From: Technotranscendence (neptune@mars.superlink.net)
Date: Fri Mar 20 1998 - 06:11:43 MST
All:
Thought this might be of interest.
Daniel Ust
---- This is the review that appeared in _Full Context_ three months ago, with a couple of small corrections. I'm given back the rights to the review after this period. BOOK REVIEW by Frank Forman George Reisman, Capitalism: A Treatise on Economics (Ottawa, IL: Jameson Books, 1996, 1045 pp., $95). Available from the publisher, Box 738, Ottawa, IL 61350, at a current discount of $69.95, plus $5 domestic postage or $10 international postage. Fax: (815) 434- 7907. Excerpts from all chapters and the entire first chapter can be viewed at www.capitalism.net. "Hire your pastor to read the first volume for you. But don't miss the second." Thus ends H.L. Mencken's celebrated review of Theodore Dreiser's An American Tragedy. The words apply to George Reisman's defence of laissez-faire capitalism, Capitalism: A Treatise on Economics, except that far more than the equivalent of one out of two volumes is superfluous to the book's real contribution, a new vision of the economy as a whole, with the producer put back into the central place, which led him to develop a new system of national income accounting. It is the stuff of a revolution in economics and a Nobel Prize for whoever carries it off. I recommend the huge double-columned book, however, only to someone who already knows a good deal of economics and who is ambitious about carrying forward Reisman's ideas. The book is in three major parts. The first part, "The Foundations of Economics," lays the ground work. Reisman defines economics as "the science that studies the production of wealth under a system of division of labor" (p. 15) and wealth as "material goods made by man" (p. 39) and discusses the nature of capitalism and freedom and the protection of rights by governments. This part further lays down basic ideas on the division of labor and the need for wealth and concludes with a discussion of the ecology movement. The second part, "The Division of Labor and Capitalism," discusses why an extensive division of labor is necessary for economic progress and why capitalism is the necessary institutional framework for having an extensive division of labor in the first place. He shows how a free-market economy solves the economic coordination problem and how socialism is impossible. The part goes into great detail how price controls backfire, with particular reference to the energy "crisis" of 1973. And it also argues why the alleged threat of private monopoly power is bogus. The third part, "The Process of Economic Progress," is the most original part and looks at the economy as a whole, with particular reference to the supply of money and the importance of having a precious-metal standard of money. Most of this part consists of refuting fallacies of other schools of economic thought, seemingly leaving laissez- faire capitalism as the remaining alternative, but a great deal of the part is given over to expounding the author's positive conception of the workings of the economy. The book concludes with an Epilogue, outlining a long-term strategy toward achieving laissez-faire society. First comes efforts to educate the public, only later will it become possible to eliminate regulation and, more slowly, subsidies and government jobs. Reisman envisions a government that spends about a tenth of what it does today. Capitalism and Objectivism Capitalism is being touted as an integration of economics and Ayn Rand's Objectivism. Had the book done this, it would have been an even greater achievement than the revolution the author has begun in putting the producer into central place in economics (about which more anon). To be sure, her ideas are discussed repeatedly in the book, but it does not deal with her most tantalizing idea having to do with economics, namely that of "philosophically objective value," as opposed to the market-determined "socially objective value, i.e., the sum of the individual judgments of all the men involved in trade at a given time."^ She notes that if a stenographer "spends all her money on cosmetics and has none left to pay for the use of a microscope (for a visit to the doctor) when she needs it, she learns a better method of budgeting her income; the free market serves as her teacher.... The only thing that a capitalist system requires of her is the thing that nature requires: rationality, i.e., that she live and act to the best of her own judgment." Ayn Rand speaks of the free market, "which teaches every participant to look for the objective best within the category of his own competence, and penalizes those who act on irrational considerations." ^["What Is the Capitalism?", reprinted in Capitalism: The Unknown Ideal] Reisman does speak of "imaginary goods," such as rabbit's feet and tarot cards, but all he says is that "the economic principles that apply to such goods, such as the laws of price determination, are the same as that apply to genuine goods" (p. 41). So if it is