It doesn’t require a creative imagination to ponder the results of a
Soviet sympathizer teaching American history. The consequences of
learning laissez faire capitalism from a supporter of the welfare state are
no less obvious.
Such is the case in economics departments at universities all across
America. While the ideas of free-market economists such as Milton
Friedman and Friedrich Hayek are cited more often in college texts than
they have in the past, they continue to be “explained in terms of a general
Keynesian model or theory,” explains Professor Richard Ebeling, head of
the department of economics and business at Hillsdale College.
In other words, Keynesian theory’s progenitor--the godfather of the
welfare state--John Maynard Keynes, continues to dominate economics
departments at most universities.
Capitalism’s Defenders Underrepresented
Economic myths, skewed views of economic principles, and an
inaccurate portrayal of human action are thus inevitably perpetrated by
this Keynesian juggernaut. Naturally, pro-government, anti-free market
sentiments are then fostered in today’s economics student.
According to financial economist Mark Skousen in his book Economics
on Trial: Lies, Myths, and Realities, references to economic schools of
thought in the top ten economics textbooks numbers Keynes and
Keynesianism as nearly twice as often cited as the nearest competitor.
While Friedman and the various branches of monetarism are cited 252
times, Keynes influence has an index frequency of 442 times.
Perhaps most interesting is that the
economic policy employed by President
Ronald Reagan--supply-side
economics--is cited only 95 times in the
top ten books, while the economic system
he brought to its knees, Marxism, is
referred to 36 more times (131). The
unabashedly free market school of
Austrian economics found mention only
67 times.
Even more surprising is that the widely
used World Philosophers, an economic
history textbook written by Robert
Heilbroner, fails to mention Friedman or
the great Austrian Ludwig von Mises even
once. This 4 million-copy bestseller does
highlight Adam Smith, but the emphasis throughout the rest of the book is
on Keynesianism and various utopian socialists, with a large section
devoted to Karl Marx.
Representative of this bias against free marketers is the fact that
anti-Keynesians (those who have debunked or otherwise provided
alternative theories) are given little mention in economics classrooms
today. One prominent example of a work that is very rarely cited includes
Henry Hazlitt’s The Failure of the ‘New Economics’, which presents a
step by step refutation of Keynes’ General Theory. Another notable
example is Ludwig von Mises’ Socialism and his various works on
interventionism, all of which target the maladjustments which are ushered
into the economy by bureaucracies and the futility of determining price in
a command economy.
Similarly, the work of Austrian economists--of which Hazlitt and
Mises were part--is often overlooked despite being the only school to
have predicted the Great Depression. As Skousen commented, “Given
the superior record of the Austrian and sound money schools during the
critical 1929-33 period, one would expect them to receive more notice in
the textbooks.”
The record shows that Mises predicted that the Austrian bank Credit
Anstalt would crash; and it did in 1931. Mises’ student, Hayek,
published several articles as director of the Austrian Institute for
Economic Research’s monthly reports in early 1929. He noted that the
artificial inflationary boom in 1920s America would within months result
in collapse due to the Federal Reserve’s decision to stop feeding the
inflation. The stock market did indeed crash on “Black Thursday,”
October 24, 1929, signaling the official beginning of the Great
Depression.
Meanwhile, U.S. sound money economist E.C. Hardwood developed
a monetary theory closely resembling that of the Austrians. He believed
that bank credit inflation was the cause of the business cycle, and even
predicted that there would be widespread bank failures and that the
depression would not be short lived in an article published in the
November 29, 1929 issue of The Annalist, and later reprinted in The
New York Times. His forecast proved right.
In today’s economics class, then, Hayek and Mises’ correct prophecy
that the Fed’s manipulation of the money supply would cause the Great
Depression is largely ignored. So too is Nobel winner Friedman’s (of the
Chicago Monetarist School) later documentation of the Fed’s blunders
leading to the Great Depression. And the monumental work by Austrian
School economist Murray Rothbard, America’s Great Depression,
which countered the Keynesian argument against inflationary recession,
has also failed to earn him due respect in academic circles.
Samuelson’s Shadow
Perhaps no other economist has had a greater impact on the way
economics is taught than Paul Samuelson. A student of Keynes, this MIT
professor and Nobel laureate has introduced the “New Economics” to
millions with his textbook, Economics. Now printed in its 16th edition,
this textbook is the most popular textbook of any kind, selling over 4
million copies in 46 different languages since 1948.
Skousen has documented the evolution of Samuelson’s thinking over
the last several years. Though the weight of economic evidence has
begrudgingly forced Samuelson to slowly move away from Keynesianism
to the Classical economic model of Adam Smith, Skousen said, “the old
Keynesian cannot break with his old mentor whom he proclaims as
‘this century’s greatest economist.’”
