Austrian

Economics Newsletter
have had a tremendous impact on mainstream economists, and in particular a beneficial impact on the Chicago school. As one observer noted: "It is one of the few times the Prize has been given to an economi st for advancing economic theory!"
Coase's Nobel Prize

by Roy E. Cordato S h o u l d Austrian economists celebrate on the oc casion of Ronald Coase's Nobel Prize? Yes we

should, but cautiously. First some background. In 1960 Ronald Coase published an article that revolutionized the way a large segment of the eco nomics profession has come to think about external ity problems. In "The Problem of Social Cost," Coase argued that the Pigouvian approach to assessing such issues was wrong and that it implied policy prescrip tions that could lead to less than optimal results.

Ronald Coase Awarded Nobel Prize

R o n a l d H. Coase was awarded the 1991 Nobel Prize in economics for his role as one

of the principal founders of the modern study of

law and economics. He is best known for the

Coase took issue with Pigou's focus on the divergence between private and social costs that externalities gen
erate. Ultimately, Coase argued, from the perspective

"Coase Theorem" the proposition that resources will be efficienctly allocated through voluntary agreement even in the presence of externalities such as pollution, if property rights are defined and for pioneering the economic analysis of the in ternal working of the firm. Coase has made pathbreaking contributions to the theory of organizations, the theory of cost, property rights, public goods, externalities, eco nomic method, as well as important works on the origins of monopoly. His work promotes the expan sion of our understanding of the market process while eschewing mathematical techniques. A propo nent of the importance of ideas, Coase showed that personal freedoms (speech, religion, press) were parallel with economic freedoms.
The British-born economist was educated at the

BULLETIN BOARD

An Austrian economics weekend, March 27-

29 at the University of Nevada, Las Vegas.

A conference on the Federal Reserve at

Jeykll Island, Georgia, May 8-10.

1992 Mises University, July 4-11, at Stanford University. Mises Institute 10th anniversary celebration October 9-11 in New York City. $1,000 Ludwig von Mises Paper Awards (see back page).
For more information contact the Mises In

London School of Economics where he was heavily in fluenced by Arnold Plant and F. A. Hayek. The works
of this fellow traveler of the Austrian school, while few,

stitute, Auburn University, Auburn, Ala bama 36849-5301; (205) 844-2500; fax (205)
844-2583.

of social welfare, private costs are unimportant and that the issue of externalities is entirely a problem of
social cost.

to be decided is whether the gain from prevent

ing the harm is greater than the loss which would
be suffered elsewhere as a result of the harm"

This led Coase to ask different kinds of questions than had typically been asked when assessing prob lems associated with negative externalities. Pigouvians had focussed on trying to transform social costs into private costs. This led to the con
clusion that the costs of externalities should be in

(p. 27). The ultimate social welfare goal, in

Coase's framework, is to maximize the social

value of output (p. 16). From this perspective, then, it is clear that internalizing the harm may or may not result in optimality. Coase's emphasis on minimizing social costs led him, and those who have adopted his method, to con sider how alternative institutional arrangements, that is, property rights, affect the efficiency of market out comes. Viewing negative externalities as primarily a problem of conflicting property rights, Coase argued that what must be determined is "the arrangement of right [that] may bring about a greater value of pro duction than any other" (p. 16).
The first case considered resulted in what has come to be called the "Coase theorem." Here Coase

ternalized by those who are generating them, specifically through excise taxes or, with respect to legal remedies, by holding the generator of the externality liable for all damages. Coase's strict
emphasis on social cost led him to recast the na ture of the problem. He argued that "what has

Austrian
Economics Newsletter

Volume 13, Number 2

CONTRIBUTORS TO THIS ISSUE

Roy E. Cordato is an economist with the Institute for Re search on the Economics of Taxation in Washington, D.C.

