Economics and Its Opposite
[An MP3 audio recording of this article, read by the author, is available for download.]
One of the fatalities of publishing at a rocket pace is that some amazing treasures get overlooked. So this column, perhaps the first of a series, covers some titles in the Mises Store that have not received much attention in the praiseworthy swirl of mania over Rothbard's Mystery of Banking and America's Great Depression, and Mises's Causes of the Economic Crisis, titles which speak directly to the moment.
I'll start with an unlikely title here, a book by an author you have never heard of. His name is Faustino Ballvé. He was from Mexico, a working economist whose intellectual life was changed completely when Mises visited the country and lectured. Mises and Ballvé carried on an extensive correspondence after. Ballvé continued to read and correspond for years.
Finally the professor sat down and wrote a primer on economics. The result was Essentials of Economics, first in Spanish and then translated to English. Nowhere does this book specifically says that it is free-market oriented or Austrian or Misesian. To Ballvé, this is just good economics, and he presents it as such.
He organizes the book in a very clear manner. What is economics? What is the market. The role of the entrepreneur. Capital, labor, and wages. Money and credit. And so on. The tone is clear and calm but never boring. Effervescent is a word I would use. Another word is elegant.
Clearly Leonard Read of FEE was mightily impressed because he used scarce resources to put this book by an unknown into print and to promote it very heavily. [Note: Gary North writes to explain that it was actually F.A. Harper who commissioned this book as part of the Volker Fund series, and was first published by Van Nostrand, and only later by FEE.] There is a certain generation out there for whom this book was very important.
Then … it went away. Until this year. Now it is in print again, and the result is glorious. After you read Economics in One Lesson, this is an excellent book to take you to the next level. Hazlitt covers the general lessons and applications, but this book zeros in on particular aspects of theory that are essential for stage two.
Essentials focuses on positive theory but anyone who learns economics this way is immediately confronted with the reality that this is not the economic theory propounded in the business press or accepted by the government. The major theoretical apparatus that these people use has its origin in the work of John Maynard Keynes, whose major assumption is that the price system doesn't work properly; it needs to be goaded and prodded this way and that, with policy experts at the helm. The theory has been failing for nearly three-quarters of a century but no matter: Keynesianism is like a virus that never goes away. So it is something you must learn about.
There is the wonderful treatment of Keynes's book by Henry Hazlitt called The Failure of the New Economics. But you might not be interested in a line-by-line critique. What you want is the overview of what it is and what is wrong with it.
That's where this gem by V. Orval Watts comes in: Away from Freedom. It was written in 1952, a highly significant year because it was from a time in which Keynesian theory was entrenching itself deeply into economics departments around the country. It was a time of heartbreak for anyone trained in the old classical style, because they began to see economic science turned on its head. Instead of offering a defense of economic freedom, it began to be used as a cover for state intervention in economic life. Instead of telling government officials what is not possible, economists were urging the state the do more — a departure from centuries of progress in science.
Professor Watts took his PhD from Harvard (in a "nobler era," says Rothbard) and taught in the Ivy League circuit for years before moving to the Los Angeles Chamber of Commerce and finally following Leonard Read to FEE. He wrote this while there. It burns with anti-Keynesian passion, for he is ever aware of the implications of the theory being propounded in college classrooms: it meant the end of economic freedom.
This book explains where Keynesian theory goes wrong and shows why fiscal fine-tuning and monetary manipulation cannot achieve their desired ends. It is especially interesting coming from someone who watched as all his former colleagues fell for the wizardry associated with Keynesianism. He wrote this book as a desperate plea for them to turn away from fallacy and back to the truths that took centuries to build up.
And so here we have what is surely the first full-blown smash attack on the economics of Paul Samuelson, whose principles became the leading textbook for decades, despite its persistent sneering at laissez-faire and its off-handed and implicit defense of socialism.
Watts's account depends heavily on one of the great anti-Keynesian books of all times, but one you have probably never heard of: The Economics of Illusion by L. Albert Hahn. He was a banker in Germany in the 1920s, and he was of the view that monetary inflation was the key to preventing economic slumps. Then he saw where this line of thinking led. Germany's economy was utterly destroyed through hyperinflation, which in turn led to dictatorship and war and social collapse.
Imagine what it must have been like for him to see these errors of the 1920s ascend to the status of scientific theory in the England and the United States in the 1930s. He set out to try to stop it with this book, which shows how Keynesian policy can create temporary booms that always end in bust. The prosperity generated through macroeconomic planning amounts to a mirage — the "economics of illusion," he called it.
Mises thought very highly of this book, as did Watts and Hazlitt and many others. It was hugely influential in creating the anti-Keynesian backlash, a true foundational text, one that ironically appeared in English the same year as Mises's Human Action. Perhaps that is why it has been overlooked? It is hard to say, but Joseph Salerno confirmed my sense of the book's importance. It turns out to have had a big influence on his thinking as well.
Finally, the great W.H. Hutt wrote The Keynesian Episode as a comprehensive critique of the Keynesian hubris that it had somehow refuted Say's law.
Hutt was trained in the classical tradition but his virtuosic performance in this book shows why the Austrians have traditionally claimed him.
Hutt writes in an old-fashioned and high style of English that is a far cry from the rhetorical dazzle of Watts, but students of economics will appreciate his sobriety and precision.