Never underestimate government’s willingness to delay the inevitable.

FEE Timely Classic:
“Economics on Trial” by Mark Skousen

To be sure, financial firms leveraged up—that is, they did a lot of business with borrowed money. That juiced up revenues and bonuses in the boom—and exacerbated losses in the downturn. Selling notes based on questionable mortgages as collateral was one method for tapping into the money sloshing around.

Without abundant credit, it would not have been possible to borrow so much and in so many different ways. Banks create credit but are subject to myriad controls by the Federal Reserve System. Money was plentiful because of Fed policy.

Politicians, pundits, and the Obama administration want to impose new regulation on the financial system, giving wider powers to government agencies. Depending on how and to what extent they implement that agenda, the Federal Reserve—alongside other agencies like the Securities and Exchange Commission—stands to gain greater authority. Hence the Fed’s track record is a timely and pertinent subject.

Although the institution now commands unquestioning acceptance, its inception was controversial. Richard Timberlake, in his history of monetary policy in the United States, quotes a congressman shortly after the 1913 passage of the law that created the Federal Reserve System: “This act establishes the most gigantic trust on earth, such as the Sherman Antitrust Act would dissolve if Congress did not by this Act expressly create what by that Act it prohibited.”

That gigantic trust has correspondingly gigantic effects on the economy, through multiple roles and powers. As overseer of ordinary banks the Fed makes sure they play by the rules. As lender of last resort it can keep banks going through cash-flow problems. Beyond its supervision of individual banks the Fed pursues economy-wide goals.

It operates various levers that reduce or expand the supply of money and credit. In what is generically called monetary policy, the Fed uses the levers to boost a drooping economy—as is happening at present—or cool down an overheated one. In theory those efforts benefit society at large.

In reality—well, let’s take a look at the 1930s and our own time to understand the Fed’s role in the two most dramatic financial crises of living memory.

Stability Found and Lost

Two seminal insights emerged from the path-breaking A Monetary History of the United States, 1867–1960 (1963) by Milton Friedman and Anna Schwartz. They argued that the Federal Reserve worsened the banking collapse of the 1930s and probably killed off a potential recovery by tightening money. In reaction to a drain on U.S. gold reserves, the Fed clamped down on an already shrinking money supply, thereby turning an ordinary recession into what came to be known as the Great Depression.

Current Fed Chairman Ben Bernanke agrees with that conclusion and is certainly not repeating the mistake. He has eased money in every way it can be eased.

But Friedman and Schwartz offered a broader lesson as well. They showed that the stock of money became subject to greater fluctuations after the Fed took over the control of money from the gold standard system. “The blind, un-designed, and quasi-automatic working of the gold standard turned out to produce a greater measure of predictability and regularity—perhaps because its discipline was impersonal and inescapable—than did deliberate and conscious control exercised within institutional arrangements intended to promote monetary stability,” Friedman and Schwartz wrote.

By the late twentieth century it looked as though central bankers had taken this criticism to heart. They had reason to congratulate themselves on what was called the Great Moderation. Since the mid-1980s both prices and output growth had been reassuringly stable. In a 2004 speech Bernanke argued that this was primarily due to improved monetary policy, although economic change and plain old luck also may have played a role, too.

At that time Bernanke was not yet Fed chairman, but he was a member of the board of governors, a position he held from 2002 to 2005. Current Treasury Secretary Tim Geithner was president of the New York Federal Reserve Bank from 2003 until this year. These facts are worth recalling because there is a tendency to concentrate the blame on former chairman Alan Greenspan. But whatever one thinks of Greenspan, the officials who currently make policy were there with him as the Fed sowed the seeds of financial crisis.

In retrospect those seeds were already discernible in the late 1990s. The steep rise in housing prices had started, encouraged by a stock bubble that created the illusion of wealth. In 1998 the Fed eased interest rates several times in response to panic after Russia defaulted on its bonds and the related near-failure of a large hedge fund, Long-Term Capital Management. This policy reassured investors, who subsequently bid up share prices to the stratosphere in 1999 even as the Fed reversed course.

The stock bubble burst in early 2000, and the economy stalled. Interest-rate cuts are prescribed and expected in a recession, so it is no surprise that the Fed took that course. But even after the economy recovered, rates stayed exceptionally low in comparison to what they would have been by the standard of the Great Moderation.

Stanford University economist John Taylor has used a measure known as the Taylor Rule to demonstrate that monetary excess lasted several years, into 2006. The title of Taylor’s new book says it all: Getting Off Track: How Government Actions and Interventions Caused, Prolonged, and Worsened the Financial Crisis.

Not everybody agrees that monetary policy was loose during the Greenspan era. David Henderson and Jeffrey Rogers Hummel argued in the March issue of The Freeman that monetary policy was not expansionist from 2001 to 2006 as measured by the declining growth of monetary aggregates. The Taylor Rule, however, allows the comparison of two periods—and the federal funds rate was lower in the 2000s than in the 1980s.

Another explanation of the monetary excess, endorsed by Bernanke and Greenspan, is that there was a global glut of savings. But Taylor shows that worldwide there was no such glut because the surplus savings in Asia and the Middle East were offset by a savings gap in other countries, in particular the United States.

It is fair to say that most of us partook of the Fed’s generous punch, whether by running up credit-card debt, buying houses beyond our means, trading with borrowed money, or making 30 percent on exotic debt instruments. Monetary excess meant that borrowing was easy; mortgages were to be had for a song. Housing prices rose at amazing rates year after year. With the hazard of price declines out of sight and out of mind, homeowners, developers, and banks overextended themselves.

It was an extraordinary boom; hence the following bust was also extraordinary. In effect, the stability of the 1980s Great Moderation was over by the time Bernanke credited monetary policy for fostering that stability.

What Failed

The bubble-and-collapse sequence is now attributed to a failure of capitalism, to use the title of a new book by Richard Posner, a judge and prolific author. According to a widely held view, the private financial system is intrinsically unstable, with leverage a central element in its penchant for self-destruction. Had the system been properly regulated and restrained, it would not have gone haywire. Hence whatever is not sufficiently regulated should be nailed down to avoid similar disasters in the future. Much of the media reflects that view.

And yet the Fed and the Securities and Exchange Commission (SEC) between them already have massive regulatory powers over banks and broker-dealers, including investment banks. What is more, they and other agencies were part of the President’s Working Group on Financial Markets, set up after the crisis of 1998 to deal with systemic risk—the kind of danger that came up so frequently in 2007–2008.

Despite all the regulatory powers, a crisis broke out. Posner may represent current conventional wisdom when he writes that the government’s myopia, passivity, and blunders played a critical role in allowing the recession to balloon, but there would have been a crisis anyway regardless of those shortcomings.

The alternative view, represented by Taylor (following in the footsteps of Ms. Schwartz and the late Mr. Friedman), is that monetary policy turned what might have been mild cyclical fluctuations into a big bubble, inevitably leading to a big collapse. No easy money, no crisis.

Regarding the central bank’s multiple functions, its stance in the supervision of individual banks appears to have been of a piece with its broader policy. The Fed as overseer of banks could have demanded that they reduce their use of leverage, but the Fed as maker of monetary policy was providing the wherewithal for that leverage.

Hence the let-them-leverage regulatory stance was not accidental or myopic; it was consistent with deliberate monetary policy. If policymakers were concerned about the galloping credit expansion, they should not have let money go loose in 2003–2006. Lacking such concern, the Fed had no reason to get banks to reduce their risk. The whole institution took this track, not just Alan Greenspan.

Controlling or Creating Risk?

There’s no question private action results in economic cycles, largely because human beings have mental biases that keep them focused on the near term. The key point, though, is that even the largest private actor does not have the impact of the gigantic banking trust. Monetary policy is system-wide; policy mistakes have ramifications across the economy.

So the Fed by itself can create systemic risk, even as people call for expanding its powers to control the systemic risk posed by market participants like banks and hedge funds.

The Fed actively implemented measures that destabilized the system in the 1930s and again in the 2000s, albeit in different ways. The mistake was different—back then the Fed tightened in a downturn; this time it kept money too loose in an upturn. But there was the same fundamental consequence of financial and economic instability.

Timberlake thus summarized the Federal Reserve’s track record: “It comes across as a prototypical governmental institution operating under the rule of men rather than the rule of law.” To prevent misguided monetary interventions, the discretion of the people who run the institution should be limited.

Friedman argued for rule-based monetary policy, specifically that the Fed should follow a rule to keep the money supply growing steadily at a fixed rate of 3 to 5 percent a year. This turned out to be difficult to implement, given that the money supply and its relation to the economy are complicated.

This is where the Taylor rule, which describes actual policy during the Great Moderation, comes in. Taking that policy as a template, the Fed can set the short-term interest rate in accordance with a constant formula based on inflation and output.

Compared to Friedman’s fixed rate, the formula is more flexible.  But it keeps interest-rate policy predictable and transparent. If followed consistently, rule-bound monetary policy, combined with proper enforcement of existing regulations for banks and broker-dealers, would prevent the excesses seen in recent years.

Government Intelligence and the Nirvana Fallacy

Instead, what’s being advocated is broader activity by policymakers. Posner, for instance, draws the conclusion that “we need a more active and intelligent government to keep our model of a capitalist economy from running off the rails.” It is interesting that he sees a need not just for more-active government but more intelligent government. If government action has not been intelligent in the past, why expect it to be intelligent in the future?

We’re talking about institutions with overarching powers that have caused a variety of harms, from deliberate Fed policies that created instability to the SEC’s inability to detect fraud even after being told about it, misleading investors into believing that all was well with Bernard Madoff. (See my May Freeman article on the Madoff case) If there is more government activity of this sort, there will be even worse disasters.

One way to prevent another round of government-made debacles would be to replace the central bank with market-based money, thereby imposing an impersonal discipline—to use the words of Friedman and Schwartz. But following the Taylor Rule is a more likely solution, since it serves the goal Fed officials themselves say they want to pursue, namely, more predictable and transparent policy.

Those calling for greater interventionism tend not to engage the issue of what the government does in reality. There is a presumption that regulation is the cure-all, even as we live through the effects of a systemic policy failure. Economist Robert Solow, in a review of Posner’s book, writes that Panglossian ideas about “free markets” encouraged lax or no regulation of a potentially unstable financial apparatus.

When you consider the actual role of the Federal Reserve in crises, it is the notion of government activism as the solution to financial uncertainty and fluctuations that comes across as Panglossian.

Lewis poses excellent questions and gives fairly good answers. His questions include: Should prices in general be stable, fall, or rise? and Should the stock of money grow continuously, never, or sometimes? He conducts a dialog with himself over these questions, first defending a “yes” answer, then a “no,” and then offering additional replies and counter-replies. His sympathies lie with what he describes as “the Austrian, laissez-faire, or free-market point of view,” but he endeavors to represent the alternative Keynesian view fairly.

Lewis is to be applauded for presenting the case for letting prices fall in a growing economy. Unfortunately he appears to have overlooked some of the strongest previous presentations of that case. We must distinguish between a harmless deflation, where technological progress or other sources of improved productivity lower costs and thereby gently draw prices down, and a harmful deflation, where shrinkage in the stock of money or its velocity brings unsold inventories and thereby painfully forces prices down. Lewis recognizes a distinction between gentle and painful, but oddly claims that, in the view of its defenders, “deflation is always good,” even when “quite painful.” Claiming that deflation is always good is absurd because there is no benefit from deliberately creating a deflation by shrinking the money stock. Auric Goldfinger’s plan, in the James Bond story, to nuke the gold in Fort Knox, thereby raising the purchasing power of his own gold, was the plan of a villain not a hero. Just as a central-bank-engineered monetary expansion disrupts the economy and causes misallocation of resources—something Lewis recognizes—so too does a central-bank-engineered monetary contraction.

To his credit Lewis identifies the error of monetary expansionism: “If you have four apples and a dollar, the dollar may help you price and trade the apples. But adding another dollar will not increase wealth; it will simply raise the price of the apples.” Unfortunately, he fails to identify the corollary error of deliberate contractionism.

In the second half of the book, Lewis discusses what he calls “the problem of banks,” meaning the question of fractional-reserve banking. Here Lewis—following and citing Murray Rothbard’s The Case Against the Fed—offers the view that fractional-reserve banking is prone to runs, “inherently destabilizing” for the broader economy, and should be outlawed as fraudulent. Uncharacteristically, he neglects to consider the other side: the historical studies indicating that free banking with fractional reserves is not run-prone but robust, the theoretical arguments for the efficiency and economically stabilizing character of free banking, and the jurisprudential arguments for the legitimacy of voluntary fractional-reserve arrangements based on freedom of contract.

