The Making of a Mess
Mises Review 7, No. 2 (Summer 2001)
THE MAKING OF MODERN ECONOMICS: THE LIVES AND IDEAS OF THE GREAT THINKERS
Mark Skousen
M.E. Sharpe, 2001; xv + 487 pgs.
Mark Skousen is not easy to satisfy. “In 1980,” he informs us, ” I asked Murray Rothbard to write an alternative to Robert Heilbroner’ s The Wordly Philosophers” (p. 9). Skousen wanted a popular history of economics, aimed to counter the statist bias of Heilbroner’ s widely circulated work. In response, Rothbard wrote one of the great works of twentieth-century scholarship, An Austrian Perspective on the History of Economic Thought.
One might think Skousen would be overjoyed. How many people have the opportunity to sponsor a masterpiece? But Skousen does not see things this way. Rothbard took fifteen years to complete two volumes; and these did not finish the job, since the second of the two volumes does not get beyond Marx. Further, although the book contains “stimulating” insights, Rothbard is grievously in error about Adam Smith. “It was a troubled finish for a man who held so much promise” (p. 383).2
He tells us with apparent satisfaction that he never paid Rothbard his full advance.
If Rothbard did not meet Skousen’ s exacting standards, only one course of action remained open. Skousen would have to do the job himself, and the result we have before us to examine. He offers us a simple story, told in an engaging way. Economics begins with Adam Smith, who realized the great scope for human progress that a market economy provides. Smith’ s pioneering analysis led other economists, e.g., Jean-Baptiste Say, to develop the case for freedom of exchange; and Skousen has a useful section on Say’s law of markets.
But soon a counter-tradition emerged. David Ricardo and Thomas Malthus viewed the economy as subject to rigid laws that doomed most people to a life barely above subsistence. Though the classical economists did not wish to replace capitalism with some other system, matters were far different with the deviant Ricardian, Karl Marx. As Marx saw matters, the growing impoverishment of workers would lead to the revolutionary overthrow of capitalism and its replacement by socialism.
The battle between Smithians, who saw the liberating power of the market, and their pessimistic opponents did not end with Marx. The marginalist school of Menger, Jevons, and Walras destroyed the main weapon of the pessimists, the labor theory of value. Under the new subjective theory of utility, one could readily show that workers are not exploited under capitalism. Ludwig von Mises and Friedrich von Hayek extended the case for the market by showing that the main rival system, socialism, must inevitably collapse into chaos.
But once more the struggle continued. The Darwinian analysis of Thorstein Veblen viewed the market with misgiving; Veblen hoped for a society guided scientifically by engineers and other technicians. His ideas did not win general acceptance among economists, but another critic of the market had much greater success. John Maynard Keynes’s General Theory (1936) convinced most of his contemporaries that an unhampered free market could not guarantee full employment. In the end, though, Skousen awards the honors to the optimists. Milton Friedman undermined from within the main tenets of Keynesianism.
Skousen tells his dramatic story with a notable flair for colorful facts. Readers will learn spicy details about the relationships of Hayek, Veblen, and Schumpeter with women. Was A.C. Pigou a Soviet agent? Why did Max Weber and Joseph Schumpeter engage in a fierce argument? Readers will no doubt find amusing the photograph of the author standing next to Jeremy Bentham’s preserved body.
Though the book reads well, I find myself compelled to issue a warning. The book is a disaster. Skousen has virtually no feel for history. He misunderstands important issues; and, like Disraeli’s wife, he cannot remember which came first, the Greeks or the Romans.
As already mentioned, Skousen does not agree with Rothbard’s criticisms of Adam Smith. Rothbard contended that, in many areas, Smith led economic analysis along the wrong path. To Skousen, ” [t]he story of modern economics began in 1776 [when The Wealth of Nations was published]” (p. 13). But Skousen himself, without noting how this damages his claim, takes over one of Rothbard’ s key points. ” The Spanish scholastics in the sixteenth century determined that the ’ just price’ was nothing other than the common market price, and they generally supported a laissez-faire philosophy” (p. 37). If this is true, why is Smith the founder of economics?
Admittedly, this is a matter of interpretation. The same cannot be said of a number of other assertions our author makes. Ever alert for the colorful detail, Mr. Skousen notes that Thomas Carlyle said of Adam Smith, “He was the most absent man I ever knew” (p. 32). I hope Skousen will not think me unduly critical if I question whether Thomas Carlyle said this. Smith died in 1790, and Carlyle was not born until 1795. Skousen provides both of these dates elsewhere in the book, but he does not notice the problem they create for his anecdote.
Perhaps Skousen can at least partially shift the blame for this error away from himself. He cites as his source a book by E.G. West, an eminent authority on Smith. But if one looks up the reference, one will find the remark attributed to ” Dr. Carlyle.” I suppose that for Skousen, one Carlyle is the same as another.