true that rabbit's feet do not lead to satisfaction of objective (in some sense) desires, then the demand for such feet will fall and so, very likely, their price. There has always been a tension in economics over the range of applicability of its supposed principles. On the one hand, economics presupposes conditions of peace and the absence of force and fraud. On the other hand, economists, including Reisman, regularly analyze the economic consequences of government intervention using the various principles that presuppose their absence. A second reading of Ludwig von Mises' Human Action left me overwhelmed with the sleights of hand he performed in this regard: for example, businessmen, through a mysterious process called "understanding" (Verstehen), can readily calculate the effects of technology-induced changes in the money supply but are totally miffed by government- induced inflation! Reisman, much to his credit, does not engage in this bit of hermeneutic, phenomenological metaphysics of Verstehen; still, an axiomatic treatment could bring out the precise range of economic principles. Now if this ambiguity of the range of economics is problematic, much more so will be the distinguishing of Ayn Rand's "philosophically objective value" from her market-determined "socially objective value." The philosophically objective value of an action is not something that can be directly read off; rather, its discovery requires rational thought and investigation, just as in the discovery of an improved production process. Both require effort, sometimes considerable. Whether this effort constitutes a kind of "cost," I am not prepared to say and am not sure how Reisman would treat this matter either, but clearly an integration of economics and Objectivism would require consideration of the notion of objectivity in consumption as well as production. By contrast, neo-classical economics by and large presupposes consumer rationality and has no concern at all with rationality of ends, except to dismiss it as forever beyond its purview. There is a large literature in economics about the costs of technological innovation, mostly consisting of trite statements about optimizing this or that; I suppose one could generate any number of trite, mathematics- filled papers on rationality in consumption. (It's hard, at times, to blame Reisman and other Austrians for their disdain for mathematics, but they vastly overdo it.) The larger problem of just what rational desires are would remain after all these papers were generated, and I am afraid that Objectivists have not gone beyond stating that all desires, if they are rational, need to conform to human nature and need to promote virtue and character development. (This second need has been articulated only poorly so far.) It may be high foolishness to suppose that Objectivism ought to be more than a well-organized body of abstract principles and produce algorithms to enable one to make specific consumption strategies or career choices. Still, I would not arbitrarily demarcate philosophy from the rest of human inquiry as an excuse for intellectual laziness. Let me urge any scholar willing to tackle the problem of objective ends to read David Schmidtz's Rational Choice and Moral Agency (Princeton University Press, 1995). Schmidtz argues that we choose not just means to ends but what he calls "maieutic" ends, which are ends to find final ends (ends in themselves) to live for as well. Thus, I want a career and a wife to devote myself to. The important thing is not to dally too long in picking the best career and the best wife but to get on with it and let these ends grow from being means to the satisfaction of my desires to being ends in themselves around which my desires are organized. This echoes Francisco d'Anconia's statement that the worst man was one without a purpose. These larger questions about final ends are general ones for Objectivists, whereas Reisman says, "I define economics as the science that studies the production of wealth under a system of division of labor" (p. 15). But the issues of career choice and rationality of consumption ends are relevant to economics proper. Will a rational consumer merely purchase what strikes his fancy, or will his purchases partake of purposefulness every bit as much as his career? Unfortunately, I have never seen Ayn Rand's article on why she collected stamps and therefore in what sense she found her collecting to be rationally purposeful. I urge that the article be made widely available. David Hume, characterized by Miss Rand as "the Bertrand Russell of his day" (in contrast to the heavyweight Immanuel Kant), was nevertheless wise when he spoke of man's need for work, rest, and relaxation. Recall that the residents of Galt's Gulch did a certain amount of high-minded relaxing (going to concerts and ballets, listening to lectures), but it did not take the form of goofing off. I suggest that the "science of the production of wealth" will discover that purposeful relaxation redounds to this production of wealth, while