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Book Reviews: Economics on Trial

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Economics on Trial: Lies, Myths, and Realities
by Mark Skousen (Homewood, Illinois: Business One Irwin, 1990) 314 pp.; $21.95 (h).

For 150 years after Adam Smith published The Wealth of Nations in 1776, most economists started from a common premise in their writings: unhampered, free markets were demonstrably superior to any form of governmental regulation and control. Even when some economists argued for governmental intervention, their assumption was that laissez faire was the desirable rule to follow. The burden of proof fell on the advocate of intervention to justify why people should not be free to manage their own affairs and peacefully compete and exchange with one another in the marketplace.

After 1936, however, the assumptions were reversed. The starting premise became that markets could not be trusted to generate prosperity and economic opportunities. Hence, governmental intervention was considered the rule; the advocate of a free market had to justify leaving people alone to plan their own affairs.

What happened in 1936? There appeared a book by the English economist John Maynard Keynes entitled, The General Theory of Employment and Money. Keynes argued that capitalism, when left to itself, could assure neither full employment nor economic stability. Only governmental intervention could provide these. And for the next fifty years, Keynes’ ideas dominated economic theory and policy.

During the last twenty years, Keynesian economics has been refuted and rejected by a new generation of free-market economists. But unfortunately, many of Keynes’ errors and fallacies still dominate popular thinking about economics.

This is what makes Mark Skousen’s new book, Economics on Trial. Lies, Myths, and Realities, such a valuable work. Professor Skousen has made a well-deserved reputation for himself as one of the leading members of the Austrian school of economics, particularly with his recent scholarly work, The Structure of Production. And he has acquired a large following in the financial investment community as one of the top economic forecasters in the United States. His monthly newsletter, “Mark Skousen’s Forecasts & Strategies,” brilliantly uses the insights of the Austrian school for suggesting ways of anticipating governmental policy and protecting oneself from its consequences.

In Economics on Trial, Professor Skousen takes on … well… the entire economics profession! Because even with all of the changes that have occurred in economics during the last twenty years, the fact remains that Keynes still dominates practically every textbook that is assigned to students taking a course in the principles of economics.

To begin with, every student is introduced to what is called “macroeconomics.” He is told that he should conceive of the entire economy in terms of “total output and employment,” “aggregate demand and supply” and the “price level” of goods and services “in general.” Then, because of failures of “aggregate demand” — which means that people save a part of their income instead of spending it all — employment is not provided for all of those people who desire to work at “prevailing wages.”

The “price level” of goods and services” in general,” in other words, is too low in relation to the “wage level” of labor “in general.” Government must step into the breach, the textbooks argue, and spend enough so that “aggregate demand” will be high enough to make it profitable for businesses “as a whole” to provide “full employment” for all.

The textbooks then elaborate on a set of Keynesian concepts — the “consumption function,” “savings leakage,” “the marginal efficiency of investment,” the multiplier,” “liquidity preference” — to demonstrate why it is that a market economy has inherent difficulties assuring every one a job as well as a desirable rate of growth in the “Gross National Product.”

Professor Skousen demolishes every one of these Keynesian conceptions. And he demonstrates that it is governmental intervention, government deficit spending, governmental manipulation of the money supply and the banking system that are the inherent causes of the inflations, recessions and depressions that the Keynesian attempts to place at the doorstep of the market economy.

And he shows that government deficit spending and monetary expansion cannot permanently create additional jobs in the economy. Inflation merely distorts the information that prices in the market are supposed to provide to businesses and investors in making their production and employment decisions. The jobs and investment opportunities created by inflation can only last for as long as the inflation continues. Once the inflation ends or slows down, businesses discover they have been led to make wrong investment decisions. And correcting for those governmentally generated mistakes is what is called a recession or a depression.

In Economics on Trial, Professor Skousen demonstrates that Keynesianism has been the astrology and alchemy of economics. And he also provides us with many of the needed antidotes to the governmentally created ills in our society.

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    Richard M. Ebeling is a professor of economics at Northwood University. He was formerly president of The Foundation for Economic Education (2003–2008), was the Ludwig von Mises Professor of Economics at Hillsdale College (1988–2003) in Hillsdale, Michigan, and served as vice president of academic affairs for The Future of Freedom Foundation (1989–2003).