Is Christianity the Source of Western Values?

Recently on Facebook somebody linked to George Reisman’s essay Education and the Racist Road to Barbarism[1] and gave a couple of lengthy quotes:

In order to understand the implications, it is first necessary to remind oneself what Western civilization is. From a historical perspective, Western civilization embraces two main periods: the era of Greco-Roman civilization and the era of modern Western civilization, which latter encompasses the rediscovery of Greco-Roman civilization in the late Middle Ages, and the periods of the Renaissance, the Enlightenment, and the Industrial Revolution. Modern Western civilization continues down to the present moment, of course, as the dominant force in the culture of the countries of Western Europe and the United States and the other countries settled by the descendants of West Europeans. It is an increasingly powerful force in the rapidly progressing countries of the Far East, such as Japan, Taiwan, and South Korea, whose economies rest on “Western” foundations in every essential respect.

From the perspective of intellectual and cultural content, Western civilization represents an understanding and acceptance of the following: the laws of logic; the concept of causality and, consequently, of a universe ruled by natural laws intelligible to man; on these foundations, the whole known corpus of the laws of mathematics and science; the individual’s self-responsibility based on his free will to choose between good and evil; the value of man above all other species on the basis of his unique possession of the power of reason; the value and competence of the individual human being and his corollary possession of individual rights, among them the right to life, liberty, property, and the pursuit of happiness; the need for limited government and for the individual’s freedom from the state; on this entire preceding foundation, the validity of capitalism, with its unprecedented and continuing economic development in terms of division of labor, technological progress, capital accumulation, and rising living standards; in addition, the importance of visual arts and literature depicting man as capable of facing the world with confidence in his power to succeed, and music featuring harmony and melody.

And:

For the case of a Westernized individual, I must think of myself. I am not of West European descent. All four of my grandparents came to the United States from Russia, about a century ago. Modern Western civilization did not originate in Russia and hardly touched it. The only connection my more remote ancestors had with the civilization of Greece and Rome was probably to help in looting and plundering it. Nevertheless, I am thoroughly a Westerner. I am a Westerner because of the ideas and values I hold. I have thoroughly internalized all of the leading features of Western civilization. They are now my ideas and my values. Holding these ideas and values as I do, I would be a Westerner wherever I lived and whenever I was born. I identify with Greece and Rome, and not with my ancestors of that time, because I share the ideas and values of Greece and Rome, not those of my ancestors. To put it bluntly, my ancestors were savages–certainly up to about a thousand years ago, and, for all practical purposes, probably as recently as four or five generations ago. . . .

There is no need for me to dwell any further on my own savage ancestors. The plain truth is that everyone’s ancestors were savages–indeed, at least 99.5 percent of everyone’s ancestors were savages, even in the case of descendants of the founders of the world’s oldest civilizations. For mankind has existed on earth for a million years, yet the very oldest of civilizations–as judged by the criterion of having possessed a written language–did not appear until less than 5,000 years ago. The ancestors of those who today live in Britain or France or most of Spain were savages as recently as the time of Julius Caesar, slightly more than 2,000 years ago. Thus, on the scale of mankind’s total presence on earth, today’s Englishmen, Frenchmen, and Spaniards earn an ancestral savagery rating of 99.8 percent. The ancestors of today’s Germans and Scandinavians were savages even more recently and thus today’s Germans and Scandinavians probably deserve an ancestral savagery rating of at least 99.9 percent.

It is important to stress these facts to be aware how little significance is to be attached to the members of any race or linguistic group achieving civilization sooner rather than later. Between the descendants of the world’s oldest civilizations and those who might first aspire to civilization at the present moment, there is a difference of at most one-half of one percent on the time scale of man’s existence on earth.

These observations should confirm the fact that there is no reason for believing that civilization is in any way a property of any particular race or ethnic group. It is strictly an intellectual matter–ultimately, a matter of the presence or absence of certain fundamental ideas underlying the acquisition of further knowledge.

One commenter wrote:

Reisman oddly omits the influence of biblical religion on the development of Western civilization, until recently known as Christendom, which in fact is the source of most of the values he claims to cherish.

What values?

• Suffering and sacrifice? Jesus is supposed to have suffered and died for our sins (not his own), and Christians are admonished to emulate Jesus, as best they can.

And this is not the first instance of extolling sacrifice in the Judeo-Christian religions. Remember the story in Genesis of how God commanded Abraham to sacrifice his only son, which Abraham was quite prepared to do. God did this to test Abraham’s faith in him, and when it was tested, Isaac was replaced by a goat.[2]

Or take the Book of Job, where the Lord kills all of Job’s family in order to test Job’s faith in him. After a long and tedious discussion between the Lord and Job, Job finally concedes this act was totally just, and the Lord then gives him a brand new family. A consolation for Job, but not much of a consolation for the family killed. In this book in the Bible, God acts exactly like a mafia boss.

Back from pre-historic times to the present. The latest canonized saint, Mother Teresa, saw suffering as a great value – so great that she did not bother to offer dying patients any kind of palliative care, but let them suffer great pain, arguing that the pain meant that “Jesus was kissing them”[3]. To any decent person, this is an example of pure and unadulterated sadism; but by the Catholic Church – and by many others as well – Mother Teresa is hailed as a paragon of goodness.

• Original sin? – i.e. the notion that man is depraved by nature, that he is born in sin[4], and that the only thing he can do to remove his own sinfulness is to embrace the idea that Jesus has taken all his sins on himself and suffered and died for them.

What does it mean to say that man is born in sin and cannot escape his own sinfulness? Well, to be born is a sin; one of the first things a newborn child does is learn how to crawl, and then walk, and then run and jump. This must be sinful. And then a child learns to talk – at first in single words, then in two-word sentences, and eventually he masters his first language and moves on to learn one or more foreign languages. But all of this has to be sinful. A few children very early learn to play musical instruments, and some, like Mozart, start composing symphonies at a very early age. No matter how well such a child plays, and no matter how beautiful the symphonies, this is sinful, thus evil. But this is an idea that nobody could seriously maintain. Walking, talking, composing symphonies are all good things![5]

All this changes, when you accept Jesus as your savior. But it remains unclear in what way it changes. It should be noticed, in this connection, that Jesus died for our sins some 2 000 years ago. It is hard to give an exact measurement – but has there been less sinfulness and less evil in the world since that time?

