Reisman Insights Without George Reisman

Originally written in or slightly before 2007. Some minor revisions have been made.

Plagiarism is no virtue, and plagiarism combined with back-stabbing is even less so.

In an earlier article, [scroll down to section 8], I showed how George Reisman is quoted verbatim without getting credit for the quote, and how his views on environmentalism are being used and paraphrased, again without giving him credit. The fact that such a man as George Reisman exists, that he is a long time Objectivist, and that he has revolutionized economic theory, is obviously a closely guarded secret.

When I read Andrew Bernstein’s The Capitalist Manifesto (an excellent book, but that is not the subject of this article), I was quite happy to see that Reisman is quoted extensively in it, and I thought this would be a sign that Reisman is again receiving the recognition he so amply deserves in Objectivist circles. Unfortunately, Bernstein seems to be the exception rather than the rule.

What is great about Reisman’s Capitalism: A Treatise on Economics is of course the integrated whole. But if I have to single out one identification as more important and more fundamental than the rest, I would pick out his identification of the primacy of profits principle. This is discussed at length in Chapter 11, Part C, of Capitalism, and is also presented in shorter form in the essay Classical Economics versus the Exploitation Theory[1]. A short recapitulation will suffice:

It has been assumed, since the days of Adam Smith, that the original form of income was wages, and that profits are a deduction from wages. This mistaken view of course creates the problem of having to show that those deductions are justifiable. What Reisman has proved is that it is actually the other way round: the original form of income was profits, and wages are in fact a deduction from profits. (And this is, of course, a perfectly justifiable deduction.)

I think that this principle is almost self-evident, once it has been stated. But this is the case with many path-breaking principles. (You could take some of Ayn Rand’s discoveries as examples here, e.g. that life is the ultimate standard of value. Once stated and explained, this seems self-evident. But someone had to state it and explain it! Another example, from economics, would be Mises’ analysis of how new inflationary money works its way through the economy, enriching those who are the first to receive it and impoverishing those who are the last to receive it. Once one knows that, it seems odd that nobody had thought about it before. But nobody had! And the examples, I think, could be multiplied.)

The moral point here is that nobody should utter a phrase like “wages are a deduction from profits” without giving credit to George Reisman (just like nobody should say that “life is the ultimate standard” without giving credit to Ayn Rand – or rename Rearden Metal and call it “miracle metal”). Without George Reisman, we simply would not know this!

Now to the plagiarism.

In a recently published volume called The Abolition of Antitrust, Objectivist economist Richard Salsman writes:

Profit is created by intellectual labor, which is most ably exercised by entrepreneurs and capitalists. […] Indeed, profit is the original form of income, the form that necessarily precedes all other earned incomes – the familiar trio of wages, rent, and interest. (P.  47-48)

Yet profit is the original form of income and the precondition for incomes earned by hired labor (wages), landlords (rent), and bankers (interest). Profit is not a “deduction” from these other incomes; it is yet another form of income – the first form and the form that is earned by mental effort. […] The status of profit as primary income should be obvious from the common-sense observation that in the long-run, only profitable firms are able to hire and pay laborers, landlords, or bankers, while unprofitable firms – especially those that are likely to fall into bankruptcy – are simply not capable of making such payments. (P.  51)

No reference to George Reisman is given here. Are we to believe that the “primacy of profits” principle should be attributed to Richard Salsman? Apparently not; apparently he wants to give credit for the identification to Jean-Baptiste Say:

In fact profit is not created by physical labor but by mental labor – by the intelligence exercised by entrepreneurs and capitalists. Only one economist in history has recognized this fact and used it to suggest a factual theory of profit. In the early 1800s, Jean-Baptiste Say, a French classical economist, rejected the labor theory of value. Say originated the utility theory of value and price – seventy years before neo-classical economists were given credit for doing so. Yet unlike later utility theorists Say did not confine his insight, about price incorporating a mental estimate, to consumers alone. Nor did he believe that such an estimate “balanced” a value that was “only” created by manual labor. Say showed that entrepreneurs and capitalists contribute the most to wealth creation – indeed, make manual laborers possible – by their intellectual labor. […] Say’s theories were a worthy exception to the falsehoods of British classical economists, since he rejected the labor theory of value and recognized entrepreneurs and capitalists as intelligent producers of profit. Say discovered that these producers earned their unique income and deserved praise. (P.  44)