Defenders of fractional-reserve free banking (the present reviewer included) would reject the claim that, like a central bank, “a fractional reserve bank can also ‘print’ new money” arbitrarily. Any bank in a competitive system issuing gold-redeemable notes and deposits is tightly constrained, unlike a monopoly central bank. Contra Lewis, the money supply in a fractional-reserve free banking system is neither “over elastic” nor “generally expanding.” Lewis might have consulted Mises’s The Theory of Money and Credit and Human Action more closely on these points.

Lewis does a good job of sketching the Austrian theory of the boom-bust cycle resulting from a central bank’s cheap-credit policy. And he sagely notes that when a central banker promises to inflate the economy and bail out financially troubled firms, “then it becomes more rational to speculate, to take excessive risk, and not at all rational to save, to take precautions, to be prudent. In this respect . . . so-called stabilization is actually de-stabilizing.”

The book contains three appendices, respectively concerning the Federal Reserve System and its operations, the gold standard and other international monetary arrangements and institutions, and nonmonetary cycle theories. The appendix on the Fed unfortunately gives an incorrect account of how the money multiplier and open-market operations determine the money stock.

The academic economist-reviewer cannot resist noticing some other errors. For example, no sensible view holds that a period of inflation typically or automatically leads to a period of deflation in a fiat money economy. A determined central bank can issue enough money to keep the price level rising continuously, as almost all have since the fiat era began in earnest in 1971.

Despite its shortcomings, this book is an interesting and useful introduction to the important question posed in its title.

The frequency of bank runs and panics was a crucial reason for creation of the Federal Reserve System in 1914. The idea was that the Fed would provide an “elastic” currency, injecting cash into the economy during periods of high credit or currency demand and withdrawing it in periods of low demand. This policy appeared to work initially, since bank runs disappeared from 1914 through 1928. Runs and panics returned with a vengeance in 1929–1933, however, and the huge number of bank failures contributed significantly to the Great Depression.

In response to the runs and panics during the Depression, the U.S. Congress created federal deposit insurance in 1934. Under this policy the government reimburses the depositors of failed banks. Funding comes from insurance premiums paid by the banks, and from general government funds if necessary. In principle the insurance applies only to deposits below a specified ceiling, but in practice coverage is essentially complete. Depositors can split large accounts across banks, and the FDIC typically covers all deposits.

The public and many economists now take as given that government deposit insurance is good policy.

At first glance this conclusion seems warranted. Bank runs have not occurred since 1934, and insured depositors have not lost a dollar in that time. Further inspection, however, suggests that an alternative approach to limiting bank runs might be superior to deposit insurance.

The problem with deposit insurance is that it generates a moral hazard: When banks know their deposits are insured, they have an incentive to purchase riskier assets. If these assets generate high returns, banks make good profits, while if they fail, deposit insurance cushions the blow. Thus banks assume more risk than warranted by market fundamentals. That is why current regulation tries to limit bank holdings of risky assets while also requiring a minimum degree of capitalization.

In principle the combination of balance-sheet regulation and deposit insurance can both limit runs and prevent excessive risk taking. In practice banks can innovate around much regulation, so they still end up taking more risk than is appropriate. This is precisely what occurred in the run-up to the 2007–2008 financial crisis. By using derivatives, off-balance-sheet vehicles, and “structured finance,” banks were able to assume huge risks within the confines of existing regulation. For several years the excessive risk taking generated large profits, but eventually the underlying fundamentals crashed, pushing several large banks to the brink of failure. Widespread failure did not occur, thanks to the Treasury bailout, but the adverse implications for taxpayers were at least as bad as those that failure would have imposed.

In response to these events, many observers have argued that the United States needs more regulation of banks. It is not obvious, however, why additional regulation would be any less subject to manipulation than past regulation. Thus approaches that involve less regulation, not more, are worth considering.

Suspended Convertibility

The crucial regulation in this context is the longstanding regulatory ban on bank suspension of convertibility. This regulation means that when depositors request cash withdrawals, banks are legally obligated to comply. In the absence of legal constraints, banks might offer deposit contracts that allowed them to suspend partially or fully. These contracts would presumably offer different terms from a standard demand deposit. For example, they might require that interest be paid on any suspended balances, or they might specify the length of time a bank could suspend without incurring penalties. They would not, however, commit the bank to always meeting demand withdrawals both immediately and in full.

If banks can suspend convertibility, depositors know that runs merely precipitate suspension. This greatly reduces depositor incentive to panic and run. Allowing banks the right to suspend would probably not eliminate all runs, but it would plausibly limit them to banks that are insolvent rather than merely illiquid.

The question, then, is whether a banking system with less regulation—no prohibition on suspension and no deposit insurance—might work better than current regulation—prohibitions on suspension, combined with deposit insurance and balance-sheet regulation.

The evidence from the pre-1914 era suggests that the regime with less regulation has promise. Banks were not legally allowed to suspend convertibility during this era, but many did so anyway, sometimes with explicit approval of, or even encouragement from, regulators. This did not eliminate runs and panics, but the record suggests that suspension reduced contagion and failure in these episodes. A few panics were associated with substantial declines in output, but many others were short-term and confined to a few cities or parts of the country. Even in cases where recession and panic coincided, some of this correlation no doubt reflects the effect of recession on bank solvency, rather than panics causing recessions. It is plausible, moreover, that suspension would be even more effective in limiting runs and panics if banks were able to experiment with different types of contracts and use suspension without fear of legal jeopardy.

It is also plausible that the socially desirable number of runs is not zero; after all, runs discipline banks that take excessive risks. In an idealized setting the mere threat of runs might be sufficient to prevent them; actual runs need never occur. In the real world, however, the occasional run is most likely necessary to close down irresponsible or incompetent banks and to remind others to behave.

Both theory and evidence, therefore, suggest that regimes with less regulation deserve as much consideration as those with more regulation. Designing and enforcing regulation is difficult because it complicates incentives and generates unintended consequences, as recent events have shown. Perhaps, therefore, markets are better than regulation at disciplining the banking system.

When Austrian-school theorists have examined the dynamics of market exchange, they have stressed the importance not only of the larger political context within which such exchanges take place, but also the ways in which politics influences and molds the shape and character of those exchanges. Indeed, with regard to financial institutions in particular, they have placed the state at the center of their economic theories on money and credit.

Throughout the modern history of the system that most people call “capitalism,” banking institutions have had such a profoundly intimate relationship to the state that one can only refer to it as a “state-banking nexus.” As I point out in Total Freedom: Toward a Dialectical Libertarianism:

A nexus is, by definition, a dialectical unity of mutual implication. Aristotle . . . stresses that “the nexus must be reciprocal . . . [T]he necessary occurrence of this involves the necessary occurrence of something prior; and conversely . . . given the prior, it is also necessary for the posterior to come-to-be.” For Aristotle, this constitutes a symbiotic “circular movement.” As such, the benefits that are absorbed by the state-banking nexus are mutually reinforcing. Each institution becomes both a precondition and effect of the other.

The current state and the current banking sector require each other. They are so reciprocally intertwined that each is an extension of the other.

Remember this the next time somebody tells you, as New York Times columnist Bob Herbert did, that “free market madmen” caused the current financial crisis that is threatening to undermine the global economy. There is no free market. There is no “laissez-faire capitalism.” The government has been deeply involved in setting the parameters for market relations for eons; in fact, genuine “laissez-faire capitalism” has never existed. Yes, trade may have been less regulated in the nineteenth century, but not even the so-called Gilded Age featured “unfettered” markets.

One reason I have come to dislike the term “capitalism” is that, historically, it has never manifested fully its so-called “unknown ideals.” Real, actual, historically specific “capitalism” has always entailed the intervention of the state. And that intervention has always had a class character; that is, the actions of the state have always benefited and must always benefit some groups at the expense of others.

No Neutral Government Action

Mises understood this when he constructed his theory of money and credit. For Mises, there is no such thing as a “neutral” government action, just as surely as there is no such thing as “neutral” money. As he pointed out in The Theory of Money and Credit and other works, “Changes in the quantity of money and in the demand for money . . . never occur for all individuals at the same time and to the same degree and they therefore never affect their judgments of value to the same extent and at the same time.” He traced how, with the erosion of a gold standard, an inflation of the money supply would diffuse slowly throughout the economy, benefiting those, such as banks and certain capital-intensive industries, who were among the early recipients of the new money.

One reason the gold standard was abandoned is its incompatibility with a structural policy of inflation and with a system heavily dependent on government intervention. (It should be pointed out that a free-banking system need not necessarily entail a 100 percent reserve gold standard, but I leave this discussion for another day.) The profiteers of systematic inflation are not difficult to pinpoint. Taking their lead from Mises, Hayek, and Rothbard and such New Left revisionist historians as Gabriel Kolko and James Weistein, Walter Grinder and John Hagel III point out:

Historically, state intervention in the banking system has been one of the earliest forms of intervention in the market system. In the U.S., this intervention initially involved sporadic measures, both at the federal and state level, which generated inflationary distortion in the monetary supply and cyclical disruptions of economic activity. The disruptions which accompanied the business cycle were a major factor in the transformation of the dominant ideology in the U.S. from a general adherence to laissez-faire doctrines to an ideology of political capitalism which viewed the state as a necessary instrument for the rationalization and stabilization of an inherently unstable economic order. This transformation in ideology paved the way for the full-scale cartellization [sic] of the banking sector through the Federal Reserve System. The pressure for systematic state intervention in the banking sector originated both among the banks themselves and from certain industries which, because of capital intensive production processes and long lead-times, sought the stability necessary for the long-term planning of their investment strategies. The historical evidence confirms that the Federal Reserve legislation and other forms of state intervention in the banking sector during the first decades of the twentieth century received active support from influential banking and industrial interests. . . . [“Toward a Theory of State Capitalism: Ultimate Decision-Making and Class Structure,” Journal of Libertarian Studies, 1977.]

As Grinder and Hagel explain, “[C]artellization [sic] of banking activity permits banks to inflate their asset base systematically.” This has the effect of strengthening the “ultimate decision-making authority” of banking institutions over “the activities of industrial corporations,” and, by extension, “the capital market.” These banking institutions serve as a key “intermediary between the leading economic interests and the state.”

Thus one of the major consequences of inflation is a shift of wealth and income toward banks and their beneficiaries. But this financial interventionism also sets off a process that Hayek would have dubbed a “road to serfdom,” for inflation introduces a host of distortions into the delicate structure of investment and production, setting off boom and bust and, in Grinder and Hagel’s words, “a process of retrogression from a relatively free market to a system characterized by an increasingly fascistic set of economic relationships.”

Just as the institution of central banking generates a “process of retrogression” at home, engendering additional domestic interventions that try to “correct” for the very distortions, conflicts, and contradictions it creates, so too does it make possible a structure of foreign interventions. In fact, it can be said that the very institution of central banking was born, as Rothbard argues in The Mystery of Banking, “as a crooked deal between a near bankrupt government and a corrupt clique of financial promoters” in an effort to sustain British colonialism. The reality is not much different today, but it is a bit more complex in terms of the insidious means by which government funds wars, and thereby undermines a productive economy.

So where does this leave us today?

Much has already been said about the most recent financial crisis, viewed from a radical libertarian and Austrian perspective, which helps to clarify its interventionist roots. (See, for example, Steven Horwitz’s “An Open Letter to My Friends on the Left,” and Sheldon Richman’s “Bailing Out Statism“). The seeds for this particular crisis were planted some years ago. The origins of the housing bubble can be traced to the creation of Fannie Mae and Freddie Mac, government-sponsored enterprises that extended risky loans to low-income borrowers in the hopes of expanding the “ownership society.” But the larger crisis must be understood within the wider political-economic context shaped by inflationary government and Federal Reserve policies that fueled a binge of reckless borrowing. Horwitz explains:

All of these interventions into the market created the incentive and the means for banks to profit by originating loans that never would have taken place in a genuinely free market. It is worth noting that these regulations, policies, and interventions were often gladly supported by the private interests involved. Fannie and Freddie made billions while home prices rose, and their CEOs got paid lavishly. The same was true of the various banks and other mortgage market intermediaries who helped spread and price the risk that was in play, including those who developed all kinds of fancy new financial instruments all designed to deal with the heightened risk of default the intervention brought with it. This was a wonderful game they were playing and the financial markets were happy to have Fannie and Freddie as voracious buyers of their risky loans, knowing that US taxpayer dollars were always there if needed. The history of business regulation in the US is the history of firms using regulation for their own purposes, regardless of the public interest patina over the top of them. This is precisely what happened in the housing market. And it’s also why calls for more regulation and more intervention are so misguided: they have failed before and will fail again because those with the profits on the line are the ones who have the resources and access to power to ensure that the game is rigged in their favor.

