Austrian Economics Newsletter Spring 1992

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AustrianEconomics Newsletter

Ronald Coase Award ed Nobe l P r i ze

Ronald H . C oa se was awarded the 1991Nobe l Prize in economics for hi s role as one

of the principal founders of the modern study oflaw and economics . He is bes t known fo r the"Coase Theorem" the proposition that resourceswill be efficienctly allocated through voluntaryagreement even in the presence of externalitiessuch as pollution, if property r ights are def inedand for pioneering the economic analysis of the internal working of the firm.

Coase has made pathbreaking contributions tothe theory of organizations, the theory of cost,property rights, public goods, externalities, economic method, as well as important works on theorigins of monopoly. His work promotes the expansion of ou r understanding of the market processwhile eschewing mathematical techniques. A proponent of the importance of ideas, Coase showed thatpersonal freedoms (speech, religion, press) wereparallel with economic freedoms.

The Bri t i sh-born economist was educa ted at th eLondon Schoolof Economics where he was heavily influenced byArnold Plant and F. A. Hayek. The worksof this fellow traveler of th e Austrian school, while few,

have had a tremendous impact on mainstreameconomists, and in particular a beneficial impact onthe Chicago school. As one observer noted: "I t isone of the few times the Prize has been given to aneconomi st for advancing economic theory!" Co a se 's No b e l Pr ize

by Roy E. CordatoShould Aus tr i an e conomis t s c e leb ra t e on the oc

casion o f Ronald Co as e' s N o be l Prize? Yes weshould, bu t cautiously. First some background.

In 1960 Ronald Coase published an article thatrevolutionized the way a large segment of the economics profession has come to think about externality problems. In "The Problem of Social Cost," Coaseargued that the Pigouvian approach to assessing suchissues was wrong and that it implied policy prescriptions that could lead to less than optimal results.Coase took issue with Pigou's focus on the divergencebetween private and socialcosts that externalities generate. Ultimately, Coase argued, from the perspective

B U LL ET IN B OA R D

An Aus tr ian economics weekend, March 27 -29at the University of Nevada, Las Vegas.A conference on th e Federa l Reserve a tJeykll Island, Georgia, May 8-10.1992Mises University, July 4-11, at StanfordUniversity.Mises Institute 10th anniversary celebrationOctober 9-11 in New York City.$1,000 Ludwig von Mises Paper Awards (seeback page).Fo r mo re i nf or m a ti on c on ta ct th e M i se s I ns ti tu te , Auburn University, Auburn, Alabama 36849-5301; (205) 844-2500; fax (205)844 - 2 583 .


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of social welfare, private costs are unimportant andthat the issue of externalities is entirely aproblem ofsocial cost.

This led Coase to ask different kinds of questionsthan had typically been asked when assessing problems associated with negative externalities.Pigouvians had focussed on trying to transformsocial costs into private costs. This led to the conclusion tha t the costs o f external i t ies should be internalized by those who are generating them,specifically through excise taxes or , with respectto legal remedies, by holding the generator of theexternality l iable for all damages. Coase's strictemphasi s on soc ia l cost led him to recast the nature of the problem. He argued tha t "what has

AustrianEconomics News le t te r

Volume 13 , Number 2CONTRIBUTORS TO THIS I SSUERoy E. Cordato is an economist with th e Institute fo r Research on the Economics of Taxation in Washington, D.C.Roger W. Garrison is an associate professor of economicsat Auburn University.Hans-Hermann Hoppe is professor of economics at th eUniversity of Nevada, Las Vegas.Peter G. Klein is a Mises fellow an d graduate student ineconomics a t t he University of California, Berkeley.F r a nk Mixon is a Ph.D. cand ida t e in economics a t AuburnUniversity.STAFFEditor: Mark Thornton/Auburn UniversityAssociate Editor: Jeffrey A.Tucker/GeorgeMason UniversityAssistant Editor: Peter G. Klein/UniversityofCalifornia, BerkeleyManaging Editor: Judith F. ThommesenCORRESPONDENTSAmy Marie MarshaW/University ofNotre DameAlexander Tabarrok/(7eorgeMason UniversityP E RM IS S IO N S AND S UBM I SS IO N SChange of address requests and subscript ion reques tsshould be addre ss ed to Austrian Economics Newsletter,Mises Institute, Auburn University, Auburn, AL36849-5301.Questions pertaining to submissions of articles and bookreviews s h ou ld b e addressed to Mark Thornton , AustrianEconomics Newsletter, Economics Department , AuburnUniversity, Auburn, AL36849-5242.Articles that ar e submitted should be double-spaced andno more than 6 pages in length. Articles that ar e acceptedwill be requested on an IBM format diskette, when possib le . The r e is no s ubmi s s i on fee.Permission to reprint articles is hereby granted providedfull credit and address ar e given.Copyright 1992 The Ludwigvon Mises Institute, Auburn University,Auburn, AL36849-5301; (205) 844-2500; fax (205) 844-2583.

to be decided is whether the gain from preventing the harm is greater th an the loss which wouldbe suf fe red e lsewhere as a re su l t o f th e h arm "(p. 27). The ultimate social welfare goal, inCoase's framework, is to maximize the socialvalue of output (p. 16). From this perspective,then, it is clear that internalizing the harm mayor may no t result in optimality.

Coase's emphasis on minimizing social costs ledhim, and those who have adopted his method, to consider how alternative institutional arrangements, thatis, property rights, affect the efficiency of market outcomes. Viewing negative externalities as primarily aproblem of conflicting property rights, Coase arguedthat what must be determined is "the arrangement ofright [that] may bring about a greater value of production than any other" (p. 16).

Th e f ir st c a se con s ide r ed r e su l te d in wh a t hascome to be ca l led t he " C o as e t he o rem ." H e r e Coaseassesses the property r ights confl ict in a world ofzero transaction costs. In this case, the optimal arrangement of property rights comes about strictlyas the result of a voluntary bargaining process. Inthe second case, high transaction costs block the efficient outcome and it is suggested that a th irdparty, most likely a judge, should intercede to impose the optimal solution.