Roger W. Garrison is an associate professor of economics at Auburn University. Hans-Hermann Hoppe is professor of economics at the University of Nevada, Las Vegas.
Peter G. Klein is a Mises fellow and graduate student in economics at the University of California, Berkeley.
Frank Mixon is a Ph.D. candidate in economics at Auburn

assesses the property rights conflict in a world of zero transaction costs. In this case, the optimal ar rangement of property rights comes about strictly as the result of a voluntary bargaining process. In the second case, high transaction costs block the ef ficient outcome and it is suggested that a third party, most likely a judge, should intercede to im pose the optimal solution.
Certainly, from an Austrian perspective, there

is much to criticize in Coase's analysis.1 In both the

zero and positive transaction costs cases, Coase as sumes that all prices are general equilibrium prices (pp. 6, 32), which allows him to ignore the prob lems that are posed by subjective value theory. For Austrians, the entire concept of "social cost" is vacu
ous (see Littlechild 1978). Furthermore, while

University.
STAFF

Editor: Mark Thornton/Auburn University Associate Editor: Jeffrey A. Tucker/George Mason University Assistant Editor: Peter G. Klein/UniversityofCalifornia, Berkeley Managing Editor: Judith F. Thommesen
CORRESPONDENTS

Amy Marie MarshaW/University of Notre Dame Alexander Tabarrok/(7eorge Mason University

PERMISSIONS AND SUBMISSIONS

Coase essentially argues that property rights are the most important variable when it comes to assess ing externality problems, Austrians have always ar gued that property rights must be taken as a given. In spite of these differences and the some
times bitter debates that have ensued as a result

Change of address requests and subscription requests

should be addressed to Austrian Economics Newsletter,

Mises Institute, Auburn University, Auburn, AL 36849-5301.

Questions pertaining to submissions of articles and book
reviews should be addressed to Mark Thornton, Austrian

Economics Newsletter, Economics Department, Auburn

University, Auburn, AL 36849-5242.

Articles that are submitted should be double-spaced and no more than 6 pages in length. Articles that are accepted will be requested on an IBM format diskette, when possi
ble. There is no submission fee.

of them, Austrian economists should be rejoicing over Coase's Nobel Prize. Coase's approach to ex ternalities has opened the door for Austrian ideas on this issue. Beginning with Menger, Austrians have always seen externality problems in terms of conflicts in the use of property, (see Cordato 1992, chap. 1). But since Pigou, property rights have

Permission to reprint articles is hereby granted provided full credit and address are given. Copyright 1992 The Ludwig von Mises Institute, Auburn Univer sity,Auburn, AL36849-5301; (205) 844-2500; fax (205) 844-2583.

been ignored by mainstream economists. Coase, in voking the methods of neoclassical economics, successfully shifted the focus and was able to place the issue of property rights at the center of the debate. This has bridged an important gap
for Austrian economists.

While the differences in method and approach to public policy that separate Coaseans and Austri ans should not be ignored, neither should an im portant and basic similarity, namely that both see
externalities in terms of conflicts over the use of

ships on which no toll could be conveniently im posed. In cases where owners are able to collect tolls (e.g., roads and canals), Sidgwick argued that
the tolls tend to be excessive, while conditions are

property. By bringing this focus to mainstream de bates about externality problems, particularly in
the areas of environmental economics and law and

economics, Coase has provided a significant posi tive externality for Austrian ideas on these issues. His Nobel Prize only enhances these benefits.

often neglected. He fashioned a case for local taxa tion to provide for lighthouses since their beams of fered local benefits. If the benefits of the lighthouse were dispersed nationally, then general taxation should be used to finance lighthouses. A. C. Pigou pointed out that in the case of the lighthouse, the marginal private net product falls short of the marginal social net product, because the beam performs services to third parties (the dreaded free-riders), from whom it is technically difficult to exact payment. Since lighthouse tolls are impossible, then, private resources will fail to find their optimal uses. This classical view would ordain lighthouses as the "classic" example of a public good in textbooks of the future.

For an extensive discussion of Coasean analysis from an Austrian perspective see Cordato (1992), Chap. 5. See also
Boettke (1989) and Cordato (1989).

See the collection of papers by Rizzo, Rothbard, Egger, and Demsetz, in Rizzo (1979). References

Boettke, Peter. 1989. "Comment on Joseph Farrell, 'Informa tion and the Coase Theorem.'" Journal of Economic Perspectives.
Vol. 3, No. 2.
Coase, Ronald. 1960. "The Problem of Social Cost." The

Then in 1974, Ronald Coase pointed out that the private production of lighthouses was not an

Journal of Law and Economics. Vol. 3. Cordato, Roy E. 1989. "Subjective Value, Time Passage, and
the Economics of Harmful Effects." The Hamline Law Review. Vol.

impossibility it was an historical fact.1 Pie presented

evidence from England that lighthouses were con structed privately (and run profitably) beginning in 1614, when Trinity House, the governmental light house agency, failed to answer a petition for a light house along the rocks of Eddystone. The history of British lighthouses points out the merits of private production. In 1816, 34 of the 46 lights were under private ownership. Coase also showed that private producers typically maintained the quality of service, and offered generous pensions to light house keepers and even educational assistance for their children. Coase's findings were not an iso lated accident, as I will attempt to show by using facts from American history. The history of lighthouses in the United States is much like that of England. In 1791, the U.S. gov
ernment, with Alexander Hamilton as the Secre

12, No. 2.