This is precisely correct; indeed, there are those of a certain political bent who might seek to place blame for the current financial crisis on the recipients of subprime mortgages, particularly those in minority communities. But if elements of the current housing bubble can be traced to Clinton administration attempts to appeal to traditional Democratic voting blocs, it’s not as if the banks were dragged kicking and screaming into lending those mortgages. This is, in a nutshell, the whole problem, the whole history, of government intervention, as Horwitz argues. Even if a case can be made that the road to this particular “housing bubble” hell was paved with the “good intentions” of those who wanted to nourish the “ownership society,” their actions necessarily generated deleterious unintended consequences. When governments have the power to set off such a feeding frenzy, government power becomes the only power worth having, as Hayek observed so long ago.

We heard a lot about “change” during the last presidential campaign, and about the necessity to end the influence of Washington lobbyists on public policy. But that influence exists because Washington has the power to dispense privilege. And privileges will always be dispensed in ways that benefit “ultimate decision-makers.” That’s the way the system is rigged. It is not simply that intervention breeds corruption; it’s that corruption is inherent in the process itself.

It is therefore no surprise that the loudest advocates for the effective nationalization of the finance industry are to be found on Wall Street; at this point, failing financiers welcome any government actions that will socialize their risks. But such actions that socialize losses while keeping profits private are a hallmark of fascist and neofascist economies. They are just another manifestation of “Horwitz’s First Law of Political Economy” (“Capitalists, Capitalism, and the Siren’s Song of Stability”): “No one hates capitalism more than capitalists.”

It is the government’s monetary, fiscal, and global policies that have created insurmountable debt and record budget deficits, speculative booms and bubble bursts. What is needed is genuine structural change. But the primary battle is an intellectual and cultural one. It requires that we question the fundamental basis of the current statist system.

by Jörg Guido Hülsmann
Ludwig von Mises Institute • 2007 • 1143 pages • $50.00

Reviewed by Bettina Bien Greaves

Biographer Guido Hülsmann has written a magnificent book, describing in detail not only the life of Ludwig von Mises, but also his writings, his intellectual development, and his importance. Hülsmann studied all Mises’s works in German, English, and French, and the biographer’s fluency served him well. He traveled widely to locate Mises’s papers, files, personal correspondence, and documents and did vast research into his life and background.

First and foremost, the book covers Mises’s great contributions to economic understanding. He was not the most popular, renowned, or influential economist of the twentieth century, but was undoubtedly the most important. Perhaps his greatest contribution was the development of subjective-value economics as a science of reason, logic, and immutable laws. He explained all economic phenomena as outcomes of people’s actions, choices, and decisions on the basis of their respective subjective values. Those actions generate prices, production, money, trade channels, markets, wages, interest rates, capital goods, savings, investments, competition, profits, losses, and more.

Mises’s second important contribution was in the field of money and the monetary theory of the trade cycle. In his first theoretical book he explained that money was a market phenomenon. It developed out of barter as individuals, seeking to improve their personal situations, traded with one another. Each trader was attempting to exchange something he possessed for something he preferred more. Eventually, some individual ventured to offer what he had for something he could use, not immediately but in a later trade. Other would-be traders attempted similar exchanges. In time, people began to accept a readily tradable commodity as a medium of exchange—money.

Mises also described how inflation (monetary expansion) fostered by the banks leads to widespread price increases, economic malinvestment, and then inevitably, when the banks stopped inflating, the collapse of businesses, economic stagnation, and a readjustment of prices. Thus Mises—in 1912—laid the groundwork for understanding the economic crises and boom/bust cycles that have plagued capitalistic economies.

Mises’s third significant contribution was his analysis of socialism, considered “the wave of the future” in the early 1920s. In a socialist society all property would be owned and controlled by the state. Thus there would be no market and no market prices reflecting buyers’ and sellers’ bids and offers for property. Without market prices for either consumer’s or producer’s goods, government “planners” would have no guidance as to what people wanted and did not want, and no way to know when, where, and how best to produce anything. In short, there could be no economic planning.

Hülsmann describes the life and times of Mises in his native Austria—his family, cultural, and historical background. Mises grew up in a world in which almost everybody was an interventionist or socialist. He confessed later that when he entered the university he was “a complete statist.” Then in 1903 he read Carl Menger’s Principles of Economics, which introduced him to the subjective value theory and turned Mises’s thoughts in an entirely new direction; he said it “made an economist” of him.

Hülsmann tells about Mises’s search after World War I for a position in which he could not only earn his living but also pursue his interest in economics. In 1918 he joined the Austrian government’s advisory Chamber of Commerce. While with the Chamber he was able to continue his study of economics. He also taught at the University of Vienna as an unsalaried lecturer with the title of Professor Extraordinary, conducted a private economic seminar, and established the Austrian Institute for Business Cycle Research. In 1922, as economic adviser to the Austrian government, he was influential in halting the Austrian inflation before it reached such a disastrous level as in Germany.

Mises was always writing—newspaper articles, economic papers, and books on nationalism, socialism, liberalism, epistemology, money, and economic crises. His entire life was dedicated to trying to improve his own understanding of economics and to explain to others how the market operates. By quoting from Mises’s books, papers, and correspondence, Hülsmann does a masterful job of showing how Mises gradually refined his ideas and improved his explanations.

Hülsmann’s biography portrays a man of principle who was dedicated to pursuing the truth. By dint of his studies, he transformed himself into a powerful advocate of peaceful social cooperation and the free market. The book is fascinating reading for anyone interested in Mises, the person, the economist, the libertarian.

Bettina Bien Greaves served FEE for more than four decades as a senior staff member and resident scholar.

The Shock Doctrine: The Rise of Disaster Capitalism

by Naomi Klein
Metropolitan Books/Picador • 2007/2008 • 576 pages • $28.00 hardcover; $16.00 paperback

Reviewed by Joseph R. Stromberg

The core thesis of Naomi Klein’s Shock Doctrine is that American foreign and domestic policies of the last 30 years have shaped a new corporatism. Corporatism, Klein writes, “originally referred to Mussolini’s model of a police state run as an alliance of . . . government, businesses and trade unions . . . in the name of nationalism.” Latter-day corporatism involves “a huge transfer of wealth from public to private hands, followed by a huge transfer of private debts into public hands.” Neo-liberal corporatism “erases the boundaries between Big Government and Big Business,” while organized labor—indeed all labor—is locked out of the new arrangements.

Klein’s case is tightly organized, well presented, and overwhelming in cumulative impact. She makes a complex argument dealing with what are, indeed, complicated matters. Some reviewers complain that Klein forces the evidence into a pattern. They say her treatment of the views of certain psychologists, economists, and military planners and her comparative account of how those views are (were) implemented, are “unfair,” especially to the economists. But Klein rightly pursues the ideas in question across these fields of knowledge (and action) by analogy—a perfectly good Aristotelian and Thomistic procedure. “Hooding” a captive and “blacking out” an entire city by bombing are analogous, because they are done for the same reason—to disorient and confuse, and so on, through further stages of comparison.

The said psychologists, economists, and military planners dwell endlessly on certain themes because they see the world as a manipulable object and proceed from shared mechanistic, Hobbesian, positivist premises, whereby actual people are mere atoms, objects, or empty ciphers on indifference curves. We cannot be surprised that these experts’ activities complement one another in real life and reveal an indifference to “unforeseen consequences,” while a kind of mathematical Platonism underlies the supposedly “empirical” performances. Shared themes include “shock,” “shock therapy,” crises as experimental opportunities, and “clean slates” (Hobbes’s “clean paper”) on which to plot out new worlds. They talk this way; Klein makes nothing up.

Klein follows these common threads from the “free-market” Chilean tyranny, through Mrs. Thatcher’s rather mixed reforms, phony “privatizations” in Poland and Russia, the half-mad U.S. invasion of Iraq, with more phony “privatizations,” dispossession of small-holders in Sri Lanka, and “state failure” in New Orleans, where school vouchers were imposed while the city rotted.

The Sri Lankan case must suffice here. There, long-established fishermen, having survived the tsunami, were barred from their beach holdings, so that resort hotels favored by the World Bank, U.S. operatives, and investors might expand. This is precisely what a Chicago Law and Economics (Coasean) judge would do. The fishermen are “socially inefficient.” They got no “growth.” Away with their land! They may come back in the reformed “free market” as waiters and busboys.

One key to the new order, I would add, is this: By excluding war-making capacity (“defense”) from the concept of “state” by implicit definition, Republican “anti-statists” create a desert mirage. We can wrangle over smaller government any time; no one can reasonably hold that we are getting such a thing now from those in power, sundry “privatizations” notwithstanding.

Klein somewhat overplays the verbal opposition of “public” and “private.” The current rulers set up expensive contractors to coordinate already expensive defense-industry suppliers. This done, the contractors—clothed in state power—are no longer exactly “private”; neither are they “public” like the post office. Our “free market” reformers may answer for any conceptual confusion. And here, Klein may not see that the contractor fad is partly about empowering the Unitary Executive—shielding its operations from congressional oversight. But she is quite right to see numerous threats to democracy.

I would add that imposing “spontaneous orders” by debt-leveraging, “privatization,” or invasion amounts to right-wing social engineering—not an especially “conservative” vocation. Neither are “privatizations”—amounting to confiscations on the scale of Henry VIII—conservative. Our current regime calls to mind institutionalized Whig corruption after 1689, when (in E. P. Thompson’s phrase) England was a “banana republic,” everything was for sale, and income migrated upwards via the state.

There are some problems of language throughout the book. Reading it, one might think the author deplores any conceivable free markets whatsoever. Klein uses “capitalism” and “free market” to refer to assertions made by policymaking ideologues merchandising corporatist and imperial policies. I wish she had somehow separated official rhetoric from other possible, face-value meanings of these words, by putting them in quotes or occasionally writing “state-capitalist.”

This is, in any case, an important, insightful book. Klein’s specific critique of new-wave corporatism outweighs any disagreements some might have with her “third way” politics. Accordingly, I hope people read the book before falling into predictable, knee-jerk reactions.

Joseph R. Stromberg is an independent historian and writer living in Alabama.

The Medicalization of Everyday Life: Selected Essays

by Thomas Szasz
Syracuse University Press • 2007 • 168 pages • $19.95

Reviewed by Ross Levatter

Thomas Szasz’s most recent book is, in a sense, not recent at all. The Medicalization of Everyday Life is a compilation of 16 essays Szasz published over the last third of a century. Recent or not, these essays are still quite valuable.

There was a time when people led rich lives, filled with mistakes and successes, bad habits and good ones, cowardice and heroism. Now lives are simply filled with a variety of ailments, most of them psychiatric, that cause us to act in cowardly, evil, or mistaken ways. Were it not for narcissistic personality disorder and neuroses, schizophrenia and separation anxiety disorder, paranoia and panic disorder, life would be grand. It’s only mental disease that separates us from nirvana, and we place our faith in psychiatry and psychopharmacology to bring us to the promised land.

While we wait, we follow the new rules. We’re used to doctors telling us what to do. That’s how they help us get better. As more and more aspects of everyday life are viewed as types of illness, doctors try to become more and more helpful by promulgating more rules. They morph into powerful bureaucrats, often backed by the force of law.

Szasz describes this process as it has occurred over the last half of his professional lifetime. The change in the past few decades has been striking. Szasz makes this point by telling us about a psychiatric symposium he attended in 1973. He listened to discussions by psychiatrists “proving” that alcoholism was genetically determined and noticed that (as was then fashionable) the vast majority of psychiatrists in attendance were smoking cigars or cigarettes.

Szasz says: “When my turn came to speak, I asked why, if alcoholism is a mental disease, is nicotinism not also a mental disease?” This, he argued, is because most psychiatrists like to smoke but do not drink to excess. And since they control what counts as disease, they do not place their favorite pastimes in the disease category. Looking back 34 years later, we find the profession responds to outside pressures; the desire to smoke has become yet another mental illness since psychiatrists themselves have largely given up the habit.

This compilation contains several rare pieces most Szasz admirers have not previously seen. These include his thoughts on routine neonatal circumcision, his evaluation of the Terri Schiavo case, and his hostile view of philosopher Peter Singer’s ethics of medicalization. (Singer is the philosopher who argues that lower life forms have rights, not just humans.)

The book also includes an excellent essay on the history of psychiatry, originally published in the journal History of Psychiatry, which Szasz subsequently expanded into a major book, Coercion as Cure.

Although many of the essays deal with specific issues, there are also some excellent general essays that introduce new readers to Szasz’s approach to medicine and psychiatry. These include such classics as “Mental Illness: A Metaphorical Disease,” “Diagnoses Are Not Diseases,” and “Hysteria as Language.”

Szasz is perhaps best known for his views that psychiatry has become an excuse factory for criminality and a justification for authoritarian treatment of people who have committed no crime. The book contains two famous articles on those topics, “Psychiatry’s War on Criminal Responsibility,” and “Pharmacracy: The New Despotism.”