Since Say’s Traité d’économie politique is available on the web in an English version, I downloaded the book and spent a week reading it. The book is full of valuable insights, and if all Salsman wants to claim is that Say is underrated and deserves to be read, that is perfectly fine with me. But there is not one single sentence in the book to substantiate the claim that it was Say who first identified the “primacy of profits” principle, or even that he has foreshadowed Reisman’s identification of it. (It is true that Say criticizes Smith’s “labor theory of value”. But he does not say that profit is the original form of income and that wages are a deduction from profits, which is the essential fact identified by Reisman. What he does say is that profits are a remuneration for the work performed by capitalists, just as wages are a remuneration of the work performed by laborers. This is undoubtedly true. But it is certainly not the same thing as saying wages are a deduction from profits.)

So much for the plagiarism. Now to the back-stabbing. (The person who sent me those quotes [Carl Svanberg} quite correctly prefaced this one with the words “Be prepared to vomit!”)

The latest Austrian effort, by a student of Mises, further sabotages sound profit theory by insisting that profit is determined by the personal consumption of capitalists. [Here, a footnote refers to Reisman’s Capitalism.] Older anti-capitalists, such as John Maynard Keynes, Michael Kalecki, and Joan Robinson, propounded this same theory. As Say pointed out two centuries ago, consumption is the destruction of wealth and thus can never be the cause of its creation. (P.  46)

Those of you who have read Reisman could make it an exercise to figure out just exactly how many things are wrong with this short quote. To begin with the most obvious, the theories of Kalecki and Robinson are explicitly discussed by Reisman (p.  801–803), and were it not for this discussion, Salsman would not know enough to even make this sleazy, underhanded criticism.

Secondly, this quote misunderstands (or misrepresents) the theory it purports to attack. What Reisman’s theory explains is not the individual profits made by individual entrepreneurs or capitalists, but the rate of profit in the economy as a whole. When an innovator in a branch makes an exceptionally high profit, thanks to his own efforts, this is always off-set by less profits (or losses) by his competitors. But this does not change the general rate of profits. This is ultimately determined by time preference. This fact has been recognized by “Austrians” since the days of Böhm-Bawerk; what Reisman adds to this is that time preference works through the consumption of capitalists. (I won’t go through the deduction of this principle, since Reisman’s book is actually available for those interested.) It is worth mentioning, however, that a possible misunderstanding of this theory – that one or a few individual capitalists could raise profit by simply consuming more – is dealt with explicitly by Reisman, on p.  737.

Finally, Salsman is certainly right in saying that “consumption is the destruction of wealth and thus can never be the cause of its creation”. But is this something denied or even disputed by Reisman? Certainly not. One of the points of Reisman’s theory is that, while individual profits by one capitalist show that this individual capitalist has done a good job, a rise in the general rate of profit on the contrary shows that the economy is on its way downhill. And this is explained so thoroughly in his book that no reader (no honest reader) could possibly miss it.

There is also an unstated, but very dirty, implication of what Salsman says here: that Reisman is trying to diminish or denigrate the productive contributions by capitalists. Those who know Reisman’s work also know that this is nonsense. Let me just mention a point repeated many times in Capitalism: that the productive activities of capitalists and businessmen are the source of all spending in the economy.

All in all, this is nauseating. I have not yet vomited, but I sure feel like I should.[2]

I have seen dishonest criticisms of Reisman before, but those have come from “Austrians” who do not like his departures from “Austrian orthodoxy”. Bad as they are, no one has had the cheek to plagiarize his insights and claim them as their own.

It might be thought that Salsman is making mere “errors of knowledge” here. That would be possible, if we assume that Salsman is stupid (or illiterate). But I do not think he is.[3]

What is Salsman’s motivation? Since I am not telepathic, I simply do not know. Neither do I know what makes Leonard Peikoff deliver a lecture such as the one I analyzed in an earlier article [scroll down to section 4]. Nor do I know what makes Harry Binswanger [scroll down to section 9] dismiss those who take a firm moral stand in defense of George Reisman as “moral agnostics” (as if certainty and knowledge were species of “agnosticism”). Nor, by the way, do I know what makes Nathaniel Branden write such a piece as “Benefits and Hazards” (although I have some ideas about it). I only know that my comparison here is apt.

