Freeman

ARTICLE

Trickle-Down Economics

MAY 01, 1982 by GARY NORTH

© Gary North, 1982. Gary North, Ph.D., is President of the Institute for Christian Economics. The ICE publishes s newsletter, Biblical Economics Today. A free six-month trail subscription is available by writing to Subscription Office, ICE, P.O. Box 8000, Ty1er, Texas 75711.

“It’s kind of hard to sell ‘trickle-down,’” he [David Stockman] explained, “so the supply-side formula was the only way to get a tax policy that was really ‘trickle-down.’ Supply-side is ‘trickle-down’ theory.”[1]

* * *

During the Eisenhower administration, critics of the Republican Party’s economic policies called them the policies of “trickle-down economics.” There was even a lyric in a Joe Glazer “folk” song about “trickle-down George” Humphrey, who was the Secretary of the Treasury. Trickle-down economics, the critics said, was based on the theory that tax breaks given to the rich would multiply investment, provide jobs, and eventually create increased income for everyone in the economy. In other words, by “giving” the rich more after-tax income, the government would foster economic growth, because the rich are more likely to invest than the poor, since any additional money in their hands would not have to be spent on necessities.

The critics resented the suggestion that the rich should receive a reduction in their tax rates. They had campaigned long and hard for the “progressive” income tax—the graduated income tax—and they were not happy with any suggestion that the reason why the American economy was not experiencing maximum economic growth was because of the graduated income tax, which in the 1950s extracted a maximum of 91 per cent of “unearned” (investment) income.

Value Theory

It is one of the ironies of history that both the critics and the defenders of reduced tax rates in the highest brackets relied on the same view of income. What we call “welfare economics” was created at the turn of the century by a group of British economists, most notably A. C. Pigou, who misused the crucial economic doctrine-of marginal utility. They argued that since each additional unit of income (ounce of gold, dollar, pound sterling, etc.) is worth less to the recipient than the preceding unit of income, we must conclude that it would increase total social utility within a society to impose graduated income taxes. Why? Because the goods bought by the thousandth dollar received by a poor man are worth so much to him, whereas the goods that the millionth dollar will buy a rich man are valued very low by the recipient. The rich man will have purchased all those goods and services that were high on his value scale long before he receives his millionth dollar. Thus, concluded the welfare economists, the civil government can increase total social utility in a society by taking (say) 75 cents of that final dollar away from the rich man and transferring the money to the poor man.

It took three decades for an economist to come up with a theoretically precise rebuttal to this position. Lionel Robbins, who had been influenced by the writings of Ludwig von Mises early in his career, provided the answer. Robbins argued that while it is legitimate for an individual to compare the value to him of the first, second, or nth dollar of his own income, it is not legitimate for anyone to make interpersonal comparisons of subjective utility.[2] We cannot make scientifically valid statements comparing the subjective value of the second dollar of income (or the millionth) in one person’s income with the subjective value of the second, third, or nth dollar of another person’s income. We cannot even make cardinal (quantitative) comparisons in our own minds—this is worth precisely this much more to me than that but only ordinal comparisons: this is my first choice, that is my next choice, and so forth.

Common sense may not accept Robbins’ conclusion, but such is often the case in matters of economic theory. Science frequently produces conclusions that are in flagrant opposition to common sense. We need to consider an example regarding interpersonal comparisons of subjective value. The millionaire may value his millionth dollar very highly, if he has some investment in mind which requires a high initial payment, or if he regards his income as a kind of measure of his value to society. On the other hand, some mystic or ascetic may not place a high value on his thousandth dollar of income in any given time period.

We do not have a quantitative measure of pleasure or utility; thus, we cannot, as scientists, make interpersonal comparisons of subjective utility. Conclusion: it is not scientifically demonstrable that total social utility within a society can be increased by taking 75 per cent of the rich man’s income in the highest tax brackets and transferring this money to a poor man (minus 25 per cent for government handling). There is no such thing, scientifically speaking, as total social utility. We cannot add up subjective utilities as if we were adding up a column of figures.