Certainly, from an Austrian perspective, thereis much to criticize in Coase's analysis.1 In both thezero and positive transaction costs cases, Coase assumes that all prices are general equilibrium prices(pp. 6, 32) , which allows him to ignore the problems that are posed by subjective value theory. ForAustrians, the entire concept of "social cost" is vacuous (see Littlechild 1978). Furthermore, whileCoase essentially argues that property rights arethe most important variable when it comes to assessing externality problems, Austrians have always argued that property rights must be taken as a given.

In spite of these differences and the somet imes bi t t e r deba t e s t h a t have en su ed as a r e su l tof them, Aust rian economists should be rejoicingover Coase's Nobel Prize. Coase's approach to externalities has opened the door for Austrian ideason this issue. Beginning with Menger, Austrianshave always seen externality problems in terms ofconflicts in the use of property, (see Cordato 1992,chap. 1). But since Pigou, property rights havebeen ignored by mainstream economists. Coase, invoking the methods of neoclassical economics,successfully shifted the focus and was able toplace the issue of property r ights at the center ofthe debate. This has bridged an important gapfo r Aus t r i a n economis t s .


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While the differences in method and approachto public policy that separate Coaseans and Austrians should not be ignored, neither should an important and basic similarity, namely that both seeex te rna l i t i e s in t e rms o f conf l ic t s ove r th e use o fproperty. By bringing this focus to mainstream debates about externality problems, particularly inthe areas o f env i r onmen t a l econom ic s an d la w andeconomics, Coase has provided a significant positive externality for Austrian ideas on these issues.His Nobel Prize only enhances these benefits.

Fo r an extensive discussion of Coasean analysis from anAust ri an per sp ec ti ve see Corda to (1992), Chap. 5. Se e alsoBoettke (1989) and Cordato (1989).

Se e th e collection of papers by Rizzo, Rothbard, Egger, andDemsetz, in Rizzo (1979).

Re fe r en c e sBoettke, Peter. 1989. "Comment on Joseph Farrell, 'Informa

tion and th e Coase Theorem.'" Journal ofEconomic Perspectives.Vol. 3, No. 2.Coa se , R on al d. 1 96 0. "Th e P ro bl em of Soci al Cos t. " The

Journal ofLaw and Economics. Vol. 3.Cordato, Roy E. 1989. "Subject ive Value, Time Passage, an d

the Economics ofHarm fu l Effects ." The Hamline Law Review. Vol.12 , No . 2.

. 1992. Efficiency and Externalities in an Open EndedUniverse: A Modern Austr ian Alternat ive . London a nd Bos t on :Kluwer Ac ad em i c Pub l i s he r s .

Littlechild, Stephen C. 1978. "The Problem of Social Cost,"in Spadaro, ed., New Directions in Austrian Economics. KansasCity: Sheed, Andrews, and McMeel.Rizzo, Mario, ed. 1980. Time, Uncertainty, andDisequilibriwn. Lexington, Mass: Lexington Books.

Rona l d Coase an d th eLighthouse

by Frank MixonThe classical economis t s

argued for government control of lighthousesfor var ious reasons . AdamSmi th advoca ted a toll forlighthouse users, but a toll col lec ted by the publicauthorities, since private individuals would neglectthe r epai r of the lighthouse. John Stuart Mill believed that government should build and maintainlighthouses because it would be impossible to secure a toll from the ships that benefitthe classicfree-rider argument. For this reason he felt no private individual would construct a lighthouse.

Henry Sidgwick stated that the benefits of awell-placed lighthouse would be enjoyed largely by

ships on which no toll could be conveniently imposed. In cases where owners are able to collecttolls (e.g., roads and canals), Sidgwick argued thatthe tolls tend to be excessive, while condit ions areoften neglected. He fashioned a case for local taxation to provide for lighthouses since their beams offered local benefits. If th e benefits of the lighthousewere dispersed nationally, then general taxationshould be used to finance lighthouses.A. C. Pigou pointed out that in the case of thelighthouse, the marginal private net product fallsshort of the marginal social net product, becausethe beam performs services to third parties (thedreaded free-riders), from whom it is technicallydifficult to exact payment. Since lighthouse tollsare impossible, then, private resources will fail tofind their optimal uses. This classical view wouldordain lighthouses as the "classic" example of apublic good in textbooks of the future.

Then in 1974, Ronald Coase pointed out thatthe private production of lighthouses was no t animpossibility it was an historical fact.1 Pie presentedevidence from England that lighthouses were constructed privately (and ru n profitably) beginning in1614, when Trinity House, the governmental lighthouse agency, failed to answer a petition for a lighthouse along the rocks of Eddystone. The history ofBritish lighthouses points out the merits of privateproduction. In 1816, 34 of the 46 lights wereunder private ownership. Coase also showed thatprivate producers typically maintained the qualityof service, and offered generous pensions to l ighthouse keepers and even educational assistance fortheir children. Coase's findings were not an isolated accident, as I will attempt to show by us ingfacts from American history.

The history of lighthouses in the United Statesis much like that of England. In 1791, the U.S. government , with Alexander Hami l ton as the Secretary of the Treasury, signed a bill that assumedcontrol of all American lighthouses. This bill alsoceded title of all private lighthouses to the government, with Hamilton appointing a superintendentof lighthouses to each state. But th e facts show aninconsistency in the enforcement of this law, sincesome lighthouses after 1791 seem to have beenmaintained privately.

America's first lighthouse, Boston Light, waserected under the supervision ofJohn George, amerchant, along with many of his associates in Boston. The lighthouse was bui lt on Beacon Island,and any ship using the harbor was required to paythe receiver of impost a duty of one penny per tongoing in or out of Boston Harbor. This was the first


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light erected in the Western Hemisphere, and itsconstruction and maintenance were entirely private.New Hampshire's first light was PortsmouthLight, which was erected in 1771 on Newcastle Island. This beacon was not in fact a lighthouse, buta lantern that was hoisted to the top of a flagpole.

