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.

$ $ $

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.

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

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.

[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.

George Reisman Has to Repeat Himself

Back in 1990 George Reisman wrote an excellent piece called The Toxicity of Environmentalism, published in The Intellectual Activist and later reproduced and expanded in Capitalism: A Treatise on Economics, p. 76ff. Reisman identifies the basic premise behind the environmentalist movement: the idea that nature has “intrinsic value”, quite apart from its value or usefulness to man; and he lays bare the fundamentally anti-human nature of this movement. The article is also replete with documentation, with quotes that show that the hard-core environmentalists do want to purge the earth from humans, and that they do recommend dishonest scare tactics in the process.

Nevertheless, he has recently been criticized on the grounds that his “claims are rarely substantiated with textual evidence”. Reisman answers this criticism (which is obviously based on not reading what he writes in the first place) in this blog post. The answer consists in quoting himself at some length. That he even has to do this is really an outrage.

For those not familiar with his original article or his book this at least offers an opportunity to find out what he has to say.

I will just quote one paragraph that was not in the original article but was added in the book:

The environmental movement’s blindness to the value of industrial civilization is matched only by the blindness of the general public toward the nature of the environ­mental movement’s own actual values. Those values explain the movement’s hostility to industrial civiliza­tion, including its perversion of the concept of efficiency. They are not known to most people, because the environ­mental movement has succeeded in focusing the public’s attention on absolutely trivial, indeed, nonexistent dan­gers, and away from the enormous actual danger it itself represents.

Reisman further elaborates on this actual danger in a blog post titled The Arithmetic of Environmentalist Devastation (and in several other blog posts).

And, for Scandinavian speaking readers, there is also a Swedish translation of the original article.

Reisman in Kindle Format

George Reisman’s Capitalism: A Treatise on Economics is now available in Kindle format. You may also also see it at Amazon.

Update June 27: The price has been lowered to $9.99.

George Reisman 75 years

My favorite economist (and one of my favorite human beings), George Reisman turned 75 on the 13th of January. As a token of appreciation, I will quote my review of his magnum opus, Capitalism: A Treatise on Economics:

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.

(An earlier version of this review was published on Amazon in 1999. It was originally published under my own name, but for some reason my name has since disappeared.)

75 is a respectable age, but let us still hope that he has many productive years before him.

What If the One Percent Shrugs?

(Inspired by George Reisman.)

You have certainly heard the claim from the Occupy Wall Street movement that 1% of the population owns or controls most of the wealth in the economy, and that this wealth should be taken from this 1% and re-distributed to the remaining 99%.

Those protesters need a lesson in economics.

What they fail to realize is that the wealth of the one percent provides the standard of living of the ninety-nine percent. (Read the essay I link to, and read it carefully.)

The protesters live in a highly industrialized society, but their thinking is that of the Stone Age, or at best, the age before the Industrial Revolution. They do not realize that wealth in a modern capitalistic economy plays an entirely different role than it did in the pre-capitalist world. George Reisman explains:

In such a [pre-capitalist] world, if one sees a farmer’s field, or his barn, or plow, or draft animals, and asks who do these means of production serve, the answer is the farmer and his family, and no one else. In such a world, apart from the receipt of occasional charity from the owners, those who are not owners of means of production cannot benefit from means of production unless and until they themselves somehow become owners of means of production. They cannot benefit from other people’s means of production except by inheriting them or by seizing them.

Ludwig von Mises makes a similar point:

Destitution is in a feudal society the corollary of income inequality, but not in a capitalist society. The fact that there is “big business” does not impair, but improve[s] the conditions of the rest of the people. [Quoted in a blog post by Ari Armstrong at The Objective Standard’s blog.]

In the feudal society, and back through history to the Stone Age and the Neanderthals, some men’s wealth was at the expense of other men’s destitution; and if you did not inherit wealth, there was no other solution than to forcibly seize it and redistribute it. But this is precisely what has been radically changed by capitalism and the Industrial Revolution.