Now, I believe that Objectivists, by and large, are good and honest people who will repudiate falsehoods as soon as they see them as falsehoods. But few Objectivists are also experts on economic theory and doctrine history. Salsman has obviously set himself up as such an expert. There is certainly a risk that other Objectivists, not so knowledgeable, “buy” his criticism without bothering to really investigating the matter. And – since George Reisman is the Objectivist economist of the century – this would be a tragedy.

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Post scriptum 2016: On this point it looks better today than it did when I wrote this. Objectivist “old-timers” (such as Peikoff, Binswanger, Schwartz, Berliner, Ridpath and some others) will never again acknowledge the greatness of George Reisman – since if they did, they would have to explain their own unjust treatment of him, which would amount to an attempt to explain the inexplicable. But a younger generation it not entailed in old brawls and can look at things with fresh eyes.

A couple of examples: Doug Reich often refers to Reisman in his blog posts. (In my not too humble opinion, he is the best Objectivist blogger, although he blogs rather infrequently nowadays.) And Alex Epstein, in his path-breaking book The Moral Case for Fossil Fuels, acknowledges Reisman’s influence (see p. 213).

Digression on Jean-Baptiste Say

The closest quotes I found in Say’s treatise are the following:

To the labour of man alone he [Adam Smith] ascribes the power of producing values. This is an error. A more exact analysis demonstrates, as will be seen in the course of this work, that all values are derived from the operation of labour, or rather from the industry of man, combined with the operations of those agents which nature and capital furnish him. (Introduction, 1.59.)


It is a maxim with Smith and those of his school, that human labour was the first price, – the original purchase-money, paid for all things. They have omitted to add, that for every object of purchase, there is, moreover, paid, the agency and co-operation of the capital employed in its production. Is not capital itself, they will say, composed of accumulated products, – of accumulated labour? Granted: but the value of capital, like that of land, is distinguishable from the value of its productive agency; the value of a field is quite different from that of its annual rent. When a capital of 1000 dollars is lent, or rather lent on hire, for a year, in consideration of 50 dollars more or less, its agency is transferred for that space of time, and for that consideration; besides the 50 dollars, the lender receives back the whole principal sum of 1000 dollars, which is applicable to the same objects as before. Thus, although the capital be itself a pre-existent product, the annual profit upon it is an entirely new one, and has no reference to the industry, wherein the capital originated.

Wherefore when a product is ultimately completed by the aid of capital, one portion of its value must go to recompense the agency of the capital, as well as another to reward that of the industry, that have concurred in its production. And the portion so applied is wholly distinct from the capital itself, which is returned to the full amount, and emerges in a perfect state from its productive employment. Nor does this profit upon capital represent any part of the industry engaged in its original formation.

From all which it is impossible to avoid drawing this conclusion: that the profit of capital, like that of land and the other natural sources, is the equivalent given for a productive service, which though distinct from that of human industry, is nevertheless its efficient ally in the production of wealth. (Book II, Chapter VIII, paragraphs 41–43.)

All of which is true. But I can rest my case here, for this does not tell us that wages are a deduction from profits, but merely – as I have already pointed out – that profits are quite as justifiable as wages.

But this is not the only inaccuracy in Salsman’s account. He writes:

Say originated the utility theory of value and price – seventy years before neo-classical economists were given credit for doing so.

Now, it is true that Say does ascribe value and price to utility, and this is a step forward from Smith’s “labor theory”. But the revolution inaugurated by Carl Menger in 1871 did not consist in merely identifying this fact, but in explaining the phenomenon of marginal utility and resolving the age-old “value-paradox” (why diamonds are so much more expensive that water, although water has far greater utility). It was also Menger who, in this connection, introduced the distinction between “goods of the first order” and “goods of higher orders”, which is nowhere to be found in earlier writings (including those by Say). – Of course one should not criticize Say for not making those discoveries, but neither should one ascribe them to him, when he actually did not make them.