And who stands to gain and who stands to lose, if we accept original sin? The sinner – the actual evil-doer – stands to gain, for whatever sin he commits, he can always claim that he is no worse than anyone else – and also, he just couldn’t help it, since he was born in sin.

The prophet Isaiah tells us:

If your sins prove to be like crimson, they will become white as snow; if they prove to be as red as crimson dye, they shall become as wool. (Isaiah, 1:18.)

But what happens, if our actions are already white as snow?

And of course John Galt – an upholder of Western values – refused to be born with original sin.

• The sin of pride? Or the corollary virtue of humility?

If we are born in sin and can only do sinful things, then of course it is an even greater sin to take pride in what we do, and Christianity thus teaches us to “eat humble pie”. But it may be illuminating to compare this to one of the Founding Fathers – perhaps the Founding father – of Western values: Aristotle. In The Nicomachean Ethics, he says that pride is “the crown of the virtues”. It is worth quoting him:

Now the proud man, since he deserves most, must be good in the highest degree; for the better man always deserves more, and the best man most. Therefore the truly proud man must be good. And greatness in every virtue would seem to be characteristic of a proud man. […] If we consider him point by point we shall see the utter absurdity of a proud man who is not good. Nor, again, would he be worthy of honour if he were bad; for honour is the prize of virtue, and it to the good that it is rendered. Pride, then, seems to be a sort of crown of the virtues; for it makes them greater, and it is not found without them. Therefore it is hard to be truly proud; for it is impossible without nobility and goodness of character. (The Nicomachean Ethics, book 4, chapter 3; translated by David Ross.)

And Ayn Rand, in Galt’s speech, calls pride (which she identifies as “moral ambitiousness”) “the sum of all values”.

When Christianity denigrates pride and elevates humility as a virtue, it merely tells us to blindly accept its doctrine of man’s depravity and of original sin.

• Justice? God’s behavior toward Job is hardly just. And in the Gospels we read:

 But I tell you, love your enemies and pray for those who persecute you, that you may be children of your Father in heaven. He causes his sun to rise on the evil and the good, and sends rain on the righteous and the unrighteous. (Matthew 5:44–45.)

It is a metaphysical fact that the sun and the rain does not make a distinction between good people and evil people. But the Gospel attributes this to God and tells us to be like God and make no such distinction. And this shows that the Christian God is neither moral nor immoral: he is amoral.

• Loving one’s family? Loving one’s life? Well, this what Jesus says:

If anyone comes to me and does not hate father and mother, wife and children, brothers and sisters—yes, even their own life—such a person cannot be my disciple. (Luke 14:26.)

• And what about science – one of the basic Western values Reisman mentions? I just have to refer you to the fate of Galileo. Or, for that matter, to the story of the Garden of Eden: Adam and Eve were driven out, because they had the temerity to eat from the tree of knowledge. God was opposed to knowledge!
• What about causality? What about “a universe ruled by natural laws intelligible to man”? The Bible is full of miracles, and a miracle by definition is an exception to the law of causality.
• And what about economics? What is the relation between Christianity and capitalism?

Do not store up for yourselves treasures on earth, where moths and vermin destroy, and where thieves break in and steal. But store up for yourselves treasures in heaven, where moths and vermin do not destroy, and where thieves do not break in and steal. […] You cannot serve both God and money. (Matthew 6:19–20, 24.)

And what is the Christian view on time preference? Another quote from the same chapter:

Therefore I tell you, do not worry about your life, what you will eat or drink; or about your body, what you will wear. Is not life more than food, and the body more than clothes? Look at the birds of the air; they do not sow or reap or store away in barns, and yet your heavenly Father feeds them. Are you not much more valuable than they? Can any one of you by worrying add a single hour to your life?

And why do you worry about clothes? See how the flowers of the field grow. They do not labor or spin. Yet I tell you that not even Solomon in all his splendor was dressed like one of these. If that is how God clothes the grass of the field, which is here today and tomorrow is thrown into the fire, will he not much more clothe you—you of little faith? (Matthew 6:25–30.)

Saving and capital accumulation is definitely not recommended by the Gospel!

Some people will now object that the “Protestant work ethic” is the basis of capitalism.[6] But what is the reasoning here? Jean Calvin taught that every man is predestined both for success or failure in this life and for eternal salvation or condemnation. So the followers of Calvin worked hard just to show to themselves and to others that they are predestined for success and salvation rather than failure and condemnation. All I can say about this reasoning is that it is odd.

• And what is the Christian view of free will? On the idea that we can actually choose between good and evil?

Most Christians, I believe, at least implicitly uphold free will, since it would be senseless to reward the good and punish the evil by eternal salvation and eternal condemnation, if man just can’t help what he does. But Jean Calvin could hardly have believed in free will, if he says that our eternal fate is predestined. And Martin Luther quite adamantly opposed the idea in a tract called On the Bondage of the Will.[7] He argues that free will is against what the Bible teaches, and he says that if man had free will, it could only mean the will to do evil:

In Romans 1:18, Paul teaches that all men without exception deserve to be punished by God: “The wrath of God is revealed from heaven against all ungodliness and unrighteousness of men, who hold the truth in unrighteousness.” If all men have “free will” and yet all without exception are under God’s wrath, then it follows that “free will” leads them in only one direction—“ungodliness and unrighteousness” (i.e., wickedness). So where is the power of “free will” helping them to do good? If “free will” exists, it does not seem to be able to help men to salvation because it still leaves them under the wrath of God.

And:

This universal slavery to sin includes those who appear to be the best and most upright. No matter how much goodness men may naturally achieve, this is not the same thing as the knowledge of God. The most excellent thing about men is their reason and their will, but it has to be acknowledged that this noblest part is corrupt.