For libertarians the most controversial essay is apt to be Szasz’s analysis of the Terry Schiavo case. He describes her as “half-alive” (dead brain, living body). I would restrict terms like “half-alive” to patients with, say, cord lesions rendering them with a living upper half and “dead” lower half. My personal take is that dead brain means one is dead, even when, as in the case of a persistent vegetative state, the body still has a heart that beats and lungs that breathe.

Szasz argues that the family’s desire to maintain their daughter on life support should have prevailed, at least if they were willing to cover the costs, and that her husband had clear motives for desiring her death. But after decades of psychiatric practice, Szasz should be aware that parents don’t always have their children’s best interests at heart. He also should know that children of very religious parents are not always that religious themselves, yet frequently hide this fact. Thus it is not inconceivable that Michael Schiavo spoke truthfully in saying that, contrary to her religion, Terry didn’t want to live that way. Why didn’t he speak up earlier? Perhaps he had hoped that she’d revive. I see the issue as more morally ambiguous than Szasz does, but his discussion is nonetheless stimulating and based, as always, on libertarian principles.

The Medicalization of Everyday Life is a great introduction, or re-introduction, to the deep insights and delightful prose of Thomas Szasz. You won’t regret the time you invest in this book.

Dr. Levatter was the recipient of the Thomas S. Szasz Award for Outstanding Contributions to the Cause of Civil Liberties, Professional Category, in 2007.

The Antitrust Religion

by Edwin S. Rockefeller
Cato Institute • 2007 • 124 pages • $16.95

Reviewed by George C. Leef

Many years ago when I was in law school, I listened to a talk by a fellow student on antitrust law. Right at the beginning of his presentation, he earnestly stated that the antitrust laws were a “charter of freedom.” I was probably the only person in the room who winced. That “charter of freedom” line is an item of faith among most people (and nearly all lawyers) who have been told that antitrust laws protect companies—and thereby consumers—from the monopolistic designs of greedy business tycoons.

The reason I winced was that I knew that line is nonsense. As an undergraduate I had read Dominick Armentano’s iconoclastic book, The Myths of Antitrust, and understood that antitrust, far from protecting freedom, is an assault on it. Armentano subjected to withering analysis the naïve belief that antitrust law is necessary to the preservation of free markets. Had my classmate read that book, he’d have known how foolish his remarks were.

Since Armentano’s seminal work, there have been other scholarly critiques of antitrust. The most recent is Edwin Rockefeller’s The Antitrust Religion. Rockefeller has impeccable credentials to write such a book. He is a lawyer who has served on the staff of the Federal Trade Commission, chaired the American Bar Association’s antitrust section, and taught at Georgetown Law School. Instead of writing the kind of book you might expect from someone with that background—a dense treatise with in-depth analysis of dozens of cases—Rockefeller has given us a concise book that anyone can easily read. He doesn’t try to cover all the many erroneous doctrines of antitrust, but only to prove his thesis that “antitrust is not consistent with our aspirations for a rule of law.” And why is that? Rockefeller explains, “[A]ntitrust enforcement is arbitrary political regulation of commercial activity, not enforcement of a coherent set of rules.”

That is to say, antitrust is the rule of men, not of laws.

Coming back to the book’s title, Rockefeller argues that antitrust has all the trappings of a religion. It’s accepted as a matter of faith and is built around a number of myths.

The central myth is one blindly accepted by almost all educated Americans. They have heard that the evil Standard Oil Company had a virtual monopoly in the oil business, causing government authorities to break up the gigantic, dangerous firm. If you believe that, the rest of the antitrust catechism falls neatly into place: We need government officials to constantly monitor business activity and to stop the ever-present threat of monopoly.

Rockefeller shows that the accepted Standard Oil tale is as baseless as a Halloween scare story. During the time of Standard’s supposed market dominance, the price of refined petroleum products continually fell and competitors—yes, there were quite a few—steadily chipped away at Standard’s market share. There was no problem.

The antitrust religion thrives on false history and encourages confused thinking. True believers call for antitrust enforcement to prevent the kinds of competitive “injury” that is inevitable under capitalism. “Belief in antitrust,” Rockefeller writes, “is based on a kind of competition in which some win but none lose.”

But why does our author contend that antitrust is not really “law” at all? Because true law must be knowable so people can adjust their behavior in order to avoid legal difficulties. Antitrust, however, is so vague that people can never be certain that they won’t be prosecuted for “attempted monopolization” whenever they compete vigorously. The rule of antitrust authorities is like that of a capricious dictator.

Rockefeller is absolutely correct that antitrust is not compatible with the rule of law. It was America’s first instance of law so vaguely written that people didn’t know what it meant. Unfortunately, since then it has been joined by others, as politicians enact legislation that in effect says to bureaucrats and judges, “Here are a few broad objectives—now you figure out what to do to achieve them.”

Despite his solid case that antitrust is wasteful and counterproductive, Rockefeller holds out no hope that we will escape from its clutches. The religion is just too deeply ingrained, and opinion leaders see it as a component of “social justice.” And even if we somehow repealed the antitrust statutes starting with the Sherman Act, that might make things worse because of the existence of the Federal Trade Commission, which has been invested with broad, open-ended powers to regulate business “for the public interest.” That’s just as vague as a statute that makes it illegal to “attempt to monopolize.”

The only way to root out the antitrust religion is to teach people the truth about capitalism.

George Leef is book review editor of The Freeman.

Born in New York City in 1912 to Jewish immigrants, Friedman went on to become a major force in theoretical economics in the second half of the century and the leading figure of the Chicago, or monetarist, school. As a professor of economics at the prestigious University of Chicago, he is widely credited with overturning the dominant Keynesian paradigm regarding the tradeoff between unemployment and inflation. He made monumental (if controversial) contributions to monetary theory, policy, and history in such books as Studies in the Quantity Theory of Money (1956) and A Monetary History of the United States , 1867–1960 (co-written with Anna Schwartz, 1963).

Slayer of Keynesianism

In the post-World War II era, when Keynesianism dominated the economics profession, Friedman undertook a series of studies to undermine some of Keynes’s leading assumptions. In the late 1940s he challenged the Keynesian position that discretionary government policy was essential to assure full employment. Friedman was able to show that the macroeconomic policymakers would never have sufficient knowledge about changing market conditions to successfully manipulate the fiscal and monetary policy tools in a timely manner. Instead, he argued, the wisest long-run policy was for government to follow a small number of predictable policy rules.

Beginning in the 1950s Friedman presented a restatement of the quantity theory of money, arguing that all prolonged and sustained general rises in prices were caused by an increase in the supply of money. “Inflation,” he said, “is always and everywhere a monetary phenomenon.” His Monetary History of the United States demonstrated that government manipulation of the money supply was the primary factor behind the boom-and- bust cycles experienced in the twentieth century. In addition he argued that it was misguided Federal Reserve policy in the early 1930s that generated the severity of the Great Depression—and not any inherent failures in the market economy.

This led Friedman to make the case for a “monetary rule,” under which the monetary authority would be denied any discretionary powers over the money supply. Instead, the Federal Reserve would be limited to increasing the supply of money at a fixed annual rate of around 3 percent. This would create a high degree of predictability about monetary policy and generate a relatively stable price level in a growing economy.

In making the case for a monetary rule, Friedman advocated a paper-money standard rather than the gold standard, arguing that this would save on the resource costs of digging the metal out of the ground just to store it away in bank vaults. But in the years after he received the Nobel Prize he had second thoughts about his monetary rule and the gold standard. In a series of articles in the 1980s Friedman stated that Public Choice theory had convinced him it will never be in the long-run interest of governments or their monetary authorities to follow the type of rule he proposed, since the temptation to abuse the printing press for political reasons would always be too strong. He therefore concluded that, given the actual history of Federal Reserve policy in the twentieth century, remaining on the gold standard would have been far less costly for America than the Fed-created inflations and recessions.

One final and lasting contribution of Friedman’s was his formulation of the “natural rate” of unemployment. The Keynesians of the 1950s and 1960s believed that it was possible to permanently lower the rate of unemployment through manipulation of the rate of inflation. In his presidential address before the American Economic Association in 1967, Friedman argued that, at most, monetary policy could temporarily lower the level of unemployment. But in the long run it would return to its “natural rate.”

He said that the amount of unemployment at any time was determined by changing supply-and-demand conditions in the market and people’s expectations about the future rate of inflation, which influenced their resource-price and wage demands. The monetary authority could fool people by increasing the inflation rate above people’s expectations, resulting in prices rising faster than wages, and the resulting larger profit margins would create an incentive for employers to increase output and hire more workers. But over time, as people discovered the truth about the rate of inflation, they would demand higher wages and resource prices to compensate for lost purchasing power. That would reduce profit margins and return unemployment to its “natural” level.

Unless the monetary authority was willing to continuously increase the rate of price inflation above people’s adjusted expectations, the lesson had to be accepted that in the long run, monetary policy cannot influence levels of employment and output. These are ultimately determined by market conditions and not by government manipulation.

Through these contributions, Friedman permanently transformed the debate in macroeconomics and in the process undermined many of the most cherished assumptions of Keynesian economics.

Public Intellectual

As influential as Friedman’s academic work was among professional economists, he had as profound an impact on non-economists’ thinking about the virtues of free markets and limited government. At a time when popular writing that went against the collectivist grain had few mass outlets, Friedman managed to reach a wide audience with his clear and good-natured style. He accomplished this through many books, a long-running Newsweek column, and his 1980 television series, “Free to Choose,” based on his bestselling book of the same title.

His 1962 book Capitalism and Freedom was an accessible volume that presented bold free-market thinking on such issues as medical licensing, the volunteer army, and antitrust laws. It was also the book in which Friedman unveiled controversial proposals for school vouchers and the negative income tax as transitions from the welfare state. The book undoubtedly inspired many youthful readers to pursue careers in economics.

Friedman started addressing a large popular audience in 1966, when he inaugurated a regular column in Newsweek, succeeding Henry Hazlitt. Friedman’s column, which rotated with those of the Keynesian Paul Samuelson and Henry Wallich, presented the case for free-market policies across a wide range of issues—such as wage and price controls (imposed by President Nixon in 1971) and the minimum wage—and did much to inject the libertarian perspective into the public debate. The column ran until 1983. (A compilation of columns was published as Bright Promises, Dismal Performance.)

Meanwhile, on December 19, 1969, Friedman’s picture made the cover of Time under the title “Will There Be a Recession?” It was a rare distinction for an academic economist, but by then, Friedman was more than that: he was a public intellectual.

Friedman achieved bona fide star status in 1980 with release of his book Free to Choose, written with his wife Rose Friedman, also an economist. In Free to Choose Friedman explained the unparalleled contributions to human well-being of the division of labor and free exchange, the tyranny of government regulation, the dangers of inflation and the welfare state, and the problems intrinsic to the government school monopoly. His chapters on how the competitive marketplace protects consumers and workers were eye-openers for an audience that until then had been led to believe that only coercive government could do those things.

Free to Choose, according to the Fortune Encyclopedia of Economics, became the best-selling nonfiction book of 1980. Sales were boosted by the ten-part companion television series on PBS. Each week viewers saw the congenial Friedman clearly explain why free markets serve individuals and society best, and why government creates chaos and poverty—all well illustrated with beautiful location footage, including scenes of Hong Kong ‘s success.

Four years later Friedman again combined a book with a television series in The Tyranny of the Status Quo, also co-written with Rose Friedman.

Friedman was fearless in the face of controversy, vigorously opposing the military draft during the Vietnam War and drug prohibition. But he was no idle author. In 1969-70 he participated in the President’s Commission on an All-Volunteer Armed Force. His pro-freedom credentials made his a powerful voice in the effort to end the involuntary servitude of conscription.

Friedman won many honors for his work. Besides the Nobel Prize he also won the Presidential Medal of Freedom and the National Medal of Science, both in 1988. He served as president of the American Economic Association.

In 1947 Friedman was one of a select group of some 40 economists and writers invited by F. A. Hayek to attend the founding meeting of the Mont Pelerin Society in Switzerland. Leonard Read, FEE’s founding president, Henry Hazlitt, and Ludwig von Mises also participated in that meeting to establish a worldwide network of classical-liberal scholars.

Friedman co-wrote (with George Stigler, who also later won the Nobel Prize) one of the first publications FEE released, the 1946 pamphlet “Roofs or Ceilings? The Current Housing Problem,” a critique of rent control.

Sadly, Milton Friedman is gone from us now. But his legacy and devotion to liberty will inspire freedom lovers for many generations.