By the way, Eugen von Böhm-Bawerk, in his Capital and Interest, does give Say credit for having at least foreshadowed Menger’s later insight on this point. (Book I, p.  124f.) But then, Aristotle foreshadowed many of the insights of Ayn Rand; this does not mean he made those identifications – merely that he pointed in the right direction.

Digression on Salsman’s historical acumen

I simply cannot resist telling the following:

In a lecture, Salsman once told that Adam Smith was heavily influenced by Jeremy Bentham. Obviously, he did not even bother to look up Bentham’s years (1748–1832), before he made this statement. Bentham was 26 when Wealth of Nations was published. And I do not think this book was completed in a week, nor even in a year. (The actual fact is that Smith began expounding his theories in lectures at the Glasgow University in 1752. I learned this last, by the way, from a footnote in Say’s treatise. Simple subtraction, of course, will tell you that Bentham was four years old at the time. Well – I should not belabor the obvious.)

More Salsman Nonsense

In the article above, I took Richard Salsman to task for his vile and unjust treatment of George Reisman. To summarize: he tries to hide the fact that it was Reisman who identified the “primacy of profits” principle, i.e. the principle that wages are a deduction from profits, not the other way round; and he grossly misrepresents Reisman’s theory of profit.

A young man of my acquaintance, who is interested in Austrian economics, recently sent me a couple of quotes from Richard Salsman that he had picked up on the web. While those quotes are undoubtedly taken out of a larger context, of which I know nothing, I think they do shed light on Salsman’s flawed understanding of Austrian economics.

In the Austrian theory of business cycles, it is easy to detect a lack of appreciation for the intelligence, wisdom and foresight of entrepreneurs, businessmen and investors. Austrian economists presume producers are easily fooled by government manipulations of money, credit, and the economy—especially by the alleged phenomenon of “artificially” low interest rates. They claim producers are conned into undertaking projects that later will turn out badly and require liquidation. In fact, producers are not fooled; they know, even if implicitly, which government policies are conducive to wealth creation and which are destructive. That is, they know when it’s worth producing and when it’s only worth shrugging. And when they shrug and production grinds to a halt, it does not grind to a halt because they had previously produced. [All italics mine.]

One would expect a minimal understanding of the Austrian theory of business cycles from anyone who attempts to criticize or refute it. But this is a “strawman argument” if ever I saw one. For who has said that production in a depression grinds to a halt because the producers had previously produced? It grinds to a halt because they had produced the wrong things. They had produced things for which there was an appearance of a demand, an appearance that later turned out to be illusory.

Salsman is obviously unaware of what the theory he attacks actually says, so a short recapitulation might be necessary. It starts with the observation that newly created money reaches some recipients first and other recipients only later – so that, in the beginning of an inflation, the first recipients stand to gain, while the later recipients stand to lose. This is so, because the first recipients receive their money before prices have risen, while the later recipients receive it when prices have already risen.

But this is not all. The next step is that newly created money and artificial credit expansion necessarily lead to malinvestments. To take a standard, simplified example: suppose that the new money and the artificial credit first go to the shoe industry (because the government believes that the shoe industry is in need of “stimulation”). Now, more shoes will be produced. Labor will be attracted to the shoe industry, which is now in a position to offer higher wages. There is now a greater demand for leather, so the same thing will happen to the leather industry. And more animals will be bred for the purpose of providing the leather industry with hides. In short, industries connected with shoes will experience a “boom”. In this example, other branches, such as the shirt industry, will suffer a set-back: their workers will go into the shoe industry, there will be a lower demand for wool and cotton; sheep farmers and cotton growers will not fare as well.

And later, when the “boom” turns into a “bust”, it will emerge that more shoes had been produced than people actually need; more leather than needed had been produced, and more animals bred only for their hides. Shoes will have to be sold at very low prices to be sold at all, workers will have to be laid off, shoe and leather manufacturers will experience hard times, even bankruptcy. But is this because the shoe and leather manufacturers had previously produced? No. It is because they had produced the wrong things – in this case, too many shoes and too few shirts.

Now, this is a simplified example, because credit is usually not artificially expanded to favor one particular branch, but rather to “set the wheels rolling” in the economy as a whole. But the example serves to show what will happen. In real life, what happens to the shoe industry in my example will simply be multiplied to many other industries and branches.