Symptomatic of this fact is that Friedman’s monumental work
(co-authored with Anna J. Schwartz), A Monetary History of the United
States, 1867-1960, for which he won the Nobel prize, is deliberately
omitted from Samuelson’s texts. Samuelson still holds that it was
unbridled laissez faire capitalism that caused the Great Depression.
Including Friedman’s work would invalidate this thesis.
Among other findings cited in A Monetary History, Friedman
demonstrated that the money supply declined by one third from 1929 to
1933, thus indicting it was mismanagement by the government (i.e. the
Federal Reserve), and not free markets, that put the ‘30s economy in a
tailspin. In addition, studies by Friedman, Rothbard, and Robert Higgs
further undermine Samuelson’s claim that New Deal expenditures and
World War II rescued us from the Great Depression. Nevertheless, these
are all conveniently lacking from the Keynesian’s textbooks.
For instance, Lipsey and Steiner contend in their Economics textbook
that, “Once the massive, war-geared expenditure of the 1940s began,
income responded sharply and unemployment evaporated. Government
expenditures on goods and services, which had been running under 15
percent of GNP during the 1930s, jumped to 46 percent by 1944, while
unemployment reached the incredible low of 1.2 percent of the civilian
labor force.”
However, according to the U.S. Department of Commerce, the
standard of living actually dropped during the war, with per capita
income declining in real terms and prices increasing an average of 30
percent from 1940 to 1945. In addition, wrote Skousen, the “average
work week increased by 20 percent as many employees, and especially
engineers, worked weary 14-hour days, seven days a week.”
Not only is Samuelson’s Economics the top selling textbook--of any
kind--of all time, but as Skousen has found, it also has a great influence
on many of the other best-selling economics textbooks, both in tone and
content. His treatment of the most important point in U.S. economic
history, the Great Depression, has had far reaching effects on government
policy and in economic understanding since
In his book, What Do Academic Economists Contribute?, Daniel B.
Klein has sought to explain the inability of economics departments to
purge themselves of failed models of the past. “Academic economists
belong to a careerist club, and the club has official ways of performing,”
wrote Klein, an associate professor of economics at Santa Clara
University. “Feeding on tax and tuition dollars, the club is incestuous:
MIT produces Ph.D. members of the club, who then take over the
university departments and journals and perpetuate the demand for new
MIT Ph.D. club members,” he explained. Klein added that these “official
ways” are locked in at other top universities such as Chicago and
Stanford.
This shows up in the partisan makeup of economics departments, as
well. For instance, a study conducted by Aman Verjee found that
Stanford--home of the conservative Hoover Foundation, which has
featured such notable free market economists as Milton Friedman and
Thomas Sowell--has a Democrat to Republican ratio of 21 to 7 for its
economics professors. Furthermore,
70 percent of professors at Stanford
label themselves as liberal to
moderately liberal, while only 3 or 4
percent are acknowledged
conservatives. Similar trends are seen
in the economics departments of many
other top schools, including North
Carolina (19 Democrats to 4
Republicans) and Cornell (10 to 3).
Interestingly, the economics
departments seem to be the most
balanced departments at these schools,
where often times GOP representation
is virtually nonexistent in other
departments. This too has a notable
effect on students’ understanding of economics.
As Donald Boudreaux, president of the Foundation for Economic
Education, asserted, the myth that the minimum wage “is a wonderful way
of helping poor people” is peddled by professors in other fields. (In
contrast, academic economists of nearly all persuasions are in general
agreement that the minimum wage causes unemployment to some
debatable degree.) For example, a sociology course at Oberlin entitled
“Economy, Class and Politics,” seeks to discover “What
Marxian
social science contribute(s) to understanding important political, social
and economic questions;” while “Race and Ethnicity in Social Work
Practice” at Ohio State presents “An analytical approach to problems,
needs, and intervention for effective social work practice .” Words like
“Marxian” and “intervention” are obvious in their intent.
Back in campus economics programs, Leftist bias is maintained by
obscure journals “read by almost no one except other economists who
are busy trying to excel in the club,” said Klein. These journals are used
as the proving ground for academic economists.
Klein noted that these journals are generally filled with statistical
pattern hunting and econometric model building, which is non-transferable
to the real world. “Model building goes by the code word ‘theory,’ yet
many models make no reference to real-world happenings,” claimed
Klein. “Pointless work of this kind appears in The Journal of Economic
Theory. Economic theory of what? Such journals have no connection
with real issues, yet their prestige is high.”
“By and large, the top schools, they teach technique, mathematical
manipulation of economic models, a series of equations,” agreed
Boudreaux. “They’re divorced from reality.”
Many great post war economists have defied and criticized the
profession, among them Ronald Coase, Israel Kirzner, and Nobel
laureates F.A. Hayek and James Buchanan. Unfortunately, very few can
run against this careerist club without seriously damaging their
professional status. Observed Klein, “if anyone had the temerity to
explain all the important ways in which the model failed to represent
reality, club officials would close ranks and expel that insolent person.”