goofing off to some extent may reduce it. Reisman's Signal Achievement Enough complaints about what the book did not do and on to its achievements. What is revolutionary in his actual accomplishment is his way of keeping his focus on all the activity of the economy rather than just upon the consumer goods that come out at the end of the process. Sales between businesses for raw and intermediate products are several times the size of the end products, and consideration of the whole keeps the producer in central place rather than at the margins, whereas too many economists take production as a given, to be distributed by "society" (political pressure groups or "the aristocracy of pull"). Reisman develops a new method of national income accounting on, as he calls it, "an Aristotelian base" as opposed to the "Platonic-Heraclitean" view implicitly held by other economists. Paraphrasing one of Ayn Rand's favorite sayings (which goes back only to the Middle Ages, not to Aristotle, by the way), he tells us that "the demand for A is the demand for A," whence it is improper to lump flour, wheat, and labor services into the final product (bread) and count the last only when measuring the Gross National Product. Instead, he adds sales of these intermediate and final products up, adds in wages, and calls the sum Gross National Revenue. He takes the reader through a great many exercises to show how his new accounting methods work. His accounts somewhat resemble the input-output tables of Wassily Leontief (Nobel Prize, 1973) and the earlier Tableau conomique (1st ed., 1758) of the French Physiocrat Fran‡ois Quesnay, but Reisman shares not at all their itch to engage in social planning. Reisman is, of course, a laissez-faire capitalist. The upshot of his analysis is several remarkable and counterintuitive conclusions (though not as counterintuitive as those of Keynes' "multiplier"!). Three of the most important are that all this spending in the Gross National Revenue accounts depends on how much money there is, not upon how productive the economic system is. And profits, as well as interest rates, are determined, not by productivity, but by the proportion of investment to consumption, which is ultimately tied to the (time) preference for present goods to future goods. Time horizons broaden as men are more rational and property is secure. In such a case, the rate of profit and interest is low, under three percent per year during large stretches of the nineteenth century. Third, he puts to rest the Marxist notion that profits necessarily decline over time. This last is so at variance with the facts that its continued propagation is a real puzzle, but it has been supported by (I learned from Reisman) a very large number of bad but influential arguments. Reisman's Other Achievements Much of the book--too much--is given over to refuting bad arguments rather than constructing something positive. But the refutation of Marx's still highly- influential theory of exploitation by capitalists is original. To show this, Reisman goes back to fundamental concepts, something that Ayn Rand endlessly encouraged: profits are just revenues minus the costs^ of the things produced, and wages are monies paid in exchange for the performance of labor not for the products of labor. A businessman is, therefore, not a wage earner, even if some economists "impute" a wage to him that he supposedly pays himself. This means that farmers, artisans, and everyone who did productive work were all businessmen and earned profits (selling their products for more than they paid for the raw materials), until the first capitalist employed a laborer for hire. (Strikingly and long before Reisman, the great German sociologist, Max Weber, demarcated capitalism by the free mobility of labor--that is, by how the capital was used--not by trade or the free mobility of money itself, both of which are quite old.) The upshot is that there is no "exploitation" here but instead the benevolent (one of Reisman's favorite words and more apt than "beneficial") offering of opportunities to sell one's labor rather than its products. ^[Costs are just outlays here, not so- called opportunity costs, a notion Reisman makes mince meat of. This is another side accomplishment of his book.] There are other refutations aplenty, from Keynesianism (focuses almost entirely on the consumer), alleged free-market monopoly (even so, buyers would shift to long-term contracts), wage and price controls (not even politicians believe in this anymore), the oil "crisis" (also a dead issue), and environmentalism (at least the zanier aspects), to various ideas held by earlier economists, esp. those of Smith, Ricardo, and Mill, from which Reisman extracts the best and makes it his own. Indeed, some of his criticisms of other economists, whole schools of them even, are so strong that I am not sure what is left standing. Neo-classical economics (what I had in graduate school) comes in for especial criticism, but I did not learn from Capitalism whether there is any merit to those