. 1992. Efficiency and Externalities in an Open Ended

Universe: A Modern Austrian Alternative. London and Boston: Kluwer Academic Publishers.

Littlechild, Stephen C. 1978. "The Problem of Social Cost," in Spadaro, ed., New Directions in Austrian Economics. Kansas City: Sheed, Andrews, and McMeel.

Rizzo, Mario, ed. 1980. Time, Uncertainty, and Disequilibriwn. Lex ington, Mass: Lexington Books.

Ronald Coase and the

Lighthouse
by Frank Mixon
T h e classical economists

argued for govern ment control of lighthouses

for various reasons. Adam Smith advocated a toll for

lighthouse users, but a toll collected by the public authorities, since private individuals would neglect
the repair of the lighthouse. John Stuart Mill be lieved that government should build and maintain

tary of the Treasury, signed a bill that assumed control of all American lighthouses. This bill also ceded title of all private lighthouses to the govern ment, with Hamilton appointing a superintendent of lighthouses to each state. But the facts show an inconsistency in the enforcement of this law, since
some lighthouses after 1791 seem to have been maintained privately.

lighthouses because it would be impossible to se

cure a toll from the ships that benefitthe classic

free-rider argument. For this reason he felt no pri vate individual would construct a lighthouse. Henry Sidgwick stated that the benefits of a well-placed lighthouse would be enjoyed largely by

America's first lighthouse, Boston Light, was erected under the supervision ofJohn George, a merchant, along with many of his associates in Bos
ton. The lighthouse was built on Beacon Island,

and any ship using the harbor was required to pay the receiver of impost a duty of one penny per ton going in or out of Boston Harbor. This was the first

light erected in the Western Hemisphere, and its construction and maintenance were entirely private.
New Hampshire's first light was Portsmouth Light, which was erected in 1771 on Newcastle Is

private production may result in better lighthouse services. Private producers responded to "peti tions" when the government failed to produce light
houses and to the complaints of their customers. The evidence examined suggests that the private
sector produced lighthouses in a cost-effective man

land. This beacon was not in fact a lighthouse, but a lantern that was hoisted to the top of a flagpole. The cost of raising and lowering the lantern was
paid for by the ships that benefited from the "gleam of the lantern" in the harbor. The identity of the private individual who maintained the light

and received the tolls remains a mystery today, but

it is said that he directed an ox team that delivered

gun powder to Americans at Bunker Hill.

The inhabitants of Nantucket received use of a

lighthouse for their harbor in 1746. Several sea cap tains of the island came to the old New England town meeting on January 24, 1746, and pressed for construction of a lighthouse. Ebenezer Calet, Obed Hussey, and Jabez Bunker agreed to build a light
and sell it to several citizens of Nantucket for 200.

ner, and contrary to economists such as Henry Sidgwick, maintained the lighthouses efficiently. The importance of Coase's classic article goes far beyond the gleam from the private lighthouse. Coase ruffled the heavy veil of ignorance facing mainstream economists regarding public goods the ory. No longer is the public production of "public goods" left unchallenged. The long list of widely ac cepted public goods has shrunk, so that the public provision of public goods has come more to repre sent a last resort, and the privatization of public en
terprises has become the wave of the future.
Franklin G. Mixon.Jr., "Essays on die Economics of Prop erty Rights: Lighthouses and Alligators," unpubl. Master's The sis, Auburn University, 1990.

