host) varies among organs. Ovaries and parathyroids are least antigenic; kidneys, livers, lungs and adrenal and thyroid glands fall mid-way with respect to antigenicity; and skin is most antigenic.

Structural grafts (bone, artery, cornea) do not involve the question of antigenicity.

Until a condition of non-reactivity can be more effectively induced in the host (as by chemo-therapy), procedure requires the discovery of suppliers who are histo-compatible with recipients.

Thus, there are better and worse substitutes for a diseased kidney, implying a family of supply schedules some lying closer to the ordinate and some more distant than others.

Organs and tissues to be used for transplantation are almost never bought and sold.

Blood is bought and sold in a number of countries. R.M. Titmuss estimates that, for recent years, only nine percent of the blood collected in the United States has had the properties of altruistic gifts which Edition: current; Page: [326] produce psychic utility directly. The rest has been sold for payments in cash, payments in other blood (either already received or to be received in the future in a probability or insurance sense), payments in the form of probabilistic early release from prison, or payments in kind such as holidays, meals, medical care, or admission to sports spectacles.

Almost all blood supplied in Britain, on the other hand, is, according to Titmuss, given freely “to unnamed strangers, there (being) no formal contract, no legal bond, no situation of power, domination, constraint or compulsion, no sense of shame or guilt, no gratitude imperative, no need for penitence, no money and no explicit guarantee of or wish for a reward or a return gift. They are acts of free will; of the exercise of choice; of conscience without shame.”

Of the two systems for securing supplies of blood, Titmuss prefers the British to the American. His grounds are divided into two parts which he calls ethical and economic. We shall discuss the ethics of the question first, leaving the economics to later.

Titmuss' ethical case against the purchase and sale of blood is: it represses the expression of altruism; it erodes the sense of community; it sanctions the making of profits in hospitals and clinical laboratories; it legalizes hostility between doctor and patient; it subjects critical areas of medicine to the laws of the marketplace; it places social costs upon those least able to bear them—the poor, the sick and the inept; it increases the danger of unethical behavior in various sectors of medical science and practice; and it results in situations in which proportionately more and more blood is supplied by the poor, the unskilled, the unemployed, Negroes and other low income groups and categories of exploited human populations of high blood yielders so that blood is redistributed from the poor to the rich.

The ethical case against the commercial transaction of body parts appears in the literature repeatedly. Edition: current; Page: [327] The Ciba Foundation assembled a group of medical practitioners and researchers, teachers of medicine and the law, lawyers and judges, and theologians in 1966 to discuss ethics in medical progress with special reference to transplantation. The reported discussions at that symposium contain frequent references to the “unsavory” character of money exchange for organs. The basic rule, J. Hamburger said, “must be to avoid any kind of pressure (including financial) on the prospective donor.” R.Y. Calne said it is “most deplorable to condone” the sale of organs for money and “a doctor should not be involved in such a financial contract”.

Since society is willing to pay people to put their lives and health at risk in hazardous occupations, it is difficult to see why it should be thought objectionable to risk impairment by the sale of tissue.

The proscription by medical practitioners, on ethical grounds, of commerce in organs and tissue puts power into the hands of the doctors and involves surgeons specialized to transplantation in arduous discussion and the construction of tortured distinctions in defining acceptable behavior.

Justice Cardozo said that each had property rights in his own body, but a conspiracy of physicians has greatly reduced the value of those rights or, possibly, the physicians have taken possession, by collusive fiat, of property rights in the bodies of all.

It is as though a coalition of plumbers had agreed that none of them would install bathroom fixtures that a householder had secured in exchange for money but only those altruistically given away by appliance manufacturers. To this the doctors might respond, “Ours is a different case; we exercise a profession that cares for the health of the citizenry”. But, of course, so do plumbers as anyone knows whose drinking water has been polluted by seepage from sewer drains.

When the doctors decide the rules that will govern whether they will take tissue from a supplier and install it in a host, they either take no account of the utility functions of supplier and host or they must estimate those functions. Since preference ordering and weights are best known by each for himself estimational outcomes are almost bound to be wrong. Decision-making by doctors, therefore, means that aggregate utility is less than maximized.

An exchange system that maximized the community's utility would be required to have properties that took into reckoning, too, the preferences of the doctor; he is optimally the proprietor of his own services and should be able to refuse to sell them. He would not want to execute a graft that would extinguish, with a high probability, the lives of both supplier and recipient because, if he did this often enough, he would find himself to be reputed to be a bad risk as a surgeon and custom would be driven from his door. Alternatively, he might be willing to engage in such an enterprise occasionally, tissue donor and recipient freely desiring its execution, if he were paid a fee that was somewhat higher than the discounted value of diminished and foregone lifetime income produced by failure.

A utility maximizing arrangement would be one in which the preferences of all participants—donor, doctor and recipient—affected the outcome. Such an arrangement permits all freely to decide whether to participate, each calculating personal costs and gains. Such a system is not achieved, if doctors are constrained in choice by rules elaborated by the profession and enforced by such possible sanctions as divestiture of license, ostracism by colleagues, or denial of the right to use hospital, laboratory, or research facilities.

We have such constraining rules in practice although their explicit forms are still unsettled. Under the guise of constructing standards of acceptable professional behavior that have nothing to do with medical outcomes, doctors decide which suppliers' offers of organs and tissues will be accepted and Edition: current; Page: [329] which will be rejected, which organs they will take from living suppliers and which they will take only from cadavers, which aspirant recipients of tissue they will service and which they will not. By this decision-rule system, the medical community imposes its own ethical values upon the lay community; this is clearly to be dispreferred to market arrangements that require consensus of all central participants as an antecedent to action. Then the ethics of all come to influence outcomes.

In any case, the controlling rule of the doctors is a nonsense rule. They will not graft, they say, unless the donor freely and voluntarily gives an organ without “pressure”, including without the “pressure” of money payments. They will want psychiatric evidence that a twin gives out of love for his sibling. But they will not inquire whether it is because a man dearly loves his child that he offers to sell a healthy kidney to procure income with which to pay for the child's schooling. They do not see that money can be an instrument for the expression of love. Nor do they see that participation in an act of exchange involving reciprocal payments—an organ for money—can also be a free and voluntary act.

It has already been mentioned that R.M. Titmuss had made a case, “on economics grounds”, against the purchase and sale of blood. The case mainly consists of the following.

Paying for blood gives suppliers an incentive to falsify its quality by suppressing information of past histories of serum hepatitis, malaria, syphilis and brucellosis, all of which can be transmitted by blood transfusion.

This is thought to be particularly important in the case of serum hepatitis because laboratory tests for screening out blood from hepatic suppliers do not exist; they are known only ex post when recipients come down with the disease after an incubation of about six months. Titmuss' review of the literature shows that the hepatitis transfusion rate is higher in the United States than in Britain. The risk of infection Edition: current; Page: [330] by hepatitis is enlarged if plasma is prepared in large pools (say of more than ten donors). Large pools tend to be formed in the United States and small pools tend to be formed in Britain. Plasma production unit costs exhibit the property of increasing returns to scale and it is for this reason that large pools are formed in the United States.

Titmuss argues, too, that the commercial blood market in the United States generates waste in the form of unused stocks of blood that are discarded because the blood—a perishable commodity—is kept longer than its shelf-life and because doctors do not use blood that they order in excess of their requirements.

He also argues that shortages develop in blood market economies in periods of peak demand such as weekends, the summer months, and at Christmastime when increased motoring produces accidental injuries that are especially blood-consuming in their repair.

The appropriate measure of the comparative efficiency of the two systems for collecting blood does not appear in Titmuss' calculus. That measure is the comparative quanta of real resources employed in the collection of a stock of some magnitude, in its storage, and in its re-distribution in space.

Titmuss' “economic” critique of the blood market does not hold up under examination. It is true that laboratories cannot screen out blood from hepatic suppliers. But the market can do so. It is known that the incidence of histories of hepatitis varies with the social class of the suppliers. Since there are gains to be made from keeping separate blood coming from different social classes, it would not be surprising to discover firms who certify that they have blood taken from sub-sets of the population in which the incidence of hepatitis is low. It does not matter very much whether individual suppliers give false information or not about their medical histories. The probabilities of infection through transfusion will vary among lots and the probability numbers will be known more or less. Firms may, of course, falsely certify but, if they co, they would be presumably subject Edition: current; Page: [331] to suit for recovery of damages done by their falseness and this will tend to compel truthfulness in them. And, in any case, systematic false certification will, in time, come to be known and competition will deprive a firm engaged in such activities of custom. We would expect, of course, that the market will establish a higher price for high-quality blood and a lower price for low-quality blood. Buyers would be free to choose among the distinguishable classes of blood, taking account of the magnitudes of qualitative difference and the differences in prices.

Similarly, one would expect the market to distinguish plasma formed in large- and small-pools, giving buyers the option of one or the other. Rational choosers might well prefer to run a very small additional risk of contracting hepatitis in order to achieve a very large saving in cost.

Discarding outdated blood may not be wasteful at all. Stocks of blood are kept by hospitals, blood banks, and other institutions and they are kept by surgeons incidentally in the execution of given, particular surgical operations.

The demand for blood is characterized by peaks and troughs. There is a stochastic component in the set of variables that determines the time-distribution of demand. Institutions may “insure” against running out of stock by keeping somewhat larger inventories. If it turns out ex post that the inventories were too large, some blood becomes outdated. But if they had underestimated, it might have been at the cost of impairment of life. It might be socially cheaper to discard some blood than to run the risk of exhausted stocks when they are needed.

Similarly with respect to the individual surgeon. Until he cuts he does not know with perfect certainty how many units he will need to transfuse to his patient. If it turns out that he has overstocked, his ex ante decision was not necessarily wrong. He had diminished risk. That has value and that value may exceed the value of the discarded blood.

And, finally, if shortages occur in peak accidental injury periods, the market need only offer higher prices to suppliers in those periods to bring forth larger flows.

The first successful kidney transplant was done in 1954. Approximately ten years later, the Registry of Human Kidney Transplants had a record of 627 kidney transplants. N.P. Couch has calculated that, in 1963 alone, 7,644 deaths occured in the United States of persons who qualified for transplants and whose lives might have been prolonged, if transplantation had been done. Couch also estimated that, of those who died of liver ailments in 1963, there were about 4,000 potentia liver transplants recipients.

The best cadaveric candidates for supplying kidneys and livers are those who die of subarachnoid hemorrhage. They could have supplied in 1963 about 10,600 kidneys and about 6,000 livers, according to Couch.

M.F.A. Woodruff estimates that about 2,000 persons die in Britain each year who could be kept alive with an expectation of life of 45 years at the mean by either kidney transplants or twice-weekly dialysis. This implies, as an alternative to these 2,000 per annum deaths, either 2,000 kidney transplants per year or nine million dialyses per year.

Some progress has recently been made in the discovery of more efficient chemo-therapeutic agents for diminishing the antigenic rejection of grafts by the host and the possibility of preventing death by transplantation is enormously higher now than it was a few decades ago.

The fruitful application of new knowledge in this field, however, requires that supplies of organs and tissue make themselves available in circumstances of extraordinarily complex logistical problems that derive from the perishability of organs in cadavers and the necessity to find suppliers who are histo-compatible with recipients.

One way to secure these supplies is to permit the sale of organs and tissue. They could be sold by living suppliers to be taken during life or after death from themselves. They could be sold by kinfolk upon the death of a member of the family. Buyers might be permitted to re-sell, although how much of this could be done would depend upon the length of time for which preservation techniques prevent excessive deterioration.

It surely does not help patients dying of nephritis or hepatoma, if kidneys and livers are made available, if and only if a money price is paid for them, but doctors stand in the way because they find commerce ethically offensive.