Keynes (1883–1946)² had a acquired an international reputation shortly after World War I, when he published The Economic Consequences of the Peace, a biting criticism of the Treaty of Versailles that formally ended the war.³ In the 1920s he was a leading critic of the gold standard and a vocal proponent of a government-managed currency to maintain full employment. In his 1924 book, A Tract on Monetary Reform, Keynes declared that gold was a “barbarous relic” and that governments should use their control over the money supply to maintain a stable domestic price level even if this required abandoning a stable foreign exchange rate between the British pound and the other currencies of the world.⁴

In 1930 Keynes published A Treatise on Money, a two-volume work that he expected would establish his reputation as the leading monetary theorist of his time⁵. Instead, the book was savaged by reviewers, including many of the most prominent economists in Great Britain and the United States. The most devastating criticisms were made by a young Austrian economist named Friedrich A. Hayek, who in a lengthy two-part review demonstrated the logical confusions and theoretical misunderstandings that ran through the entire work.⁶

For the next five years Keynes devoted his time to devising a new theory for his argument that a free-market economy was inherently unstable and that only the guiding hand of government could assure full employment in the face of the economic disaster being experienced during the Great Depression of the early 1930s. This work finally appeared in February 1936 under the title The General Theory of Employment, Interest, and Money. ⁷

Except for some of Keynes’s young protégés at Cambridge University, most of the reviewers of the book were highly critical of many of its theoretical “innovations,” as well as its inflationary prescriptions for unemployment.⁸ Even some economists who later became proponents of Keynes’s “new economics” were initially highly critical of his work. For example, Alvin Hansen, who was one of the leading advocates of Keynesian economics in the United States in the 1950s and 1960s, wrote in late 1936 that The General Theory “is not a landmark in the sense that it lays the foundation for a ‘new economics.’ . . . The book is more a symptom of economic trends than a foundation stone upon which a science can be built.”⁹

Yet within a few years, and most certainly by the end of World War II, Keynes’s ideas had virtually pushed aside every other explanation of the causes and cures of economic depressions.¹⁰ Keynes’s book became the foundation stone for the new “macroeconomics.” His face even appeared on the cover of the December 31, 1965, issue of Time magazine. The feature article, titled “We Are All Keynesians Now,” stated:

Today, some 20 years after his death, his theories are a prime influence on the world’s free economies, especially America’s. . . . Now Keynes and his ideas, though they still make some people nervous, have been so widely accepted that they constitute both the new orthodoxy in the universities and the touchstone of economic management in Washington. . . . Now even businessmen, traditionally hostile to Government’s role in the economy, have been won over. . . . They have begun to take for granted that the Government will intervene to head off recession or choke off inflation, [and] no longer think that deficit spending is immoral.¹¹

Keynes argued in The General Theory that the free-market economy contained no built-in mechanism to assure full employment. The crucial weakness, he said, lies in the relationship between savings and investment. People tend to consume more as their incomes go up, but the increase is not as great as the increase in income. In other words, they also save a portion of their higher income. The problem, he insisted, is that saving is “non-spending” and if people do not spend all the extra income they earn, businessmen may not have the incentive to invest enough to employ all those who want to work at prevailing wages.

As a result, a large portion of the labor force may be left unemployed because the private sector has failed to create enough jobs. The economy, therefore, may be stuck for a prolonged period in what Keynes called an “unemployment equilibrium.” Couldn’t workers improve their prospects by accepting lower money wages? No, Keynes insisted, because workers suffer from a “money illusion”—even if prices were falling and a cut in wages would make them no worse off in real buying-power terms, workers would refuse to accept less money.

Rather than demand that workers accept lower pay, Keynes favored raising the general level of prices so employers could make profits without cutting wages. In other words, Keynes’s solution to unemployment was price inflation.

Deficit Spending

Government deficit spending would provide additional market demand, pushing prices up and stimulating more hiring. Public-works projects would “prime the pump.” This policy would continue until “full employment” was attained. But since, in Keynes’s view, businessmen were usually shortsighted and irrational in their fears about investment prospects, the private sector would always lag behind in creating jobs. The government would have to be constantly at the monetary and fiscal controls, injecting spending into the economy to prevent it from sinking back into unacceptable levels of unemployment.

In Keynes’s conception of the world, governments guided by his ideas would be wise and farseeing, assuring that the mass unemployment of the 1930s never happened again. Government would manipulate interest rates, the level of prices, and the amount and direction of investment to assure that society had high employment, socially beneficial investment, and general economic stability.

There were critics of Keynesian economics in the 1940s and 1950s, but they were virtually ignored by academic economists and policymakers.¹³ Some mainstream macroeconomists also took Keynes to task. But many of their criticisms were couched in terms clearly meant not to antagonize their Keynesian colleagues.

Then in 1959 came Henry Hazlitt’s The Failure of the “New Economics”.¹³ What was unique about Hazlitt’s exposition was his chapter-by-chapter dissection of the arguments in Keynes’s General Theory.¹⁴

Central to Keynes’s theory was his insistence that “Say’s Law” was wrong in claiming that “supply creates its own demand.” Just because people supply goods on the market does not mean they will demand what others are selling. They may abstain from spending by holding idle cash balances. Thus there could be a general glut of goods on the market.

Say’s Law

Hazlitt showed that Keynes had misunderstood what the Jean-Baptiste Say and other nineteenth-century economists meant. Goods can virtually always find buyers if prices are sufficiently attractive. The pre-Keynesian “classical” economists never denied that goods can go unsold and labor unemployed if suppliers fail to adjust their prices and wages to match existing market demand.

Furthermore, Hazlitt explained, many of the classical economists, especially John Stuart Mill, understood that individuals could “hoard” money rather than immediately spend it. But this was most frequently due to the temporary uncertainties of an economic crisis, usually caused by a prior, unstable inflationary boom.¹⁵

The central flaw in Keynes’s thinking, Hazlitt insisted, was his unwillingness to acknowledge that the high unemployment in Great Britain in the 1920s and the United States in the 1930s was caused by government intervention, including the empowering of labor unions, that made many prices and wages virtually “rigid.” Political and special-interest power prevented markets from competitively re-establishing a balance between supply and demand for various goods. Hence, the market was trapped in wage and price distortions that destroyed employment and production opportunities, resulting in the Great Depression. (Hazlitt did not deny that the contraction of the money supply in the early 1930s increased the degree to which prices and wages had to fall to re-establish full employment.)

Hazlitt considered Keynes’s inflationary “fix” crude and dangerous. First, Hazlitt pointed out that Keynes’s focus on macroeconomic “aggregates” concealed the microeconomic relationships among a multitude of individual prices and wages. The price level, wage level, total output, aggregate demand, and aggregate supply were all statistical fictions that had no reality in the actual market. Thus the wage level could not be too high relative to the general price level. But in the 1930s many wages for different types of labor were out of balance with the prices of individual goods sold on the market. What was needed to restore full employment was an adjustment of numerous individual wages and resource prices to the lower prices of many consumer goods. The extent to which any individual money wage or resource price might have to adjust downwards depended on the distinct supply and demand conditions in each of the individual markets.

An inflationary policy attempts to bring some individual price-wage relationships back into balance by pushing prices up throughout the economy, Hazlitt explained.

Because Keynes, with his lump, aggregate thinking, is opposed to restoring employment or equilibrium by small, gradual, piecemeal adjustments . . . we must achieve the same result by inflating the money supply and raising the price level, so everybody’s real wages are slashed by the same percentage. . . . The Keynesian remedy, in short, is like changing the lock to avoid changing to the right key, or like adjusting the piano to the stool instead of the stool to the piano.¹⁶

Second, Hazlitt pointed out that workers and labor unions are aware of how rising prices affect the real value of money wages. There is certainly no “money illusion” in an upward direction. An increasing cost of living due to rising prices soon brings worker and union demands for higher pay to make up for lost purchasing power. But if workers and unions demand the same real wages they had before the inflation, then the Keynes solution to unemployment must fail.

Finally, Keynes’s macroeconomic approach also concealed the fact that beneath the aggregate rising price level, inflation distorts many of the relative price relationships, including the rate of interest. This inevitably brings about misdirection of resources, capital, and labor across different sectors of the market that will eventually require a reshuffling of supply and demand once the inflation ends. Thus the inflationary “cure” for unemployment brings in its wake an eventual new bout of unemployment when workers have to shift jobs and readjust their wage demands in the post-inflationary period.

Indeed, in a series of chapters, Hazlitt clearly showed that Keynes was confused about the actual relationships among savings, investment, and the rate of interest. The core of his theory was founded on a bundle of errors and mistakes. This resulted in Keynes’s failure to comprehend that saving, investment, and capital formation—not government-stimulated increases in aggregate consumer demand—are the foundations of sustainable employment and rising standards of living.¹⁷

Hazlitt also took Keynes to task for advocating increasing government control and direction of investment decision-making. Keynes clearly believed, Hazlitt sarcastically observed, “that there exists a class of people (perhaps economists very much resembling Lord Keynes) who are completely informed, rational, balanced, wise, who have means of knowing at all times exactly how much investment is needed and in exactly what amounts it should be allocated to exactly which industries and projects, and that these managers are above corruption and above any interest in the outcome of the next election.”¹⁸

If The General Theory had so many fundamental flaws, how did it become, in the words of one of his most enthusiastic followers, “the Keynesian bible”?¹⁹ Hazlitt offered some possible reasons in his introduction to his edited volume, The Critics of Keynesian Economics, which appeared a year after his own book. He suggested that Keynes’s theories rationalized the politics of special-interest groups that desired to reap the benefits of an inflation. Also, while much of The General Theory is written in difficult language, Keynes could dazzle the reader with literary imagery and wit that hid his central logical flaws. Keynes used the “technique of obscure arguments followed by clear and triumphant conclusions,” Hazlitt said. And finally, Hazlitt conjectured that the success of the book may have had a lot to do with its appearing to overthrow the existing orthodoxy in favor of radical and fashionable ideas about social engineering. “But whatever the full explanation of the Keynesian cult,” Hazlitt concluded, “its existence is one of the great intellectual scandals of our age.”²⁰

The monolithic domination that Keynesian economics once had over all macroeconomic policy has been broken for more than two decades. While too many of Keynes’s misconceptions still underlie how economists think about inflation, recession, and unemployment, the original and primitive Keynesian thinking has been more or less overthrown. To a great extent this is because of the thorough and brilliant demolition that Henry Hazlitt performed more than 40 years ago.

