Review of George Reisman's _Capitalism_

Technotranscendence (neptune@mars.superlink.net)
Fri, 20 Mar 1998 08:11:43 -0500 (EST)


All:

Thought this might be of interest.

Daniel Ust
----
This is the review that appeared in _Full Context_ three months ago, with
a couple of small corrections. I'm given back the rights to the review
after this period.

BOOK REVIEW
by Frank Forman

George Reisman, Capitalism: A Treatise on
Economics (Ottawa, IL: Jameson Books, 1996,
1045 pp., $95). Available from the publisher,
Box 738, Ottawa, IL 61350, at a current
discount of $69.95, plus $5 domestic postage
or $10 international postage. Fax: (815) 434-
7907. Excerpts from all chapters and the
entire first chapter can be viewed at
www.capitalism.net.

"Hire your pastor to read the first volume
for you. But don't miss the second." Thus
ends H.L. Mencken's celebrated review of
Theodore Dreiser's An American Tragedy. The
words apply to George Reisman's defence of
laissez-faire capitalism, Capitalism: A
Treatise on Economics, except that far more
than the equivalent of one out of two volumes
is superfluous to the book's real
contribution, a new vision of the economy as
a whole, with the producer put back into the
central place, which led him to develop a new
system of national income accounting. It is
the stuff of a revolution in economics and a
Nobel Prize for whoever carries it off. I
recommend the huge double-columned book,
however, only to someone who already knows a
good deal of economics and who is ambitious
about carrying forward Reisman's ideas.

The book is in three major parts. The first
part, "The Foundations of Economics," lays
the ground work. Reisman defines economics as
"the science that studies the production of
wealth under a system of division of labor"
(p. 15) and wealth as "material goods made by
man" (p. 39) and discusses the nature of
capitalism and freedom and the protection of
rights by governments. This part further lays
down basic ideas on the division of labor and
the need for wealth and concludes with a
discussion of the ecology movement.

The second part, "The Division of Labor and
Capitalism," discusses why an extensive
division of labor is necessary for economic
progress and why capitalism is the necessary
institutional framework for having an
extensive division of labor in the first
place. He shows how a free-market economy
solves the economic coordination problem and
how socialism is impossible. The part goes
into great detail how price controls
backfire, with particular reference to the
energy "crisis" of 1973. And it also argues
why the alleged threat of private monopoly
power is bogus.

The third part, "The Process of Economic
Progress," is the most original part and
looks at the economy as a whole, with
particular reference to the supply of money
and the importance of having a precious-metal
standard of money. Most of this part consists
of refuting fallacies of other schools of
economic thought, seemingly leaving laissez-
faire capitalism as the remaining
alternative, but a great deal of the part is
given over to expounding the author's
positive conception of the workings of the
economy.

The book concludes with an Epilogue,
outlining a long-term strategy toward
achieving laissez-faire society. First comes
efforts to educate the public, only later
will it become possible to eliminate
regulation and, more slowly, subsidies and
government jobs. Reisman envisions a
government that spends about a tenth of what
it does today.

Capitalism and Objectivism

Capitalism is being touted as an integration
of economics and Ayn Rand's Objectivism. Had
the book done this, it would have been an
even greater achievement than the revolution
the author has begun in putting the producer
into central place in economics (about which
more anon). To be sure, her ideas are
discussed repeatedly in the book, but it does
not deal with her most tantalizing idea
having to do with economics, namely that of
"philosophically objective value," as opposed
to the market-determined "socially objective
value, i.e., the sum of the individual
judgments of all the men involved in trade at
a given time."^ She notes that if a
stenographer "spends all her money on
cosmetics and has none left to pay for the
use of a microscope (for a visit to the
doctor) when she needs it, she learns a
better method of budgeting her income; the
free market serves as her teacher.... The
only thing that a capitalist system requires
of her is the thing that nature requires:
rationality, i.e., that she live and act to
the best of her own judgment." Ayn Rand
speaks of the free market, "which teaches
every participant to look for the objective
best within the category of his own
competence, and penalizes those who act on
irrational considerations."
^["What Is the Capitalism?", reprinted in
Capitalism: The Unknown Ideal]

Reisman does speak of "imaginary goods," such
as rabbit's feet and tarot cards, but all he
says is that "the economic principles that
apply to such goods, such as the laws of
price determination, are the same as that
apply to genuine goods" (p. 41). So if it is
true that rabbit's feet do not lead to
satisfaction of objective (in some sense)
desires, then the demand for such feet will
fall and so, very likely, their price.

