The Austrian Economics Newsletter|
Volume 19, Number 1
A Passion for Economics
An Interview With Richard K. Vedder
Richard K. Vedder is professor of economics at Ohio University and an adjunct scholar of the Ludwig von Mises Institute. He is the author of Out of Work: Unemployment and Government in Twentieth-Century America and Poverty, Income Distribution and the Family, and Public Policy (both with Lowell E. Gallaway); The American Economy in Historical Perspective; and articles in The Journal of Economic History and The Review of Austrian Economics. He has taught at the Mises Institute's summer Austrian economics seminar, the Mises University.
AEN: It's obvious that you love teaching.
VEDDER: It's true. I teach everything from introductory economics classes to undergrads, to PhD students. I enjoy working with the advanced knowledge of graduate students, though given the state of economics these days, they sometimes have unlearning they need to do.
But I truly love the enthusiasm of the undergraduates. They start out with little or no understanding of economics. When they leave my class, they know the rudiments. I feel I have made a real contribution to the way they view the world.
AEN: What do you consider to be the rudiments?
VEDDER: I emphasize the all-round meaning and implications of scarcity, and the central place of market mechanisms, primarily property and prices, in dealing with this reality. This is usually considered a microeconomic approach, but you cannot begin to think about my area of macroeconomics without discussing these fundamentals.
Conventional wisdom is that there are two branches of economics, and you can take one without the other, and it doesn't matter which you take first. I disagree with this fundamentally. In Austrian economics, there are not two branches of economics. There is only one theory, applied in different areas. Any Austrian macroeconomist, like Joe Salerno or Roger Garrison, using the same tools, could give a powerful lecture on micro theory at the drop of a hat.
None of the main textbooks stress this point. Not even the market-oriented textbooks concentrate enough on the Austrian point of view for my tastes. I make up for this in my lectures by discussing Mises and Hayek, hoping to spark some interest. Like all professors, I am under constraints, but I try to offer a different perspective nonetheless.
AEN: Do you emphasize the history of economic thought?
VEDDER: Even graduate students are abysmally ignorant of the subject. Most graduate schools do not require the course any more and others have stopped teaching the subject altogether. I consider this terrible. This subject is crucial, unless you think all necessary truth is in the recent literature, which it is not. For this reason, I have volunteered to teach the course next term. I'll be using some of Murray Rothbard's History of Economic Thought.
The greatest insight you gain from the class is that there are a variety of ways to look at economics. It is not enough just to say "here is the neoclassical synthesis" and be done with it. Members of the profession do not agree in a wide range of theoretical and political areas. Realizing this can spark a student's interest. In the typical economics class, you fail to pick up this diversity of thinking.
AEN: What does absence of intellectual history imply about the profession?
VEDDER: History of thought doesn't connect with the agenda of modern mainstream economics. Economics has become extremely technical and narrow in its approach. It has lost sight of broader issues. Many economists have lost sight of how to communicate with students and the general public.
Economists are speaking this specialized language that apes physics and trying to make themselves out to be practitioners of the queen of the social sciences. They want to be seen as smarter and more scientific than sociologists and psychologists. And yet the reality of this approach is to make economics too abstract, and even meaningless in places, dealing with tiny improvements in a small body of theory that has little resemblance to the real world.
Students also get very little basic information about economic structures and institutions. If you ask a typical grad student to describe the operations of the Federal Reserve System most of them will do a pretty poor job of it. Now, I don't love the Fed. In fact, I have argued that we should get rid of it. But a grad student ought not complete a degree in economics without some working knowledge of what it is and how it operates.
AEN: Why would a student study economics if not for a greater understanding of how economies work?
VEDDER: Well, students seem to be going in two directions. There are the standard academic students who aspire to be college professors. They see themselves as theorists and mathematicians who happen to be working with economic phenomena. And there's another group that has a completely different orientation. They want to get their degrees and get out into the business world to make money. Or perhaps they aspire to be like those Nobel Laureates who thought they had discovered the magic formula for investment before their hedge fund nearly went belly-up.
