- The Washington Times - Sunday, April 7, 2002

By Mark Skousen
M.E. Sharpe, $74.95, $29.95 paper, 501 pages, illus.

Not many economists can make "the dismal science" throb with action and ideas. Nor do they see a long march of clearer economic thinking since Adam Smith if with dubious detours around lingering ideas like those of Karl Marx and John Maynard Keynes to the sunny market uplands of giants like James Buchanan, Milton Friedman, Friedrich Hayek, and Ludwig von Mises. This march is subsumed under "the house that Adam Smith built," as Smith' s beacons of the "invisible hand" and "natural liberty" still shine years since publication of his "The Wealth of Nations" in 1776.
In "The Making of Modern Economics," Mark Skousen pulls off this monumental task with finessse and wit. Quite an attainment: an enjoyable and enlightening tour de force replete with scores of figures, charts, tables, illustrations, photographs, hundreds of citations, a 27-page index and brief discussions of "pre-Adamites" like Aristotle, the Spanish Scholastics, Montesquieu and David Hume.
Mr. Skousen is editor of the monthly investment newsletter Forecasts and Strategies, and author of 20 books on finance and economics, including "Economics on Trial," "The Structure of Production," and "Dissent on Keynes " (ed.). He is a free marketeer who has cracked professional economic journals. He newly serves as head of the Irvington, N.Y.-based Foundation for Economic Education, America's oldest free-market think tank, founded in 1946, and publisher of the monthly Ideas on Liberty. And he just engineered the Foundation's acquisition of Laissez Faire Books of San Francisco.
Well, what of that Marxian detour? Marx's impact on economic history and thought was and is vast. Born a Jew, he was oddly anti-Semitic. Said Marx as quoted by Mr. Skousen: "What is the worldly cult of the Jew? … What is his worldly God? Money!" The idea pops up in Marx's "Communist Manifesto" as "naked self-interest …callous, 'cash-payment,'" as evil profit at the expense of the worker. So instead of sweet, selfless, state socialism, capitalism substitutes "naked, shameless, direct, brutal exploitation."
Marx's exploitation idea, alive and venomous, helps explain his theory of communism. The idea stems partly from classical economist David Ricardo's specious labor theory of value. So Marx held that only labor produces value, that labor is but "frozen capital," that profit and interest ("surplus value") are taken from its rightful owners, the working class. So on to the "Manifesto"'s socko wind-up: "Working men of the world, unite; you have nothing to lose but your chains."
Mr. Skousen sees twisted Marxian ideas leading to twisted Marxian logic that, for example, "the theory of communism may be summed up in a single sentence: abolition of private property," that communism is but "the temporary dictatorship of the proletariat," but that workers need not worry, for in time the state waxes into an anachronism and "will wither away." When? Who knows? Meanwhile under Marxism as applied in the late unlamented Soviet Union recalcitrant workers got to labor for years in hellish Siberian Labor camps.
Yet Marxian theory has been put into practice big-time. At one point in the post-World War II era, Marxism could claim that it swayed almost half of the world population. And even today socialist tentacles grab and entrap state schemes and enterprises across America and the West such as public schools, the Enivronmental Protection Agency (EPA), Medicare, affirmative action, Social Security. Is Marx dead? Half-dead, yes, as Eurocommunism fell in 1989-1991. But what of the other half? seeing those socialist tentacles, Nobel economist James Buchanan put it this way in a Wall Street Journal op-ed: "Socialism is dead, Leviathan lives."
Well, is Keynes dead? Not quite, as in the current Democrat-GOP scrap over a Keynesian oriented fiscal "stimulus" bill, which managed to attract quite a few Republicans. Like Marx, Keynes lives on and continues to foul up public policy.
How so? Well, Mr. Skousen finds that the Great Depression shook the house that Smith built, causing "most of the Anglo-American economics profession to question classical laissez-faire economics," ignoring depression brewing U.S. policies such as a vast monetary expansion in the 1920s, a steep Smoot-Hartley Tariff Act of 1930, and a sharp rise of income taxes in the Revenue Act of 1932, all brewing much greater trouble.
The unemploymemt rate soared to 25 percent. The New Deal seemed helpless. So the economics profession turned to Keynes who flared his dislike of Adam Smith's plan of "natural liberty" in a major address in 1926 unfittingly titled "The End of Laissez Faire." So the profession came to embrace his well timed revolutionary 1936 work, "The General Theory of Employment, Interest, and Money," with its phantasmagoric formula of Y= C plus I plus G where Y (national output) equals C (consumption spending) plus I (business spending or investment in inventories, plant, etc.) plus G (government spending).
G? So G got romanticized and politicized, paving the way for America's swelling Welfare State. And so government spending became the magical balancing wheel, the master key to unlock the riddle of the business cycle, as selfless and clever state planners buried politics and resuscitated a drowning economy via the printing press and public works. State duty was simple: Lift effective demand to the level of "full employment" and keep it there, neatly repealing business recessions once and for all and, by the way, reaping votes galore and reelection of Welfare State politicians, as per that aforementioned "stimulus bill."
But Japan, the world's No. 2 economic power, has been on a Keynesian kick for more than a decade with its return to prosperity proving elusive and hurtful.
And with prosperity also proving elusive at times in the United states and elsewhere, Mr. Skousen rebuts Keynes by invoking Say's Law of markets but not as Keynes had reset it: upside-down, with demand creating supply. That error led to others such as the Phillips Curve trade-off between inflation and unemployment, or to Keynesian Nobel economist Paul Samuelson's famed "paradox of thrift" of supposed oversaving hitting consumption demand (which ignores rising savings-induced job-creating investment demand and productivity -boosting capital formation). All this G-infused macrodemand was to be sure-fire guided economic growth, the banisher of cyclical unemployment forever. Super.
Thus Keynesian economics per 16 editions of the Samuelson basic college textbook (lately coauthored with economist William Nordhaus) "Economics" has been a vehicle for that state-set, "full employment" with, oops, side effects of inflation and recession) for generations of college students, for big-government economic enshrinement in the post-world War II era. The system helped spawned no less than 10 postwar recessions such as a sharp one in the 1974-1975 and a mild one in 2001, nothing nearly as catastrophic as the Great Depression.
In his rebuttal to the Keynes general theory, Mr. Skousen reasserts Say's Law to say that supply is at base microeconomic, that the supply of X crates a demand for Y, that production enables consumption (and not the other way around), that only rising output leads to higher consumer spending and living standards that to buy, one must first produce and sell. Call it, if you will, supply-side economics.
Mr. Skousen also notes Milton Friedman's point that the Great Depression did not prove inherent instability in a free-market economy , but rather such instability traced to inept public policy: mainly a severe Fed-led contraction of the money supply by a third from 1929 to 1933, brewing disastrous deflation. Thus was the Keynesian Revolution hurt intellectually by Mr. Friedman's own astute "counterrevolution" that spotted massive monetary mischief.
Mr. Skousen winds up hailing the ongoing spirit of Adam (what a first name) Smith and seeing "certain beauty about it." He is upbeat in his global outlook:
"Market forces are on the march. The collapses of the Keynesian paradigm and Soviet communism have turned 'creeping socialism' into 'crumbling socialism' There is no telling how high the world's standard of living can reach through expanded trade, lower tariffs, deregulation, a simplified tax system, school choice, Social Security privatization, a fair system of justice, and a stable monetary system."

William H. Peterson, an adjunct scholar at the Heritage Foundation, taught history of economic thought for 12 years at New York University.

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