What about the claim that “the phenomenon of ‘artificially’ low interest rates” is merely alleged? Well, not to mince words, it is ridiculous.

On an unhampered market, free of government intervention, lower interest rates are a signal that big projects that were earlier marginally unprofitable now are marginally profitable. (One may think of projects such as digging a tunnel or a canal or building a big bridge or a new railway – any big and costly project like that.) This fact, by the way, plays a prominent role in Reisman’s Capitalism: it means that when profits and interest fall, if will set in motion what Reisman calls “springs to profitability” (and therefore, one never has to fear that profits would ever be “too low” or fall to zero.)

But it is very different when the government and its central bank create fiat money and extends it in the form of loans; for now it appears that those big projects have become marginally profitable, although in actual sober (market oriented) fact they are not. It simply sets in motion the “boom-bust” cycle.

Now to the question whether

producers are conned into undertaking projects that later will turn out badly and require liquidation.

The simplest answer to that is that if they were not conned, the “boom-bust” cycle would not take place. But it does. Certainly, entrepreneurs, businessmen and investors may respond differently to artificially expanded credit – those who take it “with a grain of salt” will fare better in the long run than those who do not. And Mises himself has once pointed out that if his business cycle theory were more widely known, people might respond to credit expansion with more caution.[4]

But there is a further reason why the bad effects of artificial credit expansion are inescapable, and that is that banks have to compete with low interest rates. A bank obviously does not attract loan customers by offering a high interest rate: it has to offer as low an interest rate as is still profitable to the bank. Now, the first effect of credit expansion is that interest falls. (This is the reason for the credit expansion in the first place: one wants to create “easy money”. Later in the business cycle, interest goes up – unless this is foolishly counteracted by a new injection of fiat money.) If some bank did not follow suit but continued to make loans to the previous higher interest, it would attract no customers and would have to face bankruptcy.

Here, one could certainly say that banks and their loan customers are conned by the central bank. But it is true that while a bank has to follow suit as regards interest rates, it could still remain cautious about issuing loans. If a banker knew the Austrian business cycle theory, he would. And actually, he could be cautious out of plain common sense: experience has told us over and over again that those “booms” always come to an end, and that there will be “hell to pay” later on.[5]

While this quote from Salsman might be explained by lack of knowledge, I do not know what explains the next quote, except a sheer flight into fantasy:

When the Austrian view of the business cycle is coupled with a malevolent-universe premise—with the view that in the economy or stock market “what goes up must come down,” that “all good things must come to an end,” that no long ride of unbroken prosperity can ever persist without taking on irrationally exuberant hitchhikers—the combination can be catastrophic. For it can bring even purported champions of capitalism to openly endorse destructive policies such as Federal Reserve interest-rate hikes, curbs on the stock exchange, and more burdensome government regulations.” [Italics mine.]

Just one question: Whenever did you see or hear an Austrian economist “openly endorse destructive policies such as Federal Reserve interest-rate hikes[6], curbs on the stock exchange, and more burdensome government regulations”? Now, Austrian economist are certainly not infallible: they do make mistakes – but never this kind of mistake.[7])

So what is Salsman saying here? Merely that they would make this kind of mistake – if their view of the business cycle “is coupled with a malevolent-universe premise”.[8] But please follow logic here: since they do not make those mistakes, it can only mean that no “Austrian” actually has a malevolent-universe premise! Then, why attack them as if they had? This is a strawman argument directly taken out of Salsman’s own dream world! And what do Salsman’s dreams have to do with actual, real-life reality?

This is clearly a case of Objectivism being misused as a rationalization for some devious purpose. And it is certainly a case of psychologizing (see Miss Rand’s essay “The Psychology of Psychologizing” in The Voice of Reason): argument is replaced with speculations about possible – even completely unproved – psychological motivations.