The Education of Lord Acton Robert L. Schuettinger

The relevance of Lord Acton for the twentieth century, according to one of his editors, “comes from his prophetic preoccupation with the very questions with which the twentieth century has found itself preoccupied. The great objects of his studies in history were the moral ends of government, the relations of politics to morality, and these are the questions which bitter experience has forced our age to think about more urgently than the Victorians needed to do.”1

The great historian of liberty and educator of both Catholics and liberals was never in his life a stranger to the corridors of power, both sacred and profane. For over forty years he was a member of one or the other of the Houses of Parliament; the rough-and-tumble world of polemical journalism was not unknown to him; nor were the most merciless lists of all, the back-alleyways of academic and ecclesiastical intrigue.

He came from an aristocratic and cosmopolitan background. He had an Italian birthplace, an English father, a French-German-Italian mother, a supra-national religion and scores of relatives in high places in Church and State in most of the nations of Europe. His ideas came from many sources; his own philosophy of liberal Catholicism was drawn from traditional conservatism and the newer classical liberals of his own time. With Burke and Tocqueville he was convinced that a liberal and just government could not long exist unless it were founded on moral principles: on reverence for God and respect for the rights and dignity of men. “Liberalism,” he once wrote, “is ultimately founded on the idea of conscience.” Throughout his life, these were his two great concerns: freedom and morality. He was absolutely convinced one could not exist without the other and that both were required for the fulfillment of man's purpose on this earth.

By examining his early formal education we may see more clearly how the ideas of the great historian of liberty were formed. Lord Acton's schooling, in four countries (Saint Nicolas in France, Oscott in England, the University of Edinburgh in Scotland and the University of Munich in Bavaria) was fully as cosmopolitan as his family life. Following the movements of his parents, Sir Ferdinand and Lady Acton, between their homes in Aldenham, Paris, Naples, Herrnsheim and London, Acton soon learned to speak French fluently and was duly entered in the preparatory seminary of Saint Nicolas du Chardonnet in Paris in the year 1842.

Acton's first teacher was Monsignor Felix Dupanloup. Like the other two priests who were to influence his intellectual development, Cardinal Wisemar and Professor Dollinger, Dupanloup was also a prominent theologian, with ideas of his own on how Peter's bark should be piloted. As the clerical spokesman for the liberal wing of French Catholicism he was deeply involved in the attempt to reconcile the liberal state with the Catholic Church. At the Vatican Council he was to be part of the minority faction which held the definition of papal infallibility to be inopportune. Although liberal, his place in the Church seemed secure; he had been tutor to the royal princes and had received much acclaim for his part in the death-bed reconciliation of Talleyrand with Rome. (When the wiliest of diplomats was about to receive the last rites, he turned his palms downward and said, “Remember, I am a bishop.”)

In 1849, the liberal monsignor was to be elevated to the see of Orleans. A few years later Bishop Dupanloup was to be elected to the French Academy; at about the same time he helped to reorganize the liberal Catholic journal Le Correspondant. He had been a friend and confessor to both the Dalbergs and the Actons and had assisted at the death of Sir Ferdinand Acton. His mother's frequent visits to Paris, Acton later said, were for the dual purpose of visiting her dressmaker and going to confession to Fr. Dupanloup.

When Acton entered the school in 1842, Fr. Dupanloup as the new supervisor had just changed the rules to permit boys who did not intend to enter holy orders to be enrolled. Acton remained at St. Nicolas for only nine months, however. Since the boy was expected to matriculate at Cambridge, as his father and uncle had done before him, the family thought it more suitable that his preparatory education should be in England. Accordingly he was sent to St. Mary's, Oscott, an Edition: current; Page: [336] institution which liked to boast that it was now what Eton once was: “a school for Catholic gentlemen.” Their official announcement, in fact, promised to teach all those branches of learning “becoming either a scholar or a gentleman.” (Emphasis supplied.)

The college at the time was under the presidency of the Right Reverend Nicholas Wiseman, titular bishop of Melipotamus, and destined to wear a Cardinal's hat. Dr. Henry Weedall, his predecessor, who was largely responsible for the growth of the college, was now in charge of the preparatory school. Through a series of moves in the ecclesiastical hierarchy, in which Acton's uncle (then Monsignor Acton) was involved, Dr. Weedall found himself, in his last years, in this relatively humble office. He was an old Catholic gentleman who belonged to the old world when Catholics desired nothing more than to be left in peace. He was thought to be too unassuming and lacking in aggressiveness. This was definitely not the mood of the militant Bishop Wiseman, who felt that “We are like the Jews returned to Jerusalem or like the first family after the Flood - we have to reconstruct everything.”2

The future Cardinal had arrived at Oscott shortly after the beginning of the Oxford Movement. Wiseman looked upon this intellectual faction within the Church of England as the foothold upon which he and his Church would build in order gradually to re-convert Britain to the orthodox faith. As things turned out, many of the leaders of the Oxford Movement, which had its origins in the publication of the famous “Tracts of the Times” in 1833, remained High Church Anglicans and did not go over to the Roman communion, despite their sympathies with the ancient church. John Keble and Dr. Edward Pusey, for instance, though they did much to widen the understanding of Anglicans of the Church of Rome, did not make the final break. John Henry Newman, of course, did take the Roman sacraments and was received into the Church at Oscott while Acton was still a student there in October of 1845. The most distinguished of English converts took up residence in the old college buildings, renamed Maryvale.

Encouraged by the small but steady trickle of converts who moved from Oxford to Oscott, Wiseman was convinced that Britain would soon be a Catholic nation once again and that Oscott, strategically placed as it was, was to be the prime mover in this turning point in history. Acton later recalled that Wiseman seemed to take personal satisfaction at each new “conquest” for Rome; “The converts used to appear among us Edition: current; Page: [337] and he seemed to exhibit their scalps,” Acton wrote.3

Some of the less far-sighted of the Catholic parents and neighboring clergy sometimes thought that the good Bishop wasn't giving enough of his attention to the job he was being paid for, namely the education of his young charges. To these men of little faith, Wiseman haughtily replied: “Among the providential agencies that seemed justly timed, and even necessary for it (the re-conversion of England) appeared to me the erection of this noble college, in the very heart of England. Often in my darkest days and hours, feeling as if alone in my hopes, have I walked in front of it, and casting my eyes toward it, exclaimed to myself, ‘No, it was not to educate a few boys that this was erected, but to the rallying point of the yet silent but vast movement toward the Catholic Church, which has commenced and must prosper.' I felt as assured of this as if the word of prophecy had spoken it.”4

Through the outer-directed efforts of its president, a continual train of distinguished men visited Oscott, English nobility, French royalty, famous statesmen both sacred and profane, philosophers and theologians. As Acton later recalled, “We used to see Wiseman with Lord Shrewsbury, with O'Connell, with Father Mathew, with a Mesopotamian patriarch, with Newman ... and we had a feeling that Oscott, next to Pekin, was a centre of the World.”5

The faculty of Oscott was by no means provincial, but was drawn from a wide variety of sources. There were, of course, many Oxford converts, some earlier Cambridge converts (including the vice-president, Henry Logan, a Scotsman by birth), Irish Catholics, local midland clergy and some others whom Wiseman had brought with him from Rome. Acton thought later that Wiseman failed to integrate properly these diverse elements or inspire them in any one direction. “The point is,” Acton wrote, “that he was an all-round person, and we did not clearly see his drift.”6 Wiseman himself was an Ultramontane: that is, he belonged to that party in the Church which favored centralization of power in the papacy. However, he sometimes had visitors to Oscott who would lecture on both points of view within the Church; for instance, he once invited Vincenzo Gioberti, well-known for his belief in the separation of Church and State, and on another occasion invited one of Gioberti's principal opponents, Antonio Rosmini. Edition: current; Page: [338] In later life, Acton was to be critical of his old school; he once wrote to his co-editor, Richard Simpson, that he had recently sent a letter to a friend on the students and divines of Oscott “compared to which X.Y.Z. is a panegyrist, and in February (the friend) told me that things were a good deal worse than I described.”7 While he was there, however, he seems to have been perfectly content and making great progress academically. He once sent the following letter to his mother, written at the age of ten.

In 1848, at the age of fourteen, Acton left Oscott, and spent the next two years at the University of Edinburgh under the tutelage of Henry Logan, former vice-president of Oscott. It was the fashion among young English gentlemen of this period, especially those with an interest in scholarship, to spend a year or two at one of the Scottish universities either before or after Oxford or Cambridge. In Acton's case, we may presume that he was taking his Scottish interlude in preparation for his entrance into Cambridge. He applied in 1849 and again in 1850 to Magdalene College, Cambridge, where both his father and uncle had been undergraduates. Magdalene, however, was probably worried about the rash of converts to Catholicism which had been unsettling its common-room at the very time Acton applied; accordingly the future Regius Professor of Modern History was refused admission as a student. Two other Cambridge colleges gave the same answer and, in what for a Cambridge family must have been a last gamble, two Oxford colleges received Acton's application. The answer was everywhere the same.9 It was hoped that at least he would Edition: current; Page: [339] learn Greek while at Edinburgh, but after two years he left, dissatisfied with his progress and knowing no more than 500 words of the language.10 The home of the Edinburgh Review, however, must have had some effect on his thought and since he later told a friend that he left Scotland stuffed with Macaulay and raw Whiggery we may assume that that citadel of liberalism had done its work.

Acton's intellectual journey next took him to Munich where in June 1850 he came to live at the house of Professor Johann Ignaz von Dollinger. Munich was chosen as the place for him to continue his studies for several reasons; not only was it a seat of Catholic learning at the time, but it was also the home of his mother's relatives, the Arco-Valleys. Count Arco-Valley (whose daughter Acton later married) had known Dollinger for years; accordingly arrangements were made for him to stay with the Professor in Munich and to visit the Arco-Valley country house at Tergensee on weekends.

Although a priest, Dr. Dollinger was primarily concerned with the life of the mind; he had refused the archbishopric of Salzburg because it would have interfered with his scholarship. Generally considered to be one of the greatest historical scholars in Europe, he was to be more influential than any other single individual on Acton's intellectual development. In the opinion of Miss Gertrude Himmelfarb, “The most decisive fact of Acton's life was his apprenticeship under Dollinger.”11 The priest-scholar was a humble man with the simple tastes and standards of the German bourgeoisie. He was himself the son of a professor of anatomy at the University of Wurzburg. “His personal appearance,” Acton wrote to his stepfather, “is certainly not prepossessing. His forehead is not particularly large, and a somewhat malevolent grin seems constantly to reside about his wide, low mouth.”12

Despite the minimum of flattery in Acton's description (which is perhaps the inevitable student-teacher relationship on the first day of class) the young Englishman had great respect for the scholar's enormous capacity for work and his austere manner of life. He seemed to be the personification of the cold, dispassionate scholar, interested in nothing but the plain search for truth for its own sake.

Catholic scholarship throughout most of the world in the nineteenth century was in a lethargic condition. The University of Munich by contrast was in the midst of intellectual ferment. At the beginning of the century Protestant scholarship Edition: current; Page: [340] had taken the lead in the German universities. Men such as Ferdinand Baur and David Strauss broke new ground in Biblical criticism, B.G. Niebuhr and Leopold von Ranke were developing whole new schools of history and Friedrich von Schelling and Friedrich Schleiermacher were attracting international attention for their work in the philosophy of religion. The Catholic scholars of Tubingen and Munich took it upon themselves to explore such problems as the relationship of science and religion or the historical analysis of the Old Testament. Their goal was to make Catholicism intellectually respectable by the standards of the most rigorous secular philosopher or historian. They succeeded so well in this task that for decades Munich was the intellectual center of world Catholicism.