handy supply-and-demand diagrams and less-handy indifference curves, and, if so, how they can be deployed legitimately. Just what are the fundamental concepts and assumptions of neo-classical economics anyhow? I've seen certain mathematical treatments, but these are never connected to the world via semantic assumptions (correspondence rules) in any rigorous fashion, as Mario Bunge insists in his monumental Treatise on Basic Philosophy that they should be. Some Criticisms I can get a little suspicious about some of Reisman's own conclusions, too, for his own lack of rigor. The numerical examples he takes the readers through may work only because he has unintendedly built in assumptions that make them work. (He often gives algebraic formulae, but they are not placed in an axiomatic format and hence need to be rigorously checked. Hint to future scholars: back-calculate the underlying production functions.) Economics, after all, is an empirical science, and any science must connect up to the world at multiple places and not just to contrived examples and to the broad historical generalizations Reisman offers. A genuine science must also lay out its assumptions in the best possible fashion using the axiomatic method, and a genuine scientist must keep up to date with the literature. (See, esp., Mario Bunge, "The Axiomatic Format" and "Examples and Advantages of Axiomatics," chapters 7 and 8 in Mario Bunge, Philosophy of Physics (Dordrecht, Holland: D. Reidel, 1973). These chapters deal with science generally, not just physics.) Furthermore, the economic realm is continuous, while our concepts are discrete. So it is not good enough to just decree what gets counted in the money supply and what is merely "near money," as Reisman does on page 540. But on pages 995-6, he recognizes that different definitions of money can differ in explanatory power. Yet he rather often speaks disparagingly of "so-called empirical research" that might test for just this explanatory power and seems wholly unaware that there are several formulae for constructing weighted averages, the merits of which make up a large sub-literature in economics journals. Ayn Rand's notion of a true definition (foreshadowed by the great Charles Peirce) as capturing those characteristics of the thing defined that maximize (scientific) explanatory power is well-recognized by Reisman. But just to proffer definitions is not enough: one must demonstrate that the purported definition indeed has this property of maximizing explanatory power. As it happens, concept refinement is every bit as important to science as the usual undertakings of induction and deduction. Forming concepts takes hard work and whenever a purported definition departs from the true one even slightly, our sciences stray farther and farther away from reality at a geometric rate as we merrily proceed link by link down long deductive chains. Who Should Read the Book? Again, a reviewer should not complain too much about a book's omissions. (I peppered my copy of the book with enough critical remarks to give anyone seeing them a severe to fatal sneezing fit.) In the end, it's the achievements that count. The refutations are generally very fine, but far more important is the book's tremendous potential, a Nobel Prize even, for a scholar who wants to develop the positive ideas on revamping the national income accounts and, effectively, redoing macro-economics from the ground up. As for integrating economics and Objectivism, it's Objectivism that needs to be better developed, especially in the realm of psychology. I recommend the book urgently to any Objectivist pursuing a career as an academic economist or considering it and who is willing to sweat through the book (not just read it as I did), willing to dig out the essential arguments and put them on a firm mathematical and axiomatic basis, and above all willing to argue, argue, and argue with his peers in the economics profession. He'll have to keep up to date and fill in on all the developments in the field since Reisman completed his dissertation in 1963, developments in the economic analysis of politics (Public Choice theory), the economic analysis of law, and new learning about how businessmen counteract the effects of regulation (Rational Expectations).^ Above all, he who would develop Reisman's ideas cannot be like Reisman himself, who would say that Joan Robinson and Michael Kalecki "are advocates of socialism, while I, of course, am an advocate of laissez-faire capitalism. Because of this I could never conceive of cooperating with them in any manner, and thus I never attempted to contact Mrs. Robinson" (p. 803). Alas such dismissiveness only becomes exaggerated in those who associate themselves with the Ayn Rand Institute, as Reisman himself once did. ^[Regards Rational Expectations, see J.W. Henry Watson and Ida Walters, "The New Economics and the Death of Central Banking," Liberty 10.6 (1997 July): 19-26, for a fine summary.] For any other reader, I cannot so strongly recommend the book. This is not for what it