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This, I think, will suffice. But there is one further point I would like to touch on: Salsman is opposed to the idea of a 100% gold standard and an advocate of a “fractional” gold standard – and because of his (undeserved) prominence in the Objectivist movement, many Objectivists swallow this view.[9] But “fractional” money is simply counterfeiting. The argument I have heard from followers of Salsman it that “fractional banking” is a phenomenon that appears on a free market, so there could be nothing wrong with it. But counterfeiting is counterfeiting, whether perpetrated by the central bank or by private banks! (Pick-pockets, too, appear on a free market; this does not make pick-pocketing right.) I have written extensively on this matter, but only in Swedish.[10])

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Post scriptum: I originally excluded the following quote, because I did not know quite what to say about it. But now I think there is something to say about it, so here it is:

Another common claim about stock-price gains in the 1920s is that they were made possible by Federal Reserve “inflation.” This view is held by many supposed free-market economists—monetarists and Austrians—and is certainly a tempting thesis for those who oppose central banking. But was Alan Greenspan correct when he wrote, in the mid-1960s, that the late-1920s represented a “fantastic speculative boom” that was triggered by “excess credit” pumped out by the Fed—credit which then allegedly “spilled over into the stock market”? This view of the late-1920s stock-price rise could not be more wrong.

Greenspan writes about this in his essay “Gold and Economic Freedom”, which was included in Capitalism: The Unknown Ideal. And in the preceding chapter of the book, “Common Fallacies About Capitalism”, one may read the following words from Nathaniel Branden:

Throughout most of the 1920’s, the government compelled banks to keep interest rates artificially and uneconomically low. As a consequence, money was poured into every sort of speculative venture. […] The boom and the wild speculation – which had preceded every major depression – were allowed to rise unchecked, involving, in a widening network of malinvestments and miscalculations, the entire economic structure of the nation. People were investing in virtually everything and making fortunes overnight – on paper. Profits were calculated on hysterically exaggerated appraisals of the future earnings of companies. Credit was extended with promiscuous abandon, on the premise that that somehow the goods would be there to back it up.  […] Such, in essence, was the nature and cause of the 1929 depression. [P.  80f in my copy of CUI. Read the whole section, which is under the heading “Depressions”.]

Those statements by Greenspan and Branden were first made in The Objectivist Newsletter and later included in Capitalism: The Unknown Ideal.[11] They must have had Ayn Rand’s approval! And we do know that Miss Rand had a high regard for “Austrian” economics; she disapproved of its philosophical underpinnings, but she did think it was the best school of economics.

And now, Salsman is running in – like a fool where angels fear to tread – to tell us that this is all wrong. “Easy money” and excessive credit were not operative causes at all in the Great Depression! I think this is ludicrous on the face of it, but let him prove it if he can. But then he should also have the guts to tell every “hard-core” Objectivist in sight that be believes Ayn Rand betrayed Objectivist principles by endorsing “Austrianism” in economics – and that she was a complete fool in doing so. (Yes: Salsman’s prominence in the Objectivist movement is truly undeserved.)

Salsman is also known for having stated that modern “Austrians” – including George Reisman – are “German-Kantian-Rationalists”. But I will not comment on this: it is simply too low for words.

[1] For Scandinavian speaking readers this essay is also translated into Swedish.

[2] “Watch your stomach, kid,” said Mike, “just watch your stomach. A man can’t get sick just because he oughta.” – The Fountainhead.

[3] Part of my disappointment with Salsman is the fact that I have read some things by him that are actually good. I liked his book Gold and Liberty – although I think Reisman’s treatment of the subject of gold in Capitalism is far superior. And although Murray Rothbard is, in many respects, a very bad guy, I would not hesitate to recommend his short pamphlets What Has Government Done to Our Money? and The Case for a 100 Percent Gold Dollar. – Salsman has also written an excellent refutation of the idea that the gold standard was somehow responsible for the Great Depression; it appeared in The Intellectual Activist, Vol. 9, No 1, January 1995. – I have not listened to Salsman’s lectures on the “Austrian School”, simply because I cannot afford to buy them. I had always been curious about what they may contain; today, my curiosity is gone.

[4] In a letter to Ludwig Lachmann, quoted by Frank Shostak in an article called Expectations and Austrian Cycle Theory. To this article, I also owe the point I make in the next paragraph.

[5] People with more detailed knowledge than I have can probably come up with many examples. An example that comes to my mind is this: In the early 90’s, there was a banking crisis in Sweden. It followed the usual pattern: there was credit expansion and lowered interest rates, and the most visible sign was that real-estate prices high-rocketed. And a couple of years later, many loans could not be repaid, and the banks experienced considerable difficulties (one of them even went bankrupt). But there was one bank that survived this crisis relatively unscathed, and this was precisely because it did not “jump on the band wagon” and did not expand their lending the way the other banks did.

