My seventeen year old son had a semester of, economics as part of the history requirement for the eleventh grade. The text — you’ve guessed it — was Samuelson. As far as I could determine, the course was well-taught. The questions of “what,” “for whom,” “how much,” et cetera, may have blurred the prime matter of economic motivation, but they did not quarrel with the ideas that the end of production is consumption or that the study of economics circles around the utilization of scarce means. The instructor betrayed no bias; it was not treated as a sin when a boy, referring on a term paper to the condition of England, made a derogatory remark about the ineptitude of labor government “planning.”
The course, however, seemed to me overweighted on the “macro” side. There was a lot about “GNP.” Samuelson is strong on the description of things-as-they-are, and, after forty-five years of interventionism, the tendency is to take such things as inflation (say at a three per cent annual rate), fractional reserve banking and some government “stimulation” for granted.
The individual tends to get lost in the “macro” approach, and the critical faculty inevitably gets dulled. We see things in terms of aggregates and large contours, and individual purpose gives way to supposed group needs and desires. The accent on the group leads, by slow degrees, to socialism. But socialism ignores the human starting motor, which is always inside the mind and body of a single, separate person.
The Uncoerced Individual
What is obviously needed, in high schools, is economic instruction that begins with the starting motor of the uncoerced individual. To overcome the deficiency, Bettina Bien Greaves of the Foundation for Economic Education staff has prepared a two-volume work, Free Market Economics (FEE, $10.00 per set), comprising a text book plus an anthology. The Syllabus, a wide-ranging and deeply penetrating treatise, takes off unabashedly from Ludwig von Mises’ “Austrian” economics. And to supplement the Syllabus, Mrs. Greaves has compiled a companion Free Market Economics Basic Reader consisting of material drawn largely from The Freeman.
Lest the reader get the idea that the eighty-one selections in the Basic Reader are from purely contemporary sources, it should be noted that such ancients as Frederic Bastiat, David Ricardo, James Madison, Abraham Lincoln and Jean Baptiste Say are represented here, along with a FEE “Clipping of Note” taken from Karl Marx’s and Friedrich Engels’ Communist Manifesto, which, like Adolf Hitler’s Mein Kampf, provided ample warning of what totalitarians intend for the underlying population whenever or wherever they achieve power. The Manifesto dates back to 1848, and it is still deluding people.
The syllabus begins with “basics” (i.e., the nature of the individual, the need for private property if there is to be free exchange, and the voluntary cooperation that creates the miraculous “interconnectedness” of the free market). Then comes a section on “principles” (pricing, savings, the role of tools, labor and wages, money and credit, competition and monopoly, and cross-border trading). Finally, there is a section on historical and political aspects, designed to give the teacher some grasp of both economic history and the history of economic thought.
Like musical motifs, the root ideas of Ludwig von Mises are sounded again and again throughout the text. Men act purposefully within the limits imposed by the natural and social orders, each one of them trying to relieve “felt uneasinesses” of one sort or the other. The effort to satisfy as many wants, both material and non-material, as is possible with the means at hand is enough to explain pricing, which varies with the individual’s need and will to trade.
The seller has his “felt uneasiness,” too — he has his living to make. He will, naturally, have more of a product to sell if he has the advantage of good tools and a ramifying division of labor. The “felt uneasiness” of empty stomachs means that workers will have the incentives to take jobs and to specialize in accordance with their native skills. And the difficulty of arranging for barter leads to the special commodity known as money.
The “Invisible Hand”
Individuals become interconnected and interrelated through the market, which seems to be regulated by an “invisible hand.” Invisibility does not mean that things are haphazard. Men have logical faculties, and can reason from axioms, or self-evident truths. They know there is regularity in the universe; the sun rises in the east and sets in the west. There is causality. And all things take place within a context of time and change. Men’s subjective desires are arranged according to a scale of personal values. And it is the subjective nature of value that decides where economic “margins” will lie. If not enough people want a given good or service at a price, the seller will have to come down a peg or two in order to keep from being stuck with inventory. Marginal utility defines what will be made. It does not guarantee that the seller will always recover the labor costs that go into the making of a product. So there can be no “labor theory of value.” But if there is no recovery of cost at the margin, the margin itself will change.
The von Mises system is, of course, the refinement of the “Austrian” system, which was pioneered by Carl Menger. Menger was a Charles Darwin in a school that had its Alfred Russel Wallaces, co-discoverers of a theory that provided the missing key to free market economics. The co-discoverers — Jevons and Walras —used mathematics to explain marginal utility. Menger favored the “literary” approach, couching his arguments in terms of logic. Since mathematics means statistics, and statistics are “past history,” the Menger approach is handier for those who want to direct their attention to the individual as the creator of the future.
No Instantaneous Miracle
There is so much in Mrs. Greaves’ syllabus that one questions the ability of the average high school teacher to impart its wisdom to students in the course of a single year. But the idea is to get prospective teachers to open their minds to the whole neglected panorama of free market thought, which necessarily entails application over many, many years.
Mrs. Greaves is profuse with her recommendations for supplementary reading of all the great and near-great texts. The teacher of free market economics can hardly bite off Adam Smith’s Wealth of Nations and Ludwig von Mises’ Human Action in a couple of months. But Mrs. Greaves is not looking for an instantaneous miracle.