Often times is the case where free market economists have been
forced to include lessons they disagree with in their textbooks. James
Gwartney and Richard Stroup were forced by the publisher’s review
board to include the Keynesian model of aggregate supply and aggregate
demand, or AS-AD, in their textbook, Economics: Public and Private
Choice. This board, like most, consists of mainstream (i.e. liberal)
economists. Said Roger LeRoy Miller, author of another best-selling
textbook, Economics Today, “AS-AD is a bunch of nonsense, but I’m
required to teach it.”
Lies, Myths, and Realities
Burton Folsom Jr., a senior fellow in economic education at the
Michigan-based Mackinac Center for Public Policy, recently finished a
study of economic textbooks. Many of the 16 top textbooks he reviewed
were less than adequate in his view, with six receiving D’s and two
winding up with F’s.
Folsom pointed to the antitrust bias of many textbooks, including what
he sees as blatant misrepresentations of historic “monopolies” such as
American Sugar, U.S. Steel, and John D. Rockefeller’s Standard Oil.
For example, the historical record shows that it was competition, not
government antitrust laws, which caused U.S. Steel’s market share to fall
from 61% in 1901 to 39% by the mid-‘20s. Observed Folsom, “This is
never mentioned in the textbooks.”
When it comes to supply-side economics, college textbooks miss the
mark, as well. “Supply side still hasn’t sunk in. Tax cuts in the ‘20s
produced more federal revenue, and the cuts in the ‘80s doubled federal
revenue.” Folsom noted that only two texts gave a fair presentation on
this topic.
Perhaps the biggest myth spread in American economics programs is
that the economy is consumer driven. This manifests itself in the view that
economics is science, and the government can therefore manipulate the
economy. Said Boudreaux: “The ideology is that if we get good people,
we can master the economy.”
Wrote Samuelson and Nordhaus in the 1989 edition of Economics,
“The Soviet economy is proof that, contrary to what many skeptics
earlier believed, a socialist command economy can function and even
thrive.”
This favorable view of central planning does not seem to have
subsided, as evidenced by many textbooks like Baumol and Blinder’s
Economics: Principles and Policy, which promote socialist Sweden as a
model economy.
One of the most oft used facets of Keynesian economics in economics
textbooks is known as “the paradox of thrift.” This is the notion that while
it is wise for individuals to save money, especially during a recession, it
can lead to a much worse overall economy during downturns. Therefore,
an inflationary monetary policy and deficit spending are pursued to
encourage consumption.
“While savings may pave the road to riches for an individual, if the
nation as a whole decides to save more, the result may be recession and
poverty for all,” wrote Baumol and Blinder.
McConnell and Brue added in their Economics: “It is difficult to
conceive of governmental bankruptcy when government has the power to
create new money by running the printing presses.”
But mainstream promotion of this principle has not been without its
costs. Wrote financial economist Mark Skousen in his Economics on
Trial: “As a result, the anti-savings mentality has led to a deleterious
economic policy of the West--taxing savings and investment at high rates
while encouraging consumer debt.” Skousen pointed to the extended
Great Depression and the stagflation of the 1970s as the inevitable results
the paradox of thrift being implemented, as well as the huge deficits of the
‘40s and ‘80s.
Hope for Capitalism?
The fact, though, that free market economists are being published at
all does lend hope for the future. In fact, several textbooks have been
published in recent years that, despite the forced inclusion of Keynesian
economics against the wishes of the authors, nevertheless provide sound
economic thinking. For instance, although Gregory Mankiw maintains his
neo-Keynesian roots (he even named his dog “Keynes"), he has flipped
the traditional approach of including Classical economics as an
afterthought, and instead has placed the Classical model as the “general”
theory in his popular textbook, Economics. The Keynesian model has
been relegated to the “special” case.
Paul Samuelson himself, while he still places the Keynesian model
first, has moved away from questionable doctrines such as the “paradox
of thrift” and the “virtue” of deficit spending and has now embraced an
increased savings rate.
Finally, in some cases free marketers have circumvented the “careerist
club” altogether and have produced textbooks on their own. Perhaps the
best is the soon to be released Economic Logic, by Skousen. Skousen
told Accuracy in Academia that, “This is the first no compromise free
market textbook in economics for college students and is presented in a
revolutionary step by step fashion. Hence the title Economic Logic.” He
mentioned that this textbook, to be released in two separate volumes
addressing microeconomics and macroeconomics, respectively, will retail
for $29.95. “I may not sell as many copies (as I might if I included
Keynesian economics), but at least it will be pure.”
Nevertheless, Keynes’ welfare state economics--at least for the
foreseeable future--still reigns supreme in academia. ©1999, Accuracy In Academia