Upon Acton's arrival in Munich he threw himself into a course of study as broad and as demanding as the Professor's own schedule. During his first few enthusiastic weeks, Acton later recalled, he read the whole of the Biographie Universelle - a work of some fifty-five volumes. “My day,” he wrote to his stepfather, now Earl Granville, “is portioned out something in this manner - I breakfast at 8 - then two hours of German - an hour of Plutarch and an hour of Tacitus. This proportion was recommended by the Professor. We dine a little before 2 - I see him then for the first time in the day. At 3 my German tutor master comes. From 4 till 7 I am out - I read modern history for an hour - having had an hour's ancient history just before dinner. I have some tea at 8 and study English literature and composition till 10 - when the curtain falls.”13

A few years later Acton, as a more mature scholar, explained his personal philosophy of education to Lord Granville. He admitted that his studies at first glance seemed to be useless or unrelated. There was, however, definite unity in his method. He studied English history, the classics, the history of the Middle Ages and of the Church, theology and the history of philosophy in order to prepare himself both for a role in public life and to lay the foundation for an academic career as a serious writer, not as a dilettante. The common theme that united all his studies, he said, was history; his academic goal was to become an original historian and to teach others of his countrymen to become the same.14 His political goal was to promote in both Church and State the supremacy of principles over interests, of liberty over despotism (whether from above or below), and of plain truth over evasion and rationalization. “He had no desire,” two of his editors note, “to make of intellectual Edition: current; Page: [341] pursuits an end in themselves. His scholarship was to him as practical as his politics, and his politics as ethical as his faith.”15

In the 1850's both Dollinger and his young student grew out of some of their intellectual shells and both changed their minds on a number of important issues. Almost on his arrival Acton was told to read Burke in order to broaden his mind and as an antidote to Macaulay; Dollinger had an aversion to Macaulay but recommended Bacon, Newman and especially Burke's Letters on a Regicide Peace, which the Professor called “the literary starting point of Legitimism.”16 At the beginning of Acton's stay in Munich, Dollinger, like most of the Munich faculty, was an Ultramontane and monarchist who saw little wrong with the status quo. He was comfortable in his life and derived satisfaction from being an industrious scholar, a loyal subject of the king and a devoted servant of the pope.

Dollinger's first serious quarrel with Rome was in 1854 over the proclamation of the dogma of the Immaculate Conception of Mary. Although there was a long tradition in the Church which maintained that Mary was herself conceived without original sin, Dollinger opposed the intended proclamation on three main grounds. First, he asserted that historically it was not held to be a divinely revealed truth and that many leading Catholic scholars, including St. Thomas Aquinas, had demurred to it. Secondly, it was to be decreed by Pope Pius IX on his own authority without the confirmation of a council of the Church. Thirdly he believed that unnecessary additions to the creed would serve only to make the Catholic Church more isolated and further divide it from the Protestants. After the new dogma was officially proclaimed, however, Dollinger accepted it and consoled himself with the thought that he had fought it as long as possible. Pius XI's early exercise of papal infallibility in this matter foreshadowed the more serious struggle that was to come in 1870 when papal infallibility in faith and morals was itself to be proclaimed by the same Pope as binding on all Catholics.

The latter doctrine was to be ratified by a council of the Church, which presumably vitiated at least one of Dollinger's procedural objections. At that time, however, Dollinger was not to submit; he and a small minority left the Roman Catholic communion and called themselves Old Catholics, continuing to venerate every dogma of the Catholic Church but the last.

The basic transformation of Dollinger's intellectual outlook which ultimately led to his excommunication took place in those years when he and Acton lived together in Munich. On Acton's side there is little doubt that he acquired his lifelong distrust of ecclesiastical power largely as a result of his participation in these early battles in the ‘50s.

The old Dollinger would have, in fact did, join in condeming any Catholic philosopher or theologian who inquired too deeply into matters which earned him the wrath of Rome. In 1835 a leading German theologian, Georg Hermes, was officially condemned by the Church for over-emphasizing natural reason and nationalistic religion in the tradition of Kant. At that time Dollinger saw nothing improper in this proceeding. Two decades later, however, a similar controversy erupted over the theological works of Anton von Gunther and Jakob Frohschammer. The first philosopher maintained that science and religion were co-equal in the area of scholarship and that science could assert its own truths independent of the teachings of religion. The second writer, Frohschammer, went farther than this and claimed that science must take precedence over religion. In this case, Dollinger reversed his earlier position and came to the defence of the alleged heretics. If Rome were to silence every serious thinker who attempted to explore problems such as the relationship of religion and science, he insisted, Catholic scholarship would be reduced to sterile servility. There must be at least a reasonable amount of freedom of thought for Catholic intellectuals, he said, if the universities were not to become centers of stagnation. Dollinger's efforts met with a cold rebuff, however, and the two scholars were duly condemned.

Dollinger's work in the theory of development, that is, the notion that moral truths and religious dogmas were not fixed for eternity but instead changed and developed as man's civilization and understanding advanced, was eventually to lead the Professor into irreconcilable conflict with the Church. Miss Gertrude Himmelfarb, in her masterly biography Lord Acton: A Study of Conscience in Politics, asserts that it was from Dollinger and not from Newman that Acton adopted his own theory of development. “The theory....” Miss Himmelfarb notes, “is more popularly known in the form given it by Newman in his Essay on the Development of Christian Doctrine of 1845 ... Newman was unfamiliar with German theology, with the work of Brey, Mohler or Dollinger, and it appears that he arrived at the theory independently.”17 The fundamental idea Edition: current; Page: [343] is of course not new; its origins go back at least as far as the efforts of such men as Gottfried Leibniz, Jean Mabillon, John Robinson and Petavius.18 Inherent in this way of studying religion are implications which eventually took both Acton and Dollinger to the very limits of the orthodoxy of the nineteenth-century church. Ironically enough, it was the influence of this same theory that led Dollinger to leave the Church after the Vatican Council had persuaded Acton to remain in it. Just because Acton never in his life doubted a dogma of the Church19 he had nothing to fear from the most rigorous historical criticism of church history or doctrine.

He was convinced, for example, that the Resurrection was an historical fact in the same sense as the Battle of Waterloo was a fact and could be documented by all the usual rules of historical evidence. He had little patience with historians who refused, for one reason or another, to deal with facts. Of F.C. von Baur he once wrote, “According to Baur, the business of history is not so much with facts as with ideas; and the idea, not the fact, of the Resurrection is the basis of the Christian faith. Doctrines are developed out of notions, not out of events. Whether or not the belief is true, he refuses to inquire. In the most characteristic passage ever written by a German historian, he declares that it is a question beyond the scope of history.”20

In Acton's interpretation, the theory of development meant that “the action of Christ who is risen on mankind ... fails not, but increases; that the wisdom of divine rule appears not in the perfection but in the improvement of the world; and that achieved liberty is the one ethical result that rests on the converging and combined conditions of advancing civilization ... History is the true demonstration of Religion.”21 This view, that God will ultimately make clear in his own good time what may appear to us now to be wrong or unjust, enabled Acton to reconcile his submission to the Vatican Decrees with his conscience. As will be seen, Acton believed that God would not allow his Church to remain for long in a grossly imperfect state; that time would “perfect” the doctrine of Papal Infallibility. As we also know, Dollinger did not agree with this interpretation of his former student and left the Catholic Church shortly after the Council.

Once a year, during Acton's residence at the University from 1850 to 1858, he and Dollinger set off on a tour of Italy, England, Austria or Switzerland or Germany, stopping Edition: current; Page: [344] to see old friends or to meet new ones or to attend scholarly conferences. These tours were an important part of Acton's education. Together they explored libraries and bookstores voraciously; they applied at first hand the modern historical techniques of manuscript research learned from von Ranke's lectures on the “new” history at Munich. These journeys revolutionized the attitudes of both Dollinger and Acton to history as well as to the Church. For Dollinger it meant that the work of decades was suddenly obsolete. For Acton, however, it meant that the young historian had found his purpose in life: to aid in that “full exposition of truth which is the great object for which the existence of man is prolonged on earth.”22

Looking back on his Munich experiences after many years of independent scholarship, Acton was inclined to revise his original estimate of the university and even of Dollinger. The Munich faculty, he wrote, was “not remarkable for originality or freshness, or warmth, or play of mind.” He thought them too committed to “defending a settled cause” to start a voyage of discovery. Dollinger, Acton thought, was overly interested in the Romantic school of historical writing and in criticizing Protestant versions of history.23 Apparently Dollinger was successful in teaching Acton many important aspects of the historian's craft; he was not, however, able to impart to his student the attitudes and techniques needed for sustained work. Dollinger himself predicted that if Acton did not write a major book before he was forty he never would.24 In later life Acton was to feel that Munich, like Oscott, had somehow let him down.

Although he spent eight years attending lectures and studying at the University of Munich, he never took a degree. (This oversight was corrected in 1872 when the faculty of Munich awarded Acton an honorary doctorate.) It is doubtful, however, if this changed his attitude toward German universities. In 1867, almost ten years after leaving Munich, Acton wrote an essay on German education which might well have been written about one of the many “multi-versities” of our own century. The function of the German universities, he wrote, “was to prepare candidates for public employment and to teach things necessary to be known in order to obtain a salary under government or in the Church, as a doctor or a schoolmaster. They existed to promote certain public objects of society, not to promote the independent ends of literature and science. They suffer alike from the want of liberty and the want of discipline. They are subject to the patronage of the State and they exert no effective restraint over the lives of the Edition: current; Page: [345] students. The very theory to which they owe their fame and influence has done harm, by the utter sacrifice of educational to scientific purposes; for it supplies a more perfect machinery for the production of good books than of good men.”25

In 1858, his formal education at the University of Munich completed, Acton returned to England to employ his wealth and education as best he could in order to bring liberalism to his fellow-Catholics, Catholicism to his fellow-liberals and the discoveries and techniques of German historical research to both.

Chicago Monetary Tradition in the Light of Austrian Theory Hans F. Sennholz

In the diversity of contemporary American monetary thought the new neoclassicism of the Chicago School has assumed an intellectual position that probably equals that of the new economics. Chicago monetary thought has invaded in force not only the American academy and the deliberations and actions of the Federal Reserve Board, but also the halls of Congress and the economic reports and policies of the President. This remarkable development is also reflected in the growing popularity and prestige now accorded to Milton Friedman, the most influential economist of the Chicago tradition.

We rejoice about this new trend in monetary thought and are appreciative of the effective Chicagoan challenge to the Keynesian orthodoxy. The analytical depth, scientific precision, and overwhelming empirical evidence offered by Professor Friedman and his colleagues have shattered many a cherished doctrine of the new economics and thereby given new life to neoclassicism. In an age of Keynesian supremacy when the discussion of money had given way to debates on the techniques of fine-tuning through fiscal measures the Chicagoans restored money to its rightful place. They successfully reconstructed a version of the quantity theory of money and re-emphasized the importance of monetary policy. And last but not least, they levelled devastating criticism at official monetary managers for having generated feverish booms and disastrous recessions through gross mismanagement of our money.

And yet, this writer casts doubt on the cogency and durability of this new neoclassism. In our judgment, it is built on the quicksand of macro-economic analysis; it misinterprets the business cycles and therefore is bound to fail as policy guide for Edition: current; Page: [348] economic stability; it is inherently inflationary as it makes government the guardian of our money. The intellectual forebears of this new neoclassicism were three Englishmen and one American: William S. Jevons, Alfred Marshall, Ralph G. Hawtrey, and Irving Fisher. As, a generation ago, their tenets gave way to the new economics of John Maynard Keynes, Alvin H. Hansen and Abba P. Lerner, so is the new neoclassicism itself destined to surrender to more statist doctrines. After all, it puts government in charge of economic stability and then prescribes monetary policies that will continue to generate business cycles. Inevitably, frustration and disappointment tend to breed demands for more government intervention.