There has always been a tension in economics
over the range of applicability of its
supposed principles. On the one hand,
economics presupposes conditions of peace and
the absence of force and fraud. On the other
hand, economists, including Reisman,
regularly analyze the economic consequences
of government intervention using the various
principles that presuppose their absence. A
second reading of Ludwig von Mises' Human
Action left me overwhelmed with the sleights
of hand he performed in this regard: for
example, businessmen, through a mysterious
process called "understanding" (Verstehen),
can readily calculate the effects of
technology-induced changes in the money
supply but are totally miffed by government-
induced inflation! Reisman, much to his
credit, does not engage in this bit of
hermeneutic, phenomenological metaphysics of
Verstehen; still, an axiomatic treatment
could bring out the precise range of economic
principles.

Now if this ambiguity of the range of
economics is problematic, much more so will
be the distinguishing of Ayn Rand's
"philosophically objective value" from her
market-determined "socially objective value."
The philosophically objective value of an
action is not something that can be directly
read off; rather, its discovery requires
rational thought and investigation, just as
in the discovery of an improved production
process. Both require effort, sometimes
considerable. Whether this effort constitutes
a kind of "cost," I am not prepared to say
and am not sure how Reisman would treat this
matter either, but clearly an integration of
economics and Objectivism would require
consideration of the notion of objectivity in
consumption as well as production. By
contrast, neo-classical economics by and
large presupposes consumer rationality and
has no concern at all with rationality of
ends, except to dismiss it as forever beyond
its purview.

There is a large literature in economics
about the costs of technological innovation,
mostly consisting of trite statements about
optimizing this or that; I suppose one could
generate any number of trite, mathematics-
filled papers on rationality in consumption.
(It's hard, at times, to blame Reisman and
other Austrians for their disdain for
mathematics, but they vastly overdo it.) The
larger problem of just what rational desires
are would remain after all these papers were
generated, and I am afraid that Objectivists
have not gone beyond stating that all
desires, if they are rational, need to
conform to human nature and need to promote
virtue and character development. (This
second need has been articulated only poorly
so far.) It may be high foolishness to
suppose that Objectivism ought to be more
than a well-organized body of abstract
principles and produce algorithms to enable
one to make specific consumption strategies
or career choices. Still, I would not
arbitrarily demarcate philosophy from the
rest of human inquiry as an excuse for
intellectual laziness.

Let me urge any scholar willing to tackle the
problem of objective ends to read David
Schmidtz's Rational Choice and Moral Agency
(Princeton University Press, 1995). Schmidtz
argues that we choose not just means to ends
but what he calls "maieutic" ends, which are
ends to find final ends (ends in themselves)
to live for as well. Thus, I want a career
and a wife to devote myself to. The important
thing is not to dally too long in picking the
best career and the best wife but to get on
with it and let these ends grow from being
means to the satisfaction of my desires to
being ends in themselves around which my
desires are organized. This echoes Francisco
d'Anconia's statement that the worst man was
one without a purpose.

These larger questions about final ends are
general ones for Objectivists, whereas
Reisman says, "I define economics as the
science that studies the production of wealth
under a system of division of labor" (p. 15).
But the issues of career choice and
rationality of consumption ends are relevant
to economics proper. Will a rational consumer
merely purchase what strikes his fancy, or
will his purchases partake of purposefulness
every bit as much as his career?
Unfortunately, I have never seen Ayn Rand's
article on why she collected stamps and
therefore in what sense she found her
collecting to be rationally purposeful. I
urge that the article be made widely
available.

David Hume, characterized by Miss Rand as
"the Bertrand Russell of his day" (in
contrast to the heavyweight Immanuel Kant),
was nevertheless wise when he spoke of man's
need for work, rest, and relaxation. Recall
that the residents of Galt's Gulch did a
certain amount of high-minded relaxing (going
to concerts and ballets, listening to
lectures), but it did not take the form of
goofing off. I suggest that the "science of
the production of wealth" will discover that
purposeful relaxation redounds to this
production of wealth, while goofing off to
some extent may reduce it.