The cost of raising and lowering the lantern waspaid for by the ships that benefited from the"gleam of the lantern" in the harbor. The identityof the private individual who maintained the lightand received the tolls remains a mystery today, buti t is said t ha t h e d ir ec te d an o x te am tha t del iveredgun powder to Americans at Bunker Hill.

The inhab i tan t s o f Nan tucke t r ec ei ve d u s e o f alighthouse for their harbor in 1746. Several sea captains of the island came to the old New Englandtown meeting on January 24, 1746, and pressed forconstruction of a lighthouse. Ebenezer Calet, ObedHussey, and Jabez Bunker agreed to build a lightand sell it to several citizens o f Nantucke t f or 200.When the l ight was completed, another town meeting was held stating that "the owners" and "othersconcerned" would maintain the light. The lighthouse owners made it c lear to ship owners that thelighthouse was their own maritime responsibility.The ship owners performed their tasks well, andthe Brant Point Light gleamed every night. Thework the ship owners shared in maintaining thelight was their "toll" for its services.

To accommodate the complaints of some shipcaptains, the owners of the lighthouse set up a system of collecting dues from all ships using the harbor. The system required any vessel ove r 15 tons topay a charge of six shillings the first time each yearit entered or left Nantucket Harbor. An inspectorcollected the tolls for maintenance o f Bran t PointLight. This shows that shippers and ship ownerswere willing to pay a toll for lighthouse service, indeed; the system of monetary payment was preferred over the system of payment-in-kind.

For many years several residents of Martha'sVineyard maintained a private lighthouse at EastChop. The lighthouse was maintained by "subscript i ons" f r om t he o w ne rs o f s e v er a l s t e am e r s t ha tsailed in the vicinity. The light was maintaineduntil 1875, when the government purchased thesight and lighthouse for $5,000.

The lighthouse may be a "public good," bu t itneed not be built , maintained by, or financed by thetaxpayer. Evidence from U. S. history supportsCoase's contention that the "public good characteristics" of the lighdiouse need not make it a public enterprise. Indeed, die historical record implies that

private production may result in better lighthouseservices. Private producers responded to "petitions" when the government failed to produce lighthouses and to the complaints of their customers.The evidence examined suggests that the privatesector produced lighthouses in a cost-effective manner, and contrary to economists such as HenrySidgwick, maintained the lighthouses efficiently.

The importance of Coase's classic article goesfar beyond the gleam from the private lighthouse.Coase ruffled the heavy veil of ignorance facingmainstream economists regarding public goods theory. No longer is the public production of "publicgoods" left unchallenged. The long list of widely accepted public goods has shrunk, so that the publicprovision of public goods has come more to represent a last resort, and the privatization of public enterprises has become the wave of th e future.Franklin G. Mixon.Jr., "Essays on die Economics of Prop

erty Rights: Lighthouses and Alligators," unpubl. Master's Thesis, Auburn University, 1990.'RonaldH. Coase, "The Lighthouse in Economics," Journal ofLawandEcorwmics 17, no. 2 (October 1974): 357-76.

l l l lFIRMl l l lMARKETand Tin :LAWR.H. Coase

The Firm, the Market,and the LawR. H. CoaseUniversity of Chicago Press, 1988

Re v i e w e d b y Peter G. Kleino r an econom i s t whowrote relatively little,

Rona l d Coase ' s in f luencehas been enormous. Still, his receipt of the 1991Nobel Prize in economics is a strange and wonderful thing, though Coase has been a favorite "darkhorse" candidate for several years. What's remarkable is how far Coase is from the stereotype of themodern academic economist. His long-time appointment at the University ofChicago is with theschool of law; he reasons like a lawyer, producinglong essays of simple argument, careful documentation, and proof by example rather than torturedmathematics; and his reputation among economistsis based almost entirely on two journal articles, onemore than 50 years old and the other so long thatfew people have read it all the way through.

In 1988 the University of Chicago Press issueda collection of Coase's papers as "The Firm, theMarket, and the Law." Included are the tw o famous ones"The Nature of th e Firm" (1937) and

F


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"The Problem of Social Cost" (1960)along withthe well-known pieces on marginal cost and thelighthouse, a 1972 survey of the field of industrialorganization, and two new essays, "Notes on theProblem of Social Cost" and a lengthy introduction.It is a good representation of Coase's style andthought, and a useful tool for understanding twomajor forces in contemporary economics: the lawand economics movement, and what ha s come tobe known as t he "New In st it u ti o na l Economics."

Coase did not originate the economic analysis oflaw, which developed into a systematic progi-amunder Aaron Director at Chicago in die 1940s and1950s,but his paper on social cost that produced the"Coase theorem" is th e best -known ach ievemen t oflaw and economics . Coase 's main con ten t iontha t aslong as property rights are welldefined, external effects can under certain conditions be bargained away,no matter who holds the specific property titleshasmet with varying degrees of enUnisiasm. Nonethelesshe did provide a new framework for thinking aboutproperty and externalities that has become widely influential. (It ismostly forgotten diat the second half ofCoase's paper provides a set ofguidelines forjudges tosettle such disputes when barriers to efficient bargaining do exist; the charge diat Coase ignores "transaction costs" is hence unfounded.) In the companionessay "Notes on the Problem ofSocialCost,"Coasedemonstrates hi s uncommon convict ion that economics ought to be useful as well as true. Responding to acritic who defends a classical Pigouvian tax plan asmathematically correct, though admittedly useless,Coase observes Uiat"[i]n my youth it was said thatwhat was too silly to be said may be sung. In moderneconomics it may be pu t into mathematics" (p. 185).

The other of Coase's legacies is the new theoryo f t he fi rm o r new ins t i tu t ional economics. I t wasCoase's "Nature of the Firm" that first urged economists to view the firm not as a set o f d em a nd a ndcost curves, but as an organization, with an internalstructure guided by the same rules of human action that govern its external activities. This line ofthought has finally developed into a systematic research program, with the growth of the highly technical l it er a tu r e on i nf o rma ti on and incentives o fthe last 20 years or so, and the work of writers likeOliver E. Williamson an d Douglass North.

