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Making Economic Sense
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Making Economic Sense
Murray N. Rothbard
2nd Edition
Ludwig
von Mises
Institute
AUBURN, ALABAMA
Copyright © 1995, 2006 by the Ludwig von Mises Institute
All rights reserved. No part of this book may be reproduced in any manner
whatsoever without written permission except in the case of reprints in the
context of reviews. For information write the Ludwig von Mises Institute,
518 West Magnolia Avenue, Auburn, Alabama 36832.
ISBN: 0-945466-46-3
v
CONTENTS
Preface by Llewellyn H. Rockwell, Jr. . . . . . . . . . . . . . . . . . . . . . . . .xi
Introduction to the Second Edition
by Robert P. Murphy . . . . . . . . . . . . . . . . . . . . . . . . . . . . .xiii
MAKING ECONOMIC SENSE
1 Is It the “Economy, Stupid”? . . . . . . . . . . . . . . . . . . . . . . . . . .3
2 Ten Great Economic Myths . . . . . . . . . . . . . . . . . . . . . . . . . . .7
3 Discussing the “Issues” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
4 Creative Economic Semantics . . . . . . . . . . . . . . . . . . . . . . . .23
5 Chaos Theory: Destroying Mathematical Economics
From Within? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
6 Statistics: Destroyed From Within? . . . . . . . . . . . . . . . . . . . .28
7 The Consequences of Human Action: Intended
or Unintended? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31
8 The Interest Rate Question . . . . . . . . . . . . . . . . . . . . . . . . . .33
9 Are Savings Too Low? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37
10 A Walk on the Supply Side . . . . . . . . . . . . . . . . . . . . . . . . . . .40
11 Keynesian Myths . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43
12 Keynesianism Redux . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45
THE SOCIALISM OF WELFARE
13 Economic Incentives and Welfare . . . . . . . . . . . . . . . . . . . . .53
14 Welfare as We Don’t Know It . . . . . . . . . . . . . . . . . . . . . . . .56
15 The Infant Mortality “Crisis” . . . . . . . . . . . . . . . . . . . . . . . .58
16 The Homeless and the Hungry . . . . . . . . . . . . . . . . . . . . . . .62
17 Rioting for Rage, Fun, and Profit . . . . . . . . . . . . . . . . . . . . .64
18 The Social Security Swindle . . . . . . . . . . . . . . . . . . . . . . . . . .68
19 Roots of the Insurance Crisis . . . . . . . . . . . . . . . . . . . . . . . . .71
20 Government Medical “Insurance” . . . . . . . . . . . . . . . . . . . . .74
21 The Neocon Welfare State . . . . . . . . . . . . . . . . . . . . . . . . . .77
22 By Their Fruits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .81
23 The Politics of Famine . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .84
24 Government vs. Natural Resources . . . . . . . . . . . . . . . . . . . .87
25 Environmentalists Clobber Texas . . . . . . . . . . . . . . . . . . . . . .89
26 Government and Hurricane Hugo:
A Deadly Combination . . . . . . . . . . . . . . . . . . . . . . . . . . . .92
27 The Water Is Not Running . . . . . . . . . . . . . . . . . . . . . . . . . . .96
POLITICS AS ECONOMIC VIOLENCE
28 Rethinking the ’80s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .103
29 Bush and Dukakis: Ideologically Inseparable . . . . . . . . . . .106
30 Perot, The Constitution, and Direct Democracy . . . . . . . .110
31 The Flag Flap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .113
32 Clintonomics: The Prospect . . . . . . . . . . . . . . . . . . . . . . . .116
33 Clintonomics Revealed . . . . . . . . . . . . . . . . . . . . . . . . . . . . .119
34 Price Controls are Back! . . . . . . . . . . . . . . . . . . . . . . . . . . . .123
35 The Health Plan’s Devilish Principles . . . . . . . . . . . . . . . . .127
vi Making Economic Sense
36 Outlawing Jobs: The Minimum Wage, Once More . . . . . .133
37 The Union Problem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .136
38 The Legacy of Cesar Chavez . . . . . . . . . . . . . . . . . . . . . . . .140
39 Privatization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .144
40 What To Do Until Privatization Comes . . . . . . . . . . . . . . .146
