All Commentary
Wednesday, January 1, 1997

Perspective: Economic Research and Economic Education

Too Many Economic Fallacies Persist

In 1948, Ludwig von Mises wrote a memorandum to FEE President Leonard Read on the objectives of economic education.[1] In this memorandum, Mises laid out the main fallacies . . . which economic education must unmask. Exposing economic error requires a transcendence of the practical problems of the day: The urgent tasks of the daily routine impose on [businessmen, professionals, politicians, editors, and journalists] an enormous quantity of pressing work, and no time is left for a thoroughgoing examination of . . . principles and doctrines.

The practical man, in fact, often scorns theory. But, as Mises pointed out, this disdain is mainly caused by the mistaken belief that the facts of experience speak for themselves, that facts by themselves can explode erroneous interpretations. Facts must be interpreted through the lens of theory. The intellectual conflicts of any age are theoretical conflicts, not factual ones.

Theories give meaning to facts. Hence, Mises wrote, it is obvious that the attempts to free the people, especially the intellectual youth, from the fetters of ‘unorthodox’ indoctrination must begin on the philosophical and epistemological level.

This was, in Mises’ view, the purpose of FEE. To educate thoughtful people, especially the intellectual youth, on the political, philosophical, and economic issues of the age was the main task of a foundation for economic education. A disinclination to deal with theory would mean submission to Marxism and Progressivism. According to Mises, the doctrine of the age promoted ten major economic fallacies which must be debunked.

1. Modern technological developments, it is contended, have delivered humanity into a post- scarcity situation. Thus, remaining economic problems are a result of inherent contradictions with capitalism, not due to the problem of limited resources and unlimited wants.

2. Following from the post-scarcity situation, monetary expansion can solve problems. Poverty can be eradicated simply by printing new money.

3. Business cycles, it is said, are not a result of government mismanagement, but instead a natural consequence of the contradictions of capitalism.

4. Mass unemployment is endemic to capitalism and the free enterprise system cannot provide enough jobs. Technological improvements in production are beneficial to some, but a scourge to the masses.

5. Improvements in the working class are due to actions of government, and especially, pro- labor union legislation.

6. Despite the best intentions of government and labor unions, the masses of workers remain in a desperate state of affairs.

7. Bargaining power within the economy rests disproportionately with businessmen, and against labor. Without the aid of collective bargaining, wages would be pushed to subsistence levels by businessmen, who see this as the way they will increase their profits.

8. Competitive capitalism might have accurately described a previous era, but in the world of today the market is dominated by monopolies.

9. In a world dominated by monopolies, the idea of consumer sovereignty is a myth. Business firms do not attempt to supply the wants of consumers, but instead attempt to manipulate those wants in order to increase profits.

10. Since we live in a post-scarcity world, and income distribution is so top-heavy, redistribution of income from rich to poor will not have any effect on economic productivity.

These fallacious economic propositions, one should recognize, were later embodied in such influential writings as John Kenneth Galbraith’s The Affluent Society. But at the time Mises was writing to Leonard Read, the intention was to give a purpose and direction to FEE’s educational mission. This required first and foremost the continued refinement of economic theory, significant historical work guided by correct theory, and the ability to communicate the results of these theoretical and historical investigations to as wide an audience as possible. According to Mises, success or failure of endeavors to substitute sound ideas for unsound will depend ultimately on the abilities and the personalities of the men who seek to achieve this task.

Mises, the philosopher and economic theorist, was complemented in his effort by Henry Hazlitt, the economic journalist. Leonard Read—the entrepreneur of ideas—was able to coordinate the activities of Mises, Hazlitt, and other scholars and writers to translate theory into the modern idiom, thus challenging the prevailing progressivism of postwar America.

If we compare the current state of economic knowledge with the economic outlook of the late 1940s, as presented by Mises’ analysis, then classical liberals have reason both to rejoice and to despair.

On a fundamental level, the work of Mises, Hazlitt, and others—and such organizations as FEE—has done much to unmask error. But too many economic myths persist. A new generation must pick up where Mises and Hazlitt left off, advance the theoretical and historical understanding of economic life, and learn to communicate these ideas to the intellectual youth more effectively.

Much has been made of the failure of universities and colleges in recent years. Self-indulgent professors, who pursue their esoteric research at the expense of the education of their students, have come under increased scrutiny as tuition continues to rise. Teaching, not research, should be the primary function of faculty, though it must be understood that research is vital for improved instruction—in particular, careful academic study and writing that meet the scholarly demand of peer review. But with the legitimate critique of the existing situation, there also tends to be a disdain of theories and philosophies that Mises warned would lead to the spread of economic fallacies.

As classical liberals work to fulfill their mission in the coming years, they must take inspiration from the accomplishments of Mises, Hazlitt, and Read. If they too readily reject basic research and theory in favor of practical knowledge and superficial instruction, then Mises’ challenge will remain unmet.

  • Peter Boettke is a Professor of Economics and Philosophy at George Mason University and director of the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics at the Mercatus Center. He is a member of the FEE Faculty Network.