Freeman

ARTICLE

A Reviewers Notebook: Planning for Freedom

NOVEMBER 01, 1980 by JOHN CHAMBERLAIN

“Supply side economics” is the current rage. In essence, it is simply J. B. Say’s old “law of markets” restated. What the supply-siders are saying is that production must come before consumption, which is a truism. But, looking at economics as a totality, the processes of production and consumption are a seamless web. The funds laid out for production—wages, raw material purchases, interest, dividends—constitute the buying power that eventually clears the market. The effort to whip up an “effective demand” by issuing paper tokens unrelated to production is supererogatory, and results in inflation as the extra “money” joins the chase for the given supply of goods.

There can, of course, be an overproduction of some things in relation to what consumers actually want at a given price. This means that the workings of Say’s Law will be ragged as enterprisers correct for their mistakes in judgment. But this does not change the fact that commodities are paid for ultimately by other commodities, often at changing ratios. Money plays an intermediary role. The important thing is to avoid public policies that keep enterprisers from bringing an expanding supply of goods into being in the cheapest possible way.

This is what the supply-siders are now saying in Washington as they look for tax policies that will offer the least discouragement to business. But it is an ancient wisdom. Ludwig von Mises was talking “supply” as long ago as 1950 when he published his remarkable essay, “Lord Keynes and Say’s Law,” in The Freeman. I remember reading the essay in a board of editors’ meeting in great excitement. My wonder now is that this happened thirty years ago.

The essay subsequently went into a Mises collection, Planning for Freedom, an expanded fourth edition of which is now available. Four new essays have been added to the original thirteen, and the book also includes other extra dividends. There are Murray Rothbard’s study, “The Essential von Mises,” which places its subject in the Austrian School tradition, and separate salutes to Mises by Henry Hazlitt, Gottfried Haberler and Albert Hunold.

New Chapters by Mises

The four new essays, all of them vintage Mises, are “The Gold Problem,” “Capital Supply and American Prosperity,” “Liberty and its Antithesis,” and “My Contributions to Economic Theory.” In “The Gold Problem,” printed in The Freeman in 1965, Mises made the accurate prediction that the American Treasury would continue to lose gold if deficit spending did not stop. Americans, of course, were forbidden to own gold in 1965, but foreigners could legally draw it out from what had once been its American haven.

In the essay on “Capital Supply and American Prosperity” Mises kept hammering at a thesis that has only recently caught the attention of a Congress that has finally been brought to admit that capital gains taxes are self-defeating. Long ago, from his vantage points in Vienna and Geneva, Mises could see that America was the most prosperous nation in the world because “its per-head quota of capital invested” was higher than elsewhere.

Coming to this country to escape Hitler, Mises was appalled at the way we were deserting our own wisdom. His “Capital Supply” essay was written in 1952. It constituted a warning that if the federal government continued to prevent capital accumulation by its tax policies and its inflationary spending, our productivity would decline and our standard of living would suffer accordingly.

Mises did not make the mistake of attributing our traditional prosperity to the physical resources of the American continent. He said “capital is more plentiful in America than it is in other countries because up to now the institutions and laws of the United States put fewer obstacles in the way of big-scale capital accumulation than did those foreign countries.” Morality, too, had something to do with it. “The climate of opinion in which capitalism could thrive,” said Mises, “was characterized by the moral approbation of the individual citizen’s eagerness to provide for his own and his family’s future. Thrift was appreciated as a virtue no less beneficial to the individual saver himself than to all other people.”

In his “My Contributions to Economic Theory” Mises correctly cites his Socialism, which dates back to the early Nineteen Twenties. What Mises proved in that book was that “an economic system, where there is no private ownership of the means of production, could not find any criterion for determining the values of factors of production and therefore could not calculate.” Socialism, in short, flies blind.

Mises was never impressed by economic models that depend on the manipulation of past statistics, which inevitably ignore the capacity of individuals to change ground in their future choices. “In the libertarian system,” so Mises wrote in “Liberty and its Antithesis,” “every individual is a moral person, that is, he is free to choose and to act and is responsible for his conduct . . . Where the authoritarian system is fully established, as was for instance the case in the empire of the Inca in pre-Columbian America, the subjects are merely in a zoological sense human; virtually they are deprived of their specifically human faculty of choosing and acting and are not accountable for their conduct.”

Beware Econometric Models

Whether he wrote in German or in English, Mises always had a magnificent verbal felicity. Like others of the Austrian School, Mises knew mathematics but was not im pressed by any economic methodology that (to quote Murray Rothbard) “all but crowded out language or verbal logic from economic theory.” Mises thought mathematical equations were only useful in describing a never-never land of “general equilibrium.”

Rothbard, in his explanation of Mises’ distrust of mathematics, says that “no one has ever discovered a single quantitative constant in human behavior, and no one is ever likely to, given the freedom of will inherent in every individual.” The human development of high-speed computers has led to supposedly sophisticated econometric models. Alas for the usefulness of these models, the lack of confirmable constants to feed into them has made for a sorry record of econometric forecasting.

Relying on verbal logic and his analytical study of business-cycle theory, Mises correctly predicted the coming of the Great Depression when Irving Fisher, for example, was proclaiming a “New Era” of indefinite prosperity based on the manipulation of governmental central banks. There is an odd contradiction involved here. Mises knew that bad mistakes would accompany a wild credit boom. This is a “constant” factor in a credit cycle. But, since the mistakes are individual and show up only in retrospect, they can’t be “timed” for computer use. That is why the econometrist’s supposed precision should give way to the Austrian School’s sheer common sense.

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November 1980

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