Almost 100 years ago WILLIAM STANLEY JEVONS had attempted “to substitute exact inquiries, exact numerical calculations, for guesswork and groundless argument” in his analysis of quantitative data on prices and business movements.1 In a paper on “The Variation of Prices, and the Value of the Currency since 1782” Jevons studied the changing purchasing power of money between 1782 and 1865. He concluded his analysis with the following comment on gold: “in itself gold-digging has ever seemed to me almost a dead loss of labor as regards the world in general—a wrong against the human race, just such as is that of a government against its people, in overissuing and depreciating its own currency.”2 Instead, Jevons favored a “tabular standard of value” which his own work on index numbers was supposed to promote. He was convinced that some day this system would come into use and that gold coins would cease to be the principal media of exchange.3

ALFRED MARSHALL lent his support to the Jevons plan. Mindful of the great changes in the purchasing power of money and their detrimental effects on contractual relationships, he searched for a stable monetary unit. In a proposal to the Royal Commission on the Depression of Trade and Industry, in 1886, he urged the government to publish tables showing changes in the purchasing power of money so that contracts could be made in terms of units of constant purchasing power.4 Professor Marshall introduced the great dichotomy that continues to Edition: current; Page: [349] guide most contemporary economists, that is, the separation of the micro sphere in which individual prices are determined by supply and demand, from the macro sphere in which the total supply of money and its velocity determine the value of money and the price level.5 Although Marshall did not draw the political conclusion from this doctrine, his followers in Great Britain and America later went the final step: they called on government for price level stabilization through manipulation of the quantity of money stock.

RALPH G. HAWTREY, an economist connected with the British Treasury from 1919 to 1937, developed a purely monetary theory of business cycle on a macro-economic concept of equilibrium. Changes in the flow of currency, in particular bank credit, cause instability in production and employment. At first, total bank credit expands as interest rates are reduced. Total demand for finished goods rises, which causes prices to rise. Businessmen use easy money to expand their inventories. The expansion of credit thus causes incomes to rise, which eventually leads to more currency passing into circulation. And under the gold standard this currency has to be either gold coin or paper money backed by gold. But such a demand encroaches on the available supplies of gold in all gold standard countries and especially in central banks. According to Hawtrey, “the flow of currency into circulation in such circumstances is very gradual, and lags far behind the expansion of credit which causes it. The result is that, if the authorities controlling credit are guided in their action by the adequacy of their stock of gold, their intervention is bound to be very tardy. And the expansion and contraction of credit are both likely to be very slow processes in a group of countries which are all made to keep pace with one another by the rather cumbersome expedient of gold movements.”6

In short, the trade cycle which is a credit phenomenon is caused by the defects of the gold standard as a regulator of credit. Guided by their gold reserves the monetary authorities intervene too slowly first in the restriction of bank credit and then Edition: current; Page: [350] in the expansion during periods of recession. The Great Depression, according to Hawtrey, was the result of such defects. Throughout those baneful years he called for more credit expansion by the central banks as the only remedy for unemployment.7 In 1962 Hawtrey restated his conclusion: “When we look back on the monetary experience we have had since 1932, surely the moral to be drawn from it is above all the importance of maintaining stability of the money unit. The depression of the nineteen thirties was due to the doubling of the wealth-value of gold.”8

Similar conclusions were drawn by IRVING FISHER, the American economist who spearheaded the new neoclassicism. “The key to the business failure, and therefore the key to the depression,” he wrote in 1933, “is the deflated price level; the key to the deflated price level is monetary deflation; the principal kind of money which deflates is our checking accounts at the banks.”9 This is why Fisher called for reinflation throughout the Great Depression. In particular, he urged President Roosevelt to devalue the dollar and later hailed him for having done so. In fact, Fisher went further. “We might even abandon gold altogether, and resort to a managed currency with no base but paper. Several other nations have done this to their distinct advantage.”10

Professor Fisher had a simple explanation for business cycles. Credit currency perpetuates its own motion in a sort of vicious circle, or rather a vicious spiral—upward or downward as the case may be. But what determines the direction of the spiral? Fisher gave at least three different answers: (1) the motion springs from completely random, uncoordinated, inexplicable “frenzies of enterprise”;11 (2) “if something big enough hits humanity” the spiral may be set into motion. A war may trigger it. According to this explanation, “the depression grew out of a boom which started in a credit currency boom, which started from a debt boom, which grew out of the World War.”12 And (3), faulty monetary management by the central bank may redirect the motion. In 1928, for instance, the Federal Reserve Board Edition: current; Page: [351] brought the speculative movement to a stop through credit stringency, which then began to be felt in legitimate business.13

Fisher's crusading spirit led him to be active in many fields of reform, such as health, conservation, prohibition, the League of Nations, and many others. But throughout his active life he crusaded above all for economic stabilization and monetary reform. In numerous writings he presented his plan for the “compensated dollar,” a dollar of constant purchasing power, sometimes called the “commodity dollar.” The conventional gold standard was to be replaced by a standard that defined the dollar in terms of constant value, which was to be determined by an index number of commodity prices of a given basket of goods. This commodity standard was to be strengthened further by “100$ money,” that is, a cash reserve of 100$ against all demand deposits. A “Currency Commission” would issue new money and turn into cash the assets of every commercial bank so that the cash reserve of each bank would be increased to 100$ of its checking deposits. The new money thus would provide an all-cash backing for the checking accounts without either increasing or decreasing the total stock of money in the country. Thereafter the banks would be required to maintain permanently a 100$ cash reserve against their demand deposits. According to Prof. Fisher, his plan would keep banks 100$ liquid, prevent inflation and deflation, cure or prevent depressions, and wipe out much of the national debt.14

Hubris and Environmental Variance Joseph J. Spengler

Arrogance, C. M. Bowra has written in his The Greek Experience, “was regarded as the worst of evils,” in part because “it scorned the social obligations on which the city-state depended.” And F. A. Hayek has observed that “never will man penetrate deeper into error than when he is continuing on a road which has led him to great success.” One may ask, therefore, if the conjoining of these two observations has implication for the practitioners of social science, above all the economists.

Not until the second third of this century did confidence in the economist and his findings promote him into the hierarchy of policy formulators. Theretofore his role was predominantly advisory in nature and confined to the realm of microeconomics. Moreover, he did not find himself pressed to postulate a degree of fixity in economic relationships, corresponding in some measure to those on which an engineer counts when developing and executing plans in the world of structures.

An Application of Economics in Biology Gordon Tullock

The recent rise of interest in problems of pollution and similar matters has led to considerable contact between those biologists interested in ecology and economists interested in the special economic field of “externalities.”1 It is the point of this essay to indicate that there are certain interrelations between the economics of externality and the problems of ecology, which are different from those ordinarily studied. Specifically, I propose to use the economics of externality as an analytical tool in dealing with natural ecological systems. Plants and animals have effects on other plants and animals, and the effects of these externalities are very much the same as the externalities which human beings impose on each other or upon the natural environment.

The results of this investigation will be, I think, somewhat startling to the biologist. I think I can demonstrate that the climax state of any ecological system is inferior. That, substantially, regardless of what value we put upon the individual species within the ecological system and/or their usefulness to man, it is nevertheless possible always to improve upon the system produced by “nature.” In order to make such a judgment which will fit any one of a vast number of different sets of values, I will be compelled to make use of an economic concept, known as Pareto optimality, albeit in a radically reformed manner. Pareto optimality was first suggested as a way of avoiding making certain types of value judgments, and it can be used in evaluating biological systems in a similar way.

For the purpose of this article, I propose to use a very simple system. This simple system will not exist anywhere in the real world—it is too simple for that—but it closely approximates a situation which we do find very commonly in the real world.2 The system is composed of two species: grass and some herbivore. One may consider it to be an approximation of the situation in the Old West in which cattle grazed upon grasslands.3 For the time being, we will assume that these are the only two species. This simplification is introduced in order to make the line of reasoning easier; it can be demonstrated that the same principles apply even if we have many species and the ecology is quite a complex one. This Edition: current; Page: [377] demonstration, however, will not be included in this article, since it is quite complicated and the outcome seems intuitively obvious.

Under these circumstances, we may feel fairly confident that what is known as “over-grazing” would occur. The cattle would multiply until such time as there were enough cattle exactly to consume the maximum amount of grass produced by the plot. This grass, however, in part would be produced by mature plants; in other words, it would be possible for the number of cattle temporarily to rise to a larger number than could be permanently maintained by the process of eating the existing plants back down to the point where they no longer are fully efficient. In a sense, this is consumption of capital in the form of grass to support additional cattle.

In order to make the matter clear, let us turn to Figure 1. On the horizontal axis, I have shown varying amounts of grass that could be on our plot of land. The vertical axis then shows the increment that one could expect in a short Edition: current; Page: [378] period of time, let us say one day, granted that you have that amount of grass shown on the horizontal axis at the beginning of the time period. If you have very little grass already in existence and, hence, are on the left end of the horizontal axis, there will be relatively little growth in any given short period. Similarly, if the grass is already up to the maximum that the land can hold, there will be no increment; hence the line once again hits the horizontal axis.

Between these two points, the increment rises as the amount of grass increases, and eventually falls off. If we propose to harvest the maximum amount of grass that we can from this plot, we should choose to maintain the stock of grass at amount A and harvest, during this period, A' of grass. Assume that our method of harvesting the grass is to let cattle graze upon it. You should also assume that the line drawn represents the amount of grass which the cattle can take in each day, although in practice this line would probably be somewhat below the physical increment in our diagram, because the cattle are not perfectly efficient in removing grass in such a way as to inflict the least possible damage on the remaining grass.

Suppose, then, that we attempt to graze more cattle on the land than can be supported by eating the grass A'. Under these circumstances, they would eat not only the increment in any given period, but some additional grass, let us say the amount A-B on the horizontal axis. As a result, in the next period the total amount of grass available to produce more grass would be smaller, hence only B' amount of grass would be produced. Under these circumstances, the cattle would once again cut into the existing stock and move us farther to the left. Eventually, we would reach a situation in which grass was scarce, and the few scrawny cattle which grazed upon it would find the energy involved in chasing down their grass enough so that they could not increase in population. Under these circumstances, a new Edition: current; Page: [379] equilibrium would be reached somewhere to the left of A.

Hereditary selection of the “fit” makes this outcome inevitable. If some of the cattle had a relatively low rate of reproduction and others a rather high rate of reproduction, and the cattle with the low rate of reproduction had a rate of reproduction such that they remain in exact balance with the grass supply, the only effect of this would be that in each generation there would be more cattle of the high reproduction strain and a lower percentage of cattle in the low production types. The death rate from overgrazing would be spread across both types, independently of these reproductive capacities; hence the end product would be the gradual disappearance of the low reproduction strain.

Note the situation, however. By artificially restricting the number of cattle, we can increase the amount of grass produced each year and, thus, in the long run produce more cattle. It is possible by intelligent management to produce a situation in which both more grass and more cattle (or both elements of our simple ecology) exist than would exist under natural climax conditions. Suppose that point B in Figure 1 is the natural climax with the amount of cattle which consume exactly B' grass. Under these circumstances, by reducing the number of cattle temporarily, one could increase the amount of grass and make it possible to maintain a larger number of cattle on the same land in the future.

Intelligent range managers do exactly this. A well-functioning cattle ranch supports more poundage of beef animals than it could support if the manager did not artificially keep the grass and the beef in balance. This balance is essentially an artificial structure which could not occur in a state of nature, and the natural balance would involve less of both grass and cattle. The movement from the cattleman's organized ecology to natural balance would involve Edition: current; Page: [380] a natural (and temporary) increase in the number of cattle, which would then graze back the grass supply. Similarly, a movement from the natural ecological balance to the cattleman's superior ecology would involve a temporary restriction of the number of cattle in order to permit the grass to grow up to a higher level of productive efficiency.