Notes

1. Henry Hazlitt, The Failure of the “New Economics”: An Analysis of the Keynesian Fallacies (Princeton: D. Van Nostrand, 1959), reprinted by the Foundation for Economic Education in 1995.
2. The most comprehensive biography of Keynes is Robert Skidelsky, John Maynard Keynes: Hopes Betrayed, 1883–1920 (London: Macmillan, 1983), John Maynard Keynes: The Economist as Saviour, 1920–1937 (London: Macmillan, 1992), and John Maynard Keynes: Fighting for Britain, 1937–1946 (London: Macmillan, 2000); in addition, see, Roy H. Harrod, The Life of John Maynard Keynes (London: Macmillan, 1951), and D. E. Moggridge, Maynard Keynes: An Economist’s Biography (London: Routledge, 1992). All of them are highly sympathetic to Keynes as an economist and policy advocate.
3. John Maynard Keynes, The Economic Consequences of the Peace (New York: Harcourt, Brace, 1920); see the critical analysis of Keynes’s arguments about the peace treaty by Etienne Mantoux, The Carthaginian Peace, or The Economic Consequences of Mr. Keynes (New York: Charles Scribner’s Sons, 1952).
4. John Maynard Keynes, A Tract on Monetary Reform (New York: Harcourt, Brace, 1924); see the critical analysis of Keynes’s arguments by Benjamin M. Anderson, “The Gold Standard vs. ‘A Managed Currency,’” Chase Economic Bulletin, March 23, 1925, p. 39.
5. John Maynard Keynes, A Treatise on Money, 2 vols. (New York: Harcourt Brace, 1930).
6. Friedrich A. Hayek, “Reflections on the Pure Theory of Money of Mr. J. M. Keynes,” Economica, August 1931, pp. 270–95, and February 1932, pp. 22–44; reprinted in Bruce Caldwell, ed., The Collected Works of F. A. Hayek, vol. 9: Contra Keynes and Cambridge: Essays, Correspondence (Chicago: University of Chicago Press, 1995), pp. 121–97, which also includes Keynes’s reply after the appearance of part I of Hayek’s review and Hayek’s rejoinder.
7. John Maynard Keynes, The General Theory of Employment, Interest, and Money (New York Harcourt, Brace, 1936); he earlier presented an outline of his prescriptions for an “activist” government policy in The Means to Prosperity (London: Macmillan, 1933).
8. Some of these reviews, especially those by Frank Knight and Jacob Viner, were published together many years later in Henry Hazlitt, ed., The Critics of Keynesian Economics (Princeton: D. Van Nostrand, 1960); there were many others not included in this excellent anthology, especially the reviews and essays by Henry Simons, Joseph Schumpeter, Dennis Robertson, Arthur C. Pigou, Bertil Ohlin, Erik Lindahl, and Carl Landauer, which were highly critical and insightful about fundamental errors in Keynes’s ideas.
9. Alvin H. Hansen, “Mr. Keynes on Underemployment Equilibrium,” Journal of Political Economy (October 1936), p. 686. Hansen later wrote one of the most widely read popular expositions of Keynes’s ideas; see his A Guide to Keynes (New York: McGraw-Hill, 1953).
10. For a detailed exposition of the alternative “Austrian” analysis of the causes and cures for the Great Depression compared to the Keynesian perspective, see Richard M. Ebeling, “The Austrian Economists and the Keynesian Revolution: The Great Depression and the Economics of the Short-Run” in Richard M. Ebeling, ed., Human Action: A 50-Year Tribute (Hillsdale, Mich.: Hillsdale College Press, 2000), pp. 15–110.
11. “We Are All Keynesians Now,” Time, December 31, 1965, pp. 64–67B. The quotations are from pp. 64–65. Four years later, Milton Friedman appeared on the cover of Time (December 19, 1969, pp. 66–72), with the magazine now saying that “Friedman, a 57-year-old economics professor at the University of Chicago . . . has reached the scholar’s pinnacle: leadership of a whole school of economic thought. It is called the ‘Chicago School,’ and its growing band of followers argues that the money supply is by far the most important and fastest-acting of the economic regulators at the Government’s disposal. . . . [M]ost economists now consider themselves . . . hybrid . . . ‘Friedmanesque Keynesians’” (p. 66).
12. Among the strongly anti-Keynesian critics who took his ideas to task in some detail were W. H. Hutt, The Theory of Idle Resources (London: Jonathan Cape, 1939); Arthur W. Marget, The Theory of Prices: A Re-Examination of the Central Problems of Monetary Theory, 2 vols. (New York: Augustus M. Kelley, 1966 [1938 and 1942]); Benjamin M. Anderson, “The Road Back to Full Employment” in Paul T. Homan and Fritz Machlup, eds., Financing American Prosperity: A Symposium of Economists (New York: Twentieth Century Fund, 1945), pp. 9–70; L. Albert Hahn, The Economics of Illusion: A Critical Analysis of Contemporary Economic Theory and Policy (New York: Squier Publishing, 1949), and Common Sense Economics (London/New York: Abeland-Schuman Ltd., 1956); Philip Cortney, The Economic Munich (New York: Philosophical Library, 1949); and Hans Mayer, “John Maynard Keynes’ ‘Neubegründung’ der Wirtschaftstheorie” [“John Maynard Keynes's ‘New Foundation' for Economic Theory”] in E. Lagler and J. Messner, eds., Wirtschaftsliche Entwicklung und soziale Ordnung [Economic Development and Social Order] (Wien: 1952), pp. 39–55.
13. Four years later another detailed critical study of Keynes-ian economics appeared: W. H. Hutt, Keynesianism: Retrospect and Prospect: A Critical Restatement of Basic Economic Principles (Chicago: Henry Regnery, 1963); it later appeared in a revised edition under the title The Keynesian Episode: A Reassessment (Indianapolis: Liberty Press, 1979); see also W. H. Hutt, A Rehabilitation of Say’s Law (Athens: Ohio University Press, 1974).
14. Hazlitt, The Failure of the “New Economics, p. 4: “I know of no single work that devotes itself to a critical chapter-by-chapter or theorem-by-theorem analysis of [The General Theory]. It is this task that I am undertaking here.”
15. Ibid., pp. 361–71; see John Stuart Mill, “Of the Influence of Consumption on Production” [1844] in Hazlitt, ed., The Critics of Keynesian Economics, pp. 24–45.
16. The Failure of the “New Economics,” pp. 280–81; on the degree to which inflexible money wages relative to the prices for finished consumer goods raised the real cost of employing workers in the early 1930s, and therefore resulted in rising unemployment, see Richard K. Vedder and Lowell Gallaway, Out of Work: Unemployment and Government in Twentieth-Century America (New York/London: Holmes & Meier, 1993), pp. 79–95.
17. See also Henry Hazlitt, The Conquest of Poverty (New Rochelle, N.Y.: Arlington House, 1973), pp. 217–28.
18. The Failure of the “New Economics,” p. 324; on the arrogance in Keynes’s thinking about an elite who are wise and good enough to macro-manage the economy, and the harmful real world consequences, see also James M. Buchanan and Richard E. Wagner, Democracy in Deficit: The Political Legacy of Lord Keynes (New York: Academic Press, 1977).
19. Seymour E. Harris, “About this Book,” in Seymour E. Harris, ed., The New Economics: Keynes’ Influence on Theory and Public Policy (New York: Alfred A. Knopf, 1948), p. 9.
20. Hazlitt, “Introduction” in The Critics of Keynesian Economics, pp. 9–10.

by Paul Seabright

Princeton University Press • 2004 • 304 pages • $29.95

Reviewed by Richard M. Ebeling

One of the most profound insights of economics is that the activities of billions of people can be coordinated without central direction and without most of these interdependent people knowing anything about one another.

This interdependency not only spans all the continents of the world but also stretches across time. There are people right now extracting some raw material from the ground, or planting some seeds in the soil, or beginning the manufacturing process of some commodity, which—days, months, or even years from now—will satisfy other people’s wants for multitudes of goods. Even more astonishing is that practically all these people have little or no idea of the “bigger picture” of how their diverse and decentralized actions all fit together in an intricate network of exchange relationships that bind humanity into one commercial community. Equally amazing, it is not necessary for any of these people to understand how all their actions are connected for each one to find his niche and perform his specialized role in the division of labor.

Yet precisely because most people do not have to understand how this all works, numerous misconceptions abound about the nature of the system. This often leads to government policies that do serious harm to the maintenance and continuing success of the international economic order. That is why it is important to constantly remind both scholars and laymen of the basis of this international order, and of the threat from misguided public policies.

This is the theme of Paul Seabright’s recent book, The Company of Strangers: A Natural History of Economic Life. Seabright goes far beyond the narrow field of economics to incorporate recent research in history, anthropology, sociology, and psychology. Among the benefits from an extended division of labor, he explains, are that risks can be shared, greater specialization can be developed, and a wider accumulation of knowledge can occur. But to take full advantage of these benefits, mankind had to go far beyond the small hunter-gatherer tribe or primitive agricultural community, to include people outside the immediate circle of family and non-relatives in the closed group.

The circle of association, cooperation, and exchange had to include “strangers” if the division of labor was to be significantly expanded. But how did primitive man come to trust strangers? Being outside the narrow tribal band, they were competitors for the basic physical means of survival; they were “the others” who might kill, rob, or enslave you.

In the process of primitive man’s evolution, Seabright argues, two qualities developed: the capacity for rational calculation and the sentiment for reciprocity. When primitive man first began offering or receiving opportunities for trade, he might well have thought that deceit and theft could be to his advantage in the encounter with the stranger. But reflection would have made him realize that there might be benefits from future interactions with such strangers, meaning that in his own longer-run self-interest any such repeated transactions could only be assured if he kept his word and abided by any agreement. At the same time, various social experiments have suggested that people generally follow a psychology of “tit for tat”; that is, even if repeated transactions are not expected, individuals will mostly reciprocate with either generosity or malice, depending on how another has behaved or is expected to behave toward them. Thus general kindness and honesty by some individuals tends to beget the same from others. Psychological and physiological studies have also shown how smiling and laughter—and their actual and perceived sincerity—reinforce bonds of trust, confidence, and association among people outside their narrow circle of family and friends.

Seabright discusses the role of money as an institution that facilitates the interconnections of multitudes of individuals unknown to one another through the willingness to accept a commodity whose only or primary usefulness is to be traded for other goods. The unease which some feel that money depersonalizes human relationships, he argues, is more than outweighed by the liberating anonymity that monetary relationships introduce for individuals in society. The greater trust that existed in more intimate face-to-face relationships has been replaced with “purchased trust” in the form of product warranties and brand-name reputations that stand behind goods and men in their dealings with one another.

Also behind the growth of an extended division of labor are the general and abstract rules of association that leave much of society’s development uncertain and unpredictable. Yet it is only when governments are mostly limited to securing life, liberty, and property that people have the latitude for creativity, imagination, and innovation, along with the freedom from political constraint to experiment in the arts and sciences, as well as with industrial technology and general cultural change.

Seabright applies these ideas to a variety of themes and topics. He emphasizes that a growing multitude of interacting human beings will have many different views concerning the value of things and the ends to pursue. The social institutions of property and exchange serve as means to resolve these differences through the price system. He illustrates this with the problem of the growing scarcity of water in many parts of the world, the competing demands for which may be reconciled through peaceful market competition.

Seabright also highlights how social order and patterns often emerge out of the spontaneous interactions of men, without any imposed design or command. Drawing on some of the writings of Jane Jacobs, he shows how safety and trust emerge in urban neighborhoods without a policeman or a social planner at every corner. He explains how markets have transformed the original “business unit” of the traditional family into the modern corporate firm. And he discusses how human knowledge has been preserved and shared, from the primitive symbols on the walls of caves to the intricate and virtually instantaneous means for transmitting information around the modern world.

Though Seabright explains and defends the vast benefits of market globalization, he is not an advocate of laissez faire. He sees various problems concerning “negative externalities” and “public goods” that require extensive government intervention, as well as the need for a welfare state to assist those “harmed” by market change. Nonetheless, his book offers a fascinating and extremely informative panorama for understanding how the human race has evolved from the simple hunter-gatherer into modern man in the global society.

Richard Ebeling is the president of FEE.

Saying Yes: In Defense of Drug Use

by Jacob Sullum

Tarcher/Putnam • 2003 • 340 pages • $25.95

Reviewed by Paul Armentano

Like ex-President Bill Clinton and former Vice President Al Gore, author Jacob Sullum admits he’s smoked marijuana. He’s also dabbled with psychedelics, cocaine, opioids, and tranquilizers. But unlike so many political figures, Sullum offers no mea culpa for his past vices in Saying Yes: In Defense of Drug Use. Rather, he confesses his “sins” to illustrate that the typical recreational drug user bears more resemblance to someone like him (or even the ex-president) than the drug war’s stereotypical poster boy: the down-and-out street-corner junkie.

However, it’s precisely those like Sullum who have been AWOL from America’s drug-policy debate. The reason is obvious. Admitting to illicit drug use risks harsh legal and economic sanctions. Because of this, Sullum writes that “people who use illegal drugs in a controlled, inconspicuous way are not inclined to stand up and announce the fact. Prohibition renders them invisible.”

Those who favor America’s present prohibitionist policies would prefer they stay that way. From the drug warriors’ standpoint, even acknowledging the existence of such a class strikes a blow to their entire justification for the drug war, as summarized by the Drug Enforcement Administration (DEA): “Drugs undo the bounds that keep many seemingly normal people on an even keel.”

Sullum counters this assumption by bringing the “silent majority” out of their smoky closet. His purpose “is to contrast drug use as it is described by politicians and propagandists with drug use as it is experienced by the silent majority of users: the decent, respectable people who, despite their politically incorrect choice of intoxicants, earn a living and meet their responsibilities. The lives they lead challenge a central premise of the war on drugs—that certain substances have the power to compel immoral behavior.”

Sullum includes within this majority computer programming guru Bob Wallace, an early employee of Microsoft, founder of Quicksoft, and a pioneer in the concept of shareware. Wallace (who died shortly before the book’s publication) was a daily pot smoker, one of 32 “controlled drug users” Sullum interviewed for Saying Yes. In most cases, their stories are remarkably similar: Illicit drugs are something they enjoy—or in some cases, enjoyed—responsibly and in moderation. Moreover, almost all admit that their illicit drug use seldom posed any significant problems in their personal or professional lives. Sullum draws from these testimonials, as well as his own experiences, not to absolve drugs as potentially harmful substances, but to reinforce his point that the vast majority of illegal drug users harm neither themselves nor others.

“Just as writing about moderate drinking does not mean denying the harms caused by alcoholism, writing about controlled drug use does not mean denying the damage done by destructive relationships with illegal intoxicants,” Sullum maintains. “Rather, my intent is to add some balance to the public debate by pointing out that excess is the exception.”

Saying Yes is not so much a defense of casual drug use (as the subtitle implies) as a plea to draw rational, legal distinctions between between use and abuse, and to base our laws accordingly.

If what Sullum calls “voodoo pharmacology” is a myth, he believes it’s illogical for the law to treat illicit drugs any differently from alcohol.

Consequently, only when drug-law critics tackle voodoo pharmacology (rather than the negative effects of the drug war) will they succeed in changing America’s drug policies.

Paul Armentano is a senior policy analyst for the NORML Foundation in Washington, D.C.