41 Population “Control” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .150
42 The Economics of Gun Control . . . . . . . . . . . . . . . . . . . . .153
43 Vouchers: What Went Wrong? . . . . . . . . . . . . . . . . . . . . . .156
44 The Whiskey Rebellion: A Model for Our Time? . . . . . . .160
45 Eisnerizing Manassas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .164
ENTERPRISE UNDER ATTACK
46 Stocks, Bonds, and Rule by Fools . . . . . . . . . . . . . . . . . . . .169
47 The Salomon Brothers Scandal . . . . . . . . . . . . . . . . . . . . . .173
48 Nine Myths About the Crash . . . . . . . . . . . . . . . . . . . . . . . .176
49 Michael R. Milken vs. The Power Elite . . . . . . . . . . . . . . .181
50 Panic on Wall Street . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .185
51 Government-Business “Partnerships” . . . . . . . . . . . . . . . . .189
52 Airport Congestion: A Case of Market Failure? . . . . . . . . .192
53 The Specter of Airline Re-Regulation . . . . . . . . . . . . . . . . .195
54 Competition at Work: Xerox at 25 . . . . . . . . . . . . . . . . . . .199
55 The War on the Car . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .201
FISCAL MYSTERIES REVEALED
56 Are We Undertaxed? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .209
57 The Return of the Tax Credit . . . . . . . . . . . . . . . . . . . . . . .212
58 Deductibility and Subsidy . . . . . . . . . . . . . . . . . . . . . . . . . . .215
59 That Gasoline Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .217
Contents vii
60 Babbitry and Taxes: A Profile in Courage? . . . . . . . . . . . . .221
61 Flat Tax or Flat Taxpayer? . . . . . . . . . . . . . . . . . . . . . . . . . .224
62 Mrs. Thatcher’s Poll Tax . . . . . . . . . . . . . . . . . . . . . . . . . . .227
63 Exit the Iron Lady . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .230
64 The Budget Crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .233
65 The Balanced-Budget Amendment Hoax . . . . . . . . . . . . . .236
ECONOMIC UPS AND DOWNS
66 The National Bureau and Business Cycles . . . . . . . . . . . . .243
67 Inflationary Recession, Once More . . . . . . . . . . . . . . . . . . .246
68 Deflation, Free or Compulsory . . . . . . . . . . . . . . . . . . . . . .250
69 Bush and the Recession . . . . . . . . . . . . . . . . . . . . . . . . . . . .254
70 Lessons of the Recession . . . . . . . . . . . . . . . . . . . . . . . . . . .258
71 The Recession Explained . . . . . . . . . . . . . . . . . . . . . . . . . . .264
THE FIAT MONEY PLAGUE
72 Taking Money Back . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .271
73 The World Currency Crisis . . . . . . . . . . . . . . . . . . . . . . . . .295
74 New International Monetary Scheme . . . . . . . . . . . . . . . . .300
75 “Attacking” the Franc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .302
76 Back to Fixed Exchange Rates . . . . . . . . . . . . . . . . . . . . . . .306
77 The Cross of Fixed Exchange Rates . . . . . . . . . . . . . . . . . .311
78 The Keynesian Dream . . . . . . . . . . . . . . . . . . . . . . . . . . . . .315
79 Money Inflation and Price Inflation . . . . . . . . . . . . . . . . . .317
80 Bank Crisis! . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .321
81 Anatomy of the Bank Run . . . . . . . . . . . . . . . . . . . . . . . . . .325
82 Q & A on the S & L Mess . . . . . . . . . . . . . . . . . . . . . . . . . .328
viii Making Economic Sense
83 Inflation Redux . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .333
84 Inflation and the Spin Doctors . . . . . . . . . . . . . . . . . . . . . . .336
85 Alan Greenspan: A Minority Report on the
Fed Chairman . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .339
86 The Mysterious Fed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .341
87 First Step Back to Gold . . . . . . . . . . . . . . . . . . . . . . . . . . . .344
88 Fixed-Rate Fictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .347
ECONOMICS BEYOND THE BORDERS
89 Protectionism and the Destruction of Prosperity . . . . . . . .355
90 “Free Trade” in Perspective . . . . . . . . . . . . . . . . . . . . . . . . .367