Those two categories sum up nearly all the existing students. But the ones I am interested in do not fit into either category. Those in this third group are interested in economics because they want to discover, from a philosophical and scholarly standpoint, how the world works. They are interested in events, history, institutions, places, law, and policy. They ask probing questions about real phenomena, and seek to understand a general theory to explain it. They care about the history of thought, the workings of central banking, the intersection between economics and other disciplines, and a wide range of real issues.
If you think about it, the truly great economists of the past--Mises being the most impressive example, but also including Hayek, Friedman, and even Keynes and Marx--fit into this third category that is so rare these days. They spoke to the issues of the day.
Most current economists are ill-equipped to do that, because they work only in math and econometrics. They don't know the details of how the world works. They learn the technical material, but don't have a solid grounding in basics, like scarcity and prices.
AEN: This problem undoubtedly affects the way economics is taught.
VEDDER: It is appalling that so many students consider it a dreary subject. Economics can be beautiful. It can be exciting. But emphasis solely on mathematics and technique robs economics of its inherent power. It makes economics dull. I think that explains why more students do not persist in economics.
The American Economic Association established a commission on graduate study several years ago that included economists of all stripes. There was fairly widespread agreement that the profession had become too narrowly technical. For example, it was found that many graduate students couldn't teach a principles class because they were so wrapped up in esoterica.
Most economists today are trained in state universities. They work in state universities or in government. Their income is subsidized, directly or indirectly, by government. There is a pro-state bias built into the system. Most economists have had very little contact in their professional lives with the private sector. They haven't worked in jobs in which consumer service is the priority. They are isolated from the principle and consequences of scarcity.
That would not be a problem if their business was physics, literature, or even history. But economists are writing and thinking about this thing called the economy that they have never actually experienced. That's what accounts for the leftist bias indicated in surveys showing that 80 to 90 percent of economists vote for the Democrats. The growth and popularity of Austrian economics represents a good sign. But still a large majority can be counted on to favor leftist positions.
AEN: Do you think this bias has affected the reception of your own work?
VEDDER: The view advanced in Out of Work is that free markets are the best means to avoid extended periods of high unemployment; prolonged joblessness is most closely associated with a variety of interventionist schemes. This thesis alone guaranteed that we would not get the most respectful hearing within mainstream circles. But we had an additional problem: most of the book is a narrative that tells a story, one that even a lay person can find interesting.
Now, I have probably had more success than most Austrians in reaching the mainstream. I write for mainstream journals and give papers at mainstream conferences. Without compromising, I generally try to approach the discipline in ways that mainstreamers will not find excessively jarring. This is reflected in the book, which includes low-tech regressions. Incidentally, Murray Rothbard loved it. He would always say to me, if you can tell the Austrian story with regressions, go ahead and do it.
The establishment backlash didn't come for a long time. But eventually, we irritated enough Keynesians that it finally came, in the form of an attack from Brad DeLong, a well-known Keynesian at Berkeley. He wrote a slashing attack on the book. Most of his criticisms would be dismissed out of hand by Austrians. Nonetheless, in the new edition of Out of Work, we added 50 pages of econometrics to go along with the descriptive history. We have done even more technical analysis, and it hasn't changed the message one bit. It is still not going to please everyone.
AEN: Can the essential message of your book be conveyed by econometrics alone?
VEDDER: You cannot reduce economics to equations, not even economic history. Ironically, in the course of doing all this math, I have become more and more skeptical of the efficacy of these techniques. There are all kinds of problems with them which cannot be overcome. At the same time, the more I understand about the Austrian literature, the more I marvel at the theoretical sophistication and subtlety of argument you find in the works of Mises and Hayek.
I'm not entirely against econometrics. Neither do I see it as just a way to raise my Nielsen ratings. For all of its imperfections, econometrics can add some rough support for agnostics who cannot see truth through any other means. But you cannot convey ideas like the discovery process in econometrics.
AEN: In fact, you have written a strong critique of relying exclusively on government data sets.
VEDDER: The most popular statistic in economics is the Gross Domestic Product, but the whole thing is problematic. The idea that we can "add up" the national output is fraught with peril in a society in which government is so heavily involved in the economy.