The War Against Excellence

by Cheri Pierson Yecke

Praeger • 2003 • 260 pages • $49.95

Reviewed by George C. Leef

The 1983 “A Nation at Risk” report famously stated that “If an unfriendly foreign power had attempted to impose on America the mediocre educational performance that exists today, we might well have viewed it as an act of war.” Since then, there has been a great deal of talk about improving the educational system and some legislative developments purporting to “raise standards.” On the whole, though, it’s hard to perceive any improvement, and if Cheri Pierson Yecke is correct in the War Against Excellence, things have gotten worse, particularly at the middle-school level.

Yecke, Minnesota’s former education commissioner, has penned another in the stream of books exposing the deplorable truth about government schools. The education establishment is quite happy that about 88 percent of all children attend government schools, and it invests mightily in public relations to keep everyone convinced that “public education” is doing wonderfully, but just needs more money. Yecke pulls back the curtain to reveal that over the last 20 years or so, middle schools (usually grades 6–8) have been infested with an alarmingly anti-education mindset.

According to the author, five beliefs that “progressive” education theorists embrace have infiltrated the middle schools. (Yecke does not say that these views are confined to middle school—they certainly are not—only that the problem seems worst there.) The beliefs are: • in the equality of educational outcomes; • in questioning the value of individualism; • in the supremacy of the group over the individual; • as well as the belief that advanced students have a duty to help others at the expense of their own needs; and • that competition is negative and must be eliminated.

If those ideas sound like egalitarianism, that’s just what they are.

Yecke quotes University of Florida professor Paul George, who states that middle schools should become “the focus of societal experimentation, the vehicle for movement toward increasing justice and equality in the society as a whole.” Schools, he writes, “are not about taking each child as far as he or she can go. They’re about redistributing the wealth of the future.”

The United States has always had plenty of educational theorists eager to use government schools as laboratories for their dubious notions about the reformation of society, but the current crop seems to have been particularly effective in getting theirs implemented. Yecke discusses several distressing manifestations of those egalitarian beliefs.

One is the attack on ability grouping. Schools have customarily put brighter students in accelerated classes and sometimes grouped slower students for special attention. To the egalitarian theorists, naturally, that practice is both educationally bad and morally wrong. They have insisted that schools end ability grouping, and quite a few have done so.

What’s so bad about ability grouping? Supposedly, it contributes to “the stratification of society.” If gifted kids could be slowed down, the thinking goes, they wouldn’t be so successful later in life, thus taking a big step toward “social justice.”

Even if you buy into coercive redistribution, why take steps to reduce the future output of ideas, inventions, and wealth? Abolition of ability grouping has been resisted from parents of gifted children, who resent having their kids held back so the education theorists can enjoy their utopian daydreams. Unfortunately, when those parents have complained, for the most part they’ve often run into a stone wall.

Another manifestation of rampant egalitarianism is “cooperative learning,” that the notion students should work and be graded in groups rather than individually.

The obvious problem with cooperative learning is that the smarter kids do most of the work, but must share the credit. To our egalitarian theorists, this approach to education tells the bright kids that they have to “share” their talents. The best thing one can say that it alerts them early on that they will be treated as social resources to be exploited in the future through the income tax.

The War Against Excellence is bound to increase the number of parents who bail out of government schooling.

George Leef is the book review editor of The Freeman.

A History of the Federal Reserve, Volume I: 1913–1951

By Allan H. Meltzer

University of Chicago Press • 2003 • 800 pages • $75 hardcover; $25 paperback

Reviewed by Christopher Mayer

The Federal Reserve System began operations in 1914, 11 months after passage of the congressional act that created it. Rooted in European thinking and modeled after the Bank of England, the Fed was a political animal that encountered difficulties right out of the gate. Hardly independent, the Fed was often under the thumb of the U.S. Treasury. Its purpose was a confusing mash of varying economic theories and political goals.

In this book, Allan Meltzer chronicles Fed history with an amazing eye for detail—minutes, speeches, books, journals, letters are all culled as footings for his narrative. The author is to be commended for his wide survey of primary sources. Unfortunately, Meltzer’s prose leaves something to be desired. It is professionally written, no doubt, but it is as dry as the driest of autumn’s fallen leaves. Slogging through this dense book will be difficult for all but the most ardent Fed followers.

Meltzer, who teaches at Carnegie-Mellon University and specializes in monetary theory, gives the reader a conventional history. Indeed, Fed Chairman Alan Greenspan himself wrote a kind foreword to the book, calling it both “stimulative and provocative.” Meltzer is even-handed in his assessments of various actors and their ideas and his representation of their goals; he seems to take everyone at face value. One sees none of the conspiratorial overtones, for example, regarding the Fed’s snug relationship with the banking industry. Not surprisingly, in perusing his list of sources, you will not find references to Murray Rothbard or Edward Griffin (author of The Creature from Jekyll Island). As a result, this book might be little else than a reference for details otherwise hard to uncover or find in one place.

There are lots of details about specific policy debates that Fed members had with one another and others outside the Fed. But those details are likely to be of little interest to libertarian-minded readers. It’s like listening to burglars debate how they are going to break into a house. To the libertarian, such considerations are irrelevant—the house should simply not be broken into. Similarly, one tires of hearing Fed governors pontificate about their tools for manipulating the economy—the economy should simply not be manipulated.

The period Meltzer covers is a depressing tale of monetary degradation. It sounds quite odd today, but Meltzer writes of the early years of the twentieth century that “many bankers, economists as well as ordinary citizens believed that the gold standard was the correct way to harmonize international monetary politics.” Therefore, efforts to maintain the gold standard or some system with gold at its base met little opposition. The gold standard was widely viewed as the proper way to restrict inflation and contain the damage government could do to the currency. Meltzer notes that “the gold standard was a main issue in several presidential elections in the United States. Each time, the gold standard candidate won.”

However, as we know now, such views did not last. As Meltzer observes, the “gradual dissemination of Keynesian ideas in the 1940s slowly transformed the consensus view.” That is, Keynesian ideas weakened the support for the gold standard and replaced it with an activist view of the Fed as a manager of economic output and employment. Discretionary policy by government experts became the accepted, “sophisticated” view; belief in gold came to be regarded as hopelessly old-fashioned.

“The population had become more urbane and more educated,” Meltzer writes, as if those characteristics and support for our monetary traditions were somehow incompatible. He is obviously a fan of the Fed, praising its work at many points. While he is critical at times, his criticism is never of the institution itself, but only of its policy errors. In other words, Meltzer would not dismantle the system, only push different buttons or pull different levers.

The history of the Fed is laced with irony. Here is an institution thought to provide stability and ballast to the economy. Yet its meddlesome ways create and amplify forces of instability and weakness. After reading Meltzer’s history, one has to wonder what would have happened in the absence of Fed’s constant economic meddling.

Christopher Mayer is a financial writer living in Gaithersburg, Maryland.

In the early months of 1889 a 37-year-old Swedish student named Knut Wicksell was walking through the streets of Berlin in Germany when he happened to notice in the window of a bookstore a recently published volume by the Austrian economist Eugen von Böhm-Bawerk: The Positive Theory of Capital.

Wicksell later wrote to a friend that,

I procured a copy and was soon lost in the book. I understood most of it rather imperfectly, as can be seen from my notes in the margin. . . . Nonetheless the book came to me as a revelation. I had already tried on my own, with little success, to penetrate the phenomenon of interest and the general problem of economic distribution, when complicated by the existence of capital (as well as labor and natural resources). . . . It was as though I now saw with my own eyes the roof being put on a scientific construction, which no economist since the days of Ricardo had managed to raise above its lower floors.¹

This discovery put Knut Wicksell on an intellectual path that led to his becoming one of the great economists of the twentieth century. Through his writings and personal influence Wicksell provided a framework for monetary and business-cycle analysis that has served as the starting point for several generations of Swedish and Austrian economists. Knut Wicksell was born on December 20, 1851, in Stockholm. The sesquicentennial of his birth offers an appropriate occasion for an appreciation of some of his important contributions to economics.

Wicksell was born into a middle-class Swedish family. His father ran a grocery business and wisely invested the profits in real estate. Knut’s mother died when he was seven years old, and his father when he was 15. But he and his four siblings were left financially comfortable enough for them to get through high school and for Knut and his brother to attend the University of Uppsala, not far from Stockholm. He graduated with a bachelor of science degree, cum laude, after only two, instead of the usual four, years, having specialized in mathematics, physics, and astronomy.

But he began having doubts about his future. First, after an intense devotion to his Christian faith following his father’s death, he increasingly came to have doubts, and at the age of 23 became a “free thinker,” a position from which he never wavered for the rest of his life. Second, he doubted whether he could make any meaningful contributions to mathematics, if he chose that direction for his graduate studies.

At the same time, he began to be interested in the social and economic issues of the day, especially the relationship between drunkenness, prostitution, the condition of the poor, and overpopulation. The poor were driven to drink because of the apparent hopelessness of their economic condition. Many men in the lower middle class turned to alcohol and the services of prostitutes because they had no hope of earning a sufficient income that would make early marriage possible.

Wicksell concluded, therefore, that if these vices were to be ameliorated, population growth had to be slowed down so that the rate of capital formation would exceed the rate of increase in population, resulting in a relatively greater scarcity of labor in comparison to capital. This would raise the value of labor and wages relative to the value and price of capital. But Wicksell rejected Thomas Malthus’s famous prescription of “moral restraint” on the part of the members of society. Instead, he made the case for a wide distribution of contraceptives, and in later years advocated the legalization of abortions during the first three months of pregnancy.

For these and other “radical” social views that he put into print in the early 1880s, Wicksell was condemned by the professors at the University of Uppsala, censured by the Uppsala medical association, and warned that he was following a dangerous path in publicly advocating these ideas.

He made his living during these years as a journalist and read economics on his own. But in the mid-1880s and then again late in the decade he was awarded travel grants to study abroad that took him to London, Strasbourg, and Vienna. In Vienna he attended the lectures of Carl Menger, founder of the Austrian school of economics. It was on the second of these travels that Wicksell came across Böhm-Bawerk’s work in a Berlin bookstore.

When he returned to Sweden he applied for a lectureship in economics at the University of Uppsala, but was turned down because of his political and social views. Nevertheless, he was recommended to apply to the university law school, where he was told that he could teach economics only if he had a law degree. So at the age of 45 he did what he had done as an undergraduate and crammed four years of study into two. He passed the law examination in 1899 and was appointed a lecturer in economics at the University of Uppsala the same year. The following year he accepted a professorship at the University of Lund, a position he held until his retirement in 1917 at age 65.

At Lund he continued to make controversial statements. At a May Day demonstration in 1904 he suggested that it was futile to imagine that Sweden could ever successfully defend itself against a determined, more powerful foreign enemy. Instead, he suggested that Sweden should abolish all military spending and invite Imperial Russia to annex the country. Russia would supply all necessary defense against would-be attackers, and the role of the Swedes would be to educate and civilize the rough and backward Russians in the ways of social freedom and democracy. He stepped back from this radical position after the First World War and became a strong proponent of the League of Nations.

Then in 1908 Wicksell took up the cause of an “anarchist agitator” who had “disturbed the religious peace” of the country with remarks declared to be blasphemous for which he was sent to prison. Insistent that this was a blatant and serious violation of freedom of expression and personal liberty, Wicksell delivered a public lecture in which, as an act of peaceful civil disobedience, he satirized the story of the Immaculate Conception. Wicksell was tried and convicted of blasphemy and after several appeals spent two months in prison in 1910.

He wrote widely on the problems of wartime inflation and postwar monetary problems following the First World War and suggested how the negative effects of the war could be minimized in neutral Sweden. He also turned out a string of seminal books on capital, money, interest, and public finance. On May 2, 1926, at the age of 74, he died from a stomach disorder that was complicated by pneumonia.

Major Works

Wicksell’s first major work was Value, Capital and Rent published in 1893.² The classical economists, from Adam Smith through David Ricardo to John Stuart Mill, had attempted to show that the relative prices of goods and the distribution of income among the factors of production (land, labor, and capital) were all ultimately determined by the quantity of labor (along with a few auxiliary assumptions) that was required for the manufacture of goods and the production of food. The “marginalist revolution” of the 1870s had shown that the value of goods and factors of production are ultimately based on the subjective valuations of demanders. Their marginal (or incremental) decisions concerning tradeoffs between units of commodities determine relative prices in the market.

What Wicksell did in his first book was to synthesize the mathematical general equilibrium theory of Léon Walras with Böhm-Bawerk’s theory of capital as a time-consuming, multistaged process of production. He explained how each factor of production received an income equal to its contribution (or marginal product) to the manufacture of a good. He also showed that even in a stationary equilibrium, interest income had to be earned as the incentive for replacing the capital consumed in the processes of production through time.