does accomplish, nor for what it refutes, nor for the picture it gives of how the economy works, nor for the wit that pops up frequently, but because it is too long and reading it comes at the "cost" of not reading a dozen shorter books. Mencken, Dreiser's greatest defender, in his generally laudatory review, nevertheless called Dreiser's novel "this present shapeless and forbidding monster--a heaping carload of raw materials for a novel, with rubbish of all sorts intermixed--a vast, sloppy, chaotic thing of 385,000 words--at least 250,000 of them unnecessary," but in the context of overall high praise. I am compelled to say something not entirely dissimilar of George Reisman's Capitalism: it is the stuff of a revolution, but.... Alas, a very great deal of it is written at the level of high school students (as is so much of the material put out by the Ayn Rand Institute), yet other parts presuppose an advanced knowledge of the history of economics thought and the technicalities of both micro- and macroeconomics as taught in graduate schools. Indeed, it is hard to discern the target audience for the book, since the doctrines of the neoclassical orthodoxy are only referred to and not spelt out the way a less than advanced reader would need. I cannot help but think that Reisman might have carried out his own revolution had he not wasted so many years being involved in said Institute, which in the end did him no good, since he was purged himself. It would be better for most prospective readers to first read a dozen other books on economics and before tackling Reisman's mammoth work. I am not the best to recommend current books to learn economics, since I have actually read very few of those now in print and sold, say, by Laissez Faire Books. Go through a text in price theory and actually do the homework. Beyond that, aim for as broad an understanding of the economist's way of thinking as you can. Economics is not all that intuitive, since our hunting past seems to have instilled in us the general perspective of command economies--not so far from the truth when getting on with the work by following orders was not much better or worse than innovating from a very small knowledge base. (I hasten to add that command economies became obsolete, surely by the time of agriculture, if not already by the time that hunting bands coalesced into tribes.) Thinking like an economist, in other words, requires disciplined study. The first book I ever read on economics, Henry Hazlitt's Economics in One Lesson, remains an excellent first choice. I can commend any book by Gordon Tullock and urge you later on to read Richard Posner's Economic Analysis of Law, not to further enlighten you but to show you how disciplined thinking can lead to "educated incapacity": to me, this book is a bad caricature of the economist's mind-set! Definitely include James M. Buchanan's What Should Economists Do? In my own specialty within economics, Public Choice theory (the application of economics to group decisions), I'd include the first two classics, Anthony Downs, An Economic Theory of Democracy, and Buchanan and Tullock's The Calculus of Consent. Follow them with Buchanan's magnum opus, The Limits of Liberty. Try some books that inspire, such as Burton W. Folsom, Jr., The Myth of the Robber Barons (in print) and John Chamberlain, The Enterprising Americans (out of print). I do not have to recommend Ayn Rand's Capitalism: The Unknown Ideal, to the readers here. Finally, you should probably have the classics of Smith, Ricardo, and Mill under your belt before you tackle Reisman. I am sorry to render the verdict that readers not start their study of economics with Reisman's book, but if the right reader already knowledgeable of the field can be found, the enormous effort put into Capitalism by the author will have been more than rewarded. And so will the economics profession and the world. Mencken on Dreiser again: "It takes a kind of skill that is surely not common. Good writing is far easier." Original thinking in economics is also far easier than good writing. Reisman's book contains a great many original thoughts but is badly overwritten in most places and underwritten where it matters most. It takes someone with a fair amount of knowledge to grasp what may or may not be original and merits further development. Get the knowledge needed to fully profit from Reisman's book first; then, if you are ambitious, get Reisman. ---------- Frank Forman went to graduate school in economics at the University of Virginia during 1966-9 and studied under James M. Buchanan and Gordon Tullock. He wrote his dissertation under Buchanan at George Mason University (Ph.D., 1985) and expanded it into The Metaphysics of Liberty (Dordrecht, Holland: Kluwer Academic, 1989). He has published articles and reviews in Association for Recorded Sound Collections Journal, Constitution Political Econmy, Menckeniana, Public Choice, and Vera Lex. Submitted to Full Context, 1997 October 7 version 4 ---END
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