Ranch managers, in dealing with this kind of problem, have a fairly simple and straightforward objective: they want to maximize the production of beef or whatever else it is they are raising. Our system, however, has no such obvious maximum. Consider Figure 2. On the vertical axis, I have put the total amount of grass on some particular Edition: current; Page: [381] plot of land, and on the horizontal axis, the total number of cattle. Since there is some minimum amount of grass necessary to sustain each head of cattle, I have drawn in a line representing this minimum, starting at the origin. In actual fact, the line would probably be slightly concave downward and not quite hit the origin, due to the fact that the cattle must use more energy to seek out grass when it is scarce, but we can ignore this minor correction. All of the points in the area above the minimum line and below the curving line GABC, are feasible, i.e., it is possible to reach any combination of grass and cattle shown in this area.

The line, GABC, is the maximum amount of our two species which can be supported by the land in varying combinations. It corresponds to the production frontier of standard economic theory. The maximum amount of cattle which can be raised or the cattleman's maximum is shown at C. Similarly, the maximum amount of grass which can be raised is shown at G. Note that G is not drawn at the vertical axis, because I assume that the fertilizer produced by the cattle has at least some effect in stimulating grass production. This might not be so in some circumstances, in which event the maximum grass production would be obtained without any cattle at all. The other points on the line GABC represent other combinations of production of cattle and grass, and in each case they are maxima, i.e., you cannot produce more with the same ratio. The area within the production frontier and above the minimum, which after all is simply part of the production frontier, represents those combinations of cattle and grass which are achievable, but are less productive than the areas on the frontier.

Let us suppose that N is the natural climax or equilibrium of the system. It is the point to which the system will proceed if there is not regulation on the number of cattle. Any point in the triangle—bounded on the bottom by the minimum line, on the left by the vertical line Edition: current; Page: [382] drawn through N, and on the upper right by the curved line ABC—is superior to N in production of grass and cattle. Any point in this area will be better from the standpoint of both increasing grass production and increasing cattle production than is N.4

Note, however, that there is a good portion of the production frontier—that running between the vertical axis and the vertical line running through A—which we cannot say is clearly dominant over the natural climax. In order to make any judgment here, we would have to have some way of evaluating grass against cattle. If we did feel that grass was much more important than cattle, we would probably aim at point G, even though this would reduce the number of cattle. But this requires a value judgment; movement up and to the right from N requires no judgment as to the relative merits of grass or cattle, it merely requires a feeling it is desirable to have more. Hence, if movement into this triangle is movement into a permanently sustainable system, it seems hard to argue against the view that we would have as much of the natural product as possible. Certainly, the ecology buffs cannot complain about it.

It is very hard, however, to decide what specific movement from N would be optimal without some kind of value system putting cattle against grass. Movement out to point D and then on, let us say, to point B clearly involves two improvements from the standpoint of both cattle and grass. Edition: current; Page: [383] From the standpoint of the grass, however, A would be better and from the standpoint of the cattle, C would be better. Here we are confronted with a situation which frequently confronts economists, and we shall follow the economist in refusing to solve the problem. With an external value system, we could decide which point was the best. Without such an external value system, however, all we can say is that our diagram shows a number of points which are superior to the natural equilibrium point, but gives us no way of choosing among these points. Since any one of them is superior to the natural equilibrium, on the whole movement to any one of them would be desirable. The decision as to which point on the frontier is optimal is equivalent to the distribution problem in economics, and, as in economics, can only be solved by bringing in external value judgments. I have no objection to the reader bringing in such a value judgment, but I suspect that the readers have different judgments. We can all agree, however, that movement up and to the right would be desirable, even though we might disagree as to which of the various directions within the pieshaped space would be optimal.

So much for our simple two-species ecology. Let us now engage in a somewhat more rigorous investigation of the tools which have been used in this example, and then indicate how a more general version of these tools can be applied to a more realistic ecology. First, note that we have had only two species on Figure 1. Economists have discovered that a simple two-item diagram like this can be a great help in analyzing many-dimensional situations. The real ecology could be placed in a multidimensional space with each species, or indeed each subspecies, on a separate dimension. This hyperdimensional diagram would then have a hypersurface, its equivalent of the curved line, and there would again be an area inside this which was achievable but not fully efficient.

A simple two-dimensional diagram which can, after all, be drawn on a piece of paper can be Edition: current; Page: [384] thought of as a cross-section of that much more complex diagram. Alternatively, it can be considered to be a special two-dimensional space in which one of the axes is a particular species and the other is a composite bundle of all of the other species. By this method, each species can be taken out by and of itself and its interrelation with the whole ecology (minus itself) analyzed. This latter technique is perhaps less convenient for ecological problems than it is in economics, because in economics we have a rather simple measure of the purchasing power. We can consider the baskets of goods which are being contrasted to the single good as having whatever their monetary value is.

The most elegant way of dealing with a manydimensional space with many species, each represented by one dimension, would of course make use of the Cartesian algebra in its many-dimensional version. Although this is the most elegant method, it is generally speaking much too tedious and, in any event, we seldom have enough empirical knowledge to make it sensible to move to such a complicated representation. Nevertheless, it should always be kept in mind that this many-dimensional Cartesian system is the true model, and the twodimensional subset of that model is a simplification.

A second special problem has to do with values. It is good Catholic doctrine that the natural world exists solely for the benefit of man, and that man, therefore, is the measure of the ecology. This would, needless to say, raise the question of which man; hence, we would be back to the distribution problem of economics. There is, however, an even more fundamental difficulty here. A great many people are now saying that they do not think that man should be the measure of all ecological problems, and that we should take into account the well-being of other species. In part, these people are simply expressing themselves badly. Many of them do in fact hold the well-being of mankind as their major goal, but feel that long term calculations of the well-being of mankind require some Edition: current; Page: [385] temporary sacrifices of human well-being in the aid of the well-being of certain other species.

In this sense, there is no particular problem with our diagrams. The point on the efficiency frontier would be the long-run sustainable output; hence we could still retain the desire to maximize the return for human beings. In Figure 1, since human beings do not eat grass and do eat cattle, we would choose point C. Some of the members of the Sierra Club, however, apparently do believe that it is worth sacrificing some long-run human goals for long-run growth of other species. For them, the value system is not quite so straightforward.

Fortunately, the Paretian apparatus makes it possible for us to deal with this matter without much difficulty.5 The Paretian apparatus was first designed for the specific purpose of dealing with some change which might injure one person and benefit another. It was pointed out by Pareto that we had no positive reason for believing that the injury and the benefit were commensurable. It might well be that what we thought was a rather minor injury to Mr. A actually hurt him more than the benefit received by what to us appeared to be a very significant improvement for Mr. B. Pareto, therefore, suggested that we accept a very modest criterion: any change which Edition: current; Page: [386] benefits at least one person and injures no one must be an improvement. It is clear that this rule gives guidance only in a general way. Returning to Figure 2, it indicates that we should move up and to the right from point N, but does not tell us the exact location. It is an astonishing fact that this very simple rule has permitted a very large amount of calculation on improvement in the economic system. I hope to demonstrate that it will be of almost equal use in the biological system.

For people who have strong personal feelings on the evaluation of different species, the rule will not be ideal. They might feel very strongly that some particular point on the frontier shown in Figure 1 is superior to all others. There is no reason why they should not feel this way and they can, of course, make calculations very similar to the ones I have made; thus, they get results which are in essence a specialization of the very general results I get. The advantage of the very general results, however, is that they are not dependent upon the particular value system of the investigator. We do not have to choose between grass and cattle to accept a movement up and to the right from point N. If I am interested in the well-being of either human beings or of these particular species or any one of them, such a move is an improvement, even though it may not be a movement toward the point which exactly maximizes my particular goal. If, for example, I was pro-grass, I would regard movement from N to D to be an improvement; but I would regard any point between A and C as inferior to G. Such a move, however, would be a marked improvement over N.

The system, thus, is relatively value-neutral simply because it is consistent with a tremendous Edition: current; Page: [387] range of possible values, not because it imposes any value system of its own. Individuals are likely to regard their own personal value system as better than this criteria which, instead of aiming wholeheartedly at fulfilling their value, aims at giving at least some benefit under a very large range of values. The principal argument for the Paretian rule is that it does avoid most of the controversies which any more specific rule would entail. Actual decision in any specific case must involve putting in more in the way of a preference function than the Paretian rule. The Paretian rule demonstrates in Figure 1 that improvements are in fact possible; it does not specify which of the many improvements should be undertaken.

Let us now discuss the concept of externality. Externalities were originally developed in economics to analyze certain areas where the market economy worked badly. They are probably more familiar to biologists than most other tools of economics simply because the problems of pollution are very good examples of externalities in the pure economic sense. We, however, are not talking about externalities generated by human beings, but externalities generated by plants and animals.

Externalities are rather easily understood. Any given species will have some effects upon the development of some other species. The grass, for example, provided a food for the herbivores and the cattle reduced the total amount of grass by eating it. In the first case, we have a positive externality, that is, a species providing something of benefit to other species; and in the second case, we have a negative externality, that is, a species doing something to injure another species.

We need not, however, confine ourselves to these very direct relationships of eating and being eaten. Most plants release into the soil and into the atmosphere various chemicals. The Edition: current; Page: [388] obvious case, of course, is free oxygen into the atmosphere, but there are many others. Confining ourselves to chemicals found in the soil, we find that these chemicals have an effect upon the soil which makes it more or less suitable for the growth of other plants. This is an example of an externality. There are innumerable other similar examples. Indeed, in a real sense, the whole science of ecology is devoted solely to the study of such externalities. The existence of one plant or animal has significant effects on many other parts of the ecological community, and the study of this chain of effects from each plant or animal to all the other plants and animals is the subject matter of ecology. I will not, however, make an effort to develop the collection of interactions in any existing ecology, but to discuss the theoretical consequences of the mere existence of such interaction.

Let us begin our discussion with a very simple example. We assume two plants which customarily live in close proximity and we assume that each produces, as a byproduct to its life processes, a chemical which is of benefit to the other. Thus, each plant will grow somewhat better in the presence of the other.6 Here we have an externality. Naturally the plants, having no minds, do not take this externality into account; but evolution will select the plants for efficiency in generation of these byproducts as well as for efficiency in other matters. We can, therefore, discuss what is the most efficient rate of generation of the byproduct for the plants and, as we shall see, the rate of generation of the byproduct which would be selected by natural selection is inferior to another rate. The details of this argument are quite complex, but we may begin by simply assuming Edition: current; Page: [389] that each of the plants is available in two strains, as shown on Figure 3. Species A is available in variant A₁ and A₂. A₂ produces the byproduct only insofar as that byproduct is essential for the maximization of the growth of the strain in and of itself. In other words, it spends no energy at all on producing additional amounts of that byproduct. A₁, on the other hand, sacrifices some of its own growth in order to produce more of the byproduct. With species B, the same situation obtains, with B₂ being the strain which produces only enough of the byproduct as is consistent with maximum growth of itself, and B₁ being the one which produces more of the byproduct and which tends to get somewhat less growth itself.

In the figure, the weight of each of these plants which, given a space of land (granted there is a mixture of the two), can be expected to support is shown with A in the upper right hand corner and B in the lower left of each cell. Since each species byproduct benefits the other species and since, in this case, the benefit is Edition: current; Page: [390] “Pareto relevant,”7 the weight of each plant is higher in the upper left hand corner where each of the plants is using some of its energy to provide “fertilizer” for the other than in the lower right, where each of the plants is composed of the “2” strain, which simply attempts to maximize its own development while ignoring the development of the other. Both types of plant have a higher net weight in this upper left square than in the lower right; hence, the upper left can be regarded as being superior from the standpoint of either plant.