Reisman's Signal Achievement

Enough complaints about what the book did not
do and on to its achievements. What is
revolutionary in his actual accomplishment is
his way of keeping his focus on all the
activity of the economy rather than just upon
the consumer goods that come out at the end
of the process. Sales between businesses for
raw and intermediate products are several
times the size of the end products, and
consideration of the whole keeps the producer
in central place rather than at the margins,
whereas too many economists take production
as a given, to be distributed by "society"
(political pressure groups or "the
aristocracy of pull").

Reisman develops a new method of national
income accounting on, as he calls it, "an
Aristotelian base" as opposed to the
"Platonic-Heraclitean" view implicitly held
by other economists. Paraphrasing one of Ayn
Rand's favorite sayings (which goes back only
to the Middle Ages, not to Aristotle, by the
way), he tells us that "the demand for A is
the demand for A," whence it is improper to
lump flour, wheat, and labor services into
the final product (bread) and count the last
only when measuring the Gross National
Product. Instead, he adds sales of these
intermediate and final products up, adds in
wages, and calls the sum Gross National
Revenue. He takes the reader through a great
many exercises to show how his new accounting
methods work. His accounts somewhat resemble
the input-output tables of Wassily Leontief
(Nobel Prize, 1973) and the earlier Tableau
conomique (1st ed., 1758) of the French
Physiocrat Fran‡ois Quesnay, but Reisman
shares not at all their itch to engage in
social planning. Reisman is, of course, a
laissez-faire capitalist.

The upshot of his analysis is several
remarkable and counterintuitive conclusions
(though not as counterintuitive as those of
Keynes' "multiplier"!). Three of the most
important are that all this spending in the
Gross National Revenue accounts depends on
how much money there is, not upon how
productive the economic system is. And
profits, as well as interest rates, are
determined, not by productivity, but by the
proportion of investment to consumption,
which is ultimately tied to the (time)
preference for present goods to future goods.
Time horizons broaden as men are more
rational and property is secure. In such a
case, the rate of profit and interest is low,
under three percent per year during large
stretches of the nineteenth century. Third,
he puts to rest the Marxist notion that
profits necessarily decline over time. This
last is so at variance with the facts that
its continued propagation is a real puzzle,
but it has been supported by (I learned from
Reisman) a very large number of bad but
influential arguments.

Reisman's Other Achievements

Much of the book--too much--is given over to
refuting bad arguments rather than
constructing something positive. But the
refutation of Marx's still highly-
influential theory of exploitation by
capitalists is original. To show this,
Reisman goes back to fundamental concepts,
something that Ayn Rand endlessly encouraged:
profits are just revenues minus the costs^ of
the things produced, and wages are monies
paid in exchange for the performance of labor
not for the products of labor. A businessman
is, therefore, not a wage earner, even if
some economists "impute" a wage to him that
he supposedly pays himself. This means that
farmers, artisans, and everyone who did
productive work were all businessmen and
earned profits (selling their products for
more than they paid for the raw materials),
until the first capitalist employed a laborer
for hire. (Strikingly and long before
Reisman, the great German sociologist, Max
Weber, demarcated capitalism by the free
mobility of labor--that is, by how the
capital was used--not by trade or the free
mobility of money itself, both of which are
quite old.) The upshot is that there is no
"exploitation" here but instead the
benevolent (one of Reisman's favorite words
and more apt than "beneficial") offering of
opportunities to sell one's labor rather than
its products.
^[Costs are just outlays here, not so-
called opportunity costs, a notion Reisman
makes mince meat of. This is another side
accomplishment of his book.]

There are other refutations aplenty, from
Keynesianism (focuses almost entirely on the
consumer), alleged free-market monopoly (even
so, buyers would shift to long-term
contracts), wage and price controls (not even
politicians believe in this anymore), the oil
"crisis" (also a dead issue), and
environmentalism (at least the zanier
aspects), to various ideas held by earlier
economists, esp. those of Smith, Ricardo, and
Mill, from which Reisman extracts the best
and makes it his own.

Indeed, some of his criticisms of other
economists, whole schools of them even, are
so strong that I am not sure what is left
standing. Neo-classical economics (what I had
in graduate school) comes in for especial
criticism, but I did not learn from
Capitalism whether there is any merit to
those handy supply-and-demand diagrams and
less-handy indifference curves, and, if so,
how they can be deployed legitimately. Just
what are the fundamental concepts and
assumptions of neo-classical economics
anyhow? I've seen certain mathematical
treatments, but these are never connected to
the world via semantic assumptions
(correspondence rules) in any rigorous
fashion, as Mario Bunge insists in his
monumental Treatise on Basic Philosophy that
they should be.