Admittedly, as policy-makers we have to make judgments concerning the advisability of particular economic programs. But Robbins’ refutation of welfare economics by means of the argument against the scientific validity of interpersonal comparisons of subjective utility cannot be limited to the narrow case of the graduated income tax. It undermines all attempts to “tally up” social utility in the name of economic science. We cannot, as economic scientists, say that any policy will increase total social utility. There is no way to measure “total social utility.” So effective is this argument that it denies to economics the legitimacy of making estimates of the total value of any aggregates. What does Gross National Product mean, anyway, if we cannot assign any value (or meaning) to the columns of figures in a GNP index? If Robbins’ thesis is correct—and since 1932, no economist has shown how it might be in-correct-then most of what we know as modern applied economics, including the formulation of economic policy, is an illusion.

Robbins had this pointed out to him by Roy Harrod, who later became Keynes’ biographer, in 1938.[3] Incredibly, Robbins capitulated to Harrod and abandoned the obvious and inescapable logic of his earlier argument.[4] But he could never explain where he had been incorrect. He simply wanted to maintain the status of economists as scientific advisors, so he abandoned the logic of subjectivist economics. Somehow, he and Harrod agreed, economists as scientists can make assessments of the total social utility of particular economic policies. Somehow, GNP (or other economic statistics) are meaningful They could not say exactly how, but somehow.[5] It was a matter of faith.

Capital Formation

The welfare economists have long argued that if the State extracts a higher percentage of taxes from the upper income brackets, and then transfers this money to poorer members of society, total social utility can be increased. Robbins demolished the scientific validity of this statement, but his argument has never been taken seriously by economists, since it has so many implications that are unfavorable for the practice of applied economics.

On the other hand, advocates of capitalism have replied to the socialist critics of the rich with this argument: the rich man has most of the food and clothing he can use, once he gets into the highest income brackets. Thus, he will be more likely to invest higher and higher proportions of his income as his income stream carries him upward. His “necessities” are taken care of early. Then his pleasures are taken care of. Finally, he has money ]eft over. What is he going to do with it? He will be increasingly willing to invest it or give it to charity, the free market economists have argued. The rich man has demonstrated his competence in making investments; thus, he acts as a public benefactor in his capacity as investor.

What if the civil government attempts to extract this money from him? He will then spend more time and effort in seeking out tax avoidance schemes. He will be less interested in expanding his income. He will spend more money on luxuries. For example, a person who was in the 98 per cent tax bracket in England, prior to Mrs. Thatcher’s election and the reduction of these confiscatory top-bracket tax rates, might have faced the following decision. Perhaps he had $50,000 to invest (or about 25,000 pounds). If he thought he might get 10 per cent on his money—always a guess, given the inescapable uncertainty of the economic future—he could expect an income stream of $5,000 a year. But he would be allowed to keep only 2 per cent, or $100, after taxes. Or he could buy a Rolls-Royce for $50,000—an asset which tends to appreciate over time. What was the real cost of driving his Rolls-Royce for a year (not counting gasoline, insurance, and repairs)? The $100 he would have forfeited. Tell me, if you could drive a Rolls-Royce for $8.30 a month, plus insurance, maintenance, and gasoline, would you consider it? So did a lot of rich Englishmen.[6] This, of course, increased the demand for Rolls-Royces, thereby giving the buyer ownership of an appreciating asset.[7]

Workers Lack Capital

The problem facing British workers is lack of capital investment. This problem always faces all workers, but especially the British worker today. The confiscatory tax rates have driven private capital into high payoff, high-risk investments, into “off shore” (foreign) investments, which are less easily taxed, and into “conspicuous consumption.” Is this bad? Economists, as scientists, cannot legitimately answer this question. It is a welfare question. But individual workers seem to want higher income, and higher per capita investment—better tools—is the way we produce increased productivity. (This, at least, is Mises’ contention.[8] The problem facing a consistent defender of subjective utility theory is this: How can we divide the abstract idea of total capital—a statistical aggregate—by the total number of workers in a society, and come up with anything meaningful? Prof. Kirzner, Mises’ student, has explicitly denied the legitimacy of just such a measurement.[9])

So the defender of the free market argues that Britain’s high taxes on the top income brackets are responsible for the low rate of capital formation in Britain. But is this argument correct? And if it is, haven’t we granted too much credibility to the socialists’ argument that the rich control sufficient capital to influence greatly the wealth or poverty of the average citizen?