Note, however, that the structure of this diagram is that of the prisoner's dilemma. It is clear that the strains which would be selected by natural selection are not A₁ and B₁, but A₂ and B₂. We can see this very easily by observing that if a mixture of A₁ and A₂ were placed in a field with either B₁ or B₂ (or a mixture of them), the A₂ would grow more rapidly than A₁, as shown by the matrix. Over a number of generations, A₂ would completely replace A₁. For example, if the strain of B which happened to be in the field was B₁, then a given amount of plant seed for A₂ would produce ten-ninths as much as the same amount of plant seed would for A₁. Similarly, if the field was planted in B₂, the ratio would be eight-sevenths. Since the diagram is symmetric, the same line of reasoning applies to B. Thus, natural selection would select strains which produce a lower quantity of these plants than other strains. With selective breeding, it would be possible to produce strains which produced more of both of the two plants.

Needless to say, positive externalities of the sort shown in Figure 3 are not the only ones we find in nature. Plants may also cause great injury to or exterminate other plants, and the same is, of course, true of animals. We could make up an example similar to Figure 3 to deal with such cases, and we would find once again that the natural selection optima would not be that which maximizes the output of the two strains. Further, the use of two strains is dictated only by a desire for simplicity. We could have a very large number of strains and, for that matter, mixtures of different strains. The end product would be the same. Further, the use of two species instead of the many-species of the average ecology is dictated solely by the fact that I am using a two-dimensional piece of paper. The argument is, in fact, much stronger if there are many species than if there are only two. Thus, nature unaided does not reach an optimum.

What Mises Did for Me John V. Van Sickle

I first met Professor Mises some 51 years ago. I had crossed over the Ringstrasse from my office in the Austrian Kriegsministerium with a letter of introduction from Professor Charles Rist of Paris, determined to use the ample time at my disposal as Assistant Secretary to the American Unofficial Delegation to the Austrian Section of the Reparations Commission to write the doctoral thesis that had been twice interrupted—first by President Wilson's call to the young to make the world safe for democracy, and then, following discharge from the armed services, by a 14 months tour of duty at the American Embassy in Paris where I prepared daily summaries of the press for an Ambassador who could neither speak nor read the language of the country to which he was accredited, and where, in my spare time, I had worked on a study of Franco-American commercial relations.

Professor Mises was seated behind an uncluttered desk in a room even larger than the one I had left. I told him how far I had gotten along at Harvard with a study of direct taxation in Massachusetts. He suggested that there was need for a similar study of direct taxation in Austria. So I went to work and before I left Vienna in late 1923, I had completed an acceptable thesis on Direct Taxation in Austria which eventually appeared under the same title in the Harvard Economic Series (Volume XXXV, 1931), with a dedication to Professor Mises.

I remember very vividly my then vision of the Good Society, and the stages by which I had come to it. I was, in effect, a Fabian socialist.

Capitalism, I admitted, could build an impressive International House, with tall walls, graceful columns, majestic stairways and marvelous central heating, but it could not put a Edition: current; Page: [393] roof over the structure. And the social and material inequalities within the house made life uncomfortable for most of the inhabitants most of the time, even in the fairest weather. Socialism, on the other hand, could build a livable International House. It would be low and rambling, with a thatched roof, wide-open fireplaces in its many rooms, and friendly people moving freely from room to room.

This pretty picture had taken place very gradually. I had left college a confirmed free trader, convinced that if governments would let goods, services and people move freely into and out of their territories, if they would but specialize in doing what they could do best, the divisive spirit of nationalism would subside and men everywhere would live in peace and harmony with one another.

Like many, perhaps most of my generation, I took it for granted that wars were a thing of the past. Consequently, World War I had come as a great shock. It seemed clear to me that this war, like the Revolutionary War and the War between the States, as the people in the South still insisted on calling our Civil War, was the result of selfish tariff protectionism, and the world's businessmen, despite their lip-service to private enterprise, were largely responsible. The working man and his spokesmen, the union leaders, and socialists generally were pacifists, internationalists and free traders.

My stay in Paris had strengthened my attachment to the socialist dream. Day-in, day-out I had reported in my press summaries the hymns of hate coming from the journals of the Right and the calls for reconciliation with their late enemies coming from those of the Left. The short sharp economic collapse at the end of the war appeared to confirm the socialist thesis that capitalism was inherently unstable, that a high and continuous level of employment required planning which, wisely conceived, would reduce social and economic inequalities and promote harmony within, as well as between nations. Admittedly, there would be some blunting of incentives, but the socialist performance over reasonable spans of time would be better than that of its rival.

Such was my vision when I started and in a single night finished Mises' classic dissection of the socialist dream.1 I had gone to bed a Fabian socialist; I rose the next morning a free enterpriser, or at least something like the 19th century liberal of my college days when Woodrow Wilson was my hero. From that day on it was clear to me that the burden of proof was on those advocating coercive interferences with the market's allocative functions and that interventions frustrating its adjustment mechanism would miss their marks.

Yet I realize, on rereading my reactions to Die Gemeinwirtschaft as they appeared in La Revue d'Economie Politique (Paris: 1923, vol. 37) and in the September 1923 issue of The American Economic Review, that my conversion was not complete. There was (and there still is) a bit of the Fabian socialist in me. I would like to see a somewhat more equal distribution of incomes than can be expected even if we could eliminate all the remediable deficiencies in the capitalistic performance.

In both reviews I recommended Mises' re-examination of the theory of socialism as “deserving careful reading by friend and foe alike,” and characterized his defense of capitalism as “a clear, vigorous and convincing restatement of the case for individualism, much in the tone of a Manchester Liberal of the ‘60s.... Whoever accepts the Austrian theory of value even in part,” I concluded, “can hardly refuse to follow the reasoning of Professor Mises as to the impossibility of complete socialism. More open to criticism, however, is his conclusion that complete laissez-faire is the solution.”

And then, in a final paragraph, I gently chided Professor Mises. After noting with approval his admission that the socialist ideology could only be destroyed by persuasion, by “right reasoning,” I assured him that “he need not fear the trade unions, or the presence of laborers in the councils of industry. Trade unionism had proved an educational force as well as at times a destructive one. Industrial democracy will prove as great an education in the intricate problems of production as political democracy has proved in that of citizenship.”

To date, Professor Mises' glimpses into the future have proved far more accurate than those inspired by my wishful thinking. Nonetheless, though with far less confidence than 50 years ago, I continue to believe2 that the State, through taxing and spending (not through the manipulation of prices or the building up of the power of occupational groups) can provide a guaranteed income for all, as suggested by Professor Hayek toward the close of World War II,3 or by Professor Friedman in Capitalism and Freedom,4 originally presented in a lecture series at Wabash College in 1956; and could do it in a way that might actually improve the capitalistic performance and thus increase the prospects that the “right reasoning” that has flowed from Professor Mises' tireless pen in the years since the appearance of Die Gemeinwirtschaft will yet bear out his faith that “once the thinkers of the Socialist movement cease to believe in their doctrine, the movement itself is doomed to extinction.”

At this writing it looks as though something approximating Friedman's negative income tax may be enacted. I must confess, however, that the political supporters of such a daring innovation show no realization of the need, as Friedman insisted, to repeal “the rag bag of measures” that now fetter the free enterprise system and discredit it in the eyes of those who stand to benefit most from the full deployment of its incredible productive powers. If these measures remain on the statute books, we may well discover that “we have jumped from the frying pan into the fire, ... supporting in demoralizing idleness even more people than at present, and most of them would belong to the ethnic groups that now bear the brunt of the majority's misplaced benevolence.”5

Thus, if I survive to the ripe age of Professor Mises, I may well be forced to admit that his predictions of the consequences of political interventions with the market's allocative functions have again proved far more accurate than my wishful thinking.

Economics in a Changing World G. C. Wiegand

As the emphasis in economics has shifted during the past fifty years from a search for knowledge of the forces which govern the economic life to an attempt to plan and regulate the economy, a schism has developed within the discipline between the ‘pure theorists’ and the ‘practical policy-makers’ which may have serious consequences for the discipline and for the country as a whole, because it reflects a fundamental misunderstanding of the nature of economics in modern life.

The general public has never fully understood the basic nature of economics, and even economists occasionally admit that “they have not yet agreed what it is (they) are talking about.”1 After attending a recent meeting of the American Economic Association, a reporter complained about the “impotence and irrelevance” of economics, and the tendency of economists “to operate in a vacuum.”2 And many people agree with this view regarding the work of the ‘pure theorist.’

No doubt, the general public has always been inclined to criticize economists. The Physiocrats were ridiculed, and 19th century humanists and humanitarians deplored the ‘iron law’ pessimism of the classical school. “No Englishman in his secret soul” according to Bagehot, “would ever be sorry for the death of a political economist.” Today's criticism, however, is of a different nature by being largely pragmatic. What use is there, the people wonder, in spending time and money on abstract models which even members of the profession often do not fully understand, and which have no apparent bearing on the problems of the day? And why don't the practical policy-makers, who claim that they can “fine-tune” the economy, get on with finding a Edition: current; Page: [399] solution for the pressing problems of inflation and unemployment?

The public is told that we live in the “Age of the Economist,” and that thanks to “the internal advances in recent decades ... in economic knowledge ... modern economics can deliver the goods.”3 Yet the country and the world seem to be drifting deeper and deeper into what the Germans have come to call “stagflation,” the unhappy combination of economic stagnation and inflation. Is there something fundamentally wrong with economics as we know it today? Is the discipline as a whole in need of a basic reconstruction?

Few modern economists feel as Robert Torrens did 150 years ago, that within a few decades “there will scarcely exist any doubt respecting any of [the] fundamental principles”4 of political economy, or as Schumpeter wrote just before the First World War that “the theory of the socio-economic process [had been] unfolded for the first time as an organic whole.”5 But while most modern economists admit that we have made little progress in understanding the inner workings of the “great machine,” there is a widespread feeling that even though we do not really understand what makes the economy work, we can probably improve it “by tinkering with it.”

“Pragmatism” wrote Time some years ago, in describing the attitude of President Kennedy's economic advisors, “is the vogue word among economists today.... When economists call themselves pragmatists, they mean that they are the opposite of dogmatists, that they are wary of broad theories, that they lean to the cut-and-try approach to public problems, and that they believe it is possible to improve the functioning of the economy by tinkering with it.”6

In short, the pure theorists claim that they are not concerned—or certainly not immediately concerned—with the problems of the day, and the practitioners are wary of theories and try to solve the problems of the nation and the world by day-today ad hoc measures. All in all, not a picture Edition: current; Page: [400] which should reassure mankind, yet characteristic of the critical stage in which economics as a discipline finds itself at present.

Can a Liberal Be an Equalitarian? Leland B. Yeager

An answer to the question posed by my title depends obviously, on how its terms are defined.1

I shall deny that a liberal can consistently advocate government action to chop down high incomes or especially favorable opportunities out of zeal for a closer approach to material equality as a goal in its own right.2

Instead of using the term “liberal” as it is used in modern American politics, I use it, as Professor Mises and the “Austrian” and “Chicago” economists do, in the traditional sense. Liberalism is a doctrine that rejects any supposed social or national purpose transcending the purposes of individuals. Instead, it seeks to assure each individual a wide range of free choice among purposes and pursuits. (While emphasizing Edition: current; Page: [423] the goals of each individual, it in no way denies the healthy fact that he may largely relate his own interests and satisfactions to those of many people beyond himself.) Liberalism calls for preserving, adopting, and devising the social, political, and economic institutions likeliest to minimize the frictions that inevitably arise to some extent among the pursuits and the specific freedoms of different individuals. Yet it cannot give an equal blessing to whatever goals individuals might have. Malicious enjoyment of the misfortunes of other people, or envy, or a sheer delight in meddling—all are hard to square with liberalism. This judgment holds even when such tastes are gratified through voluntary transactions among all persons concerned. More about this later.