We are lucky that Coase's main works are fewenough to be collected into one small book(Hayek's collected works, by contrast, are projectedat around 20 volumes). The publishers could actually have included a few more selections, but weneedn't quibble. The. Firm, theMarket, and theLawdoes conta in t he c or e o f Coasc 's contr ibut ion to eco

nomics, and he is without a doubt o ne o f t he mostpowerful and creative minds in the discipline.

Values fo r a Value :Sou t he r n Schoo l s Domina t e

Cho o s i n g a college is perhaps one of die mostdifficult decisions, especially if you are looking for a school that promotes instruction in Austrianor free-market economics. With the state becomingincreasingly involved in secondary education, qualityis falling while the costs of a degree continue to escalate. The results of the John Templeton Foundation'sHonor Roll of Free Enterprise Teaching and theMoneyGuide "value" survey of American universitiesand colleges are presented here to provide some information in making that choice.

Schools known for their emphasis on Austrianand free-market economics were highly ranked inboth the Templeton and MoneyGuide Magazine su rveys. Southern schools dominated both surveys. Institutions that were ranked in both surveys arelisted in the table below.

The Templeton Foundation survey (conductedby the Foundation for Economic Education) askedthe presidents of universities and colleges if they"(1) teach the principles and benefits of free-market economic systems, (2) encourage a high degreeof personal initiative, responsibility, and accountability, (3) emphasize Constitutional concepts oflimited government, (4) support the traditionalwork ethic and pride of productivity, [and] (5) foster an appreciation for private property rights."

Sou the rn schools were s e le c ted as fou r o f thetop seven institutions and 46 ou t of a total of 87 sel ec ted. Seven schools were s e le c ted f rom the Westand Northwest, 12 from t he No rt h, and 19 f romt he c omb in ed a re as o f t he M i dw es t and Sou thwes t .

MoneyGuide evaluated 1,011 institutions basedon price and quality. Out-of-state tuition was usedto determine the overall price of public institutions.To measure the quality of instruction the student/faculty ratio, the percentage of full-time instructors with Ph.D.s, library resources, and thepercentage of resources devoted to instructionwere examined . En t rance exam scores (SAT) andclass rank of incoming freshmen, as well as theschool's acceptance rate were used to measure thequality of the student body. Freshman retentionrate and graduation rate were used to gauge overall student satisfaction. MoneyGuide u sed th e percentage of graduates who go on to earn graduate,


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VIoncyGuidciSlffprofessional, and doctoral degrees and thenumber of graduatesl is te d i n Standard an dPoor's Executive/CollegeSurvey as a measure ofthe institution's outputsuccess.

T h e Sou th dom inated MoyieyGuide's listof top 100 institutionsfor price and quality with 5 out of the top 10, and41 listed in the top 100, plus all ten of the top-ranked mid-sized schools. The often-touted qualityof Northeastern schools is purchased at a very highprice, with nine of the top ten highest pricedschools located in the Northeast (averaging $22,500

per year).For those interested in a quali ty education at an

i n s ti tu t io n known to h av e s om e in te re s t in th e f reeenterprise system these surveys provide some information. However, a few words of caution are inorder. Surveys and statistical ranking models aremerely formalized guesses based on specific criteriaand limited information. The college decision can involveas much as $150,000 in direct expenses. Evaluation of specific departments (i.e., economics), campusvisits, family traditions, and financial aid packagescan all play major rolls in your decision.

Institution Temp le ton MoneyGuideHonor Roll T o p 1 0 0

Hillsdale College 1 9 6University of Chicago 2 6 9George Mason Universi ty 3 Grove City College l Baylor University 5 3 7Auburn University 6 12Harding University 7 No t SurveyedRice University Top 87 1University of Virginia Top 87 4Spelman College Top 87 18Rutgers University Top 87 33University of Georgia Top 87 3 5Wake Forest University Top 87 3 6Samford University Top 87 4 0Washington and Lee Top 87 5 6

UniversityVirginia Polytechnic Institute Top 87 GOand Sta te University

University of California. Top 87 6 7Los Angeles

Clemson Unive rs ity Top 87 73Furman University Top 87 7 5Davidson College To p 87 32John Carro l l Unive rsi ty Top 87 8 4Stanford University Top 87 8 8University of Dallas Top 87 9 0

Conference ReportTh e Political Economy of BureaucracyPublic Choice l i terature ha s f ocused on die issue ofbureaucracy, but the subject has unfortunatelybeen neglected by die Austrian school. "The PoliticalEconomy of Bureaucracy," went a long way towardcorrecting diaL It was sponsored by the Mises Instituteand was held at the College of William and Mary inWilliamsburg, Virginia, October 25-27, 1991.

AsLvMI president Llewellyn H. Rockwell, Jr .noted in his introduction, the country has been invaded by bureaucrats. Each fiscal year, governmentat all levels sends 30 million people checks for "services" rendered on a full- or part-time basis. Thefederal government itself employs 3.1 million full-t ime bureauc ra t s .

ProfessorMurray N. Rothbard of the University of Nevada, Las Vegas spoke on the rise of thebureaucratic state in his paper, "The Political Economy of Civil Service," surveying the history of bureau-eradc expansion. He clarified diat under the Iron Lawof Oligarchy it isinevitable that elites rule in both theprivate and public sectors. While die market insuresthat elites circulate in the market, the public sectordoes not, especially since only a dny minority are subject to expulsion during elections. The elites administer government "services" in a way that benefits onlydie government and its connected interests. While diewatchword in private business is profit, in governmentit is untrammeled growth. And while business advertising benefits consumers, diere is no check on government propaganda which cover up die trudi to bolsterits own legitimacy. In showing how we came to thissituation, he covered die history of government employment, hitting Lincoln, Wilson, Roosevelt, andJohnson particularly hard. He argued for a returnto the "spoils" system where bureaucrats are tossedout each time the party in power changes.