When the light was completed, another town meet ing was held stating that "the owners" and "others concerned" would maintain the light. The light house owners made it clear to ship owners that the lighthouse was their own maritime responsibility. The ship owners performed their tasks well, and the Brant Point Light gleamed every night. The work the ship owners shared in maintaining the light was their "toll" for its services. To accommodate the complaints of some ship captains, the owners of the lighthouse set up a sys tem of collecting dues from all ships using the har bor. The system required any vessel over 15 tons to pay a charge of six shillings the first time each year it entered or left Nantucket Harbor. An inspector
collected the tolls for maintenance of Brant Point

'Ronald H. Coase, "The Lighthouse in Economics," Journal of

Lawand Ecorwmics 17, no. 2 (October 1974): 357-76.

llll

The Firm, the Market,

and the Law
R. H. Coase

FIRM
llll

MARKET
and Tin:

University of Chicago Press, 1988

Reviewed by Peter G. Klein

LAW
R.H. Coase

or an economist who

wrote relatively little,

Ronald Coase's influence

Light. This shows that shippers and ship owners were willing to pay a toll for lighthouse service, in deed; the system of monetary payment was pre ferred over the system of payment-in-kind.

For many years several residents of Martha's Vineyard maintained a private lighthouse at East Chop. The lighthouse was maintained by "subscrip
tions" from the owners of several steamers that

has been enormous. Still, his receipt of the 1991 Nobel Prize in economics is a strange and wonder ful thing, though Coase has been a favorite "dark horse" candidate for several years. What's remark able is how far Coase is from the stereotype of the modern academic economist. His long-time ap pointment at the University of Chicago is with the school of law; he reasons like a lawyer, producing
long essays of simple argument, careful documenta tion, and proof by example rather than tortured

sailed in the vicinity. The light was maintained until 1875, when the government purchased the sight and lighthouse for $5,000. The lighthouse may be a "public good," but it need not be built, maintained by, or financed by the taxpayer. Evidence from U. S. history supports Coase's contention that the "public good characteris
tics" of the lighdiouse need not make it a public en terprise. Indeed, die historical record implies that

mathematics; and his reputation among economists is based almost entirely on two journal articles, one more than 50 years old and the other so long that few people have read it all the way through. In 1988 the University of Chicago Press issued a collection of Coase's papers as "The Firm, the
Market, and the Law." Included are the two fa

mous ones"The Nature of the Firm" (1937) and

"The Problem of Social Cost" (1960)along with the well-known pieces on marginal cost and the

nomics, and he is without a doubt one of the most

powerful and creative minds in the discipline.

lighthouse, a 1972 survey of the field of industrial organization, and two new essays, "Notes on the
Problem of Social Cost" and a lengthy introduction.

It is a good representation of Coase's style and

thought, and a useful tool for understanding two

Values for a Value: Southern Schools Dominate

major forces in contemporary economics: the law

and economics movement, and what has come to
be known as the "New Institutional Economics."

Coase did not originate the economic analysis of law, which developed into a systematic progi-am under Aaron Director at Chicago in die 1940s and

Choosing a college is perhaps one of die most difficult decisions, especially if you are look ing for a school that promotes instruction in Austrian
or free-market economics. With the state becoming increasingly involved in secondary education, quality

1950s, but his paper on social cost that produced the

"Coase theorem" is the best-known achievement of
law and economics. Coase's main contentionthat as

long as property rights are well defined, external ef fects can under certain conditions be bargained away, no matter who holds the specific property titleshas met with varying degrees of enUnisiasm. Nonetheless he did provide a new framework for thinking about property and externalities that has become widely in fluential. (It is mostly forgotten diat the second half of Coase's paper provides a set of guidelines forjudges to settle such disputes when barriers to efficient bargain ing do exist; the charge diat Coase ignores "transac
tion costs" is hence unfounded.) In the companion

is falling while the costs of a degree continue to esca late. The results of the John Templeton Foundation's Honor Roll of Free Enterprise Teaching and the MoneyGuide "value" survey of American universities and colleges are presented here to provide some in
formation in making that choice.