As for equalitarianism, instead of defining it explicitly, I want to distinguish between leveling up and leveling down. Consider a minority of people whose wealth or income or opportunities are distressingly inferior to those of most people. Redistribution to help them, perhaps through the government budget, is leveling up. With that I have no quarrel in principle. Such relief of actual poverty—of definitely sub-modal circumstances—is not meddlesomeness. Rather, it is an effort to remedy a situation almost universally recognized as bad. (This is not to say that monks and nuns and other ascetics should be barred from choosing a life of poverty.) Involuntary but eradicable poverty is a blemish, making a society less attractive for practically everyone who comes in contact with or even is keenly aware of it. Its elimination would be in the recognized interest of almost everyone.

Redistribution to level down unusually great wealth or incomes or unusually favorable opportunities is quite a different thing. Great wealth is the opposite of something that almost everyone would consider bad for himself. It, or the opportunity to choose it, broadens the range of alternatives open to people, as we can recognize without supposing that material abundance must form the very core of the good life. Ideally, a liberal would like each person to have the opportunity for it if that is what he wants. A policy aimed at leveling down the exceptionally wealthy few would deprive some people of their good fortune—a good fortune that a liberal would welcome Edition: current; Page: [424] for everyone-because other people are less fortunate. If everyone cannot be very lucky, no one shall be. This attitude may be a very human one; but it is an unlovely one, unworthy of being sanctified in public policy.

But do any people who consider themselves traditional liberals really advocate leveling down as distinguished from leveling up? Does any liberal really favor tax progression of such a degree that direct benefits to poor people are doubtful or trivial? It is true that this idea seldom appears unequivocally in print. But it crops up often in discussions. And it seems to underlie the ubiquitous slogan that “Equality is an end in its own right.” Henry Simons, who deservedly ranks as one of the saints of the Chicago School, has expressed his preference

According to Simons,

According to Allan T. Peacock,

Frank H. Knight has repeatedly likened social life to a “game” or “contest”, has talked about the “distribution of prizes”, has mused on what arrangements tend to make the contest “interesting to participants and spectators”, and has considered the imposition of “handicaps”.6 His thought is so rich and complex that a reader cannot be sure whether Knight really favors some degree of leveling down for the sake of equality as an end in its own right. Qualifications can also be found in Simons's writings. But whatever the correct interpretations may be, Knight and Simons have furnished intellectual stimulation for some of their more forthrightly equalitarian Chicago School disciples. Ideas of the kind under consideration abound, of course, in the works of writers who do not even claim to be traditional liberals.

I wonder whether liberals who speak of equality as an end in its own right have really examined their values thoroughly. Why is equality an end? Perhaps some people honestly have no idea of how to answer this question because they consider equality as an ultimate desideratum that they cannot describe as a Edition: current; Page: [426] means of serving any more basic values. But this position must be rare. Most equalitarians presumably consider equality a means to more basic values with which the connection is obvious.

What might these still more basic values be?7 One might be the avoidance of concentrated power. But great wealth is not great power. Being wealthy does not enable a person to coerce others or to restrict the opportunities open to them. His ability to offer them financially attractive deals is not the same as power to deprive them of alternatives they would have had anyway. The situation would be different if one person or group, or a very few of these, accounted for a large enough fraction of national income or wealth to possess monopoly power in dealing with other people. Then, however, the unsatisfactory condition would be precisely this monopoly power; and it would confuse the issue to talk about inequality instead. When a country has several thousand separate individuals or families of great wealth, it is almost a contradiction in terms to speak of concentration of wealth or power in their hands. On the contrary, the existence of several thousand pillars of economic strength, many of them able and some of them willing to support causes and persons that may be unpopular with the general public and with the government, may be of great value in preserving a free society.

Another motive for equalitarianism might be the belief that a marginal dollar adds less to the utility of a rich person than of someone else and Edition: current; Page: [427] that redistribution might accordingly increase total social utility. Besides taking some old-fashioned strands of economic theory too seriously, this argument blinks the ethical question whether an involuntary transfer can be justified by the mere fact or conjecture that the gainers gain more than the losers lose. A more plausible version of the argument is that the surplus of the rich can be taken for such socially important purposes as building and running schools and hospitals. In considering this argument, we must distinguish between two cases, though the analysis does not hinge on any exact dividing line between them. First, suppose that those who benefit from the schools and hospitals8 are so poor that they could not pay for them without trenching painfully on consumption of still more urgent necessities: they could not pay by ordinary private purchase of schooling and hospitalization, through premiums on private or governmental insurance, by taxes, or in any other way. The problem is then one of their actual poverty, and rhetoric about schools and hospitals in particular beclouds the issue. Most liberals would favor measures to relieve actual poverty; but precisely because it is in almost everyone's interest to live in a society free of actual poverty, it is not clear—at least, not without further argument—why the cost should be concentrated on a rich minority. Secondly, suppose that the beneficiaries of the schools and hospitals are not especially poor and could afford to pay for their services in one of the ways mentioned. Why, then, should a rich minority have to pay a share of the costs out of proportion to their share of the benefits? So far as the beneficiaries of the schools and hospitals escape the cost, they have money left over to spend on other things. Redistributive taxation may thus in effect make the rich help pay for the clothing, automobiles, entertainment, and liquor of Edition: current; Page: [428] people who are not poor. Perhaps this is defensible; but what, then, becomes of the special emotional aura of schools and hospitals?

Perhaps equalitarianism is an extension of the liberal case for relief of actual poverty. For (redistributionists might argue) the dividing line between poverty and adequate income is vague. Even persons in the modal or typical income brackets may suffer relative poverty: they may be uncomfortable about not being able to live on the same material plane as the wealthy minority. If relieving the discomfort of actual poverty is urgent, then relieving the mental discomfort of relative poverty may be advantageous.9 In reply, it may be pointed out that while a line between poverty and material comfort cannot be drawn precisely, a general basis for the distinction exists. In the United States, the persons to be considered actually poor are a fairly small minority in material circumstances well below what is typical. Redistribution to benefit this poor minority is different in principle from leveling down a rich minority in the supposed interest of a modal majority. Principle, not definite tax schedules, is what is at issue here. A further aspect of the issue is whether public policy should recognize the notion of relative poverty and should dignify whatever uneasiness some people may feel about the better fortune of others by basing tax legislation upon it. It is not enough to consider what attitudes may in fact prevail, causing mental pain or pleasure; social philosophers also have the job of considering what sorts of attitudes should or should not be encouraged because they do or do not tend to promote a good society, coherently conceived.

Perhaps the redistributionist case rests less on any of the foregoing arguments than on inchoate notions about what makes for a healthy tone of society—notions about avoiding social distinctions and feelings of inferiority and about promoting solidarity and brotherhood. Slogans about equality as part of the democratic ideal support this conjecture. I admittedly would consider it a good thing (though I would be hard pressed to explain just why) if the distributions of physical and mental talent and energy, personal ambition and inclination, inherited property, advantageous family backgrounds, and so forth meshed with the derived demands for material and human factors of production in such a way that the personal incomes distributed on the free market were not conspicuously unequal. Spontaneous equality of this sort could perhaps be furthered by measures to break down any contrived restrictions on economic opportunity.

Spontaneous equality would still contrast sharply with deliberately leveling down the rich. Deliberate leveling would be likely to do the reverse of overcoming incentives to envy, embarrassments to social intercourse, and obstacles to brotherhood and mutual respect. The degree of envy and so forth would probably not correlate at all closely with the size of inequalities remaining under an avowed program of equalization; sometimes the smallest distinctions are the most keenly resented. More important, the idea of deliberate leveling seems dangerously akin to ideas that all men are not equal in those respects which concern the State, that men with different incomes are different in intolerable ways, and that differences in people's material wealth and life style—differences going beyond the discomforts of actual poverty—are conditions to emphasize, to be suspicious of, and to take action about. To work against poverty is admirable, but to be concerned about other people's exceptional good fortune and to want to interfere strikes me as hardly compatible with a coherent liberalism. People are all too ready, anyway, to pass judgment on their fellows. They are all too ready to display intolerence, bitterness, Puritanism, a busybody spirit, and suspicion of other people and their personalities and life styles. Many redistributionists, it is true, are moved by humanitarian motives; they do not want to promote suspiciousness or pander to resentment. But “good intentions are not enough.” The spirit of live-and-let-live, Edition: current; Page: [430] so crucial to a free society, is fragile. Any policy that dignifies and reinforces the less lovely traits of human nature, however unintentionally, deserves bad marks on this score.

The leveler philosophy may rest in part on the feeling that extremely high incomes are undeserved. Of course not all large incomes derive from hard work, ingenuity, or alertness in meeting consumer tastes. Large incomes obtained by force, fraud, restraint on competition, or dishonest advertising and salesmanship are indeed open to question. More precisely, it is the illegal or immoral activities themselves that deserve attention; to focus on the sheer size of the resulting incomes beclouds the issue. Large incomes due to inheritance of talent or energy or beauty or connections or wealth, or to sheer luck, pose a trickier question: why should some not particularly virtuous people enjoy luxury while millions of harder-working and worthier people must scrape to make ends meet? In partial reply, one may ask another question: If the processes of allocating the services of persons and property into the lines of most intense consumer demand yield very large incomes for some not especially deserving persons and for their heirs, who is actually hurt and entitled to complain? In an innovating, enterprising society, total real income is not a rigidly fixed pie; larger slices for some do not necessarily mean smaller slices for others. Perhaps people with lower incomes are harmed in the sense that their taxes would be lower if the rich paid still higher taxes. But this “harm” is different from harm positively inflicted by the rich. As for rich persons innocent of illegal or immoral activities, the demand that they justify or forgo their exceptional incomes raises fundamental questions about what prerogatives of organized society are compatible with liberalism. Like busybodiness, it is perhaps a human trait to begrudge one's fellows whatever exceptional good luck may come their way—I say “perhaps” because the general public does not seem to bear grudges against lottery winners and against the exceptionally glamorous rich—but grudges about good luck are unworthy of being dignified as the basis of public policy.

Note that I am not accepting—instead, I explicitly reject—the “marginal productivity ethics” of John Edition: current; Page: [431] Bates Clark and his followers, a doctrine rightly dissected by Frank Knight and other liberal economists. The mere fact that a man's own work or the services of his property happen to have an exceptionally high market value does not mean that he is especially deserving, in any ethical sense, of an exceptionally large income. Market value is not a measure of ethical merit, and people in general would be happier if this fact were explicitly recognized.10 My concern is with what sort of a politico-economic system would replace capitalism if productivity and market-value considerations were set aside as a basis of income distribution. More specifically, in this paper, I am concerned about the implicit redistributionist conception of the State as an agency that, while not allotting individuals their fates outright, at least takes a decisive hand in readjusting that allotment. I am rather horrified at the idea of the State as a dispenser of “justice” in the concrete, material sense, and as a God that passes judgment on what people deserve and steps in not merely to allay the unfortunate consequences of bad luck but also to strip people of the fruits of what it considers too much good luck.

Before returning to the question of equality of opportunity, I shall now shift from examining possible strands in a rationale of leveling down to expressing some actual doubts. A much-discussed problem in political ethics arises when people who expect material or psychological gain from redistributionary taxation act as judges in their own cause. By imposing higher tax rates than they themselves are willing to pay, the majority of voters ask a a rich minority to “work more days out of the year for the government” than they themselves are willing to do. As Hayek has said, “That a majority, merely because it is a majority, should be entitled to apply Edition: current; Page: [432] to a minority a rule which does not apply to itself is an infringement of a principle much more fundamental than democracy itself, a principle on which the justification of democracy rests.11

This “discrimination” argument infuriates redistributionists, who suspect that its user's heart is bleeding for people who will have more income and wealth per head, even after taxes, than their alleged despoilers. The critic has a hard time proving that his real worry is over the attitude that might makes right—the sheer might of numerous votes.