Her own Basic Reader makes use of the small gem to illustrate the important truths. Roger Williams tells us how completely individual every one of us is. (Exit, the “planned” economy.) Henry Hazlitt explains why a broken window, though it may be a boon to the glass manufacturer, means a lost sale for a tailor. John Campbell brilliantly illuminates the case for tools by noting the role of the horse collar in expanding traffic in medieval Europe. Percy Greaves, Jr. proves in depth the common sense of William Graham Sumner’s random remark that the “amount of money in a country will do the work of the country.” A single passage from Ricardo establishes the law of comparative advantage in foreign trade. J. B. Say shows that production creates all the income needed to “clear the market.” And so it goes.
If there is one thing that seems to be missing in Mrs. Greaves’ anthology, it is Friedrich Hayek’s bit from The Road to Serfdom that shows why, under State planning, it is the “worst” that get to the top. Gustavo Velasco’s “Intervention Leads to Total Control” tells us all we need to know about the economic end of State interference, but Hayek’s essay is needed to remind us that it takes a gang of hardened thugs to make control stick.
THE GROWTH OF THE AMERICAN GOVERNMENT by Roger A. Freeman. ( Stanford, California 94305: Hoover Institution Press), 228 pages, $8.95 hardcover; $5.95 paperback.
Reviewed by William H. Peterson.
Business Analysts fear a critical capital shortage in the U.S. within ten years. What is the cause? Where has the potential capital gone?
Roger Freeman, Stanford Hoover Institution economist, supplies one hard answer: It’s been devoured by government with its enormous appetite for the nation’s resources. It’s gone into taxes that impede “individual productivity and industrial success.” It’s gone into a massive redistribution of national income from producers to nonproducers, from production into consumption, from capital formation into a raft of programs like Food Stamps, Aid to Families with Dependent Children, and the biggest domestic program of them all with a truly prodigious appetite for resources and potential capital — Social Security.
Consider Social Security and other federal payroll taxes, which, as Dr. Freeman notes, have been growing faster than any other federal levy. This payroll “take” is estimated by the Office of Management and Budget at $86.3 billion for 1975, which amounts to more than twice as much as expected corporation income tax receipts of $38.5 billion estimated for 1975, and about three-quarters of the expected individual income tax receipts of $117.7 billion. Federal payroll taxes amount to about three-quarters of the $116.0 billion expected to be spent on fixed capital formation this year, meaning, expenditures for new plant and equipment planned by American businessmen in 1975, as surveyed by the Commerce Department’s Bureau of Economic Analysis. The national government diverts $86.3 billion into “transfer payments” instead of permitting individuals to invest this sum as they decide in job-producing industry.
There are solid grounds for believing that Social Security recipients would be better off in their old age if they had not put their “contributions” into current government expenses but into capital formation — directly into stocks and bonds, or indirectly via private insurance annuities or pension plans. Either way, not only would these people likely be better off but the country and especially the American worker would also be better off — thanks to greater productivity, rising wages, and less inflation.
But the $86.3 billion payroll tax is but one facet of the federal budget, which, according to a recent House-Senate Budget Committee conference, will come to $367 billion in the 1976 fiscal year which began July 1st (involving a deficit of $68.8 billion).
Related to the problem of government absorbing an ever larger percentage of GNP — and potential capital — is a continuing increase of what Dr. Freeman calls “welfare dependency,” with its attendant disincentives to work, save and invest. He draws a distinction between genuine welfare needs and actual welfare programs. Economic growth has already greatly reduced the number of families at the poverty level. The rub is that the Government keeps redefining and generally easing the definition of poverty. This means lowering qualifications for eligibility for most any given welfare program, so that the welfare population burgeons in good times and bad.
Dr. Freeman is alarmed and writes: “The sharp rise in the number of female-headed families — between 1970 and 1973 at more than twice the annual rate of the 1960s — is an ominous sign for prospects in welfare dependency.”
There are literally hundreds of programs on the books, but there is always room for more; mass transit, environmental improvement, a nationally guaranteed annual income and national health insurance, among many other proposed programs. The cost of pending health insurance bills alone varies from $6.5 billion annually for the Administration’s Comprehensive Health Insurance Bill to an estimated $60 billion for the Kennedy-Griffiths Health Security Bill.
The irony of such proliferation is its persistence in the face of a rising tide of program failures. Shiny new public housing projects become instant slums. Major cities, under the impact of federal policies and by their own actions, are increasingly transformed into islands of poverty, crime, decay and other social ills. (Dr. Freeman bemoans the plight of bankrupt New York City, as a case in point.) The quality of education sinks as federal aid to the schools mounts. (Dr. Freeman notes that mean scores on college board entrance tests declined dramatically during the decade 1962-1973.)
The Hoover Institution economist is concerned by the fact that economic growth is being choked off by the rising welfare state, but he is also alarmed over implications for national security. From 1952 to 1972 defense expenditures dropped from 14% to 7% of GNP, while domestic expenditures increased from 12% to 26%. Russia has meanwhile been building up its war-making powers, so that under current trends “the Soviets are headed for a decisive military superiority.”
Whither America? asks Roger Freeman in this important book, and the serious reader echoes the question: Whither, indeed!