Squeezing the Apex

Another problem faced by those who favor high graduated tax rates is this: there are not that many rich people. Also, the kinds of wealth that they hold are not generally cash assets, but certificates of ownership in equipment, patented production processes, real estate, and similar capital. These physical assets cannot often be cut into distributable physical units, except in the case of land. These assets provide a stream of income, so the things the State can redistribute most conveniently are legal entitlements (certificates of ownership) to the future income streams. But as income-seeking investors begin to see what is happening to their after-tax income streams, they tend not to reinvest. Without reinvested funds, the physical capital base begins to wear out, productivity falls, the income to workers therefore falls, and there is less wealth to redistribute.

Can we make the masses rich by confiscating the wealth of the rich? The socialists have officially argued that significant welfare gains can be achieved for the masses by such policies of wealth redistribution. Those who reject this contention point to the small number of wealthy people in capitalist societies. How can hundreds of millions of people be significantly benefited by extracting the distributable forms of wealth held by the handful of super-rich? Debates then go on concerning the proportion of a nation’s wealth held by the richest 10 per cent or 20 per cent or 30 per cent of the population. Is it sufficient to make an impact on the total wealth of society?

If this wealth is held in the form of distributable shares, what happens to the ownership of these shares after the initial distribution is completed? Will men be permitted to buy and sell these shares on an open capital market? If so, what is to prevent the creation of a new class of wealthy owners? Will we not see the advent of “a new class”? Isn’t the hierarchy of wealth inescapable in a world filled with people of varying investment talents, organizational talents, and salable skills? Isn’t the proper question this one: What is the most socially beneficial arrangement of ownership, private or socialist? Which kind of hierarchy produces the greatest benefits? (Problem: we are right back to the question of social welfare, with its requirement that we make estimates concerning interpersonal, subjective utility.)

If the free market economists are correct in their contention that there are not enough rich people to squeeze for the benefit of the poor, then “trickle-down economics” has a problem. If the wealth of the rich is insufficient to enrich the poor under socialism, then how can the capital owned by the rich be sufficient to enrich the poor under capitalism? If there is not enough wealth in the top income brackets to “go around,” then why are the investment decisions of the rich so important for the economic prosperity of the nation? In short, what good is a trickle, whether the State squeezes the rich, or the rich are allowed to keep their income to invest one way or another? Whether the rich pay taxes, or buy tax shelters, or are allowed to keep large chunks of their after- tax income, why should it significantly affect the welfare of the general public? What difference will it make to the man in the street?

Getting Rich

In a modern welfare State, there is only one class with sufficient resources to pay for all of the government programs: the middle class. In a modern capitalist economy, with its tremendous demand for capital—if only to maintain the tremendous existing capital base in the modern economy—there is only one class with sufficient financial resources to maintain the capital base: the middle class. Middle-class societies have large middle classes. This is tautological, but significant nevertheless. Middle-class societies have to look to the middle class as the source of permanent, significant social change. Elites have their roles to play, as the sources of innovation, especially in the realm of ideas, but in the final analysis, the success or failure of a particular elite today depends on the fate of its innovations in the culture of the middle class.

What good does the wealth of the rich do for society? In a free market society, it serves as a symbol of what efficient, market-serving producers can attain. In a collectivist society, it serves as a symbol of what the ruthless suppression of other people’s freedom can attain. It serves as a symbol of what relentless attention to bureaucratic forms, or political intrigues, can attain.[10]

The quest for the egalitarian society has been a familiar one in academic and utopian circles, but the quest is futile. Hierarchies are fundamental to human societies for many reasons, not the ]east of which are the varying talents of men. In a world of limited resources—where there is greater demand for than supply of certain goods at zero price—men must compete for what they regard as their share of the goods. They invariably regard their fair share in terms of certain gifts or skills that they possess: good looks, strength, wisdom, a university degree, ability to forecast the future, commitment to an ideology, or a hundred other possible attributes.