Echoing similar themes in his paper "The Politics of the Managerial State," Dr. Samuel Francis ofthe Washington Times defined bureaucracy as a system of power that stands outside society's voluntaryinstitutions and is inherently in conflict with them.He argued on behalf ofJames Burnham's thesisthat a managerial revolution occurred this centurywhich transformed this bureaucracy into a technocratic elite intent on micromanaging all aspectsof economy, education, church, family, and culture. The paper engendered debate for his emphasis on the role private corporations have played incausing the revolution to come about.


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The interaction between interest group lobbying and bureaucracy was explored by ProfessorThomas DiLorenzo of the University of Chattanooga, Tennessee. Not only does the present system of government no t discourage faction, bu t itencourages it. Environmental groups, protectionistgroups, civil rights organizations, and many more,receive government money in indirect ways, whichis funneled back through to reelect candidates sympathetic to their interests. This creates a cartel ofpoliticians and non-profit group lobbyists which exercise an enormous degree of control over regulatory agencies. In turn this creates a specialin te re st /bu reauc ra t ic nexus which hur t s indiv idualtaxpayers and the economy at large.

Professor Joseph Salerno of Pace Universitydipped into the history of economic thought tofind tha t few economists have had sensib le ideas onthe subject of bureaucracy. He criticized the Virginia School of Public Choice, because it does no tprovide a fundamental theoretical framework forunderstanding bureaucracy from the standpoint ofprice theory. In Mises's 1926 book Liberalism andhis 1944 book, Bureaucracy, he argues that therecan never be bureaucracy in the free-market private sector because the profit and loss system punishes it. The government sector has no profit andloss system, and therefore cannot calculate the bestus e of resources, as socialism cannot. It doesn'tmatter how well-intentioned bureaucrats arc, theylack the tools to do their job.

Dr. Roy Cordato of the Institute for Researchon the Economics of Taxation presented a paper arguing that the so-called public goods justificationfor bureaucratic intervention is totally fallacious.The conditions of perfect competition assure thatno real-world market can mee t t he test, but th e endurance of the model causes a pro-bureaucracybias. He pointed out, for example, that 83% ofeconomists favor anti-trust legislation. The Austrian school theory, in contrast, argues that muchof what is objectified and static under conventionaleconomic theory is actually subjective and dynamicin real-world markets. His theory argued that stateadministrators have neither the will nor the way todo what they claim to do, that is, improve the operation of the free-market economy.

Applying dieory to American history, ProfessorJeffrey Herbener ofWashington and Jefferson College argued that bureaucratic growth occurred du ring critical episodes, from the civil war to thepresent administration. The government's strategyfor growth is to create a crisis which has to besolved by more intervention. He placed a special

emphasis on the effects the growth of the state hasin burcaucratizing private business. The massiveregulatory apparatus of the modern state forcescompanies to employ more and more people whosejob is not to enhance consumer welfare and profits,but rather to keep the rules and dictates issued arbitrarily by third parties. In this way, the mixed-economy of America has becomes less and lessresponsive to changes in consumer preferences andmore vulnerable during recessions and depressions.

Dr. Allan Carlson of the Rockford Institute presented his paper "Sweden and Mixed-EconomyWelfarism," on Sweden 's decl ine into bureaucraticbarbarism and how America is taking the samepath. During the 19th century in Sweden, the family was replaced by the State. Beginning with mandatory school attendance laws and anti-child laborlaws, Sweden had, by th e 1980s, constructed a complete client state. They are now trying to find theirway out of the miasma of welfarism and its effects,but no proposal goes far enough to take care ofthe problem. Although the U.S. is following a similar pathconstructing the welfare state to "solve"the problems welfarism has createdthe only realsolution, he argued, will be total dissolution of itscentral tenant that the state, not the family, shouldbe the primary caregiver.

Professor Yuri N. Maltsev of Carthage Collegedirected his discussion to the problems of former Soviet bureaucracy. In diat country (or those countries),18.3 million people work direcdy as administrators ofstate policy, and 97% of the population works insome capacity as bureaucrats, the result of which is toredis tribute 83% of die national income. Bureaucratization became much worse under d ie r ul e of MikhailGorbachev, contrary to public perception. It will require a radical decentralization. Maltsev also worriesabout t he crea tion of wha t h e called a BureaucraticInternational, a means by which Russian and American counterparts conspire to preserve their positions of power. They have more in common with

YuriMaltsev,RichardKite,

and Hans lloppcenjoyan outdoorluncheon at th e

bureaucracy conference.


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each other than with the taxpayers of their respective countr ies .

Concentrating on domestic bureaucrats, Dr.David Fand of George Mason University demonstrated the faulty bureaucratic thinking that led tothe S&L crisis. Non-bank banks, since their inceptionin the 1930s, were treated with special privilege. Regular banks were thought to support big business, butS&Ls were thought to serve the poor. Moreover, regulators thought it was important to give special privileges to those investing in the real estate market,since they thought active land markets were somehow critical to preventing recession. Bad invesunentswere overlooked and possible only because of die deposit insurance provided by government, which privatized gains and socialized losses.These conditionscreated opportunities for political graft and as a result the taxpayer is paying for the S&L debacle. Theresult will be even more bureaucracy in the bankingand f inancial indus tr ies .

The American education bureaucracy was thesubject of an attack by Dr. Thomas Fleming ofChronicles. American education, he said, is in a deplorable state because the autonomy of local schoolboards has been drastically diminished, and therole of consuming parents has been all bu t totallyremoved from t he format ion o f curr iculum, discipline, and administration. He predicted failure forany reform programs. For example, school voucherprograms would end the autonomy of any privateschool that received them, and t he s ame would bet rue of tax credits. School reform programs havebeen proposed and implemented every generationsince the mid-19th century with no substantial effect. Wha t is needed is r ad ica l decen t r a l i za t ion an da total dismantling of the state education apparatus.