91 The Nafta Myth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .370
92 Is There Life After Nafta? . . . . . . . . . . . . . . . . . . . . . . . . . .375
93 “Fairness” and the Steel Steal . . . . . . . . . . . . . . . . . . . . . . . .378
94 The Crusade Against South Africa . . . . . . . . . . . . . . . . . . .383
95 Are Diamonds Really Forever? . . . . . . . . . . . . . . . . . . . . . .385
96 Oil Prices Again . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .388
97 Why the Intervention in Arabia? . . . . . . . . . . . . . . . . . . . . .392
98 A Trip to Poland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .397
99 Peru and the Free Market . . . . . . . . . . . . . . . . . . . . . . . . . .399
100 A Gold Standard for Russia? . . . . . . . . . . . . . . . . . . . . . . . .402
101 Should We Bail Out Gorby? . . . . . . . . . . . . . . . . . . . . . . . .404
102 Welcoming the Vietnamese . . . . . . . . . . . . . . . . . . . . . . . . .408
THE END OF COLLECTIVISM
103 The Collapse of Socialism . . . . . . . . . . . . . . . . . . . . . . . . . .413
104 The Freedom Revolution . . . . . . . . . . . . . . . . . . . . . . . . . . .416
105 How to Desocialize? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .419
Contents ix
106 A Radical Prescription for the Socialist Bloc . . . . . . . . . . . .422
107 A Socialist Stock Market? . . . . . . . . . . . . . . . . . . . . . . . . . . .425
108 The Glorious Postwar World . . . . . . . . . . . . . . . . . . . . . . . .428
109 The Revolution Comes Home . . . . . . . . . . . . . . . . . . . . . . .431
110 The Trouble with the Quick Fix . . . . . . . . . . . . . . . . . . . . .436
OUR INTELLECTUAL DEBTS
111 William Harold Hutt : 1899–1988 . . . . . . . . . . . . . . . . . . . .443
112 Friedrich August von Hayek: 1899–1992 . . . . . . . . . . . . . .446
113 V. Orval Watts: 1898–1993 . . . . . . . . . . . . . . . . . . . . . . . . . .450
114 Ludwig von Mises: 1881–1973 . . . . . . . . . . . . . . . . . . . . . . .452
115 Margit von Mises: 1890–1993 . . . . . . . . . . . . . . . . . . . . . . .455
116 The Story of the Mises Institute . . . . . . . . . . . . . . . . . . . . .458
POSTSCRIPT
117 The November Revolution . . . And What to Do
About It . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .467
INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .499
x Making Economic Sense
PREFACE
The academic contributions of Murray N. Rothbard
(1926–1995) are legion, but he also had a passion for public persuasion. A free society can only be sustained if the general
public is aware of the vital importance of the market and the
terrible consequences of statism. That’s why Rothbard hoped to
convince everyone about the virtues of the free economy. For
Rothbard, educating the public was strategically necessary and
morally obligatory. It was also lots of fun.
From 1982 to 1995, the Free Market was home to Rothbard’s
monthly explanation of economic events. He presented theory
and policy in clear, sprightly prose while never sacrificing intellectual rigor. Keeping with Mencken’s rule, Rothbard’s clear
writing was a product of his clear thought. Even when discussing subjects like interest rates and excise taxes—subjects
economists typically take pains to make unbearably boring—
Rothbard teaches and entertains at the same time.
The Free Market essays are a crucial part of the legacy he has
left us. As he skewers both parties in all branches of government, and all their connected interests, we see a principled Austrian School economist at work.
The Second Edition is expanded to include “Protectionism
and the Destruction of Prosperity,” a monograph printed by the
Mises Institute in 1986; “Taking Money Back,” a piece crafted
xi
in 1991 to make a populist case for radical monetary reform,
and a brief but moving obituary of Mises published in 1973.
No matter how specialized and distant from reality the economic profession becomes, Rothbard proves it is always possible to communicate truth more broadly. In this area, as in so
much else, Rothbard shows us the way.
Llewellyn H. Rockwell, Jr.