Because men’s skills differ, and because they view the legitimacy of property in terms of differing moral or legal principles, they cannot agree on equality as a social goal. Equality of what? Wealth? But what is wealth? Is it capital? But what is capital? Money? Good looks? Strength? We cannot equalize wealth without equalizing people. There is no way to equalize people, except by killing them. Men have equal skills only in the grave.

People want to increase their wealth. They say they do, and they frequently act to do so. To increase their wealth, they must invest time, or money, or both in a future-oriented program of entrepreneurship. They must begin to forecast the future more accurately. They may be forecasting the future demand of consumers on a particular private market.[11] They may be forecasting political shifts in the wind in some totalitarian society. But they have to deal with an uncertain future, with whatever capital they possess at any moment in time.

Responsible Decisions

The free market economy opens the doors of economic opportunity to all those who believe that they can benefit themselves by meeting the future (uncertain) demands of the buying public. The free market society does not say in advance who will be successful in the quest for greater personal wealth, nor does it specify the avenues that will offer the highest return on invested funds. The free market society does not even require that successful entrepreneurs affirm a particular ideology or religion. It does require that men abstain from the use of fraud or violence against each other in their quest for private gain.

The free market society is a consumer-oriented society. Those who produce what consumers are willing and able to buy at a price they are willing and able to pay will prosper. The lure of profit is the control mechanism that other members of society have over producers. Without the hope of profit and the threat of loss, consumers would lose their leverage over the decisions of potential producers. Yet this leverage is strictly voluntary. Producers are not required by law to produce anything in particular. They are not even required by law to be producers at all. (Vagrancy laws-laws that require people to produce evidence of “gainful” employment—should not be regarded as products of a free market philosophy.) But if they wish to enter the markets as competing producers, they must face the “whip” of the consumers: the threat of financial losses.

Consumers Offer Rewards to Prospective Producers

By luring people into the production markets, consumers benefit themselves. They tell prospective producers: “If you are more successful than your competitors in meeting our demands in the future, we will make you rich.” A society which does not allow consumers to make this offer to potential producers thereby discriminates against the interests of consumers. It takes away the key element in each consumer’s quest to lure potential producers into the markets that serve his needs, namely, his legal right to make an offer to an entrepreneur, or a class of entrepreneurs, to make (and keep) a profit from serving his, the consumer’s, wants.

By allowing people to make profits through market competition, free market societies increase the likelihood that consumers will be able to lure into the markets all those future-oriented producers that the consumers can afford to reward. In fact, given the reality of uncertainty in market action, and the optimism of producers, more producers will enter the markets than consumers can actually afford to reward. Some producers will lose money. This involves waste, but uncertainty is the cause of this waste, not the free market. The free market actually reduces waste by removing the least successful forecasters from the marketplace. Losses eventually take their toll.

Producers are made responsible by the carrot and stick of the market. The larger the offer, the larger the number of future-predicting entrepreneurs who will enter into the service of consumers. If a society tells producers that their efforts, if successful, will be met with higher taxes, then some producers will cease bearing the burdens of predicting an uncertain future. The graduated income tax discriminates against successful entrepreneurs; it thereby discriminates against consumers. It reduces the lure of profit which consumers would otherwise prefer to offer producers, in order to get them working for consumers.

Squeezing into the Apex

There are no “sure things” in the hard task of predicting future market demand. The consumers are relentless. They keep asking: “What have you done for us lately, and what will you do for us tomorrow? And at what kind of discount?” Producers are constantly misforecasting the market. They sustain losses. Even the best of them fail. The “Fortune 500" of one generation bears little resemblance to those of the following generation. Innovation, shifting consumer tastes, price competition, and a baffling number of other market changes can catapult an unknown company into the economic stratosphere, or toss another firm into the mud.

What benefits consumers is not some utopian (and self-defeating) program to redistribute the wealth of those who occupy a position in the economic apex at any point in time. There will always be an apex. Any political program strong enough to capture the wealth of those in the apex is also a program which will enable political(or bureaucratic) elites to take the place of those who have lost the political battle. After all, that is the goal of political elites: to replace those who presently occupy the places of wealth and prestige. They adopt political techniques to achieve this replacement.