Schools known for their emphasis on Austrian and free-market economics were highly ranked in both the Templeton and MoneyGuide Magazine sur veys. Southern schools dominated both surveys. In stitutions that were ranked in both surveys are
listed in the table below.

essay "Notes on the Problem of Social Cost," Coase

demonstrates his uncommon conviction that econom

ics ought to be useful as well as true. Responding to a critic who defends a classical Pigouvian tax plan as mathematically correct, though admittedly useless, Coase observes Uiat"[i]n my youth it was said that what was too silly to be said may be sung. In modern economics it may be put into mathematics" (p. 185). The other of Coase's legacies is the new theory
of the firm or new institutional economics. It was

The Templeton Foundation survey (conducted by the Foundation for Economic Education) asked the presidents of universities and colleges if they "(1) teach the principles and benefits of free-mar ket economic systems, (2) encourage a high degree of personal initiative, responsibility, and account ability, (3) emphasize Constitutional concepts of limited government, (4) support the traditional work ethic and pride of productivity, [and] (5) fos ter an appreciation for private property rights."
Southern schools were selected as four of the

top seven institutions and 46 out of a total of 87 se

lected. Seven schools were selected from the West

Coase's "Nature of the Firm" that first urged econo

mists to view the firm not as a set of demand and

and Northwest, 12 from the North, and 19 from

the combined areas of the Midwest and Southwest.

cost curves, but as an organization, with an internal structure guided by the same rules of human ac tion that govern its external activities. This line of thought has finally developed into a systematic re search program, with the growth of the highly tech
nical literature on information and incentives of

the last 20 years or so, and the work of writers like

Oliver E. Williamson and Douglass North.

MoneyGuide evaluated 1,011 institutions based on price and quality. Out-of-state tuition was used to determine the overall price of public institutions. To measure the quality of instruction the stu dent/faculty ratio, the percentage of full-time in structors with Ph.D.s, library resources, and the percentage of resources devoted to instruction
were examined. Entrance exam scores (SAT) and

We are lucky that Coase's main works are few enough to be collected into one small book (Hayek's collected works, by contrast, are projected at around 20 volumes). The publishers could actu

ally have included a few more selections, but we

needn't quibble. The. Firm, the Market, and the Law
does contain the core of Coasc's contribution to eco

class rank of incoming freshmen, as well as the school's acceptance rate were used to measure the quality of the student body. Freshman retention rate and graduation rate were used to gauge over
all student satisfaction. MoneyGuide used the per

centage of graduates who go on to earn graduate,

VIoncyGuidc

iSlff

professional, and doc toral degrees and the number of graduates

listed in Standard and

Conference Report
The Political Economy of Bureaucracy
P u b l i c Choice literature has focused on die issue of

Poor's Executive/College Survey as a measure of the institution's output

success.

bureaucracy, but the subject has unfortunately

been neglected by die Austrian school. "The Political

The South domi

nated MoyieyGuide's list of top 100 institutions

Economy of Bureaucracy," went a long way toward

correcting diaL It was sponsored by the Mises Institute and was held at the College of William and Mary in Williamsburg, Virginia, October 25-27, 1991.

for price and quality with 5 out of the top 10, and 41 listed in the top 100, plus all ten of the topranked mid-sized schools. The often-touted quality of Northeastern schools is purchased at a very high price, with nine of the top ten highest priced schools located in the Northeast (averaging $22,500
per year).

As LvMI president Llewellyn H. Rockwell, Jr. noted in his introduction, the country has been in vaded by bureaucrats. Each fiscal year, government at all levels sends 30 million people checks for "ser vices" rendered on a full- or part-time basis. The
federal government itself employs 3.1 million fulltime bureaucrats.

For those interested in a quality education at an

institution known to have some interest in the free

enterprise system these surveys provide some infor

mation. However, a few words of caution are in

order. Surveys and statistical ranking models are merely formalized guesses based on specific criteria and limited information. The college decision can in volve as much as $150,000 in direct expenses. Evalua tion of specific departments (i.e., economics), campus visits, family traditions, and financial aid packages can all play major rolls in your decision.

Institution

Templeton
Honor Roll

MoneyGuide Top 100

96 69

Hillsdale College University of Chicago George Mason University

1
2 3
l

Grove City College

Baylor University Auburn University

5 6
7

37
12

Harding University Rice University University of Virginia Spelman College Rutgers University University of Georgia
Wake Forest University Samford University