And:

Now, “free will” certainly has no heavenly origin. It is of the earth, and there is no other possibility. This can only mean, therefore, that “free will” has nothing to do with heavenly things. It can only be concerned with earthly things.

Well, since Objectivism rejects the supernatural, free will in Objectivism “can only be concerned with earthly things”. But that was an aside.

Martin Luther claimed that we cannot reach salvation bay “doing good” but only by faith. But can we even choose to believe in God and in Jesus having absolved us from our sins? Oh, no. that, too, is determined by God:

Every time people are converted, it is because God has come to them and overcome their ignorance by showing the Gospel to them. Without this, they could never save themselves.

And:

Grace is freely given to the undeserving and unworthy, and is not gained by any of the efforts that even the best and most upright of men try to make.

Luther claims to have Scripture on his side: He notes that when people have done bad things, it is not because they have chosen to, but because God “has hardened their hearts”. So, if we do good, it is God who has made us do good, and if we do evil, it is God who has made us do evil.

• Faith versus reason? I will just quote Luther again:

Reason is the devil’s highest whore.[8]

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Religion has been a dominating force in man’s life since time immemorial; and the Western world has undoubtedly been dominated by Christianity. So to say that Christianity is part and parcel of our Western civilization and heritage is just a platitude. But are the things I have listed above Western values? Are they even civilized?

Ayn Rand said that the saving grace of Christianity is that it preaches the sanctity of the individual soul:

There is a great, basic contradiction in the teachings of Jesus. Jesus was one of the first great teachers to proclaim the basic principle of individualism — the inviolate sanctity of man’s soul, and the salvation of one’s soul as one’s first concern and highest goal; this means — one’s ego and the integrity of one’s ego. But when it came to the next question, a code of ethics to observe for the salvation of one’s soul — (this means: what must one do in actual practice in order to save one’s soul?) — Jesus (or perhaps His interpreters) gave men a code of altruism, that is, a code which told them that in order to save one’s soul, one must love or help or live for others. This means, the subordination of one’s soul (or ego) to the wishes, desires or needs of others, which means the subordination of one’s soul to the souls of others.

This is a contradiction that cannot be resolved. This is why men have never succeeded in applying Christianity in practice, while they have preached it in theory for two thousand years. The reason of their failure was not men’s natural depravity or hypocrisy, which is the superficial (and vicious) explanation usually given. The reason is that a contradiction cannot be made to work. That is why the history of Christianity has been a continuous civil war — both literally (between sects and nations), and spiritually (within each man’s soul). (Letters of Ayn Rand, p. 287.)

You may object that Christianity has also accomplished some great things. A couple of great philosophers – philosophers acknowledged by Objectivists to be great – were Christians (Thomas Aquinas and, to some extent, John Locke).[9] And Isaac Newton, arguably the greatest scientist of all time, was a Christian.[10]

Speaking personally, I enjoy churches and cathedrals. And certainly some Christians have composed some great music. What famous classical composer has not composed a religious oratory or a mass? And the greatest of them all, Johann Sebastian Bach, has been called “the fifth evangelist”.

But this does not really change my point. For example, are cathedrals humble? Or are they intended to make us feel humble, when we enter them? And where is the humility in Bach’s music?

It all boils down to this question: Is our Western civilization what it is because of Christianity or despite Christianity? If you answer “because of”, beware of the implications!

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[1] For Scandinavian speaking readers, this essay is also available in a Swedish translation.

[2] For a discussion of this, see Søren Kierkegaard’s Fear and Trembling (or Frygt og Bæven in the Danish original).

[3] She told this to a patient, and the patient answered: “Then I want him to stop”.

[4] There is a story about Frank O’Connor (Ayn Rand’s husband) that his parents sent him to a Catholic school; but when they tried to teach him that babies are born in sin, he left and went to a common, non-religious school instead.

[5] I exclude some composers, like Henryk Gôrecki, Arvo Pärt and all the minimalists. But you may listen to them, if you want to torture your eardrums.

[6] This idea was launched by Max Weber. But I guess you already knew that.

[7] De servo arbitrio in the original Latin. It was an answer to Erasmus of Rotterdam’s De libero arbitrio or On the Freedom of the Will. My quotes are from a section that has been published separately on the web.

[8] ”Vernunft ist des Teufels höchste Hure” in German. I call this rejection of reason “the fallacy of the stolen faculty“. Everyone has to use his reason even to put a simple sentence together, and Martin Luther did much more: apart from all the tracts he wrote, he translated to whole Bible into German and is credited with being the creator of modern German. How could he do this without “whoring with the devil”?

[9] Bad philosophers, according to Objectivism, include St. Augustine, Descartes and Immanuel Kant. Augustine and Kant certainly championed (if that is the right word) original sin and man’s innate depravity.

[10] He was an anti-Trinitarian, i.e. he opposed the doctrine of the Trinity. He is also reported to have said that space and time are the thoughts of God.

Time Preference and Net Consumption

Adapted from a Swedish blog post.

In case you are unfamiliar with these terms: “Time preference” refers to the fact that people (everything else equal) prefer a need satisfaction now or in the near future before the same need satisfaction in the more remote future. – “Net consumption” means the consumption of the capitalists, and the “net consumption theory” is the theory that the general level of profit in the economy is equal (or nearly equal) to the consumption of the capitalists. The theory is presented at length in George Reisman’s Capitalism: A Treatise on Economics, chapter 16.

Everything else equal, poor people have a higher time preference and – which is to say the same thing – a lower degree of future orientation than rich people. Take a homeless person, for example: he has to try to survive the day or the week; he is not in a position to set money aside for long-range projects or for his retirement. Another example would be a drug addict, whose time horizon is limited to his next “fix” – or an alcoholic who can only think of his next drink. – A less extreme example would be a poor farmer, who can only plan ahead for one year at a time; he needs this year’s harvest for him and his family to survive, and cannot put away more seed corn than is necessary for the next year’s harvest. (All farmers in Adam Smith’s “rude and early state” would be in this situation.)

At the other end of the spectrum, take a multi-billionaire such as Bill Gates or George Soros: he does not have to worry about surviving the next day, week, month, year or even decade; he can plan ahead for the future without having to concern himself too much with the present. He can even plan ahead for the time after his death and for securing the future of his children and grandchildren.