In too many cases, those presently in the apex adopt political programs in the name of “making the apex responsible,” or even “making those in the apex pay their fair share,” in order to lock in their existing position. They feel the innovators nipping at their heels, and they turn to political coercion to protect their position from market competition.[12] The Federal regulatory apparatus was adopted in the name of democratic justice and consumer protection, but again and again, the chief beneficiaries (and behind-the-scenes promoters) of Federal regulation have been the threatened members of a particular industry or professional association.[13] And once a regulatory commission has been in place for a few years, the loudest opponents of deregulation are the senior officials of the largest firms in the regulated industry.

Thus, what those in the apex fear most is the threat of their own trickling down as a result of increased market competition. If they see the possibility of maintaining their long-term positions of power and status by means of political manipulation, they frequently take up the cry against “cut-throat competition,” and “unfair exploitation of consumer needs,” in order to gain a predict able position in the market. Even if this involves higher taxes or more interference from Federal officials, once they have achieved their market position, they are willing to pay (i.e., to put up with less freedom in general for everyone) in order to achieve a relatively secure share of the market. They lose a portion of their economic freedom the right to compete on an open market—but they are willing to pay this price because their proportional share of this general loss of freedom is less (in the short run) than their gains from government protection. Never forget: the market does not pay them to be ideologically pure; it rewards them for making profits. This is one reason why Benjamin Rogge was so pessimistic regarding the future of capitalism.[14]

What benefits the consumers is a social philosophy which affirms the right of all those who wish to compete economically for a place in the economic apex to make and keep their profits. By affirming such a philosophy as a moral ideal and not simply as a technically efficient means of increasing per capita income—consumers cannot be misled into voting for a political program which would substitute political competition for economic competition as the pathway into the apex.

The consumers, by their decisions to buy or not to buy, determine in a free market social order who will go into the apex of wealth, and who will be forced out. If they abandon the social philosophy of the free market, they will find that their economic decisions no longer possess the same influence in calling forth the skills and efforts of suppliers to meet their demands. By abandoning the free market, consumers transfer a portion of their sovereignty as economic actors to the elite corps of bureaucrats who exercise monopolistic power as officials of the civil government. Producers will begin to respond to the incentives provided by the State, rather than to the incentives offered in open competition by the consumers. The State will begin to establish the terms by which producers compete for a position in the apex.

Trickle-Up Economics

There are limits on the number of people who can be in the top tenth of the income level. The amount of capital in the whole society is indeterminate. It can be large or small.[15] This depends on the willingness of a society’s members to save, and on their ability as economic forecasters (entrepreneurs). This means that only a minority of entrepreneurs will be successful in their quest for a place in the economic apex. Only a few will “trickle up” into the highest income or capital levels. Even fewer will remain there, let alone generations of their descendants. They will “trickle up” and “trickle down,” depending on their abilities in forecasting future consumer demand and meeting these demands at prices lower, or quality higher, than their competitors.

The issue is not the amount of wealth held by the rich. The issue is rather the terms by which they hold such wealth. Are they meeting the demand of consumers, or the demands of bureaucrats? Are they competing in a free market or in an economically controlled political market? Do citizens exercise control over producers directly, by means of their decisions to buy or not to buy, or do they exercise control indirectly, through politics, and then (very indirectly) through the politicians’ ability to control the various bureaucracies?

If citizens decide that they should exercise power primarily through political means, they are going to be thwarted continually by the bureaucracy. The great German sociologist, Max Weber, commented on this in the years immediately following the First World War. “Under normal conditions,” he wrote, “the power position of a fully developed bureaucracy is always overpowering. The ‘political master’ finds himself in the position of the ‘dilettante’ who stands opposite the ‘expert’ facing the trained official who stands within the management of administration. This holds whether the ‘master’ whom the bureaucracy serves is a ‘people’ equipped with the weapons of ‘legislative initiative,’ the ‘referendum,’ and the right to remove officials, or a parliament, elected on a more aristocratic or more ‘democratic’ basis and equipped with the right to vote a lack of confidence, or with the actual authority to vote it. It holds whether the master is an aristocratic, collegiate body, legally or actually based on self-recruitment, or whether he is a popularly elected president, a hereditary and ‘absolute’ or a ‘constitutional’ mon arch.”[16] In short, the “amateur” politician, who may be out of office after the next election, is no match for the entrenched power of the Civil-Ser-vice-protected lifetime career bureaucrat.