Professor Hans-Hermann Hoppe of the University of Nevada, Las Vegas, gave the most controversial paper, "Bureaucracy and Time Preference."He argued that increased bureaucratization lowersthe time horizons of the public; property andwealth becomes less secure and people a re less willing to save and plan long-term. This occurs withwelfarism, which encourages short-term thinkingand redistribution away from wealth holders,which reduces the amount of money invested inlong-run projects. Bureaucratic interventionismleads to shorter production projects, fewer technological advancements, and reduced prosperity.Majoritarian democracy itself, argued Hoppe,tends to have a corrupting influence on the security of property. Once the right to vote is given, oreven conceded, the political arena becomes thearea for advancement at the expense of property

holders. Moreover, under democracy, politicianshave an incentive to loot as much as they can regardless of how that affects the economy at large.He contrasted this with monarchism, under whichthe ruler has incentive to protect the commonwealth from mass looting in order that his childrenand dynasty continue as a wealthy country. Themonarchy creates a consumption statethe familyitself lives off the taxpayerbut that is better thandemocracy, which collapses into a redistributivestate i n w h ic h t he di s tinc tion be tween the ru le r andth e ru led is ob scu r ed .

Some papers will appear in a book on bureaucracy and others will be reprinted in the series "Issues in Political Economy." a

Book Rev i ews

Money, Method, and the Market Process: Essays byLndwig vonMisesRichard M. Ebeling, editorBoston: Kluwer Academic Publishers, 1990

Reviewed by Hans-Hermann HoppeTwo decades after his death, all of Ludwig vonMises's major works are still in print. Thissuccess is remarkable given that except for a fewyears during the late 1930s in Switzerland, Misesnever occupied a regular university post. He wasbarred from all positions of academic power in hisnative Austria as well as in the United States, hissecond home, primarily because of his principledopposit ion to a r is ing tide of intellectual relativism,represented in particular by historicism and positivism, and its political outgrowth: statist nationalism,interventionism, social engineering, and socialism.

Throughout his life, Mises relied exclusively onthe power of his wordsand his unwavering conviction that even the most rampant forms of statism,and the most relentless statist propaganda of asteadily growing class of "public educators" inschools and universities, could not stamp out thehuman desire for independent thinking, logic, andtruth. Each of Mises's books is exemplary in its display of lucidity and argumentative rigor (there arefew dissertations being written on "What did Misesreally mean?" because Mises says what he means,clearly, and with little room for confusion). Thelasting success of his books attests to the enduranceof human rationality.

In light of the dramatic vindication ofMises by


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viofley,Method,a n d th eMa r k e t P roc e s s

F.>aay byL ucl w i g vo n M i l e *

the collapse of fullblown socialism acrossdie globe (which hepredicted as early as1919), Mises an d hiswork may at last receive dieir proper recognition within theacademy, as one o f diegreat intellectual heroes o f o u r t ime and

the paradigm of a new age defined by a renaissanceo f e c on om i c r ea s on .

The publication ofMoney, Method, and theMarket Process is particularly fortunate. The volume, edited and with a knowledgeable introduction byRichard Ebeling, contains 21 articles written byMises between 1930 and 1969, many ofwhich arepreviously unpublished. Fo r the Misesian expert,there is nothing fundamentally new in these essaysbecause there is no such thing as Mises I, II ,o r I I I becau s e Mises r ema in ed c o n si st e nt . Y e t thisvolume is undoubtedly the bes t introduction toMisesian thought, and it rewards even the experienced Mises reader with fresh perspectives. Hismagnum opus, the monumental HumanAction, whichcontains Mises's system of economic theory and social philosophy in its most fully developed form, isextremely demanding of its reader and largely inaccessible to th e f i rs t - t ime r ea de r o f Mises. His o th e rmajor booksTheory ofMoney and Credit, Socialism,and Theory and Historyand his many smaller ones,only deal with parts of his system. The presentwork fills an important gap by offering an introduction to all major aspects of the Misesian system, including those in which Mises made his mostoriginal contributions.

The book accomplishes this task with a balanced selection of pieces, organized under fiveheadings. In the essays assembled under "Method,"Mises explains the nature of economic theory asthe logic of action, or as he terms it: praxeology. Economic theorems are propositions that are logicallydeduced, or deducible, from th e universal , incon-testably true action axiom: "that man is in a position to choose among different states of affairs withregard to which he is not neutral and which are incompatible with each other , i.e., which he cannotenjoy together" (p. 20), and a few empirical, andempirically testable, propositions (such as that leisure is a consumption good). As the conclusionsof deductive arguments ultimately derived froman in con te s tab le ax iom , economic laws are shownto be apodictic, true a priori synthetic propositions.

Historical data may provide an illustration of economic laws, bu t it "can neither prove no r disprovethe teachings of economic theory" (p. 12) . Indeed,it would involve a categorical mistake to considereconomic theory as verifiable or falsifiable by historical experience. Economic theory logically precedeshistory and constrains historical interpretations. Itrestricts the range of possibly correct interpretations of sequences of historical events much in thesame way as the laws of logic restrict and constrainthe range of possibly correct observations.

The essays in the section on "Money" explainsthe function of money as a medium of exchange,and uncertainty as the necessary condition for itsemergence. Mises demonstrates why the demandfor a medium of exchange "presupposes an alreadyexisting objective exchange value" (p. 58) , whymoney can only originate as a commodity money,and why once a directly useful barter commodity"has become money, t hen the specific demand formoney can tie into an already existing exchange relationship between money and goods in the market, even if the demand for the money-good, asmotivated by the other use, disappears," (ibid).That is, money, once established, can also be severed from its commodity origins.