In his next major work, Studies in the Theory of Public Finance (1896), Wicksell innovatively applied the theory of marginal cost-benefit analysis to the process of government taxing and spending.³ Nobel laureate James Buchanan has emphasized Wicksell’s original and important contribution to political decision-making on fiscal matters:

Among fiscal theorists, Knut Wicksell holds the unique position of having carried his theoretical ideas through to an examination of the political structure within which fiscal decisions must be made and implemented. . . . Wicksell proposed, first of all, that the bridge between tax and expenditure sides of the fiscal account be made explicit. When a specific expenditure project was presented, a whole array of possible distributions of the required tax bill were also to be presented, with each array estimated to produce revenues sufficient to cover the outlay. The expenditure project was then to be voted on in the legislature, along with each one of the tax allocations, and when one such combination secured the unanimous approval of the assembly, it was to be adopted. If no single combination received unanimous support, the expenditure project was not to be undertaken and no tax was to be levied.⁴

Wicksell stepped back from the full unanimity principle to a less restrictive super-majority rule. But Buchanan highlighted that what was crucial to Wicksell’s contribution was his focusing on government fiscal issues in terms of the individual members of society who would either receive the expenditure benefits or bear the taxation costs. The preferences of real people affected by government fiscal policy could no longer be ignored, and economists could not simply view themselves as “proffering advice to nonexistent benevolent despots.”⁵

But the contribution for which Wicksell has received the most international recognition among economists for over a century now is his book Interest and Prices: A Study of the Causes Regulating the Value of Money (1898).⁶ In the first half of the nineteenth century a number of leading classical economists, including David Ricardo, had defended “the quantity theory of money” in understanding the inflation experienced during the Napoleonic Wars. They reasoned that a general rise in prices could not occur unless there was a sustained increase in the quantity of money. And they further argued that the only way to restrain government’s temptation to abuse the printing press was to link the currency to a commodity, such as gold. Thus they advocated the gold standard as an institutional means to prevent government-caused inflations. For a variety of reasons many economists had turned away from the logic of the quantity theory of money by the end of the nineteenth century.

Wicksell set about the task of rehabilitating it.⁷ He used Böhm-Bawerk’s idea of a period of production between the application of inputs and the availability of outputs to serve as the framework for restating his version of the theory. In a nutshell, Wicksell argued that if goods were traded directly in barter, there would be a tendency for market forces to establish an interest rate that balanced the supply and demand for real capital for investment purposes. And this equilibrium rate of interest is what Wicksell called the “natural rate.”⁸

However, in a complex economy goods are traded through a medium of exchange—money. If lenders lent their savings to borrowers in the form of money at a similar equilibrium rate of interest, then money would be “nothing more than a cloak” for the savings and investing of real resources for productive purposes. However, Wicksell says, “Liquid real capital (i.e., goods) are never lent. . . . [I]t is money which is lent, and then the commodity capital is then sold in exchange for this money.”⁹

Depressed Interest Rate

Since it is money that is lent, and not real capital, the monetary authority is able to increase the supply of money available for lending and lower the money rate of interest below the “natural rate” to attract borrowers. Anticipated yields or profits on potential investments will now seem greater than before the fall in the money rate of interest, meaning that at the margin some production projects will now appear attractive that did not seem profitable at the previous higher rate of interest. However, not all types of investments are affected equally by the change in the rate of interest. Those with longer time horizons—longer periods of production before their completion—will be influenced to a greater degree because the lowering of the rate of interest increases the present value of these longer-term investment projects.

Developing several different models using slightly different assumptions, Wicksell presents his theory of how this lowering of the interest rate affects market processes.¹⁰ But the crucial one that served as a springboard for later developments of the theory by other Austrian and Swedish economists is his two-period model.

Suppose, he says, that production processes normally take one year. But with the fall in the rate of interest because of the monetary expansion, two-year investment projects now appear profitable to some entrepreneurs. Using borrowed money, these entrepreneurs purchase and hire factors of production by bidding them away from their present employment in one-year projects. This means that at the end of the first year fewer goods and services will have been produced than would have been, because the required resources were drawn into projects that will not be completed for another year.

This greater scarcity of consumer goods, reflected in higher prices, “forces” society to save—that is, do without consumption goods they normally would have desired to purchase, but which are not available. But according to Wicksell, at the end of the second year, when the longer-term projects have been completed, society will be rewarded for this forced waiting with more and better goods made possible by the longer period of production.

Wicksell argued that if the monetary authority were to keep the money rate of interest constantly below the “natural rate” through continuous monetary expansion, a “cumulative process” of rising prices would be generated. The additions to the money supply would be borrowed by entrepreneurs who bid up the prices of the factors of production to keep or add them to their sectors of the economy. The workers and resource owners receiving those higher money incomes period after period would in turn, and in sequence, bid up the prices for the consumer goods they desire. Only an end to the monetary expansion and a rise in the rate of interest back to its “natural” level could bring the process to an end.

A few years later Wicksell restated his formulation of the Austrian theory of investment and the period of production, as well as his theory of money and how monetary changes influence production processes in his two-volume Lectures on Political Economy.¹¹

Wicksell’s outline of the way in which changes in the money supply modify the market rate of interest and influence the allocation of resources through the processes of production became the starting points for the Austrian and Swedish schools of economics in monetary and business-cycle theory. Ludwig von Mises in The Theory of Money and Credit, Monetary Stabilization and Cyclical Policy, and Human Action, and F.A. Hayek in Monetary Theory and the Trade Cycle and Prices and Production adopted Wicksell’s framework for developing a theory of the business cycle.¹²

Mises’s and Hayek’s innovation was to demonstrate that there were market forces set in motion in Wicksell’s “cumulative process” that would bring it to an end before many of the longer-term investment projects could be brought to completion. Thus the inflationary upturn in investment activity carried with it the seeds for an eventual downturn and correction when these capital projects were shown to be malinvestments resulting from misdirection of resources due to the lack of real savings needed to bring them to, and maintain them after, completion.¹³

In the 1930s Wicksell’s ideas were developed in a slightly different direction by the Stockholm school of economists.¹⁴ Two of the most important contributors from this period were Gunnar Myrdal and Erik Lindahl. Myrdal formulated a theory of “monetary equilibrium,” in which he suggested the conditions that were required for avoiding Wicksell’s cumulative process.¹⁵ Lindahl accepted Wicksell’s basic framework and then analyzed the change in the cumulative process if there were less-than-full employment in either the consumer-goods or investment-goods sectors of the economy or both; Lindahl also developed a “period analysis” of sequential change over time.¹⁶ And in the late 1930s Bertil Ohlin defended the Swedish Wicksellian approach against the emerging Keynesian theory.¹⁷

Both the Austrian and Swedish variations and developments of Wicksell’s seminal ideas on money and the business cycle were submerged in the tidal wave of Keynesian macroeconomics during most of the post-World War II period.¹⁸ But in recent years there has been a renewed interest in Wicksell and his continuing relevance as found in the Austrian and Swedish variations on his themes.¹⁹ And most especially the new generation of Austrian economists has begun a revival of this insightful tradition.²⁰

Thus on the 150th anniversary of Knut Wicksell’s birth, his ideas have as much interest and offer as much insight at the beginning of the 21st century as when he was first penning them at the start of the twentieth.

Notes

1. Torsten Gardlund, The Life of Knut Wicksell (Stockholm: Almqvist & Wiksell, 1958), p. 118. The following account of Wicksell’s life and career are taken from Gardlund’s book and Carl G. Uhr, Economic Doctrines of Knut Wicksell (Berkeley: University of California Press, 1962).
2. Knut Wicksell, Value, Capital and Rent (New York: Augustus M. Kelley, 1970 [1893]).
3. This work has been partly translated as, Knut Wicksell, “A New Principle of Just Taxation” [1896], in R.A. Musgrave and A.T. Peacock, eds., Classics in the Theory of Public Finance (London: Macmillan, 1958), pp. 72–118.
4. James M. Buchanan, Public Finance in Democratic Process: Fiscal Institutions and Individual Choice (Chapel Hill: University of North Carolina Press, 1967), pp. 115–16; see also Duncan Black, “Wicksell’s Principle in the Distribution of Taxation,” in J.K. Eastman, ed., Economic Essays in Commemoration of the Dundee School of Economics, 1931–1955 (London: Economists Bookshop for the LSE), pp. 20–21: “Inside Parliament Wicksell’s principle, by requiring a high majority for an increase of expenditure and a very small minority for a reduction, would make increases of expenditure far more difficult and reductions far easier than with the normal requirement of a simple majority. The bias would be toward curtailment and reduction.”
5. James M. Buchanan, Better than Plowing and Other Personal Essays (Chicago: University of Chicago Press, 1992), p. 6.
6. Knut Wicksell, Interest and Prices: A Study of the Causes Regulating the Value of Money (New York: Augustus M. Kelley, 1965 [1898]). The ideas in this work were also summarized by Wicksell in journal form in “The Influence of the Rate of Interest on Commodity Prices” [1898] in Selected Papers on Economic Theory (New York: Augustus M. Kelley, 1969 [1958]), pp. 67–89, and “The Influence of the Rate of Interest on Prices,” Economic Journal, June 1907, pp. 213–20.
7. See Richard M. Ebeling, “Knut Wicksell and the Classical Economists on Money, Credit, Interest and the Price Level” American Journal of Economics and Sociology, July 1999, pp. 471–79.
8. Wicksell’s use and meaning of the “natural rate” of interest is not without ambiguity. See Arthur W. Marget, The Theory of Prices, Vol. 2 (New York: Augustus M. Kelley, 1966 [1942]), pp. 201–204. Marget discerned at least eight different definitions of the concept in Wicksell’s writings.
9. Wicksell, Interest and Prices, pp. xxvi, 135.
10. A detailed breakdown of Wicksell’s analysis of different “periods” under “stationary” and “cumulative” conditions, as well as some of the inconsistencies to be found in his exposition, is presented in Uhr, pp. 235–45.
11. Knut Wicksell, Lectures on Political Economy, 2 vols. (Fairfield, N.J.: Augustus M. Kelley, 1977 [1901 and 1906]).
12. Ludwig von Mises, The Theory of Money and Credit (Indianapolis, Ind.: Liberty Classics, 1981 [1912; 2nd ed.,1924; 3rd ed., 1953]); “Monetary Stabilization and Cycle Policy” in Percy L. Greaves, ed., Ludwig von Mises, On the Manipulation of Money and Credit (Dobbs Ferry, N.Y.: Free Market Books, 1978 [1928]) pp. 57–171, and in Israel M. Kirzner, ed. Classics in Austrian Economics: Samplings in the History of a Tradition (London: William Pickering, 1994), pp. 33–111; and Human Action: A Treatise on Economics, 4th ed. (Irvington-on-Hudson, N.Y.: Foundation for Economic Education, 1996), pp. 538–86; F.A. Hayek, Monetary Theory and the Trade Cycle (New York: Augustus M. Kelley, 1966 [1929]); and Prices and Production (New York: Augustus M. Kelley, 1967 [1931; 2nd ed., 1935]).
13. For an exposition of the Austrian theory of the business cycle in contrast to the traditional Keynesian theory of the Great Depression, see Richard M. Ebeling, “The Austrian Economists and the Keynesian Revolution: The Great Depression and the Economics of the Short-Run,” in Richard M. Ebeling, ed., Human Action: A 50-Year Tribute (Hillsdale, Mich.: Hillsdale College Press, 2000), pp. 15–110.
14. For an overview of the Swedish economists and their literature, see Richard M. Ebeling, “The Stockholm School of Economics: An Annotated Bibliography,” Austrian Economics Newsletter, Winter 1981, vol. 3, no. 2.
15. Gunnar Myrdal, Monetary Equilibrium (New York: Augustus M. Kelley, 1965 [1933; 1939]).
16. Erik Lindahl, Studies in the Theory of Money and Capital (New York: Augustus M. Kelley, 1970 [1939]).
17. Bertil Ohlin, “Some Notes on the Stockholm Theory of Savings and Investment” [1937], reprinted in Howard S. Ellis, ed., Readings in Business Cycle Theory (London: George Allen & Unwin, 1950), pp. 87–130.
18. For a comparison and contrast of the Swedish and Austrian contributions on the basis of Böhm-Bawerk’s and Wicksell’s theories, see Richard M. Ebeling, “Money, Economic Fluctuations, Expectations and Period Analysis: The Austrian and Swedish Economists in the Interwar Period,” in Willem Keizer, Bert Tieben, and Rudy ven Zijp, eds., Austrian Economics in Debate (London/New York: Routledge, 1997), pp. 42–74.
19. See David Laidler, Fabricating the Keynesian Revolution: Studies of the Inter-war Literature on Money, the Cycle, and Unemployment, Part I on “The Wicksellians,” (Cambridge: Cambridge University Press, 1999), pp. 25–75.
20. Most recently, Steven Horwitz, Microfoundations and Macroeconomics: An Austrian Perspective (London/New York: Routledge, 2000); and Roger W. Garrison, Time and Money: The Macroeonomics of Capital Structure (London/New York: Routledge, 2001).