Modern Bureaucratic Methods

The modern bureaucratic system of administration is far more centralized than anything in the past. The old administration by feudal barons or Near Eastern satraps was essentially decentralized. Local income financed such systems of political rule. Only the surplus reached the central treasury. Not so with modern bureaucratic methods. “The bureaucratic state, however, puts its whole administrative expense on the budget and equips the lower authorities with the current means of expenditure, the use of which the state regulates and controls.”[17]

Thus, the expansion of State power over market forces has centralized the economy in a way that the free market, because of its decentralized source of financing—the economic power of millions of individual consumers—cannot possibly achieve. On this point, Weber was incorrect and Mises was correct: bureaucracy is different from profit management, since the source of the funding is different.[18] The rise of bureaucracy in private industry is always limited by market pressures, since consumer choices determine the fate of private firms. However, when government regulations begin to replace market demand as the source of a firm’s success or failure, the statist bureaucracies steadily recreate in their own image the management structures of private firms.[19]

Conclusions

The hope of people in the economic power of the rich to bring prosperity to a society, whether through redistribution or investment, is a false hope. The hope of a society should be in the willingness of large numbers of future-oriented people to forgo present consumption and to invest. An upper-class society is a future-oriented society, whatever the present income level of the bulk of its citizens.[20] When we read, for example, that the Japanese invest 25 per cent of their income, we are not reading about a handful of rich Japanese who are future-oriented, but about a large segment of the population of Japan. This, unquestionably, is an important aspect of the “economic miracle” of Japan. The Japanese are future-oriented, and have been future-oriented throughout this century. It has led to the creation of a huge capital base which has improved the productivity of Japanese workers.

What is significant is not that rich people invest a high proportion of their incomes, but that large numbers of citizens maintain a steady investment program, whether in the hope of getting rich personally, or only in the hope of having a comfortable retirement, or leaving an economic heritage to their children. The rich may indeed set the pattern. The example they set as investors is no doubt important indirectly. But until the advocates of free market economics focus their attention on the decisions of the middle class, they will be caught in an intellectual trap set for them by the socialists. They will continue to believe that what the rich minority does with its money will “make or break” an economy. They will continue to have faith in the “trickle-down economy,” and the socialists can always use this faith against the defenders of the market.

The critics of the rich can use the emotional appeal of envy—the desire that no one benefit from wealth—against the market itself, calling for universal redistribution of private fortunes.[21] They can also appeal to jealousy—the naive hope that there really is sufficient wealth held by the rich to increase the per capita income of everyone by a wholesale confiscation of wealth by the State. The “trickle- down” economists are playing into the hands of the socialists, by providing opportunities for both the envious—“No one should enjoy such advantages!”—and the jealous—“Let the less prosperous enjoy a per capita increase in such advantages!”—to justify the attempted destruction of the economic apex. And without the lure of the apex, the efforts of the producers will be redirected: from satisfying present and future consumer demand, to satisfying present and future bureaucratic demand (or satisfying black market demand).

This is not to argue that we should not applaud the reduction of taxes in the higher brackets. But our support should be a matter of principle, a defense of the rule of law. No economic group should be singled out as “the enemy of the social good,” and therefore subjected to discriminatory taxation. But the defense of lower taxes for the rich should not be made in terms of the supposed creativity and future-orientation of the rich, in their role as investors. It should be made in terms of each man’s right to become rich, if he chooses and if he has the ability to do so in competitive markets. Our goal should be the creation of a nondiscriminatory tax structure that symbolizes the commitment of voters to the principle of the rule of law, the rights of private property, and the legitimacy of entrepreneurship. Everyone should be permitted to have a shot at the apex. Trickle-down economics, as an explanation of the wealth of nations, is misleading. It is not what the rich do with their money that matters most; it is what the broad mass of citizens do with their money that shapes the wealth of nations. []


1.   William Greider, “The Education of David Stockman,” The Atlantic Monthly (Dec., 1981), p. 47. Mr. Stockman is the Director of the Office of Management and Budget.