My article with Lowell Gallaway on The Great Depression of 1946 [PDF format] (Review of Austrian Economics, Vol. 5, No. 2) illustrates this. The official statistics at the time we wrote that article (1991) had GDP crashing in 1946, in real terms, by 17 percent. If you believe that statistic, that is the worst year for national output in our nation's history, worse than any year in the 1930s.
And yet, the stock market was rising. Unemployment was low. Ten million people were leaving government employment from the war and entering the job market. The Keynesians were all predicting massive joblessness. It just didn't happen. In fact, there was no Great Depression except in the government's own data sets. Our title was tongue-in-cheek.
The reason is that the government didn't do anything. The soldiers were sent home and that was it. We moved resources from public to private use. We went from a command economy back to a mixed-market economy. And the power of the market reasserted itself after a long time in which it laid dormant during the war.
The official statistics ignore the fact that prices were being controlled in 1945 and 1946, and didn't really reflect real scarcity. Businesses reported the value of goods and services as the price the government paid for those goods and services. Yet no rational human being would pay those prices if they had to purchase them on the market.
After the war, resources were being spent, not on tanks and bombs, but washing machines and cars. Government statistics showed this as a sharp drop in output. But it was total fiction. In fact, this year was a triumph of markets over planning. Ironically, this occurred the very year of the Employment Act of 1946, which enshrined Keynesianism in American life.
The really odd thing is how the numbers keep changing. When the numbers first came out in 1946 and 1947, they said that the economy had fallen 5 or 6 percent. But due to some problems with index numbers that I won't go into, by the early 1990s, the data showed a 17 percent drop for the same period. More recently the data has recorded a 20 percent drop. The government kept revising the figures to suggest it was even a worse depression. Since then, the government has gone to chain-link price indexes, which gets rid of the some of these distortions. The bottom line is that it's all nonsense.
AEN: How much credit does Truman deserve?
VEDDER: Very little or none. In 1946, Truman wanted to keep wage controls on. Congress passed a bill that retained them but not as vigorously as Truman wanted. Truman vetoed it because it didn't go far enough and Congress didn't override the veto. The effect, however, was that wage controls expired statutorily. We went to zero-wage controls, not because of a political commitment to free markets but because of a strategic miscalculation.
Also, when the bomb was dropped and the war was ended, the planners were caught off guard. They had talked about erecting a vast apparatus of peacetime planning after the war. But the war ended so suddenly, they didn't have time to mobilize and put it into place. That was marvelous because it meant that government was not meddling as much as it had been.
Government spending fell more than 70 percent over a two-year period. In fact, if you look at the numbers alone, you might think that Murray Rothbard was president of the United States. He wasn't working on getting rid of government completely, but he was moving in that direction! In fact, the whole thing was a fluke but a very fortunate one for the American economy. We entered into a long period of prosperity. All of this is submerged in American economic history because it isn't obvious from the data, which are highly misleading.
AEN: What other examples of statistical manipulation have you found?
VEDDER: You can support any theory of economics you want to depending on how you manipulate the data. Consider the great controversy over whether we have been richer or poorer since 1973. To support Malthus's position, I could cite data showing the average hourly wage falling 13 percent since 1973, showing that wages are moving toward subsistence. Or I could show that Marx was actually right, by pointing out that output per hour has risen even as wages have fallen. Or I could cite real compensation per hour in the business sector and show wages outpacing profits, which suggests business is being exploited by workers, sort of a reverse Marxism. If you add to this the adjustments made by those who claim the CPI is not being measured properly, matters become even more complicated. You can even show what both neoclassical and Austrian economists would expect: real-wage data and productivity data are moving in the same direction.
I'm not suggesting that the truth is not out there somewhere. I just doubt that government statistics are the magic means for finding it out. Data are highly subject to manipulation. Mainstream economists do this all the time. As Mises warned us, it is a mistake to let the data determine your theory instead of using data to illustrate a principle of economics you can explain through good sense. In pursuing this path, I would say Austrians are more intellectually honest and more straightforward than most mainstreamers.
AEN: Do you worry about what today's students will regard as the economic lessons of the 1990s?
VEDDER: To some extent. I can just see historians of the next decade putting their spin on matters. The 1980s have already been called the Decade of Greed, and that moniker has stuck. I can imagine the 1990s boom being regarded as the consequence of Clinton's mixed economy, while blaming the financial crisis on the Republicans. This is a distortion.
