Economics on Trial: Lies, Myths, and Realities
David Levy - Vice President
Published November 1, 1990 | November 1990 issue
By Mark Skousen
Business One Irwin
Economics on Trial caught my attention because of its provocative title and because I suspected its author, Mark Skousen, was heavily influenced by the modern Austrian school of economic reasoninga point of view that has always intrigued me.
Reading the book brought me to the conclusion that indeed it did have a fine chapter on the Austrians. Entitled 'The Next Economics" this portion of Skousen's book briefly, simply and chronologically sets out the evolving ideas of the Austrian school from Carl Menger through Eugen von Bohm-Bawerk, Ludwig von Mises and my favorite, Nobel prize winner, Friedrich Hayek. Skousen brings us up to date by identifying today's standard bearers: Murrary Rothbard (who can't seem to make Who's Who in Economics), Israel Kirzner, Lealand Yaeger and, among others, our own George O'Driscoll of the Federal Reserve Bank of Dallas.
The tenets of Austrian economics are evident in nearly every Skousen argument. There is a direct or implied emphasis on entrepreneurship, limited government spending and a definite inclination to begin economic reasoning by considering factors of production (supply), over those of consumption (demand).
It's difficult to categorize Skousen's book. Clearly, he's fashioned himself as an economic iconoclast. He has surveyed the top college textbooks and concluded they are in sad shape because they don't properly portray the way the world works. According to Skousen, the problem lies with academic economists who are not general practitioners in the economy, "in fact, many of them eschew the necessity of pragmatic application, dismissing it as unscientific storytelling. They teach what they have learned from textbooks authored by professors who in turn learned economics from a previous generation of textbooks and professors. The vast majority of articles in the professional journals are highly mathematical exercises in pure theory, far removed from practical values. When economists turn to evidence for their theories, they rely on complex econometric models and impersonal statistical research. It's a hapless cycle in academia...," says Skousen.
You can see that Skousen doesn't pull his punches, and he does come out punching. After his first shot he then pictures himself as a "practical economist," with "widespread experience in the business and financial world." Because of his practical dimension, and his own experience in academia, Skousen decided to write Economics on Trial "to point out the chief omissions made by today's economists, that is, the good economics they often fail to teach in colleges and in books. Second, to show the fallacies of certain theories frequently taught in economics courses as well as certain misguided policy recommendations." By any measure, that's an ambitious undertaking considering how the mainstreamers labor mightily for the smallest breakthrough. But out the window it must all go, says Skousen. "It is my contention that the core of neoclassical economics is unsound, primarily in macroeconomics, but also in certain aspects of microeconomics. If the economics profession is going to come up with an original Samuelson-style text, it must start over, with the kind of practical economics found in this book."
At this point, Skousen launches into a multi-chapter discussion of basic ideas and concepts commonly found in "principles of" textbooks. He begins with the very definition of economics which usually is some version of the allocation of scarce resources among competing ends. A better place to begin one's economic reasoning Skousen claims, would be to say that "Economics is the study of how individuals transform natural resources into final products and services that people can use."
After redefining economics, Skousen moves on to discuss alternatives to supply and demand curves, a different national statistic beside gross national product (GNP) that would describe economic activity, an alternative explanation of inflationary recession, advantages of a pure gold standard and a revisit of the Great Depression.
Who could make best use of this information? It's doubtful the academic economists that Skousen KO'd in the first few chapters will stay with the book long enough to benefit from his handiwork. The book's insulting tone to the gatekeepers of economic orthodoxy will surely put them off.
It might be useful to another set of people interested in economics. They are the teachers who try to demystify these economics concepts to a point where they become comprehensible to college and high school students. Some are stuck, but most keep an open mind to different approaches and just might find the one or few ideas that will help them connect. It might be like going to the next workshop or national meeting. You know 95 percent of what's about to happen and you may agree or disagree with that, but it's the unknown five percent that attracts you and makes the trip potentially worthwhile.
It's likely that the economists of this bank would take issue with nearly every paragraph of Economics on Trial. But interestingly, here and there Skousen argues a point that's exactly on the markby their reasoning. One example might be Skousen's comment when discussing a run on the dollar. He says, "Federal Deposit Insurance ... has actually destabilized the U.S. banking industry even more by creating the illusion that bank deposits are risk-free and customers do not have to be concerned about the quality of a bank's portfolio." That is more or less the essence of this bank's argument that the United States should move to a system of co-insurance, relying on market discipline rather than greater regulation.
Another of Skousen's observations that wouldn't be disputed is the notion that economics textbooks have a serious shortage of international coverage, especially of the Pacific Basin. We find a great hunger for international material from teachers who participate in our bank-directed, economic education programs. As our economy rapidly globalizes, so also does the need grow for information on the subject. No doubt the texts lag in this area.
A question that begs to be answered is: Why not simply take the positive approach and write a proper textbook, rather than a critique of the existing ones? Anticipating the question, Skousen says that it would be a "long, uphill battle" because his text would be "revolutionary." Anyone wanting to write a major textbook is subject to standardizing pressures that force the authors back to the central core of economics: the standard neoclassical models. That happens, Skousen says, because it is the basis of standardized testing.
Later, Skousen acknowledges that the texts generation-to-generation are not entirely static. Compared to the "monolithic years of the Keynesian era," he feels today's textbooks allow many more new concepts. He points to the texts of Dolan, Gwartney and Stroups as progressive with discussions about monetarism, supply side economics, rational expectations, and Marxism. Not surprisingly, he charges they're all a bit shy on Austrian material.
We do find a note of bad news for the Federal Reserve in Economics on Trial. Arguing for a pure commodity standard (gold), Skousen says "there would be no need for such central banks as the Federal Reserve, the Bank of England, the Bank of France, or any discretionary authorities at all." This would not bode well for The Region magazine.
One last point and it may be a Freudian slip or just a typo. Skousen says that in 1944 Hayek wrote the controversial tract The Road to Selfdom. Wasn't that Serfdom?