The “discrimination” argument would lose much of its force if leveling down were enacted not merely by an overall majority but also by a majority of even those persons who would have to pay the exceptionally high tax rates. But then why not rely on voluntary redistribution? One reason, apparently, is the “public-good” character of redistribution: the typical rich person might be willing to redistribute only if all other rich persons did the same; only compulsion could achieve the general redistribution assumed to be desired by the rich themselves. But if this coerced action would be noble and praiseworthy, would it not be still more so for each rich person to redistribute independently? A generous act is tarnished by being made compulsory and by satisfaction in seeing other persons coerced along with oneself. Those who failed to respond to an educational campaign for voluntary redistribution—I am setting aside, for the sake of argument, doubts Edition: current; Page: [433] about the desirability of even such a campaign—could be left unmolested as monuments to the toleration of eccentricity so essential in a free society. Apart from the matter of voluntary action versus coercion, much can be said for distribution from numerous individual sources and in favor of a great variety of independent purposes rather than through the monolithic agency of the State.

The doctrine of coercive redistribution has a subtle affinity with materialism. Why should it disturb us that some people are very wealthy? If we are unwilling to tolerate great superiorities in income and wealth, how do we feel about superiorities in talent, physical and mental strength and health, influence through family connections and personal friendships, ability and time to appreciate conversation and art and music and sports, amount of formal education, experience gained through travel, and so forth? People's circumstances can be different in innumerable ways. Why do redistributionists single out material inequality unless they think that money is—and should be—the prime measure of a man's capacity to enjoy life and of his worth to himself and other people, his social status, and his personal dignity? The reason cannot be that material inequality is the only kind susceptible of being leveled down. We could partially level out advantages of early training by requiring all children to attend democratically standardized public schools. (Even some self-styled liberals are perverse enough to recommend compulsory military training for similar reasons.) We could level down physical attractiveness by requiring everybody to wear masks and shapeless uniforms, or we could put especially heavy taxes on beauty as well as on brains.

Aurèle Kolnai has perceptively said:

In doubting whether the pursuit of material equality will achieve any of the more decent motives of its proponents, I can quote Frank Knight on my side:

Furthermore, pursuit of an unattainable material equality will foster attitudes and political behavior incompatible with a quasi-equality of a more human and more nearly attainable type. Ideally, people should not have to be ranked above or below each other according to the fields in which their accomplishments lie. Each person should have a chance to excel in something, with the different types of excellence regarded as incommensurable. Adventure, scholarship, conviviality, self-effacing service to Edition: current; Page: [435] mankind—all should be as respectable as the amassing of fortunes. People of modest talents or ambitions who do routine work and content themselves with inexpensive pleasures should be regarded as contributing to a desirable diversity in personalities, modes of thinking, and styles and goals of life. A teacher could continue associating without embarrassment with congenial former colleagues or students who had become business tycoons not because progressive taxation had lopped off their larger monetary incomes but because scholarly values and monetary values were regarded as incommensurate but of equal dignity. As Herbert W. Schneider has noted, the equality of the equalitarians implies measurement; he emphasizes, instead, what he calls “the incommensurability of human beings”.14

“All men are created equal” and statements like that are obviously not meant literally. They use poetic language legitimate in their contexts. They are meant as normative prescriptions for social actions and attitudes. They express disapproval of trying to classify individuals as more or less worthy, more or less entitled to pursue happiness in their own ways, and more or less entitled to have their views or interests considered in the forming of public policy.

We should not exalt materialism, but neither should we despise it. Just as a healthy society needs statesmen, humanitarians, esthetes, and eggheads, so it also needs money-minded Philistines. It takes all kinds of people to make a world. Each person's freedom to choose the niche in life that best accords with his own talents and inclinations gains from the willingness of other people to fill other niches.

Erosion of monetary incentives unleashes pressures toward conformity. One of the individual's best protections against the arbitrary whims of the business Edition: current; Page: [436] firm employing him is the fact that his employer and other employers are seeking profit in a competitive market. Policy that weakens the profit motive or the competitiveness of markets is likely to reduce the cost to employers of tyrannizing over employees. (This fact, in the academic world, leads teachers to demand other forms of protection.) Furthermore, to the extent that the tax structure leads companies to compensate their executives in kind rather than in freely spendable money—stock options, club memberships, pleasure travel in the guise of business travel, use of company cars, planes, apartments, vacation lodges, and expense accounts—to this extent business and private lives become intermingled. We see the rise of the Organization Man. From the liberal point of view, this state of affairs seems questionable not only or not even especially for the Organization Men themselves but also for members of society in general.

I offer as a mere conjecture one more doubt about equalitarianism. Especially if it is dignified by serving as a basis for public policy, the philosophy that encourages people to brood about whether wealthier people “deserve” their material abundance, and whether they themselves are not “entitled” to a larger share, may well have something to do with crime. Even relatively poor people are likely to suffer in the long run from the far-reaching consequences of a philosophy that undermines respect for personal safety and property rights.

The postponed topic of equality of opportunity will now serve as a transition to the concluding sections of this paper. Ideally, everyone should have a decent start in life, free from the cumulative disadvantages of initial poverty. But should the State go so far as to try to deprive fortunate young people of whatever advantages they might enjoy from bodily or mental or financial inheritance or from family background and contacts? Much could be done, after all, towards offsetting even the nonfinancial aspects of exceptionally favorable opportunity. Any really close approach to equality of opportunity is, however, impossible. Liberals should shun a slogan—“equality of opportunity”—whose implementation is impossible, especially since even an attempt to implement it approximately would entail extreme Edition: current; Page: [437] totalitarianism. Furthermore, it is logically difficult to establish equality of opportunity as a desideratum distinct from equality of income or status, since unequal attainments in income or status must be due either to unequal luck or to unequal endowments of the abilities and inclinations conducive to achieving income or status. From an equalitarian standpoint, inequality of results would show that unequal luck had not been properly compensated for or that opportunities had not been properly equalized.

From the liberal standpoint, the whole discussion would be simplified by calling for adequacy rather than equality of opportunity. Removal of actual poverty and of caste and race restrictions that arbitrarily hamper people in the pursuit of their own goals is quite different from chopping down advantages.

Why, incidentally, might anyone want to chop down advantages rather than merely remove disadvantages? I wonder whether one of the objectives of equalitarians who consider themselves liberals might not be to make the outcome of the market process a more nearly plausible indicator of personal worth. Their likening of life to a “game” or “race” and their talk of imposing “handicaps” to make the game “interesting” certainly suggests so. Everyone is to have the same purpose in life, overriding the diverse purposes that individuals might otherwise have; and this common purpose is to be success in the game. Everyone is to engage in—if necessary, be drafted into—the game. The score will be kept, especially in terms of money and status. No one will have an excuse for not taking this rivalry seriously, for proper handicaps will have been imposed. By persuading themselves that the “game” has been made “fair”, the self-styled liberal equalitarians will have more supposed basis than ever for indulging their propensity to pass judgment on their fellows, smugly dispensing praise and scorn.

This view of society as an organized activity, with the government as a busybody game-master or social director imposing handicaps and otherwise trying to drum up “interesting” rivalry, strikes me as profoundly anti-liberal. It is putting things backwards to regard the game—or the market of the Edition: current; Page: [438] textbooks—as a supreme value in its own right, with the diverse values of individuals taking second place.

Here I have admittedly drifted into considering the possible motives of the equalitarians. Questioning motives is often bad form. It is rank anti-intellectualism, in particular, to dismiss purportedly factual or logical propositions by a mere sneer at the alleged motives of their propounders. But when policy goals and conceptions of the good society are at issue, motives are at the core of the discussion. If we ask why a certain person advocates certain policies, the reason is that we are trying to understand his conception of the good society. The tastes gratified by leveling policies—the taste for making a goal out of the social and economic game itself, the taste for smugly passing judgment on other persons, the taste for sheer meddling-clash with the spirit of liberalism.

Am I denying that liberalism accords equal esteem to all tastes of individuals, regardless of what they are? Should liberalism discriminate between worthy and unworthy tastes, ones that “ought” and others that “ought not” to count in a liberal social order? Yes. As a conception of the good society, liberalism cannot, with consistency, give its blessing to all kinds of taste, indifferent to the kind of society that emerges in response. If social philosophy has any role at all, it is to investigate and promote consensus about what social institutions and policies and attitudes are conducive to human happiness. Its job is to paint a coherent picture of the good society. It cannot just offer a ticket instead of a picture, a ticket reading that the good society looks like whatever a substantially unanimous opinion thinks it looks like. There may be no substantially unanimous opinion. Prevalent opinion may be unenlightened. Social philosophy shirks its job whn it offers no positive guidance. Quite properly, de Tocqueville and John Stuart Mill inveighed in the name of liberalism not only against governmental tyranny but also against the conformist pressures of public opinion.

Suppose one man were to buy the fawning submissiveness of another, or even the other's submission to torture to gratify the sadism of the first. Can Edition: current; Page: [439] liberalism bless such transactions in the name of the free market? Of course not. Voluntary though they may be, they gratify and encourage attitudes subversive of an enduring liberal social order. A number of practical reasons, to be sure, tell against making them illegal. On the other hand, public policy should not provide examples that sanctify tyrannical and meddlesome private tastes. Policymakers should recognize that State actions today may well influence what private attitudes will prevail tomorrow.

Does liberalism sanctify illiberal practices freely agreed upon? Does tolerance imply toleration of intolerance? Does democracy imply the right of the people to vote democracy out and dictatorship in? Such questions are reminiscent of certain logical paradoxes discussed by Bertrand Russell and untangled by his distinction between levels of discourse. We have to be clear whether we are talking “in” or “about” language, “within” or “about” democracy, “within” or “about” liberalism. An action or policy that embodies or sanctifies meddlesomness cannot properly be called liberal merely by postulating that it is freely agreed to, perhaps in some market transaction or by some democratic procedure. Liberalism is defined, instead, in terms of the nature and motivation and probable consequences of policies and institutions. For the word to have any content, we must recognize the possibility that people may freely choose the negation of liberalism. To define liberal policies in terms of negotiating procedures or of degree of agreement is to empty the word of meaning. The choices that emerge from political or market processes may quite conceivably not be coherent; they may not fit in with a coherent picture of the good society. One reason among many is that the choices may not be sufficiently enlightened.15 A decision-making process is no substitute for a Edition: current; Page: [440] social philosophy. If totalitarianism were adopted by unanimous consent, would this decision be a liberal one? Of course not; for liberalism values arrangements that enable individuals to pursue their own diverse ends with a minimum of interference with each other.

In conclusion, I recognize that some would-be levelers of income and wealth and opportunity are honorable men. They do not believe that numerical might makes right; they do not want to aggrandize the power of the State; they do not pander to envy; they do not make money the measure of all things; they do not savor the prospect of feeling superior to the losers in a suitably handicapped contest. But in appraising a line of policy, it is not enough to satisfy oneself about the motives of the more honorable among its proponents; one must also consider the type of society that it tends to promote. One must consider that a policy may exert some of its effects over a long period of time through its influence on what attitudes prevail. If I am a good judge of my own motives, I oppose fiscal leveling because I want the kind of society that respects but puts no special emphasis on material values, one that allows niches for people with diverse drives and goals in life, one characterized by tolerant attitudes, and one whose institutions facilitate voluntary cooperation while minimizing the scope for clashes among the freedoms of its members.

The Political Economy of Nostalgia Ramon Diaz