In between there are the rest of us: people with a moderate or fairly high income. We are in a position to set some of our money aside for the future: for buying a new house or a new car, providing for our children’s education, planning vacations, providing for our retirement.

But everything else is not always equal, so there are exceptions. A poor person may be struggling hard to get out of his poverty; and a very rich person may be squandering his wealth and end up poor.

If you are familiar with The Fountainhead, you may remember that Gail Wynand was sleeping on a couch in his office while building up The Banner and only later used his money to buy a yacht, create an art gallery, and commission a house from Howard Roark. – And for an example of rich people squandering their wealth, read Bernard de Mandeville’s The Fable of the Bees[1].

A change in the time preference of very poor people does little for the economy as a whole. Neither does such a change in the time preference of the few “squandering rich”. It is the time preference of the well-to-do and the industrious rich that makes a difference. As long as those people have a low time preference and a correspondingly high degree of future orientation, they will invest their money, and it is those investments that move the economy forwards.

According to George Reisman’s theory, the level of profit in the economy as a whole is equal to the net consumption of the capitalists (I leave net investment aside, because I don’t think it changes my point). As long as the capitalists have a low time preference, net consumption stays at this low level; the greater part of their wealth goes to productive investments. And the richer they become, the lower becomes their time preference, the more gets invested, the more gets produced, the more workers get employed and the higher their wages become.

But assume that the capitalists’ time preference would increase (and their future orientation would correspondingly diminish); this could happen if there were to be a serious threat of confiscation of their wealth by a socialist government (or if there were certain indications that doomsday was approaching and the world would come to an end). Then the opposite would happen: they would consume their wealth instead of investing it; production would diminish or cease altogether; unemployment would rise; and so would the general level of profit and interest.

And this is why time preference is not a direct but an indirect cause of the level of profit and interest. It works through the net consumption of the capitalists.

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Update December 26, 2015: As George Reisman has pointed out to me in a private message, it is not entirely true that capitalists will continue saving and investing indefinitely. As long as a capitalist is building his fortune, he will save and invest heavily out of his income and consume correspondingly less. But once his fortune is sufficiently large to make his own future – and even his children’s and his grandchildren’s – secure, he will have no incentive to further enlarge it, so he will save and invest less and less and finally may come to the point where he will consume all of his income. (For an extensive discussion of this, see Capitalism: A Treatise on Economics, pp.  739–744.)

I think (this is my own reflection) that this explains why so many of the greatest capitalists establish educational or other foundations (for example Rockefeller and Carnegie, and today Bill Gates and George Soros). From the point of view of the capitalist, this is consumption, since the purpose is not to make more money and enlarge his fortune, but simply to make the best use of the money he no longer needs.

George Reisman also tells me that

capitalists continue to save to the extent that the rate of profit/interest exceeds the rate of their consumption (the rate of net consumption). What causes this is the continuing increase in the quantity of money and volume of spending in the economic system. If the quantity of money and volume of spending ever stabilized at some given level, accumulated capital would grow to the point at which the consumption of the capitalists exhausted the whole of their incomes; at that point, saving out of  income would be zero.

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The honor of having discovered the role of time preference goes to Eugen von Böhm-Bawerk. Later “Austrian” economists, such as Mises, have considered his explanation of the causes of time preference as not quite satisfactory. But the one who nails it is, once again, George Reisman:

The nature of human life implies time preference, because life cannot be interrupted. To be alive two years from now, one must be alive one year from now. To be alive tomorrow, one must be alive today. Whatever value or importance one attaches to being alive in the future. one must attach to being alive in the present, because being alive in the present is the indispensable precondition to being alive in the future. The value of life in the present thus carries with it whatever value one attaches to life in the future, plus whatever value one attaches to life in the present for its own sake. In the nature of being alive, it is thus more important to be alive now than at any other, succeeding time, and more important to be alive in each moment of the nearer future than in each moment of the more remote future. If, for example, a person can project being alive for the next thirty years, say, then the value he attaches to being alive in the coming years carries with it whatever value he attaches to being alive in the following twenty-nine years, plus whatever value he attaches in the coming year for its own sake. This is necessarily a greater value than he attaches to being alive in the year starting next year. Similarly, the value he attaches to being alive from next year on is greater than the value he attaches to being alive starting two years from now, for it subsumes the latter value and represents that of an additional year besides.

The greater importance of life in the nearer future is what underlies the greater importance of goods in the nearer future and the perspective-like diminution in the value we attach to goods available in successively more remote periods of the future. (Capitalism: A Treatise on Economics, p. 56.)

To put it in shorter words: To be alive today and this year is the necessary pre-condition of being alive tomorrow or in fifty or a hundred years. Everything else equal, we have to value life in the present over life in the future, for if we don’t, there will be no life in the future. Thus we have to have goods or money to survive the day before we can start thinking about saving for the future.

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I originally wrote this some years ago, when I was pulled into a discussion with an idiot not too well-informed person, who claimed that George Reisman could not be a real “Austrian”, since he does not share the conventional “Austrian” view om time preference.

(Other schools than the “Austrian” have no inkling of the role of time preference.)

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See also my earlier blog post Christianity and Time Preference.

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[1]) Mandeville claimed that this squandering would be a boon to the economy; but this is simply a version of the “broken windows” fallacy and has been refuted time and again by better economists.

A Review of George Reisman’s “Capitalism: A Treatise on Economics”

This is a slightly expanded version of a review I submitted to Amazon a few years ago. This review seems to be appreciated by readers, and it was much appreciated by Dr. Reisman himself, who suggested I make this expanded version for possible publication. (This version was originally written in 1999.)

George Reisman’s Capitalism: A Treatise on Economics is perhaps the greatest treatise on economics of all time; it certainly ranks with such works as Adam Smith’s The Wealth of Nations or Ludwig von Mises’ Human Action; and in one respect I think it surpasses them: even the great pro-capitalist economists in the past have had contradictions and/or inconsistencies in their reasoning that undercut their message and make it weaker than it could and should be. If there are contradictions or inconsistencies in Reisman’s treatise, I have yet to find them.