Some Criticisms

I can get a little suspicious about some of
Reisman's own conclusions, too, for his own
lack of rigor. The numerical examples he
takes the readers through may work only
because he has unintendedly built in
assumptions that make them work. (He often
gives algebraic formulae, but they are not
placed in an axiomatic format and hence need
to be rigorously checked. Hint to future
scholars: back-calculate the underlying
production functions.) Economics, after all,
is an empirical science, and any science must
connect up to the world at multiple places
and not just to contrived examples and to the
broad historical generalizations Reisman
offers. A genuine science must also lay out
its assumptions in the best possible fashion
using the axiomatic method, and a genuine
scientist must keep up to date with the
literature. (See, esp., Mario Bunge, "The
Axiomatic Format" and "Examples and
Advantages of Axiomatics," chapters 7 and 8
in Mario Bunge, Philosophy of Physics
(Dordrecht, Holland: D. Reidel, 1973). These
chapters deal with science generally, not
just physics.)

Furthermore, the economic realm is
continuous, while our concepts are discrete.
So it is not good enough to just decree what
gets counted in the money supply and what is
merely "near money," as Reisman does on page
540. But on pages 995-6, he recognizes that
different definitions of money can differ in
explanatory power. Yet he rather often speaks
disparagingly of "so-called empirical
research" that might test for just this
explanatory power and seems wholly unaware
that there are several formulae for
constructing weighted averages, the merits of
which make up a large sub-literature in
economics journals.

Ayn Rand's notion of a true definition
(foreshadowed by the great Charles Peirce) as
capturing those characteristics of the thing
defined that maximize (scientific)
explanatory power is well-recognized by
Reisman. But just to proffer definitions is
not enough: one must demonstrate that the
purported definition indeed has this property
of maximizing explanatory power. As it
happens, concept refinement is every bit as
important to science as the usual
undertakings of induction and deduction.
Forming concepts takes hard work and whenever
a purported definition departs from the true
one even slightly, our sciences stray farther
and farther away from reality at a geometric
rate as we merrily proceed link by link down
long deductive chains.

Who Should Read the Book?

Again, a reviewer should not complain too
much about a book's omissions. (I peppered my
copy of the book with enough critical remarks
to give anyone seeing them a severe to fatal
sneezing fit.) In the end, it's the
achievements that count. The refutations are
generally very fine, but far more important
is the book's tremendous potential, a Nobel
Prize even, for a scholar who wants to
develop the positive ideas on revamping the
national income accounts and, effectively,
redoing macro-economics from the ground up.
As for integrating economics and Objectivism,
it's Objectivism that needs to be better
developed, especially in the realm of
psychology.

I recommend the book urgently to any
Objectivist pursuing a career as an academic
economist or considering it and who is
willing to sweat through the book (not just
read it as I did), willing to dig out the
essential arguments and put them on a firm
mathematical and axiomatic basis, and above
all willing to argue, argue, and argue with
his peers in the economics profession. He'll
have to keep up to date and fill in on all
the developments in the field since Reisman
completed his dissertation in 1963,
developments in the economic analysis of
politics (Public Choice theory), the economic
analysis of law, and new learning about how
businessmen counteract the effects of
regulation (Rational Expectations).^ Above
all, he who would develop Reisman's ideas
cannot be like Reisman himself, who would say
that Joan Robinson and Michael Kalecki "are
advocates of socialism, while I, of course,
am an advocate of laissez-faire capitalism.
Because of this I could never conceive of
cooperating with them in any manner, and thus
I never attempted to contact Mrs. Robinson"
(p. 803). Alas such dismissiveness only
becomes exaggerated in those who associate
themselves with the Ayn Rand Institute, as
Reisman himself once did.
^[Regards Rational Expectations, see J.W.
Henry Watson and Ida Walters, "The New
Economics and the Death of Central Banking,"
Liberty 10.6 (1997 July): 19-26, for a fine
summary.]