[6] On this point, I received the following objection from George Reisman:

[Concerning] Austrian economists advocating Federal Reserve increases in interest rates. They actually do advocate this and it’s perfectly correct for them to do so. This is because we would all be better off if the Federal Reserve refused to lend except at an interest rate that was too high for anyone being willing to borrow at. In that case the Federal Reserve would be unable to affect the market in any way and might as well not exist. [Italics added.]

The Federal Reserve exists in order to make interest rates lower than they would otherwise be. It tries to achieve this by creating new and additional money and lending it out. The new and additional money appears on the market as an increase in the supply of loanable funds and in this way brings interest rates down. However, once the new and additional money gets out into circulation and is spent and respent, sales revenues and profits tend to rise throughout the economic system, which serves to increase the demand for loanable funds. If the Fed does not raise interest rates but simply provides more new and additional money to meet the additional demand for funds, the problem grows worse and worse. A rise in interest rates is essential to choke off the flow of new and additional money—to prevent a continuous acceleration in the creation of new and additional money. In objecting to this rise in interest rates, Salsman is in the position of advocating hyperinflation. Hyperinflation is profoundly destructive of wealth and rests on the total obliteration of any kind of objective standards in the economic system.

Yes, I agree with all of this. The Fed has to make “interest hikes” (and maybe trigger a recession) in order to avoid hyperinflation (which would be even worse). But I cannot imagine that the Fed would ever charge an interest so high that nobody will borrow from it at all – that would actually be the equivalent of the Fed committing suicide. “It might as well not exist” – and we should advocate its abolition!

(And parenthetically, I do not think Richard Salsman would consciously advocate hyperinflation. Still, this is the logic of his stand.)

[7] The mistakes “Austrians” do make are seldom, if ever, in the field of economic theory, but in the field of politics. Many of them (as you probably know) are anarchists or lean heavily toward anarchism. And is seems ubiquitous that they have a view of foreign policy and of the “war on terrorism” that I would diplomatically characterize as extremely naive.

(Although it is not the subject of this article, I would like to say that the opposite holds true about Objectivists – at least ARI-affiliated Objectivists. They have a principled, realistic view of the “war on terrorism”: that this war has to be won, and that it has to be strictly a war of American self-defense, not some kind of suicide mission. On economic theory, on the other hand, they are simply lousy.)

But to confuse this with economics is simply ridiculous. That “booms” lead to “busts” (what Salsman obviously means with the phrases “what goes up must come down” and “all good things must come to an end”) is a fact of economic reality and has nothing whatsoever to do with whether the universe as such is inimical to us or whether someone holds this flawed premise.

[8] For those of you unfamiliar with Objectivism: the “malevolent-universe premise” is the view that the universe is inherently inimical to man and his happiness on earth – so that our pursuit of happiness is ultimately doomed to failure. (The opposite, of course, is called “the benevolent-universe premise”.) For a short but good exposition, see Leonard Peikoff, Objectivism: The Philosophy of Ayn Rand, p.  342f.

[9] For an example of this, see Diana Hsieh’s blog post Fraud or Not? (If I ever find the time, I intend to answer this post.)

On a more positive note, I would like to mention that the person who nowadays [i.e. on 2007 or thereabouts] most frequently lectures on economics at Objectivist conferences is Brian Simpson. Simpson is a “reismanite”, not a “salsmanite”. This might mean a turn for the better.

[10] For those of you who read Swedish, here is the link:

Why “fractional banking” should be forbidden
And see also:
Why business cycles?

[11] It is of course true that both Branden and Greenspan have since turned into “bad guys”. But when they wrote this, they were still “good guys”.

Also, I do not mean to imply that something is true, merely because it is in CUI. There are some lines in Greenspan’s essay that I can only read as an endorsement of at least some extent of “fractional banking” – and I do not agree with that. But this is a very small point in the “grand scheme of things”. The bigger point is that the standard “Austrian” interpretation of the cause of the Great Depression was endorsed by Ayn Rand, and should not be dismissed out of hand by self-appointed “experts” on her philosophy.

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