An achievement of this kind is always an integrated whole. But if I were to single out one insight as the greatest one, it would be the “primacy of profits” principle, the insight that wages are a deduction from profits, not vice versa. This lays the ground for the most thorough and fundamental refutation of the Marxian exploitation theory that is possible; it also lays the ground for what actually constitutes economy-wide profit (the “net consumption” theory of profits) and the actual relationships between profits, wages and investment, and for many other things as well. To make a comparison, I think this discovery ranks with Adam Smith’s original discovery of the principle of division of labor, or the early Austrians’ discovery of marginal utility. I sincerely hope that this principle gets thoroughly understood by economists in the future.

Some other highlights I could mention merely because I have not seen them mentioned by other reviewers:

The demonstration that the rise in the average standard of living rests entirely on lower prices for goods and services. This fact is obscured by the presence of inflation, and other economists (notably the Keynesians) have managed to create a lot of fog around this issue. Reisman’s analysis completely dissolves the fog. And this point also has a positive corollary. The only thing that actually does raise the average standard of living is a rise in the productivity of labor; behind such a rise stand saving, technological progress and capital accumulation; and behind these stands man’s reasoning mind.

Understanding the extent of the gulf between a pre-capitalist, non-division of labor society and a modern division of labor society. (E.g.: understanding why a rise in population would be a threat in the former kind of society, but a source of great benefit in the latter kind.)

The demonstration that one of the things capitalism is regularly denounced for – the concentration of great fortunes in relatively few hands – is actually to the benefit of everybody, not merely the owners of those fortunes.

The demonstration of what is wrong with modern “national income accounting”. To make a long story short, the “modern” accounting method makes it look like almost all expenditure in the economy is consumption expenditure, while the truth is that most expenditure in a modern advanced economy is expenditure for the sake of further production.

And those are just a few of the highlights.

Capitalism is not always easy reading, and a beginner would be well advised to start with The Government Against the Economy (the whole of this book, however, is incorporated into Capitalism as chapters 6–8), or with some of Reisman’s shorter pamphlets (or with one of Reisman’s own favorites, Henry Hazlitt’s Economics in One Lesson). Some previous knowledge of Classical and Austrian economics is a great help. But, particularly in the first chapters, dealing with the role of material wealth in man’s life, there are passages that made me cheer aloud when I first read them, and possibly others will cheer aloud, too. (One such observation is that we value automobiles and other means of transportation for basically the same reason that we value having legs over not having legs.)

As is probably known, George Reisman was not only a student of Ludwig von Mises but also a student of Ayn Rand, and her influence permeates his book in more ways than I have space to tell. You may recall that one of the strikers in Atlas Shrugged was “a professor of economics who couldn’t get a job outside, because he taught that you can’t consume more than you have produced”. Well, this is what George Reisman teaches, for a thousand double-column pages and better than anyone has done before him.

PS: Reisman’s words of appreciation are worth quoting:

I believe that my treatment of the subject of profit is the most important and original fea­ture of the book and that the reversal of the Marxist view of the relationship between pro­fits and wages is one of the most important appli­cations of my theory of profit. Those are pre­cisely the points your review stresses. So I come away from your review with the very gratifying feeling that here at last is someone who really understands the book and has hit the nail on the head in reviewing it.

PS. Here is my original Amazon review. (It was published in 1999 under my own name, and I don’t know why it has been changed to “A customer”.)

You may also read my review of The Government Against the Economy.

Short and simple refutation of Thomas Piketty

This story is currently making its rounds on Facebook:

There is a rich man and a poor man.
The rich man makes $1000 a day.
The poor man makes $10 a day.
The difference in their income is $1000 – $10 = $990 a day.

The rich man builds a factory.
Now the rich man makes $2000 a day.
He gives the poor man a job at the factory.
Now the poor man makes $100 a day.
The difference in their income is $2000 – $100 = $1900 a day.

A politician decides the “income gap” has grown too large.
He taxes the rich man $1000 a day, gives it to the poor man.
The rich man can no longer afford to run the factory.
He closes his factory. The poor man loses his job.

Everything is as it was before.
And the politician takes credit for “closing the income gap”.

George Reisman has written a slightly more elaborate and detailed criticism of Piketty. But this short story encapsulates one of the main points of his criticism. Piketty claims that when the “capital/income ratio” goes up (in this story from $990 to $1900), it means that the capitalists are making money at the expense of the wage earners. The story tells us that the exact opposite is true.

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Update November 17, 2016: For Scandinavian speaking readers, Reisman’s criticism is also available in a Swedish translation.

New Kindle Book by George Reisman

George Reisman has published a new Kindle book called The Benevolent Nature of Capitalism and Other Essays, which is available from Amazon for $5.74. The title essay may be regarded as a condensed (well, very condensed) version of his magnum opus, Capitalism: A Treatise on Economics; the rest of the essays are elaborations on various aspects of capitalism. They have all been published earlier, but some of them, e.g. “Capitalism: The Cure for Racism” and “Education and the Racist Road to Barbarism”, may be hard to find today.

For Scandinavian speaking readers: Two of those essays, Freedom and The Toxicity of Environmentalism are also available in Swedish translations, and I am currently working on translating the title essay.

Taxing the Rich Makes Us Poorer

That taxing the poor makes the poor even poorer is not exactly rocket science. It would be a great boon to the poor man if the income tax and the value-added tax were simply abolished. In Sweden (and I believe in most countries) alcoholic beverages and tobacco products are heavily taxed; those taxes obviously hurt the poor much more than the rich: the poor man may have to quit drinking and smoking just to be able to afford his daily food and paying the rent for his apartment; while the rich man may enjoy his vintage wines and his Habana cigars without it making a dent in his fortune. (In the category of “rich” are also included the politicians who levy the taxes.) The rationalization for this is that it is necessary to preserve the poor man’s health.

