Review of Georges Reisman’s “The Government Against the Economy”

This review was published in Taurus (European Quarterly issued by European Democratic Students) no 1/1981, and is based on a Swedish version published in Svensk Linje2–3/1981.  I re-publish it now, because the book has recently been made available in a Kindle version.

In all probability, the least intelligent and most destructive method of fighting inflation is price and wage controls.

And at the same time it is the incomparably most popular method.

It is unintelligent because it represents an attempt to lower the temperature of the economy by manipulating the thermometer. It is destructive because it destroys the price mechanism, the only reliable source of information about the relation of supply and demand on a free market.

And it is popular because neither the politicians nor the public at large understand what inflation is and what causes it, what a free market is and how it functions, what the actual results are of price and wage controls. If there is any general opinion at all, it seems to be that the money supply in the economy increases because prices and wages rise (the “spiral” theory). This of course is the exact opposite of the truth, a total reversal of cause and effect.

Fortunately, there is now a book available which explains these matters in a manner clear and intelligible even to the layman, and which also makes good and interesting reading: The Government Against the Economy by George Reisman. (Reisman is an American economist who has studied under the late Ludwig von Mises and who, philosophically, is a disciple of Ayn Rand.)

The most striking feature of Reisman’s book is its rare combination of being an excellent introductory textbook on the market economy and at the same time an impassioned pamphlet in defense of that economy, without ever losing neither its intellectual nor its polemical stringency. Reisman accomplishes this feat through the pedagogical structure of his book: he starts out by describing how the free pricing process on a free, unhampered market creates harmony and progress, and how it acts to close the gaps in income and wealth between different people and groups of people rather than widen them. (This of course is quite contrary to the claims of capitalism’s backbiters.) The free market makes possible a constant progress in which everyone, not only a select few, can have a share.

Only after having laid this foundation does Reisman proceed to show the destructive effects of price controls. The primary, fundamental effect (the one that explains all the others) is that controls create shortages: goods which are not allowed to rise in price as the market demands simply disappear from the market. (And non-existent goods evidently are of no use to anyone, no matter how cheap they are!)

The odds, however, are that the politicians won’t solve the problem thus created by abolishing the harmful controls, but by expanding them and eventually make them all-embracing. But an economy where all prices are controlled is a socialist economy. And consequently the last few chapters of the book deal with socialism, with the chaos and tyranny prevailing in socialist societies.

One might say (to make a literary association) that Reisman leads us from the Paradiso of capitalism, through the Purgatorio of a mixed economy, down to the Inferno of socialism (hopefully with the result that we, in real life, will make the opposite journey).

All this may sound theoretical, and I have of course just presented the bare skeleton of Reisman’s reasoning. But his book does not lack “flesh” in the form of practical examples and applications. Most of this are taken from the oil crisis. Reisman shows that it is not the American oil companies or even the Arab sheikhs who are ultimately responsible for the US oil crisis, but the US government, which, by its controls and “guidelines”, has prevented the market (i.e. the citizens) from responding rationally to the Arab oil embargo. Without price controls, Reisman contends, the oil embargo would have made a dent in the US economy. With controls, the embargo has all but destroyed the economy.

Controlling prices is tantamount to making it illegal for people to act rationally – and the results cannot be other than disastrous. This, in a nutshell, is the message.

But if inflation is the result of an uncontrolled expansion of the money supply, wouldn’t the solution be to control it according to Milton Friedman’s monetarist prescriptions? Reisman takes this up in a short epilogue, where he rejects monetarism and advocates a 100% gold standard. The subject deserves a more extensive discussion (maybe a volume of its own?[1]) – but Reisman’s arguments are clear and, as far as I can see, quite sound. (The big problem is not that the money supply is uncontrolled, but that it is controlled by the government.)

The book has a foreword by former US Treasury Secretary William Simon, and is warmly recommended by F.A. Hayek and Henry Hazlitt, a recommendation with which I most heartily agree.

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The Government Against the Economy was also favorably reviewed in two Objectivist publications, and I take the liberty of giving a couple of short quotes from them:

The Government against the Economy’ offers the rare sight of a powerful and original mind in full control of his subject. It establishes George Reisman as an economic thinker of the first rank. – Harry Binswanger (The Objectivist Forum, vol. 1, nr 2, April 1980.)

This book is […] totally untainted by the twentieth century ‘economics’ that has produced our current state of affairs. It is a book written by the type of person that, in my judgment, Ayn Rand has referred to as a ‘new intellectual’, which is why the book can offer us the kind of fundamental guidance we need if we are to avoid the chaos and tyranny of a socialist future. – John Ridpath (The Intellectual Activist, vol. 1 nr 7, January 1980.)

Update September 9: This review is now also on Amazon.

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[1]) More extensive discussions can be found in Reisman’ magnum opus, Capitalism: A Treatise on Economics.