There is a rumor afloat that the economics profession has finally been “won over” to a free market view of the world. After all, the University of Chicago has dominated the list of Nobel Prize winners in economics, and we all know that Chicago is a free-market department. Elsewhere, I have been told, the other “prestigious” economics programs have become market-oriented in their outlook. Socialism and violent interventionism have seen their day.
If the complimentary economics textbooks that cross my desk are a bellwether, however, it is not yet time for those of us who champion free markets and private property to break out the champagne. Yes, a few of them will actually mention that entrepreneurs have an important role in the economy (even if they don’t quite get it right), and there are a few other platitudes to the role of markets.
There is almost nothing to the strategic importance of private property, and forget anything that smacks of Austrian Capital Theory and the Austrian Business Cycle Theory. On the other hand, we see the usual mention of antitrust law as a vehicle to “protect competition.” In short, if the textbooks are an indication of where the economics profession is today, these folks still don’t “get it.”
I would like briefly to deconstruct a text I have been required to use for another class in which I serve as an adjunct professor. Bradley R. Schiller, a professor at American University in Washington, D.C., has written a popular text that he says that he hopes will help “bring some of this excitement (the collapse of socialism) into the classroom.” After reading it, I have concluded that if Schiller’s analysis is true, then there is no good reason why socialism collapsed when, in fact, it should have been thriving.
While Schiller gives lip service to the role of prices in the market, it does not take long for him to point out that market mechanisms often result in failure. Why failure, according to the author? In his view, “The goal of every society is to attain the best possible (optimal) economic outcomes – the most desirable mix of output, the most efficient production methods, and a fair distribution of income. As we have seen, market signals are capable of answering all these basic questions. But the answers may not be the best possible ones.” (Italics his)
We can see the problem immediately. In the Austrian view, society does not have goals; individuals have goals and use means to attain them. However, in Schiller’s view, society has goals and when the market does not give us “optimal” outcomes, the government must step in and fix things.
Just what is this “most desirable mix” that society seeks? Schiller does not seek to give us an answer. Apparently, everyone already knows the solution, but those money-grubbing capitalists just won’t do what society wants them to do.
He gives us a hint in Chapter Four, however, as he leads off with a quote by the Marxist Robert Heilbroner: “The market has a keen ear for private wants, but a deaf ear for public needs.” Later in the chapter, Schiller again gives us the Heilbroner quote, as though the man were speaking ex cathedra.
When I was a college senior in 1975, I read Heilbroner’s An Inquiry into the Human Prospect in which he gave us all of the usual Malthusian rants and called for worldwide dictatorship to head off disaster. In that book, he emphasized his point that free markets will simply lead us down the wrong path, but a wise dictatorship that consisted of all-knowing leaders would keep those capitalists from killing all of us with their greed.
Heilbroner’s predictions--like most of the other things he has written on economics--were exactly 180 degrees from the truth. That an author would quote Heilbroner as an economic authority (and not instantly lose credibility with the rest of his peers) tells us more about Schiller and the state of the economics profession than it does about some imaginary optimal mix of “private wants” and “public needs.”
The irony is that while Schiller devotes a chapter on the failures of the socialist economies of the USSR, China, Cuba, and Eastern Europe, he never gets it right. In fact, his entire point is illogical. If, as he alleges, government can always step in and “fix” a market failure, then why in the world do we need a market at all? Since the definition of “market failure” by the economics profession simply means that a producer faces a downward-sloping demand curve (thus, owning “market power”), it would stand to reason that almost all markets are enmeshed in “failure” and need the guiding hand of the state.
One would think that Schiller cannot display any more ignorance, but, as they say on the late night advertisements, “Wait! There’s more!” I now look at how Schiller treats Classical Economics in general and Say’s Law in particular. Not only does the man prove to be incompetent when it comes to speaking about “market failure,” he also proves that he needs to sit in a classroom and retake his course on History of Economic Thought.
Schiller begins by declaring that prior to the 1930s, “macro economists thought there could never be a Great Depression.” He goes on to say that Classical theory denied the possibility of lengthy periods of unemployment and unsold inventories. Say’s Law was simply the economists’ version of “Field of Dreams”: If you produce it, you will sell it.
That a man with a Ph.D. in economics would make such a statement in the face of historical facts is breathtaking. First, by 1930, Classical Economics was dead, having been laid to rest by Neoclassical Economists such as Carl Menger, William Stanley Jevons, and (to a lesser degree) Alfred Marshall. David Ricardo and John Stuart Mill’s writings, especially when it came to understanding the nature of value, had already been bypassed. As for Say’s Law, J.B. Say himself, in writing his famous Chapter XV (Book I) in his Treatise on Political Economy, began by describing conditions of what today we would call a recession.
In other words, the “Classical” economists and their successors had all lived through various downsides of the business cycle. To say that they denied the possibility of economic depression after having lived through a number of them is ludicrous.
Furthermore, the Great Depression actually vindicated much of the theory known as Classical Economics. Their point was that in the absence of constraints on wages and prices, the economy would ultimately find a balance. As Murray N. Rothbard has so eloquently shown us in his classic America’s Great Depression, the U.S. Government under Herbert Hoover did everything in its power to prevent wage and price flexibility.
All of this is lost on Schiller, who simply apes John Maynard Keynes and his unfortunate “classic” The General Theory on Employment, Interest, and Money. What he gives us is not an explanation of economic theory, but rather a hodgepodge of myths, fallacies, and ex cathedra statements trying to pass as economics.
Perhaps my optimistic colleagues are correct in saying that economists are moving more and more toward free markets. Maybe Schiller is an aberration, not the rule.
Maybe so, but I must admit that what I read in his text is still found in one form or another in other texts that have come my way. Yes, there are some good books out there, but if Schiller represents the mainstream, then the economics profession has a long way to go before it manages to give a believable answer to how the world really works.
