All Commentary
Friday, November 1, 1991

Book Review: Economic Policy And The Market Process: Austrian Economics And Mainstream Economics edited by K. Groenveld, J. A. H. Maks, and J. Muysken

North-Holland, P.O. Box 882, Madison Square Station, New York, NY 10159 • 1990 • 304 pages • $69.50 cloth

Austrian economics, with a tradition dating back over 100 years, distinguishes itself by its insistence on using strict rules of logic to deduce economic laws that govern human action. But that isn’t the source of the worldwide attention the Austrian school is now receiving. Instead, it is its association with economists who steadfastly declare that the free market is the most stable and rational means for ordering economic society. This book is a new collection of articles by leading free-market Austrians debating conventional interventionists.

For most of this century, Austrians have argued that socialism, and the endless variants of the mixed economy (democratic socialism, social democracy, planned markets), prove deficient in providing a coherent mechanism for ensuring that economic resources are used by society in the most optimal way. What’s more, the Austrian case for the free market has an intellectual power that is unavoidably attractive, since it insists that economic laws apply to all societies at every stage of economic development.

The editors of this volume are all professors of economics at universities in the Netherlands and are highly sympathetic with policy positions of the Austrian school. And they enlist some well-known Austrians to help make their case.

Most of their Dutch colleagues who also con_ tribute essays are not sympathetic—they are different breeds of social democrats. Whether they regard themselves as post-Keynesian, neoclassical, or institutionalist, they see a need for a market, but a limited one, heavily regulated, taxed, and restricted. They favor a wide variety of social welfare programs to promote “equality” and “social justice,” antitrust laws, labor market restrictions, and so forth.

When these two world views clash—the free market versus social democracy—sparks sometimes fly. Other times, the contributors just talk past each other. Although this book neither initiates nor closes the debate, the exchange herein, enlisting 20 economists in all, is a fruitful one.

Israel Kirzner launches the debate with a masterful presentation of the case for viewing the market as a process of learning, depending on a free price system, and driven by entrepreneurial discovery, interventions in this market may generate “unanticipated side-effects,” substitute “the preferences of legislators or officials in place of the wishes of the consuming public,” and limit “the exploitation of opportunities for pure entrepreneurial profits.”

Angus Maddison responds with bewilderment: “Kirzner’s description of the market process is somewhat extreme or even mystical.” He dismisses much of Kirzner’s history of the 1930s economic calculation debate between Ludwig von Mises and Oskar Lange as “not very relevant.” It’s unfortunate that Kirzner has no opportunity to rejoin the debate.

Although not an Austrian, Yale Brozen presents one of the best empirical cases against government intervention seen in years. He covers monopoly policy, wealth redistribution, taxes, the negative consequences of an inflationary monetary policy on saving and investment, and more. It was a strategic decision to include this essay, given both Austrian tendency to rely on high theory and mainstream economists’ skepticism about abstraction.

Yet Brozen’s respondent, Arnold Heertje, is not impressed: “We must go back to economic theory . . . it would not be too difficult to produce evidence which just ‘proves’ the opposite of what Brozen likes to indicate.” This kind of methodological circularity can be frustrating, for it raises the question: Exactly what kind of argument for free markets, if any, will a social democrat accept?

Austrian economist Don Bellante weighs in with an outstanding case for free labor markets, pointing out the bad effects labor unions and wage controls have on labor market coordination. In the process he points to the embarrassing reality (for market opponents anyway) that unions cartelize the labor market at the expense of nonunion employees. Legislation enacted on behalf of a union has negative consequences for the entire economy.

Bellante’s respondent, P. Keizer, pleads for cost-benefit appraisals of labor market intervention, although he fails to provide persuasive evidence on the benefit side of the calculus. His main argument favors a kind of democratic collectivism: The voters tolerate labor interventionism, so what’s the problem? The problem is that voters are prone to vote their parochial interests at the expense of the common good, and economists are supposed to rise above that.

Moving to issues of macro-economic stability, Austrian economist Pascal Salin presents an outstanding case for dropping the entire interven-tionist apparatus of fiscal and monetary manipulation, on grounds that it is destabilizing. Especially impressive is his argument for the Austrian theory of the origins of business cycles. It points to central bank credit expansion as the source of interest rate manipulation that distorts investment decisions. His respondent, J. C. Siebrand, is aghast at Salin’s policy proposals and tosses out a series of one-liners against the market that have the ring of clichés rather than scientific analysis.

Another exchange occurs between free-banking advocate Roland Vaubel and central banker G. A. Kessler. And again the substantive arguments are on Vaubel’s side, and his opponent doesn’t seem up to the task of refuting his case against central banking.

The volume also contains an interesting discussion of the merits and flaws of European economic integration.

Part of the difficulty in such debates is that the two sides use different vocabularies. For example, when Austrians speak of competition, they mean an open-ended and unrestricted process of discovery. The social democrats see competition as an end-state to which the market must be made to conform. One wishes that the editors had taken notice of such difficulties and insisted on more discussion of this issue. These problems are compounded by the ideological rigidity of the mainstream economists presented here. But this doesn’t detract from the merits of the debate. Let’s hope the future presents opportunities for many more such exchanges, and that the Austrian school economists continue to win.

Mr. Tucker is a fellow of the Ludwig von Mises Institute.