In some ways, of course, Clinton has been better than Bush. Under Clinton, government spending as a percentage of total output has fallen. In 1992, the government spent 22 percent of the GDP. In 1998, the government spent 19.5 percent of the GDP. My interpretation of the prosperity of the 1990s is in this single statistic. The overall size of government fell. (By the way, these numbers may be fundamentally erroneous, but since the distortions occur every year, certain patterns emerge over time that can be useful to examine.)
Clinton's philosophy of government has always been: do whatever is necessary to retain power. The one mark he attempted to make on the country was through his health-care proposal, and he was beaten back pretty badly. When that happened, the stock market was 3,800, about what it was when he took over as president. Since then the stock market has more than doubled.
After the health-care fiasco, the crazies fell out of favor within the administration, and the Republicans took control of Congress. Clinton began to give speeches proclaiming the era of big government to be over. He didn't mean it, of course. But political forces were pushing him in the right direction. The result was a government gridlock, with government growth suddenly lacking that ideological push it needs in order to outpace economic growth. The economy grew at 5 percent and the government at 3 percent, and the result over time has been a relative shrinkage in the government's take.
Two-and-a-half cents of every dollar got taken out of the public sector and put into the private section. This is no revolution but it is a step in the right direction. It provided some impetus for the boom. By the way, the boom is overstated: we haven't had a year of four or more percent of real increases in output. This is the first long-term expansion where this has been the case. Nonetheless, we've been reasonably prosperous, and I think it's been because the big-government liberals have been spooked.
AEN: What about efficiency gains from dramatic technological changes?
VEDDER: Technological changes have always been around. I think the difference may be that the government has been relatively unsuccessful in trying to regulate the new technologies in computers and information. Regulation in some areas has declined. For example, the Interstate Commerce Commission is gone.
The best thing the Republicans did was shut down the government in 1995. The stock market rose three days in a row. I wondered in an article I wrote at the time: since the market went up 100 points with a third of the government shut down, how much would it rise if the whole thing were shut down? In any case, some progress has been made.
I'm not optimistic that this will continue. This notion that we have moved into a free-market age is wildly overstated. The reality is that the forces of interventionism are very much on the march. You can see it in regulatory activity and you can see the political left gaining in Europe. Germany practically has a communist as a foreign minister.
Many of the worst aspects of American regulatory law--for example, the Americans With Disabilities Act--were approved by George Bush, who, I think, was a worse president than Clinton in terms of the economy. There's more to being president, of course. I do think issues of moral turpitude are relevant. Nonetheless, we're talking about economics, and Bush was very bad on that front.
AEN: What do you make of the Commerce Department's data showing historically low savings?
VEDDER: It is true that the rise in equity prices have made people seem wealthier. And there is a well-known rule in economics that people's consumption and income depend not only on their income levels but also on their perceived well-being. If people perceive themselves to be well-off, they feel they don't need to save out of current income.
The way the government defines savings is subject to some debate and scrutiny. Economists usually think of savings as the changes in the flow of wealth minus consumption over a period of time. Well, that's not the way the Commerce Department looks at it. The government says savings is the residual income that isn't consumed. That creates all sorts of inaccuracies. That's why the Fed's superior data diverge sharply from the Commerce Department's.
Again, aggregate statistics have to be handled with care.
AEN: You're not suggesting that the savings decline is entirely artificial.
VEDDER: I think we can still grant that our savings rate is low. I think the main reason is that we tax savings as capital at punitive rates in this country. The double, triple, and quadruple taxing of capital punishes savings because savings is converted into investments and financial capital in the process of creating real physical capital. If you tax capital high, the incentives to save are going to be reduced.
We have corporation income taxes at 35 percent, on top of state income taxes. If the corporation makes $100, $40 are taxed away. Let's say half of the remainder is given to the shareholders in the form of dividends, leaving only $30 to keep as retained earnings to build new machines and expand production. The shareholders will pay a tax of about a third on those earnings. If the shareholder sells the stock, the capital is taxed again.