Skousen’s mistake is no isolated gaffe. He states: “In the eighteenth century . . . the English writer Thomas Hobbes rightly called the life of man ‘solitary, poor, nasty, brutish, and short’ ” (p. 13). Amazingly, Skousen thinks that Hobbes is describing life before the Industrial Revolution, rather than conditions in the state of nature. Did it ever occur to Skousen that Hobbes was a political theorist attempting to discern the conditions of political order, rather than an economic historian describing the state of the economy? And although he includes in brackets the correct date, 1651, of Leviathan, this does not prevent him from claiming that Hobbes wrote in the eighteenth century.
Matters do not improve when one reaches the nineteenth century. We learn that Malthus had to abandon his career as a clergyman when he decided to marry, because the Church of England “required celibacy” (p. 71). Of course it does not. William Temple, an archbishop of Canterbury, was the son of another occupant of that office. It is no doubt commendable of Skousen to take note of Ekelund and Hébert’s thesis that Jules Dupuit was a pioneer of modern microeconomics; but did it occur to him to take a second look at the dates he gives for Dupuit: 1842-1942? (p. 169). One must, though, give Skousen credit for discovering a hitherto unknown economist: one “Senior Nassau” (p. 24; also p. 24, n. 4). Elsewhere he refers, correctly, to Nassau Senior (p. 187). Both names have entries in the index.
Well, you may say, perhaps Skousen does not have a good eye for historical detail; but does he not explain the main economic theories with exemplary clarity? I am afraid not. He completely fails to grasp the central point of Marx’ s labor theory of value. As Skousen presents matters, “If indeed all value was the product of labor, then all profit obtained by capitalists and interest by landlords [don’t landlords collect rent?] must be ‘surplus value,’ unjustly extracted from the true earnings of the working class . . . capital was nothing more than ‘frozen’ labor and . . . consequently, wages should absorb the entire proceeds from production” (pp. 149-50).
Marx of course rejected capitalism, but his labor theory of value does not aim to show by itself that this system is unjust. Quite the contrary, Marx endeavored to answer the question of how, under capitalism, capital can earn interest. If, as the labor theory assumes, the value of goods is determined by the socially necessary labor time required to produce them, how is profit possible? I do not think it here the place to delve into the murky distinction between labor and labor power, by which Marx attempts to solve his problem; but of all this, Mr. Skousen seems unaware. Neither is it the case that under socialism, as Marx conceived it, all proceeds would go to the workers. Marx explicitly recognized the need for investment funds under socialism.
Further, where does Skousen derive the incredible contention that, for Marx, capitalism is a synthesis between slavery and feudalism? He also thinks that communism is a synthesis that results from the struggle between capitalism and socialism (p. 152).
It is admirable for Mr. Skousen to present the philosophical background of the various economic theories he considers, but he really ought to have acquired some elementary knowledge of the subject before passing on his wisdom to others. Bentham did not propose pleasure and pain as a substitute for good and evil in the battle of life, as Skousen appears to think (p. 120); he defined the good as what tends to produce pleasure. G.E. Moore did not preach “a disregard for morals and universal rules of conduct” (p. 325). In point of fact, Moore stressed the need strictly to observe general rules, because of the difficulty in calculating the consequences of particular actions.
Let us, finally, proceed to the economists of the twentieth century. Skousen thinks that Schumpeter, “one of Mises’s most illustrious students, rejected his teacher’s thesis [about socialist calculation]” (p. 415). In fact, the two were fellow students at the University of Vienna, and Schumpeter obtained wide recognition as an economist before Mises.
Our scholarly author has serious reservations about Mises. He claims: ”Mises’s adamant refusal to use empirical studies to make the case for the free market is one reason the Austrian school has floundered and been left behind in an era when empirical work and quantitative studies have advanced the cause of economics”(p. 314). He alleges that Rothbard differed on method with his teacher Mises, since ”he collected and interpreted a wide range of historical data to support the Austrian explanation of the Great Depression” (p. 314).
What nonsense! Of course Mises did not reject the use of historical accounts to illustrate economic laws. If Skousen will glance at Human Action, he will find penetrating remarks about the fall of the Roman Empire, the Industrial Revolution, and much else. Mises did think that the theorems of praxeology neither required nor admitted of historical proof; but this hardly constitutes a repudiation of history.
Oddly enough, after condemning Mises for his alleged neglect of history, Skousen says “there is method in Mises’s madness” (p. 314). He proceeds to give a quite serviceable account of Mises’s arguments against testing economic laws by controlled experiment. Can our author remember what he writes from one moment to another?
Skousen also criticizes Mises for “obstinate refusal to integrate himself into the modern economics community after World War II” (p. 302). He finds Rothbard guilty of the same offense: “he made the costly mistake of staying outside the discipline” (p. 382). Did it ever occur to Skousen that the mainstream of the economics profession excluded Austrian ideas from consideration in the years after World War II? Does he think that Mises and Rothbard regularly turned down chairs at Harvard, Princeton, and Yale? I withdraw these questions; to ask what Skousen thinks of anything is a futile task.