At least here in Sweden, gasoline and electricity are also heavily taxed; this is part of the effort to “save the planet” from the results of industrialization. The relatively poor – those who can at least afford a car – are made to pay extra for driving to and from their work; but it does not make a dent in the fortune of Al Gore, who is able to afford a well-lit mansion and to drive in a limousine or fly by private airplane while traveling the world to preach austerity to the rest of us.

But what about exclusively taxing the rich and hand the money out to the poor (after a handsome deduction for paying the politicians and their henchmen other public servants)? Here is a quote from Ayn Rand:

In view of what they hear from the experts, the people cannot be blamed for their ignorance and their helpless confusion. If an average housewife struggles with her incomprehensibly shrinking budget and sees a tycoon in a resplendent limousine, she might well think that just one of his diamond cuff links would solve all her problems. She has no way of knowing that if all the personal luxuries of all the tycoons were expropriated, it would not feed her family – and millions of other, similar families – for one week; and that the entire country would starve on the first morning of the week to follow. […] How would she know it if all the voices she hears are telling her that we must soak the rich?

No one tells her that higher taxes imposed on the rich (and the semi-rich) will not come out of their consumption expenditures, but out of their investment capital (i.e., their savings); that such taxes will mean less investment, i.e., less production, fewer jobs, higher prices for scarcer goods; and that by the time the rich have to lower their standard of living, hers will be gone, along with her savings and her husband’s job – and no power in the world (no economic power) will be able to revive the dead industries (there will be no such power left). (“The Inverted Moral Priorities” in The Voice of Reason, p.  274.)

This is what taxing the rich will inevitably accomplish: less investment, fewer jobs, higher prices, scarcer product, and in the end (if practiced consistently enough) starvation.

This point is also stressed by “Austrian” economists, especially by George Reisman. There is an essay by Reisman on the Ludwig von Mises Institute’s web site, called Anti-Obamanomics: Why Everyone Should Be in Favor of Reducing Taxes on the “Rich”, from which I quote:

The progressive personal income tax, the corporate income tax, the inheritance tax, and the capital-gains tax are all paid with funds that otherwise would have been saved and invested. All of them reduce the demand for labor by business firms in comparison with what it would otherwise have been, and thus either the wage rates or the volume of employment that business firms can offer. For they deprive business firms of the funds with which to pay wages.

By the same token, they deprive business firms of the funds with which to buy capital goods. This, together with the greater spending for consumers’ goods emanating from the government, as it spends the tax proceeds, causes the production of capital goods to drop relative to the production of consumers’ goods. This implies a reduction in the degree of capital intensiveness in the economic system and thus its ability to implement technological advances. The individual and corporate income taxes, and the capital-gains tax, of course, also powerfully reduce the incentive to introduce new products and improve methods of production. In all these ways, these taxes undermine capital accumulation and the rise in the productivity of labor and real wages, and thus the standard of living of everyone, not just of those on whom the taxes are levied.

And later on:

Starting with tax cuts for the so-called rich — based on equivalent reductions in government spending — is the only hope for the resumption of significant economic progress, indeed, for the avoidance of economic retrogression and growing impoverishment. Because of this, it is actually the quickest and surest road to any major reduction in the tax burden of the average wage earner. It holds out the prospect of the average wage earner being able to double his standard of living in a generation or less. The average standard of living would double in a single generation if economic progress at a rate of just 3 percent a year could be achieved. Such economic progress would also mean a halving of the average wage earner’s tax burden in the same period of time — if government spending per capita in real terms were held fixed, for then he would have double the real income out of which to pay his present level of taxes. And then, of course, once all the taxes that most stood in the way of capital accumulation and economic progress were eliminated, further reductions in government spending and taxation could and should take place that would be of corresponding direct benefit to wage earners, that is, show up in the reduction of the taxes paid by them.[1]

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But if there should be no taxes on the poor and no taxes on the rich, what taxes should there be? Who, then, should pay the salaries of our politicians and their henchmen other public servants? Or should there be no politicians and no government at all? Should the proper functions of government (as some anarcho-capitalists suggest) be taken over by insurance companies? At least, they would not levy taxes but be paid voluntarily.

Well, as you probably know, Ayn Rand addresses this question in her essay “Government Financing in a Free Society” in The Virtue of Selfishness. I quote parts of it:

In a fully free society, taxation – or, to be exact, payment for governmental services – would be voluntary. Since the proper services of a government – the police, the armed forces, the law courts – are demonstrably needed by individual citizens and affect their interests directly, the citizens would (and should) be willing to pay for such services, as they pay for insurance.

And here is her proposal:

As an illustration (and only as an illustration), consider the following possibility. One of the most vitally needed services, which only a government can render, is the protection of contractual agreements among citizens. Suppose that the government were to protect – i.e., to recognize as legally valid and enforceable – only those contracts which had been insured by the payment, to the government, of a premium in the amount of a legally fixed percentage of the contractual transaction. Such an insurance would not be compulsory; there would be no legal penalty imposed on those who did not choose to take it – they would be free to make verbal agreements or to sign uninsured contracts, if they so wished. The only consequence would be that such agreements or contracts would not be legally enforceable; if they were broken, the injured party would not be able to seek redress in a court of law.

And later on:

When one considers the magnitude of the wealth involved in credit transactions, one can see that the percentage required to pay for such governmental insurance would be infinitesimal – much smaller than that paid for other types of insurance – yet it would be sufficient to finance all the other functions of a proper government.

And:

Men would pay voluntarily for insurance protecting their contracts. But they would not pay voluntarily for insurance against the danger of aggression by Cambodia. […] A program of voluntary government financing would be amply sufficient to pay for the legitimate functions of a proper government. It would not be sufficient to provide unearned support for the entire globe.

And I have to quote this paragraph:

It may be observed, in the example given above, that the cost of such voluntary government financing would be automatically proportionate to the scale of an individual’s economic activity; those on the lowest economic levels (who seldom, if ever, engage in credit transactions) would be virtually exempt – though they would still enjoy the benefits of legal protection […] These benefits may be regarded as a bonus to the men of lesser economic ability, made possible by the men of greater economic ability – without any sacrifice of the latter to the former.