Mises clarifies the categorical difference between deposit banking and loan banking; why thebanking system becomes inherently bankrupt; andthe cause of recurring boom-bust cycles, as soon asthese two functions are no longer strictly separated.That is, as soon as deposit banks deviate from a policy of 100% reserves (as he pla inly called for in his1952 addendum to The Theory of Money and Credit)and loan ou t their deposits while retaining theircontractual obligation of instant redeemability. Inconclusion, wri tes Mises, " it is not the ol d classicalgold standard, with effective gold circulation,which has failed; what has failed is the gold'economizing' system and the credit policy of thec e n tr a l b a n ks o f is sue. "

In the section o n "T ra d e" Mises demonstra tesonce again the truth of the Ricardian insight "thatfree trade only ensures the highest productivity ofthe economic efforts and diat every kind of protectionism must necessarily result in a reduction of theoutput of capital and labor" (p. 114). He shows that"division of labor and war are incompatible" (p. 117)and, mutatis mutandis, why governmental restrictionson the freedom ofmigration, imports and exportscreate nat ional ism and in ternat ional conf l ic t s a s wellas lower living standards at home and abroad.

The essays on "Comparative Economic Systems" demonstrate Mises's vigor as a defender of


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laissez-faire capitalism and private property, andsaving and capital accumulation as indispensable toprosperity and progress. Socialism, the collectiveownership of factors of production, by outlawing acapital goods market, and hence capital goods prices,makes cost accounting impossible and thus leads topermanent misallocations, capital consumption, andimpoverishment Nor isa mixed economya "social"market economy or welfare state systema viable social order. For any interference with die operation offree markets invariably produces more of the sameproblems it was designed to cure, and hence eidierleads to full-blown socialism or else requires a returnto free-market policies and capitalism as the only genuinely "stable" social order.

In the final sect ion o n " Id e as " Mises restatesthe Humean insight , which has only recently received another dramatic confi rmat ion w ith t he sudden collapse of the seemingly impregnable powerof the communist rulers o f the Soviet Un ion, t ha tno government can last without majority support,be it active or passive. Once this support is gone,even the most ruthless tyrant will be toppled. Inthe last resort, then, the course of history and theoutcome of man's ceaseless struggle for liberty willbe decided in the rea lm o f ideas .

Reading Mises and reflecting on his life-longfight against the prevailing trends of social and economic thought I was reminded of a passage fromStaniskav Andreski's scathing attack on the sociology profession in his Sociology as Sorcery:Despite die advanced stage of cretinizationwhich our civilization has reached under th e impact of the mass media, there are still some people about who like to use their brains without thelure of material gain; . . . people interested inideas, and prepared to think diem through andexpress them regardless of personal disadvantage, have always been few; and if knowledgecould not advance without a majority on die rightside, there would never have been any progress atallbecause it has alwaysbeen easier to get intodie limelight, as well as to make money, by charlatanry, doctrinairism, sycophancy and soothing orstirring oratory than by logical and fearless thinking. No, the reason why human understandinghas been able to advance in die past, and may doso in the future , is diat true insights are cumulativeand retain their value regardless of what happens to their discoverers; while fads and stuntsmay bring an immediate profit to the impresarios, but lead nowhere in the long run, they cancel each other out, and are dropped as soon astheir promoters are no longer there (or have lostdieir power) to direct the show. Anyway, let usnot despair , (p. 17)

Indeed, if the sweeping vision of the essays collected here were absorbed by a new generation ofintellectuals, there is no reason for despair, butrather reason for hope, a

Reflections ona Keynesian ConcordanceKeynes's The General Theory of Employmerit, Interest,andMoney: A ConcordanceFred R. Glalie , editorRowman and Littlefield, 1991

Reviewed by Roger W. GarrisonA concordance is more at home in literary criticism and theology than in economics. So foreign is this particular research technique toeconomists that many will reach for their dictionarybefore they get past the title page. My Webster'sNinth defines concordance as "an alphabeticalindex of the principal words in a book. . . ." Theword "principal," though, must be understood toexclude only articles, conjunctions, prepositionsand pronouns and all forms of the verb "to be." Allother words used by Keynes in his General Theory[2] are listed in alphabetical order together withthe total n umb er o f t imes each is used and th e id entification by page and paragraph of each use. Wecan note, for instance that Keynes used the word"same" 209 t imes and t he wo rd "different" 120times. He used the word "optimistic" three timesand the word "pessimistic" only twice. Even the ifs(566), ands (2,123), and buts (496) and other "excluded" words are l is t ed widi their total word counts.This 280-page index plus a two-page preface by theeditor and a two-page introduction by Kenneth E.Boulding make up the concordance.

Whya concordance of die General Theory}or ofany book, for that matter? A concordance is offeredas a research tool, as a means to an end. A comprehensive listing of the words Keynes used may help usto understand how Keynes thought, why he believedwhat he did, and what his message really was. Ofcourse, we need help in these directions only if the alternative means of reading the words in die sequencein which Keynes himselfarranged them proves unsuitable for achieving diese ends. Let's give Keynes achance to answer a few simple questions and possiblyrender this concordance superfluous.

Q: Please, Professor Keynes, what do you mean by"involuntary unemployment'"?

A: My definit ion is . . . as follows: Men are10


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involuntarily unemployed if, in die event of a smallrise in the price ofwage-goods relative to the money-wage, bodi the aggregate supply of labour willing towork for the current money-wage and the aggregatedemand for it at that wage would be greater than theexisting volume of employment (p. 15).

Q: Please, ProfessorKeynes, whatgoverns private investment in a market economy?

A: Our conclusions can be sta ted m the most gene ra l f orm ... as f ol lows: No f ur th e r increase in d ierate of investment is possible when die greatestamongst die own-rates of own-interest of all availableassets is equal to die greatest amongst the marginal efficiencies of al l assets, measured i n t erms of th e assetwhose own-rate of own-interest is greatest (p. 236).

Q: Please, ProfessorKeynes, doesn't monetary expansion triggeran artificial boom ?

A: [A]t this point we are in deep water. Thewild duck has dived down to the bottomas deepas she can getand bitten fast hold of the weedand tangle and all the rubbish that is down there,and it would need an extraordinarily clever dog todive down and fish her up again (p. 183).

Please, Professor Glahc, provide us with a concordance .