2.   Lionel Robbins, An Essay on the Nature and Significance of Economic Science (2nd ed.; London: Macmillan, [1935] 1962), ch. VI. Reprinted in the United States by St. Martin’s.

3.   Roy Harrod, “Scope and Method of Economics,” The Economic Journal, XLVIII (Sept., 1938).

4.   Lionel Robbins, “Interpersonal Comparisons of Utility: A Comment,” Ibid., XLVIII (Dec., 1938).

5.   I have dealt with this theoretical problem at some length in my book, The Dominion Cove nant: Genesis (Tyler, Texas: Institute for Christian Economics, 1982), ch. 4. The problem of interpersonal comparisons of subjective utility is perhaps the most far-reaching epistemological problem in modern economics.

6.   This example was provided by economist Paul Craig Roberts. It is cited by George Gilder, in his book, Wealth and Poverty (New York: Basic Books, 1981), p. 173.

7.   When Prof. Roberts first offered this exam-pie in The Wall Street Journal (August 1, 1978), the figure he used for a new Rolls-Royce was $50,000. Today, that figure is out of date. It is close to $100,000. Price inflation and high demand have raised the stakes considerably.

8.   Ludwig von Mises, The Anti-Capitalistic Mentality (Princeton, New Jersey: Van Nostrand, 1956), pp. 5, 38, 87.

9.   Israel Kirzner, An Essay on Capital (New York: Augustus M. Kelley, 1966), ch. IV. See especially page 120.

10.   F. A. Hayek, “Why the Worst Get on Top,” Chapter 10 of his book, The Road to Serfdom (Chicago: University of Chicago Press, 1944).

11.   Frank H. Knight, Risk, Uncertainty and Profit (New York: Harper Torchbook, [1921] 1965). See also Ludwig von Mises, Human Action (3rd ed.; Chicago: Regnery, 1966), pp. 289-300.

12.   D. T. Armentano, The Myths of Antitrust (New Rochelle, New York, 1972).

13.   Gabriel Kolko, The Triumph of Conservatism (New York: The Free Press, 1966). See also Frederic C. Howe, Confessions of a Monopolist (Upper Saddle River, New Jersey: Gregg Press, [1906] 1968); Howe, Confessions of a Reformer (Chicago: Quadrangle, [1925] 1967).

14.   Benjamin Rogge, Can Capitalism Survive? (Indianapolis, Indiana: Liberty Press, 1979), ch. 1.

15.   I think we can make estimates regarding the value of capital, in contrast to Kirzner’s view, but we make such estimates by means of assumptions that are not strictly economic in nature. See my discussion in Chapter 4 of The Dominion Covenant: Genesis.

16.   Max Weber, “Bureaucracy,” in H. H. Gerth and C. Wright Mills (eds.), From Max Weber: Essays in Sociology (New York: Oxford University Press, 1946), pp. 232-33.

17.   Ibid., p. 223.

18.   Mises, Bureaucracy (New Rochelle, New York: Arlington House, [1944] 1969).

19.   Gary North, “Statist Bureaucracy in the Modern Economy,” in North, An Introduction to Christian Economics (Nutley, New Jersey: Craig Press, 1973), ch. 20.

20.   Edward Banfield, The Unheavenly City Revisited (Boston: Little, Brown, 1974), pp. 57-59.

21.   Helmut Schoeck, Envy: A Theory of Social Behavior (New York: Harcourt, Brace, 1970). Cf. Gary North, Successful Investing in an Age of Envy (Sheridan, Indiana: Steadman Press, 1981), ch. 1.


The spurious catchwords and fallacious doctrines of the advocates of government control, socialism, communism, planning, and totalitarianism cannot be unmasked except by economic reasoning. Whether one likes it or not, it is a fact that the main issues of present-day politics are purely economic and cannot be understood without a grasp of economic theory. Only a man conversant with the main problems of economics is in a position to form an independent opinion on the problems involved. All the others are merely repeating what they have picked up by the way. They are an easy prey to demagogic swindlers and idiotic quacks. Their gullibility is the most serious menace to the preservation of democracy and to Western civilization.

Ludwig von Mises, Bureaucracy

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By LEONARD E. READ

No one knows how to make a pencil: Leonard Read's classic (Audio, HTML, and PDF)