So under this proposal, the taxes would, predominantly, maybe even exclusively, be paid by the rich. But it certainly wouldn’t have the effects that taxes on the rich have today.[2]

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What, then, are the chances of such a tax reform ever being implemented? Pretty slim, I would say. In today’s world, non-existent. But maybe in some distant future. As Ayn Rand writes in her essay

…the principle will be practicable only in a fully free society, a society whose government has been constitutionally reduced to its proper, basic functions. […] Any program of voluntary government financing is the last, not the first, step on the road to a free society – the last, not the first reform to advocate.

If we were to argue for such a reform today, would the politicians even listen?

One obvious stumbling block[3] is that a fully free society would mean fewer politicians and government employees than we have today – fewer by a large extent. Would today’s politicians and government officials voluntarily step down, take their place in the market economy and leave the rest of us alone and only interfere in our lives when our rights have been violated?

A political career is quite lucrative today. Politicians grant themselves quite handsome salaries – and when they are voted out of office (which does happen, sometimes), they also grant themselves quite handsome pensions; they do not even have to begin looking for other jobs, if they don’t feel like it. And if they do feel like it, they take well-paid jobs as lobbyists, without having to relinquish their handsome pensions. (At least, this is the case here in Sweden, but I do not think it is much different in the rest of the Western world.) With a government “constitutionally reduced to its proper, basic functions”, this would not be possible.

So, judging by the situation today, I have to be pessimistic. And the distant future is – well, distant.

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[1]) This part of the essay is adapted from Capitalism: A Treatise on Economics, p. 308-310.

[2]) Ayn Rand’s essay does not seem to be available on the web, so you will have to buy the book. – There is a good elaboration on her essay by Craig Biddle of The Objective Standard; if you are not a subscriber, you can download it for the modest price of $3.95.

[3]) Another stumbling block is (to use George Reisman’s words) “massive ignorance of economics”. It will take, at best, a generation to uproot “mainstream” economics and replace it with sound, “Austrian” ideas.

Precious Metals Inflation?

In the past, I have written extensively on the evil of inflation and of fractional reserve banking; and I have pointed out, time and again, that newly created money reaches some people before prices have risen and others after prices have risen; and that this is a way of defrauding the latter category. Nobody has been intelligent enough to ask me the question: “Would this not also be true with an increase in the precious metals? If a vast new gold and silver mine were to be discovered and mined, would this not have the same effects?” Since I am intelligent enough to ask this question, I will also answer it.

First, this is what Ludwig von Mises has to say:

If the supply of caviar were as plentiful as the supply of potatoes, the price of caviar—that is, the exchange ratio between caviar and money or caviar and other commodities—would change considerably. In that case, one could obtain caviar at a much smaller sacrifice than is required today. Likewise, if the quantity of money is increased, the purchasing power of the monetary unit decreases, and the quantity of goods that can be obtained for one unit of this money decreases also.

When, in the sixteenth century, American resources of gold and silver were discovered and exploited, enormous quantities of the precious metals were transported to Europe. The result of this increase in the quantity of money was a general tendency toward an upward movement of prices in Europe. In the same way, today, when a government increases the quantity of paper money, the result is that the purchasing power of the monetary unit begins to drop, and so prices rise. This is called inflation. (Economic Policy: Thoughts for Today and Tomorrow, p. 55.)

So, yes: An increase in the amount of precious metals will have this inflationary effect; and it is also true that also in this case the money would reach some people first and others only later. But there are some important differences between this and paper money and/fractional reserve inflation.

First of all: Who will be the first ones to receive this new money? The persons who mine the metals and those who then mint it. But this is eminently just: It is simply their payment for the work they have done. This cannot be compared with the “work” of a counterfeiter, be he a private criminal or a central bank.

Second: Fiat paper money and fractional reserve money pretend to be real money, although they are not. But a new gold or silver coin does not pretend to be anything else than it really is.

Thus, there can be no moral objection to this kind of increase of the money supply. But there is a more practical point that needs to be stressed – if only to show, once again, that the moral is the practical.

Both fiat money and fractional reserve money (fiduciary media) will eventually disappear. They are created “out of thin air” and will eventually disappear into the same thin air. Fiat paper money will inevitably someday lead to hyperinflation, and the paper currency will collapse. As for fiduciary media, they will disappear the day the inflation bubble bursts and we get a depression.

By contrast, gold and silver once mined remains in existence, and so do gold and silver coins once coined. They cannot disappear. (Even the gold and silver occasionally lost in ship wrecks may one day be retrieved.) For this reason – and this one of the important things one can learn from George Reisman, in particular – it is not just inflation proof, it is also deflation proof.

Earlier on this subject:

Debating Fractional Reserve Banking
A Belated Open Letter to Ayn Rand on Fractional Reserve Banking
More on Fractional Reserve Banking
Fractional Reserve Banking Yesterday and Today
Should Pick-Pocketing Be Legalized?
Is “Fractional Reserve Banking” Compatible with Objectivism?

And, in Swedish:
Varför “fractional reserve banking” bör förbjudas
“Fraktionella reserver” än en gång

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.

Is the Wealth of the Rich Merely Trickling Down to Us?

The “trickle-down” theory is a ludicrous attempt to justify economic inequality on the grounds that the poor can live of the crumbs that are falling from the rich man’s table – and the richer the man, the more crumbs will fall to the poor. It is also known as the “horse and sparrows” theory: if a horse is fed oat, some oat will fall by the wayside to be eaten by sparrows, and the more oat you feed the horse, the more oat also to the poor sparrows. Of course, this theory is an easy target for ridicule from advocates of economic equality – an easy straw man to attack. The poor would gain much more if the rich were heavily taxed or if their wealth were outright confiscated and distributed equally among us poor. That is their reasoning, anyway. “Trickle-down” should be replaced by “loot-and-plunder”.

I found this cartoon on Facebook to illustrate the theory:

There is, however, not a shred of truth in this theory. Consider what the productive rich are actually doing with their money. They save it, invest it, make profits that they then re-invest, make more profits, re-invest them, and this just goes on and on. (I wrote “the productive rich”; there are also worthless heirs that squander their money, but then they will lose their wealth.[1] The guy in the picture above will certainly soon become poor, if he does nothing but wining and dining. And then there are the politicians, who take our money and squander it on their own pet projects; and they, too, are wining and dining a lot.)

