"Those [ideas] that are better tend to prosper and
survive. Those that are worse tend to recede and vanish [like Austrian
capital theory]." -Sherwin Rosen, University of
1
At every Mont Pelerin Society meeting, a debate
develops between the two schools of free-market economics: the Austrians
(followers of Ludwig von Mises) and the Chicago school (followers of
Milton Friedman). I've discussed their similarities and differences in
various columns (see, for example, the February, March, and April 1995
issues of The Freeman).
At this year's program, held in Vienna, Austria, the
discussion centered around how much (or little) Austrian economics has
been absorbed into the mainstream "neoclassical" model. At the end of
the discussion, Professor Rosen made an interesting observation: the
competitive free market of ideas tends to weed out bad economics from
good economics. Good economics "passes the market test," he claimed, bad
economics doesn't, and is discarded. Therefore, concluded Professor
Rosen, if some Austrian concepts have not been absorbed by the
"neoclassical" model, they are probably "useless" and need not be
pursued. He cited Austrian capital theory as an example.
It was almost as if Professor Rosen was suggesting that
a student need not bother with actually studying Austrian capital
theory; one could simply dismiss it on the grounds that it was not being
taught by mainstream economists.
Does the Market Guarantee Good Economics?
I first encountered this odd view of economic progress
while reading a paper by Professor William Baumol (New York University)
about college economics. Baumol, a textbook writer, boldly declared,
"there is absolutely nothing wrong with the current state of economics,"
because, he claimed, the mainstream economic approach "is a superb
machine for grinding out theorems.: 2 In other words, the
competitive process works in economic research. Through trial and error,
economists sift and test theories, acquire good ones, and discard bad
ones in a never ending upward spiral of academic progress. In short, the
science of economics marches onward and upward to its current advanced
stage of knowledge and wisdom.
Based on this rather complacent view, Professor Baumot
dismissed my criticisms of mainstream economics in Economics on Trial by
reiterating, "I am totally unrepentant. There is absolutely nothing
wrong. . . ." 3 I offer two criticisms of this distorted view
of the market of ideas. First, I question the competitive market process
in academia. As Professor Peter Boettke (New York University) notes, the
economics discipline, like most social sciences, is a market of fashion,
not the free and equal exchange of ideas through a rigorous scientific
method. Philosopher Thomas Kuhn made this point forcefully in his
classic work, The Structure of Scientific Revolutions (University of
Chicago Press, 1962). Kuhn pointed out that the history of science
typically works very differently. Once a central paradigm is
established, very little testing or sifting is done until a series of
failures or anomalies emerges. Only when a "crisis" arises does the
profession seek out a new paradigm, and there is no assurance that the
next paradigm will be more correct than the previous one.
The Keynesian revolution is a case in point. During and
immediately following the 1930s, most economists incorrectly concluded
that free-market capitalism caused the Great Depression. Throughout the
fifties and early sixties, Keynesianism triumphed in the academic world,
and the free-market schools of Vienna and Chicago were dismissed out of
hand. Granted, free-market economics has made a huge comeback, thanks to
the efforts of Friedman, Buchanan, and Hayek, and the turn of world
events - most notably, the collapse of Soviet communism in 1990. But let
us not fall into the trap of thinking that economic errors automatically
are eliminated in the classroom, or that deeply flawed ideas cannot be
resurrected.
Murray Rothbard calls this progressive view of history
the "Whig Theory" because nineteenth-century Whigs maintained that
things were always getting better and better. He states, "the
consequence [of the Whig theory of history] is the firm if implicit
position that ... there can be no such thing as gross systemic error
that deeply flawed, or even invalidated, an entire school of economic
thought, much less sent the world of economics permanently astray."
4 Rothbard rejects the Whig theory. In writing his history of
economic thought, he concludes that "there can ... be no presumption
whatever in economics that later thought is better than earlier."
The Market Produces Goods and Bads
I offer another objection to Professor Rosen's view of
the free market. He notes that in a free market bad musicians don't sell
very many records. True enough, but one must distinguish between what is
technically competent and what is morally deleterious. Certainly,
Hollywood produces technicality advanced films, with special effects,
skilled acting, and superior photography, but it also makes films whose
contents are often morality bankrupt. In short, the market does a great
job in producing both "goods" and "bads."
Austrian Capital Theory, Again
Finally, a comment about Austrian capital theory, as
developed by Eugen Böhm-- Bawerk, Ludwig von Mises, and Friedrich Hayek.
Admittedly, it is not currently part of the mainstream. But is it
"useless"? Hardly. In fact, I frequently depend on the Austrian
stages-of-production model in analyzing the economy and financial
markets. Because it is usually ignored by the establishment, I can more
easily use the Austrian model in pre- dicting economic trends and
developing fi-nancial strategies . 5 The unpopularity of Aus-
trian capital theory does not make it wrong or useless.
At the time of the original publication, Dr. Skousen
was an economist at Rollins College, Department of Economics, Winter
Park, Florida 32789, and editor of Forecasts & Strategies, one of
the largest investment newsletters in the country. The third edition
of his book Economics of a Pure Gold Standard had been published by
FEE.
1. Sherwin Rosen, "Austrian and Neoclassical Economics:
Any Gains from Trade?", Proceedings of the Mont Pelerin Society
Meetings, Vienna, Austria, September 9, 1996.
2. William Baumol, "Economic Education and the Critics
of Mainstream Economics," Journal of Economic Education (Fall 1988), pp.
323-4.
3. See the paperback edition of Economics on Trial
(Burr Ridge, Ill.: Irwin, 1993).
4. Murray N. Rothbard, "Introduction," Economic Thought
Be/ore Adam Smith (London: Edward Elgar, 1995), p. ix.
5. See my work, The Structure of Production (New York:
New York University Press, 1990), and Austrian Economics For Investors
(London: Pickering & Chatto, 1996).
Reprinted with permission from The
Freeman, a publication of The Foundation for Economic Education, Inc.,
December 1996, Vol. 46, No. 12.
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