In 1959, Henry Hazlitt [1] provided a virtualpage-by-page critique of the General Theory, exposing many contradictions, fallacies, and confusionsin Keynes's arguments. But TheFailure of the "NewEconomics" was largely dismissed by the economicsprofession partly on the grounds that Hazlitt wasnot a (degreed) economist and par tly on thegrounds that his focus was too narrow. The journal-ist-turned-Keynesian-critic, it was claimed, neverperceived the underlying theme nor understoodthe central message of Keynes's book.

For several decades, now, Keynesian interpreters wdio have overlooked the problems identifiedby Hazli tt in order to ge t the big picture have gotten many different and conflicting big pictures.Well-credentialed Keynesian scholars can be foundon both sides of key issues: Is the General Theory acontinuation of the work begun in Keynes's Treatise on Money, or is it a revolutionary break fromhis earlier book? Does the so-called liquidity trap,which prevents a fal ling wage rate from reducingunemployment and renders monetary policy impotent, figure importantly in Keynes 's case for fiscal activism, or is it only a curious extreme withno historical or practical importance? DoesKeynes actually contend that the economy can besuffering from widespread unemployment andnonetheless be in equilibrium, or is he saying

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that market adjustments in circumstances ofeconomywide disequilibrium may need to beaugmented with or supplanted by policy prescription? Is th e assumption of fixed or stickyprices and wages critical to Keynes's arguments, or is it merely a convenient means ofmaking those arguments? Is th e standard textbook rendition of Keynesianism, which largelyabstracts from problems of economic uncertainty, faithful to Keynes's theory, or is the notion that capital markets are debilitated bypervasive uncertainty an important part of hiscentral message?

If a reading of the text-as-is doesn't resolve diesequestions, maybe a concordance can help. We cannow be sure, for instance, diat the word "trap," as in"liquidity trap," does not appear in the book. (Theterm was actually introduced by Dennis Robertson ina critique ofKeynes's theory of interest) However, ifwe cross-check th e word "absolute" (16) wi th theword "liquidity" (44) or "liquidity-preference" (47),we find two overlapson pages 191 and 207. Thefirst overlap reference leads us to a discussion concerning "die rate of interest at which liquidity-preference becomes absolute"; t he second to a similarpassage in which "liquidity-preference may becomevirtually absolute. . . ." We haven't exacdy identifiedthe true significance of absolute liquidity preferencein the General Theory, bu t at least, the concordancehelped us find the relevant passages.

Was Keynes an equilibrium theorist or a disequilibrium theorist? Here, the concordance prov ide s i n f o rma t i on t h a t wou ld o th e rw i se b e diff icultto come by. The word equilibrium is used 77 times;the words disequilibrium and disequilibria are usedonce apiece. A quick check of the two instances inwhich Keynes appended the prefix "dis-" providesno support for the claim that Keynes was interestedin disequilibrium. Of course, there is still room forthe claim that Keynes used the tools of Marshallianpartial equilibrium analysis, which were the onlytools he knew about, to analyze an economy in mac-roeconomic ^equilibrium.

All in all, it is probably t rue tha t the very existence o f this conco rd ance tells us mo r e a b o u tKeynes's book than even the most competent andinspired use of th e concordance can t el l us. The facttha t there is (presumably) a demand for the concordance implies that researchers are now stoppingjust short of tea leaves and dream analysis in theirefforts to decode Keynes's message.

Further, the fact that this concordance is beingsupplied carries its own message. Time-saving andcost-saving developments in computer technology


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have shi f ted the effor ts o f a t least o ne economis taway from more conventional research to the production of a concordance. A digital scanner andword processor have accomplished a task thatwould otherwise have occupied an army of monksfor many a fortnight.The computer sorts and counts words mindlessly.Boulding notes in his introduction that the word "in

terest" is t he s ec on d m o st u se d non- tr i v ia l word in th eThe General (103) Theory (225) ofEmployment (615), Interest (712), andMoney (505). But two of die first ten re ferences to t he u se of the word "interest," we discover,a re ins tances where the word means " a ro u se d a t te ntion." "Ricardo expressly repudiated any interest inthe amount of the national dividend . . ." (p. 4, emphasis altered). And "Queen Victoria wasa betterqueen but not a happier woman than Queen Eliza-bedia proposition not widiout meaning and not without tnteres/" (p. 40, emphasis added).

The concordance includes entries that may puzzle idle browsers. For instance: "san (1) 355:1." Thismeans diat the word "san" is used only once inKeynes's book and that it appears in the first paragraph ofpage355. Few users of die concordancewilllink this entry with a much earlier one: "Antonio (1)355:1." According to Keynes, literature touting the

AustrianEconomics NewsletterAuburn University, AL 36849-5301

ideas of Silvio Gesel l , whose inflationist schemesKeynes endorsed, were distributed in San Antonio.Other , less obvious but more serious, instances

of splitting a two-word name o r term make the concordance less than useful that it might otherwisebe. Keynes's concept of "user costs," for example, issometimes identified as a key subject iv is t insightand a link between the thinking of Keynes and thethinking of t he more thoroughgoing subjectivists ofthe Austrian school. But "user cost" does no t appear as a single entry . "User" appears 97 times;"cost" and "costs" appear 294 and 45 times, respectively. The cross-checking required to identifyevery instance of "user cost(s)" would be tedious.

Allsuch problems aside, it can be said diat amongmajor twentiedi-century contributions to economics,the General Theoryand probably only the GeneralTheoryremains enough of an enigma to justify a concordance at all. Two cheers for Glahe for bestowingupon Keynes diis unique honor.

Re fe r en c e sHazlitt, Henry, TheFailure of the"NewEconomics." Princeton,N.J.: D.van Nostrand, 1959.Keynes, John Maynard, TheGeneral Theory of Employment, Inter

est, andMoney. New York: Harcourt, Brace, 1936.

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PA IDAuburn Univer s ity , AL 36849-5301

PERMIT NO . 9

Austrian Economics Newsletter Spring 1992

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