Of course, taxing the poor makes the poor poorer; but, paradoxical as it may sound, taxing the rich also makes the poor poorer, although in a more indirect way.

As is so often the case, George Reisman explains it best, so let me quote him:

The progressive personal income tax, the corporate income tax, and the capital gains tax all operate in essentially the same way as the inheritance tax. They are all paid with funds that otherwise would have been saved and invested. All of them reduce the demand for labor by business firms in comparison with what it would otherwise have been, and thus either the wage rates or the volume of employment that business firms can offer. For they deprive business firms of the funds with which to pay wages.

By the same token, they deprive business firms of the funds with which to buy capital goods. This, together with the greater spending for consumers’ goods emanating from the government, as it spends the tax proceeds, causes the production of capital goods to drop relative to the production of consumers’ goods. In addition, of course, they all operate to reduce the degree of capital intensiveness in the economic system and thus its ability to implement technological advances. […] [T]hese taxes, along with the inheritance tax, undermine capital accumulation and the rise in the productivity of labor and real wages, and thus the standard of living for everyone, not just of those on whom the taxes are levied. (Capitalism: A Treatise on Economics, p. 308.)

In my own words: taxing the rich will lead to fewer jobs, lower real wages, less labor saving machinery; in short, a lower standard of living for us who are poor (or relatively poor).

Some taxes hurt the poor directly, for example taxes on tobacco, or alcoholic liquors, or petrol. It stands to reason that a poor person may have to give up smoking or drinking simply because the alternative would be to give up eating or moving out of his apartment and become homeless; while a rich person may continue his consumption of Habana cigars and vintage wine without even noticing the extra expense. And a poor person may not be able to afford driving his car to work, while Al Gore and his ilk will continue to ride in limousines or tour the world in air planes to teach the rest of us to take the bicycle instead of the car to avoid carbon emissions and “save the climate”. This is, to put it diplomatically, a vile injustice.

That the common income tax and VAT hurt us economically goes without saying: and this any educated laymen can understand. But taxes on the rich are especially insidious, because they do not at a cursory glance seem to harm the poor. But, as explained above, they do.

But back to the idea that this is “trickle-down”. George Reisman again:

Of course, many people will characterize the line of argument I have just given as the “trickle-down” theory. There is nothing trickle-down about it. There is only the fact that capital accumulation and economic progress depend on saving and innovation and that these in turn depend on the freedom to make high profits and accumulate great wealth. The only alternative to improvement for all, through economic progress, achieved in this way, is the futile attempt of some men to gain at the expense of others by means of looting and plundering. This, the loot-and-plunder theory, is the alternative advocated by the critics of the misnamed trickle-down theory. (Ibid., p. 310.)

The productive rich (think Rockefeller, Carnegie, Ford, Bill Gates, Steve Jobs, etcetera, etcetera) actually flood the rest of us with wealth (and themselves become wealthy in the process). Taxing or expropriating them simply means to dam this flood. And this may make it appear “trickle-down” – because governments and politicians will only allow a small portion of this wealth to trickle down to us; the rest of it lands in their own pockets.

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[1]) It has actually been argued that such squanderers are a boon to the economy: there is a famous book called The Fable of the Bees by Bernard de Mandeville, published 1714 that argues this. The argument is that the worthless heir who splashes his money around makes the restaurants (or brothels) he frequents richer; while his frugal brother, who spends and invests his fortunes, has no such visible effects. As one can expect, Mandeville’s book has been praised by John Maynard Keynes. In fact, this is of course a variant of the “broken windows” fallacy; if one does not focus on the immediate effects but also on the long range effects, one will see that the frugal brother is of benefit to the economy, not the worthless heir.

Kindle Book by George Reisman

George Reisman has just published a Kindle book called Warren Buffett, Class Warfare and the Exploitation Theory. It is only 59 pages long and consists of two parts: first, his Open Letter to Warren Buffett, and second, an excerpt from Capitalism: A Treatise on Economics, dealing with the same subject. Especially for those unfamiliar with George Reisman’s theories, this is an excellent introduction. (Those familiar with his theories may enjoy it, too.)

Reisman’s identification of the “primacy of profits” principle is certainly one of the most important discoveries in the history of economic thought. At least since the days of Adam Smith it has been taken for granted that the original income was wages and that profits are a deduction from wages. Reisman shows that the exact opposite is true. In the “early and rude state”, as Adam Smith calls it, no wages were paid at all, and all income was profits; the rate of profit was 100%. It was only with the advent of the first capitalists – people who hired workers to help them and invested in buying tools from others rather than making their own tools – that wages (and other money outlays) came into existence. Since that time the rate of profit has steadily been lowered and is today, in our fairly advanced capitalist society, only a few percent. And this is what, over the centuries, has improved our standard of living to unprecedented heights.

Also, this is a truly original discovery – at least, I have not seen it anywhere in the writings of other economists (and I only read good economists). It is a pity that too few, so far, have paid attention to this principle.

Much of what Reisman writes can be found, explicitly or implicitly, in Mises and his other predecessors. But this principle, along with his “net consumption/net investment theory”, is a new insight.

(For Scandinavian speaking readers, I have tried to present the “primacy of profits” principle in an essay called George Reisman: Why Do We Need Him? – George Reisman, of course, has not read this essay, so any mistakes are my own responsibility. But I don’t think I have made any mistakes.)

Update August 10: Now also on Amazon. (Also read Wladimir Kraus’ Amazon review.)

George Reisman himself mails me:

I was especially gratified that you stressed the primacy-of-profits doctrine. I consider it extremely important and also relatively simple, but almost everyone seems to ignore it or just not get it. So I’m extra glad that you both get it and stress it.

Yes, I think this principle is simple, once one has grasped it. But someone has to be the first to grasp it, and this someone was George Reisman. I would not have been able to arrive at it on my own.