If you somehow survive all of this with some money intact, you get taxed again if you try to pass wealth on after your death. The federal estate tax table starts at 37 percent and runs as high as 55 percent.
Remember too that some of these gains are mythical because they are brought about through inflation. Let's say your aunt bought $10,000 in stock in 1971. She kept it until 1997, when the stock was now worth $40,000. She then decided to sell it. The government tells her that she made a $30,000 profit, and 20 percent is due to the federal government. After the state government gets its cut, she ends up paying about $7,000 in taxes.
The reality is that because of inflation, the price of everything has quadrupled since 1971. The purchasing power of the initial value is nearly identical to its purchasing power in 1997. There are no real capital gains, and yet she pays the government anyway. Under these conditions, why save? Why not consume?
Many other countries have higher taxes than we do. But they don't have as high taxes on capital as the U.S. does. As a consequence--again granting the problems with this data--most every developed country has higher savings than we do. Until recently, we have saved about a nickel on the dollar. Well, France and Germany save over 12 cents. Italians save 14 cents--three times as much as Americans. Japan and Britain save between 10 and 15 cents. The reason: taxes on capital are very high in the U.S.
AEN: What about indirect taxes on capital and savings?
VEDDER: Certainly, there is the regulatory tax. OSHA regulations require companies to spend billions, not to expand output, but to meet some government mandate. This is a disguised tax. If you add these taxes, you've got something on the level of quintuple taxation on capital. This is gross over-taxation.
Forced savings programs like Social Security end up discouraging savings too. Martin Feldstein, who has limitations, has nonetheless made his reputation demonstrating that this program directly reduces personal savings. The aggregate national savings rate is not increased in the way that people think. I think he is right. There's this fiction that companies don't really pay the Social Security tax, but in fact they do.
The tragedy for younger people is that the money taxed for Social Security is not going to be given back at any respectable rate of return. One solution, that of diverting revenue to higher-return investments, could potentially lead to a government takeover of the stock market. This would be a disaster. The devil is in the details of these plans.
Ideally, I would like to see a total opt-out option: young people surrender their claim to future benefits in exchange for no longer paying the tax. That would eliminate a huge portion of the liabilities in the system. It's possible to do it without a costly transition.
A quick warning: take all predictions about Social Security's future with a grain of salt. If you change assumptions modestly--such as assumptions about the growth in future benefits--the numbers change dramatically. All these calculations you read about in the newspapers are very sensitive.
AEN: To your mind, is there a preferred level of savings?
VEDDER: The Austrian position is that there is not, which is why I am a little uncomfortable with warning about declining savings. Mises and Rothbard were right: there is no optimal level of savings. I believe that Americans save too little, not because I in my wisdom think people ought to save more, but because it is manifestly clear that the government discourages savings, causing them to be below what they otherwise would be.
The optimal rate of savings depends on human action as it operates through the subjective notion of time preference. Whether people want things now or later determines how they allocate their consumption and savings decisions. Part of the idea of the free market is that we allow the price system to signal people to make their own choices. The prices in this case are interest rates, which variously reward and discourage the saving-consumption choice.
This is where Austrians have so much to contribute. A lot of the problems we have in macroeconomics are due to mainstream economists' lack of understanding in this area. When the central bank manipulates the interest rate, it creates distortions very much like those that are created by price controls. The Federal Reserve interferes as much with the market system as a price-control board.
AEN: How does international trade affect economic data?
VEDDER: It causes great difficulties. How can you tell where dollars are earned these days? With economies integrated at all levels within the structure of production, it is hard to know. The Gross Domestic Product statistic measures all output by Americans within a given year, including those living overseas. How do you value what's going on in Japan?
When you consider a company like Daimler Chrysler, you are left to wonder: what nation does this company belong to? Germany or the U.S.? I think the right answer is neither. Corporations are taking on an identity of their own, and part of the reason is that companies are fleeing the tax state as best they can and playing different jurisdictions off each other. They are trying to become transnational. I think all this is wonderful, but it does cause administrative difficulties for corporations.
The great example of skewed data in international economics is the balance of payments data. Within this data, there is something called "errors and omissions," which signals where the bureaucrats couldn't get the numbers to balance out. Well, some years, the errors and omissions reach $50 billion.