For any other reader, I cannot so strongly
recommend the book. This is not for what it
does accomplish, nor for what it refutes, nor
for the picture it gives of how the economy
works, nor for the wit that pops up
frequently, but because it is too long and
reading it comes at the "cost" of not reading
a dozen shorter books. Mencken, Dreiser's
greatest defender, in his generally laudatory
review, nevertheless called Dreiser's novel
"this present shapeless and forbidding
monster--a heaping carload of raw materials
for a novel, with rubbish of all sorts
intermixed--a vast, sloppy, chaotic thing of
385,000 words--at least 250,000 of them
unnecessary," but in the context of overall
high praise. I am compelled to say something
not entirely dissimilar of George Reisman's
Capitalism: it is the stuff of a revolution,
but.... Alas, a very great deal of it is
written at the level of high school students
(as is so much of the material put out by the
Ayn Rand Institute), yet other parts
presuppose an advanced knowledge of the
history of economics thought and the
technicalities of both micro- and
macroeconomics as taught in graduate schools.
Indeed, it is hard to discern the target
audience for the book, since the doctrines of
the neoclassical orthodoxy are only referred
to and not spelt out the way a less than
advanced reader would need. I cannot help but
think that Reisman might have carried out his
own revolution had he not wasted so many
years being involved in said Institute, which
in the end did him no good, since he was
purged himself.

It would be better for most prospective
readers to first read a dozen other books on
economics and before tackling Reisman's
mammoth work. I am not the best to recommend
current books to learn economics, since I
have actually read very few of those now in
print and sold, say, by Laissez Faire Books.
Go through a text in price theory and
actually do the homework. Beyond that, aim
for as broad an understanding of the
economist's way of thinking as you can.
Economics is not all that intuitive, since
our hunting past seems to have instilled in
us the general perspective of command
economies--not so far from the truth when
getting on with the work by following orders
was not much better or worse than innovating
from a very small knowledge base. (I hasten
to add that command economies became
obsolete, surely by the time of agriculture,
if not already by the time that hunting bands
coalesced into tribes.) Thinking like an
economist, in other words, requires
disciplined study.

The first book I ever read on economics,
Henry Hazlitt's Economics in One Lesson,
remains an excellent first choice. I can
commend any book by Gordon Tullock and urge
you later on to read Richard Posner's
Economic Analysis of Law, not to further
enlighten you but to show you how disciplined
thinking can lead to "educated incapacity":
to me, this book is a bad caricature of the
economist's mind-set! Definitely include
James M. Buchanan's What Should Economists
Do? In my own specialty within economics,
Public Choice theory (the application of
economics to group decisions), I'd include
the first two classics, Anthony Downs, An
Economic Theory of Democracy, and Buchanan
and Tullock's The Calculus of Consent. Follow
them with Buchanan's magnum opus, The Limits
of Liberty. Try some books that inspire, such
as Burton W. Folsom, Jr., The Myth of the
Robber Barons (in print) and John
Chamberlain, The Enterprising Americans (out
of print). I do not have to recommend Ayn
Rand's Capitalism: The Unknown Ideal, to the
readers here. Finally, you should probably
have the classics of Smith, Ricardo, and Mill
under your belt before you tackle Reisman.

I am sorry to render the verdict that readers
not start their study of economics with
Reisman's book, but if the right reader
already knowledgeable of the field can be
found, the enormous effort put into
Capitalism by the author will have been more
than rewarded. And so will the economics
profession and the world. Mencken on Dreiser
again: "It takes a kind of skill that is
surely not common. Good writing is far
easier." Original thinking in economics is
also far easier than good writing. Reisman's
book contains a great many original thoughts
but is badly overwritten in most places and
underwritten where it matters most. It takes
someone with a fair amount of knowledge to
grasp what may or may not be original and
merits further development. Get the knowledge
needed to fully profit from Reisman's book
first; then, if you are ambitious, get
Reisman.

----------

Frank Forman went to graduate school in
economics at the University of Virginia
during 1966-9 and studied under James M.
Buchanan and Gordon Tullock. He wrote his
dissertation under Buchanan at George Mason
University (Ph.D., 1985) and expanded it into
The Metaphysics of Liberty (Dordrecht,
Holland: Kluwer Academic, 1989). He has
published articles and reviews in Association
for Recorded Sound Collections Journal,
Constitution Political Econmy, Menckeniana,
Public Choice, and Vera Lex.

Submitted to Full Context, 1997 October 7
version 4
---END