Auburn, Alabama
January 2006
xii Making Economic Sense
INTRODUCTION TO THE SECOND EDITION
Murray Newton Rothbard (1926–1995) was one of the most
important thinkers of the twentieth century. I choose the
somewhat vague term thinker because Rothbard’s interests were
so diverse that they defy conventional classification. Yes, Rothbard was an economic theorist in the “Austrian” tradition of
Ludwig von Mises and Friedrich Hayek. But Rothbard also
wrote a detailed history of the Great Depression, two volumes
on the history of economic thought, several methodological
articles, as well as an incredibly lucid text on economic principles. With the specialization of the modern economics profession, these feats alone would be unusual: You do either economic theory, economic history, history of economic thought (if
you don’t care about getting a job, at any rate), or—if you’re one
of the few economists who can actually produce prose that students and the lay public find comprehensible—you go ahead
and write an introductory textbook. Except for freaks like Paul
Samuelson (and Murray Rothbard), you don’t do all of these
things, just as a surgeon specializes in the heart or the brain, but
never both.
And yet we can’t stop there. In addition to his contributions
to all areas of economics, Rothbard wrote four (provocative)
volumes on the history of colonial America. He also drew on
philosophy, political science, and legal theory to synthesize a
357-page deductive treatise on the nature and content of the
legal code in a just and free society. Oh yes, I almost forgot:
xiii
Rothbard virtually single-handedly created the modern libertarian movement through his ceaseless agitation and two books,
one explaining the terrible consequences of all government
intervention and the other giving the virtual blueprints for a
society with no government.
“An impressive fellow,” you may say, “who was no doubt a
genius. Yet surely he was a humorless robot of a man, spewing
forth lonely and bitter critiques of all those lesser mortals with
whom he could not identify.”
Now this relates to the really surprising aspect of Murray
Rothbard—the guy was funny, and he was a real person. You
will see this immediately as you read the essays, but I fear that
if the present volume is your only sampling of Rothbard’s work,
it may give the impression that his writing was remarkably
entertaining in light of how, well, stuffy the topics were. But
what do you expect? Most of these essays were originally published in the Free Market, a newsletter obviously devoted to
economic and political issues, subjects that can at times (despite
their tremendous importance) be a bit dry. If this is indeed your
reaction, you absolutely must go on to read The Irrepressible
Rothbard, a collection of some of his lighter essays. There you
will see the same impeccable logic, brutal honesty, and wonderful wit, but in the context of antiwar polemics, politically incorrect musings on various racial and sexual conflicts, surprisingly
plausible conspiracy theories, insensitive ad hominem (yet undeniably funny) attacks on people Rothbard can’t stand, good old
Clinton bashing, and, believe it or not, movie reviews that are
far more insightful than what you will likely get in your local
newspaper.
As I mentioned above, most of the essays in the present volume originally ran in the the Free Market, a monthly newsletter
put out by the Ludwig von Mises Institute, which was founded
in 1982 to promote and advance the legacy of Rothbard’s
beloved mentor. Ludwig von Mises (1881–1973) was the undisputed champion of the Austrian School of economics during his
lifetime. (The term “Austrian” refers to the nationality of the
xiv Making Economic Sense
School’s pioneers; Austrian economists do not study the unemployment rate of Vienna.) Among his theoretical achievements
was the incorporation, in the early twentieth century, of money
prices into the subjectivist, marginalist framework that other
economists of that day had used only to explain prices in a
barter economy. Mises also drew on the work of his own mentor, Eugen von Böhm-Bawerk, as well as Knut Wicksell, to
elaborate a theory of the business cycle that laid the blame not
on capitalism but rather on the central government’s manipulations of the banking system. (It was for his elaboration of the
Misesian cycle theory that Friedrich Hayek won the Nobel
Prize in economics in 1974.)
Another major contribution was Mises’s work on methodology, in which he argued that economic laws were a subset of
“praxeology”—the logic or science of human action—and were
not comparable to the physical laws of the natural sciences. In
the natural sciences, we observe the actual outcome—the trajectory of a cannonball, let us say—and then we must come up
with hypotheses to explain the causal forces at work. In contrast,
in the social sciences (whether criminology, sociology, psychology, or economics) we presumably know the motivating forces
at work, at least at a certain level of generality: When a man
robs a bank, we do not study the physical forces on the atoms in
his body, but rather ask, “What drove him to this desperate act?