In today’s world, virtually everyone benefits from the wealth of the “one percent”, even if you yourself own none of that wealth. Some examples (taken from Reisman’s essay): When you drive a car, you benefit from the wealth of the automobile industry and the oil industry; when you use a computer or a cell phone, you benefit from the wealth of Microsoft and/or Apple; and so on. Radio and television sets, refrigerators and washing machines are other examples; and you can multiply the examples on your own.

Those things – cars, computers, etc. – did not even exist in pre-capitalist days. Today, they not only exist; they get both better and cheaper over time. This is the result of the fierce completion between members of the “one percent” club. One example given by Reisman is that when Henry Ford introduced the T-Ford, the price of cars went from about $10 000 at the beginning of the 20th Century to $300 in the mid 1920s. And nobody can have failed to notice that computers and cell phones have improved vastly over the decades and have also become cheaper.

One example from my own experience: Some twenty years ago, I bought a second-hand computer for about 10 000 SEK or about $1500. This computer used Windows 3.11 as its operative system, had 4 kilobytes RAM, and the size of its hard drive – well, I don’t remember exactly, but it was measured in kilobytes or perhaps a couple of megabytes. The computer I work on now I bought last year for about the same price. It has Windows 7, the hard drive is 465 gigabytes (of which 433 are still unused), and what the RAM is, I don’t know, but is certainly more than 4 kilobytes.

And this is not all. I bought my first computer second-hand. The price the former owner had originally paid for is was 40 000 SEK or $6000!

This is the result of Bill Gates, Steve Jobs and other computer entrepreneurs vying with one another to produce both better and cheaper computers.

In the pre-capitalist age, there were no feudal lords vying with one another to produce better ploughs for the farmers. They were vying with one another to produce better weapons, better war-fare techniques, and better ways of making the farmers’ lives miserable. There was no struggle to produce more wealth; there was only struggle to seize as much as possible of the little wealth that existed.

In George Reisman’s words, the OSW protesters “see the world through an intellectual lens that is inappropriate to life under capitalism and its market economy”. They have to believe that the fortunes earned by Henry Ford, or by Bill Gates and Steve Jobs, or by any great entrepreneur, is actually stolen from them, or from the rest of us. However perverse this view is, it has to be their implicit basic premise.

What would happen if those protestors actually got their way and all the wealth of the 1% were seized and redistributed to the 99%? The question is what would vanish first: the cell phones they use to communicate; the web sites, blogs and Facebook pages they use to spread their message; or the cars or even bikes they use to travel to the places where they hold their demonstrations; or the washing machines and other household appliances that give them the free time in which to protest.

That may be as it may: the end result will be starvation. Civilization would simply end, and we would be back to pre-industrial days. That would serve them right; but they probably only comprise 1% of the population; so what about the remaining 99% who do not deserve such a fate?

And what if the “one percent” were to shrug and leave the rest of us alone? Well, I do not have to tell you, because there is a novel that shows what will happen. So I will end with quoting from it:

When you live in a rational society, where men are free to trade, you receive an incalculable bonus: the material value of your work is determined not only by your effort, but by the effort of the best productive minds who exist in the world around you.

When you work in a modern factory, you are paid, not only for your labor, but for all the productive genius which has made that factory possible: for the work of the industrialist who built it, for the work of the investor who saved the money to risk on the untried and the new, for the work of the engineer who designed the machines of which you are pushing the levers, for the work of the inventor who created the product which you spend your time on making, for the work of the scientist who discovered the laws that went into the making of that product, for the work of the philosopher who taught men how to think and whom you spend your time denouncing.

The machine, the frozen form of living intelligence, is the power that expands the potential of your life by raising the productivity of your time. If you worked as a blacksmith in the mystics’ Middle Ages, the whole of your earning capacity would consist of an iron bar produced by your hands in days and days of effort. How many tons of rail do you produce per day if you work for Hank Rearden? Would you dare to claim that the size of your pay check was created solely by your physical labor and that those rails were the product of your muscles? The standard of living of that blacksmith is all that your muscles are worth; the rest is a gift from Hank Rearden.

This is the speech the OSW protestors should listen to. But then: When will they ever learn?