Then there is the problem of grey and black markets. I'm not just talking about drug lords in Colombia. This includes people who go to Europe and buy a $10,000 diamond and bring it here in a sock because they don't want to declare it at customs. As the state has grown, we have become a world of liars and thieves. This makes all this data suspect.
AEN: Do you see mergers among international corporations affecting union power?
VEDDER: Internationalization accelerates the decline of labor unions. From a company's perspective, if unions get too strong, it will just move its operations to another region or country. The unions are not really in a position to stop them because union power is seriously on the wane.
In the private sector, union membership is down to about 10 percent of the labor force. That is below the number in 1920, a decade before the Wagner Act and the New Deal and its labor-protection laws. The only argument that could be made for them pointed to the lack of labor mobility in company towns and the like. But now, even the poorest of Americans can afford a jalopy. Anyone can move today, so the notion that a person is "trapped" is absurd.
Americans now realize that we don't need labor unions. However, there is one area where the union thrives, and that is in the public sector. For the first time in U.S. history, one half of union membership is not in the private sector.
AEN: Is your work in labor economics influenced by W.H. Hutt?
VEDDER: He was influential in Out of Work. He once told me that the Depression in the 1930s was in part due to the artificial propping up of wages. I couldn't believe that was true, but as I looked into it, I realized he was exactly right. Murray Rothbard's book America's Great Depression helped me in this regard too. That book was an important precursor to a whole new revisionist school on Herbert Hoover. I think Murray was the first to argue that Hoover was an early New Dealer. Even mainline historians now agree.
Oddly, I never set out to be a labor economist. It was not my focus in graduate school. As I became interested in macroeconomics, I realized that unemployment is a key factor in sorting out the theoretical issues. That's when I read Hutt, as well as Hayek, and the early writings of Edwin Cannan, Lord Beveridge, and Lionel Robbins. They all pointed to the fact that markets are the way to deal with labor problems.
AEN: Labor economics frequently intersects with moral issues, like justice and equality.
VEDDER: I have never understood the appeal of a goal like "equality." People are inherently different. They have different talents, different interests, different degrees of marginal productivity. This is what makes exchange possible. It's what makes life interesting and complex. Variety is the spice of life. Cindy Crawford makes much more money than I do, but I don't resent it. I don't think everyone in the world ought to be forced to look like Richard Vedder.
This obsession with equality is very destructive for the human race. Mises is correct that free societies need to learn to deal with and even celebrate the existence of enormously wealthy individuals. They are a driving force behind rising wealth of the whole society.
By the way, I could give a two-hour lecture on the fallacies inherent in income-equality statistics. In brief, what is the point of taking a snapshot of a one-year period as opposed to a ten-year period? Some people who win the lottery one year are digging ditches the next year. Some people who are college students go from $3,000 to $100,000 per year.
AEN: You seem to have a talent for cutting through the conventional story.
VEDDER: This is what I mean about economics being powerful and interesting. For example, on the Great Depression, there was no need for there to be this decade of mass suffering. It was a consequence of massive government intervention in the economy. This is not just a story of data and number crunching. It is a tragic human drama and ought to be taught that way.
AEN: Certainly the students at our summer program come away from your classes with that feeling.
VEDDER: The great thing about the Mises University is that I feel liberated to teach the way I want to, without fear of reprisal. Like all professors these days, I feel somehow limited in what I can say in my own university, even though I have never been threatened. I have just finished reading The Shadow University, a book by Alan Charles Kors and Harvey A. Silverglate (The Free Press, 1998). I could only read 25 pages per night because it made my blood pressure too high.
What the authors describe is an overall atmosphere on campus of intimidation, brainwashing, political indoctrination, and browbeating, of both students and professors, by an entrenched university bureaucracy. The biggest surprise is how oppressed the students themselves are, with disciplinary boards, dormitory social police, etc. My university is better than most, but even here you worry about taking particular positions on affirmative action and the like.
When I am at the Mises University, I get to say whatever I want to. It has the feel of academic freedom. I go to all those social functions in the evening, and I find it exhilarating. The students want to talk about ideas and concepts. They want to learn. I wish we could have a whole university that operates this way.
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