Didn’t he have a strong role model to teach him right from
wrong?” and so on. (It’s not so much that we couldn’t use the
methods of the physicist or chemist, but just that they wouldn’t
take us very far. They certainly wouldn’t help detectives recover
the loot! For that task, we need to “get inside the head” of the
thief.) Mises looked at the growing body of economic analysis
(at least in the early twentieth century) and crystallized its
essence as logical deductions from the fact that people act; in
other words, Mises felt all valid economic laws were implied by
the fact that people are rational (though fallible) beings who
choose means to (attempt to) achieve desired ends. I bring this
point up because there is a tendency among certain people to
lump all “free market” economists together, so that Milton
Introduction to the Second Edition xv
Friedman and Ludwig von Mises (or Murray Rothbard) are
“basically saying the same thing.” This issue of the proper foundation of economic science is one major example of the error of
such careless grouping; in exact contradiction to the view of
Mises and Rothbard, Milton Friedman is famous for his defense
of positivism in economics, i.e., the application of the methods
of the physical sciences to the social sciences.
There is another difference between Mises (and Rothbard)
and such popular advocates of laissez-faire as Milton Friedman
or, more recently, heroes of American political “conservatives”
such as Lawrence Kudlow or Alan Greenspan. It is true that all
of these economists would agree, say, that a cut in the capital
gains tax would be good for the American economy, or that raising the minimum wage to $10 per hour would hurt inner city
minorities. In that sense they are all “anti-government.” But
Mises (and even more so, Rothbard) were far more consistent in
their promotion of individual liberty and free enterprise, and
their condemnation of government intervention in the economy. Thus Friedman could advocate a “negative income tax”—
i.e., a welfare program that is novel only in the method by
which the amounts of the checks are calculated—and
Greenspan and Kudlow certainly do not feel “government is the
problem” when it comes to the Federal Reserve.
Of course, some may feel that these last remarks are both
unfair and politically naïve. Indeed, one of the biggest complaints against Mises, and especially Rothbard, is that they were
stubborn, “dogmatic” ideologues, who couldn’t support a move
in the right direction because of their unrealistic principles.
Although I don’t subscribe to this objection, this Introduction is
hardly the place for me to answer it. Let me mention, though,
that another popular objection is that Rothbard was a sellout
who would ally with various communists, Democrats, protectionist Republicans, etc. based on the shifting political winds.
Now say what you will about his strategic vision—and the huge
growth of the extremely radical “anarcho-capitalist” movement
is a point in his favor—but Rothbard can’t be both a dogmatic
purist and an opportunistic sellout at the same time!
xvi Making Economic Sense
I wish I could include some of my personal anecdotes of
Rothbard to give you a sense of the man, but unfortunately I
never met him. As many say of John F. Kennedy, I can truly
remember exactly where I was when I learned the news. I was
an economics major at Hillsdale College, and another student
mentioned to me that “some big free market economist” had
died. With a sinking stomach I asked, “It’s not Murray Rothbard, is it?” to which my friend replied, “Yeah, that was his
name.” I was extremely disappointed because, in many respects,
Rothbard’s work (in both economics proper and political philosophy) had been the standard by which I would judge my own.
On those issues where we disagreed—and there were many—I
wanted to hear him reply to my critiques, and now that would
be impossible. (Yes, I was as self-absorbed as any other American undergrad.) But on those issues where we agreed—where
Rothbard really nailed the issue on the head, in my mind—wow
did he do it beautifully.
You will see this in the present collection. In addition to
being correct, Rothbard’s prose is also precise and direct. (In
contrast, Hayek’s points are often valid and extremely precise,
but might involve seven clauses and three semicolons.) You will
also get a sense of Rothbard’s extreme breadth of knowledge. To
paraphrase Mark Twain: the older I get, the smarter Murray
Rothbard becomes. I realized this when I first taught an
advanced class in Austrian economics, and one of the readings
was Rothbard’s famous (1956) essay, “Toward a Reconstruction
of Utility and Welfare Economics.” Having just graduated from
a fairly highly ranked doctoral program in mathematical economics, I considered myself quite knowledgeable about abstract
concepts such as von Neumann-Morgenstern utility functions.
I was quite surprised, then, to see that Rothbard was perfectly
adept with the mathematical sophistication in these demonstrations, and could point out their underlying (false) assumptions.
I was surprised yet again when rereading the present collection,
and came across Rothbard’s essay on chaos theory. Because of
an honors seminar on “spontaneous order” (i.e., the emergence
of orderly macro phenomena from simple micro foundations) I
Introduction to the Second Edition xvii