Not Surveyed 87 87 87 87 87 87 87 87
1 4
18

Washington and Lee

University

Top Top Top Top Top Top Top Top

Professor Murray N. Rothbard of the Univer sity of Nevada, Las Vegas spoke on the rise of the bureaucratic state in his paper, "The Political Econ omy of Civil Service," surveying the history of bureauera dc expansion. He clarified diat under the Iron Law of Oligarchy it is inevitable that elites rule in both the private and public sectors. While die market insures that elites circulate in the market, the public sector does not, especially since only a dny minority are sub ject to expulsion during elections. The elites adminis ter government "services" in a way that benefits only die government and its connected interests. While die watchword in private business is profit, in government it is untrammeled growth. And while business advertis ing benefits consumers, diere is no check on govern ment propaganda which cover up die trudi to bolster its own legitimacy. In showing how we came to this situation, he covered die history of government em ployment, hitting Lincoln, Wilson, Roosevelt, and Johnson particularly hard. He argued for a return to the "spoils" system where bureaucrats are tossed out each time the party in power changes. Echoing similar themes in his paper "The Poli tics of the Managerial State," Dr. Samuel Francis of the Washington Times defined bureaucracy as a sys tem of power that stands outside society's voluntary institutions and is inherently in conflict with them. He argued on behalf ofJames Burnham's thesis that a managerial revolution occurred this century which transformed this bureaucracy into a tech nocratic elite intent on micromanaging all aspects of economy, education, church, family, and cul ture. The paper engendered debate for his empha sis on the role private corporations have played in causing the revolution to come about.

33

35 36 40 56

Virginia Polytechnic Institute

and State University University of California.

Top 87
Top 87 Top Top Top Top Top Top 87 87 87 87 87 87

GO

67

Los Angeles
Clemson University Furman University
73

75
32

Davidson College
John Carroll University Stanford University University of Dallas

84 88 90

The interaction between interest group lobby ing and bureaucracy was explored by Professor Thomas DiLorenzo of the University of Chatta nooga, Tennessee. Not only does the present sys tem of government not discourage faction, but it encourages it. Environmental groups, protectionist groups, civil rights organizations, and many more, receive government money in indirect ways, which

emphasis on the effects the growth of the state has in burcaucratizing private business. The massive regulatory apparatus of the modern state forces companies to employ more and more people whose

job is not to enhance consumer welfare and profits,

but rather to keep the rules and dictates issued arbi trarily by third parties. In this way, the mixed-econ omy of America has becomes less and less

is funneled back through to reelect candidates sym

pathetic to their interests. This creates a cartel of politicians and non-profit group lobbyists which ex ercise an enormous degree of control over regula tory agencies. In turn this creates a special
interest/bureaucratic nexus which hurts individual

responsive to changes in consumer preferences and more vulnerable during recessions and depressions. Dr. Allan Carlson of the Rockford Institute pre sented his paper "Sweden and Mixed-Economy
Welfarism," on Sweden's decline into bureaucratic

taxpayers and the economy at large.

Professor Joseph Salerno of Pace University dipped into the history of economic thought to
find that few economists have had sensible ideas on

barbarism and how America is taking the same path. During the 19th century in Sweden, the fam ily was replaced by the State. Beginning with man
datory school attendance laws and anti-child labor laws, Sweden had, by the 1980s, constructed a com

the subject of bureaucracy. He criticized the Vir ginia School of Public Choice, because it does not provide a fundamental theoretical framework for understanding bureaucracy from the standpoint of price theory. In Mises's 1926 book Liberalism and his 1944 book, Bureaucracy, he argues that there can never be bureaucracy in the free-market pri vate sector because the profit and loss system pun ishes it. The government sector has no profit and
loss system, and therefore cannot calculate the best
use of resources, as socialism cannot. It doesn't

plete client state. They are now trying to find their way out of the miasma of welfarism and its effects, but no proposal goes far enough to take care of the problem. Although the U.S. is following a sim ilar pathconstructing the welfare state to "solve"

the problems welfarism has createdthe only real

solution, he argued, will be total dissolution of its

central tenant that the state, not the family, should be the primary caregiver. Professor Yuri N. Maltsev of Carthage College
directed his discussion to the problems of former So viet bureaucracy. In diat country (or those countries), 18.3 million people work direcdy as administrators of state policy, and 97% of the population works in some capacity as bureaucrats, the result of which is to
redistribute 83% of die national income. Bureaucrati zation became much worse under die rule of Mikhail

matter how well-intentioned bureaucrats arc, they lack the tools to do their job.
Dr. Roy Cordato of the Institute for Research

on the Economics of Taxation presented a paper ar guing that the so-called public goods justification for bureaucratic intervention is totally fallacious. The conditions of perfect competition assure that
no real-world market can meet the test, but the en

Gorbachev, contrary to public perception. It will re quire a radical decentralization. Maltsev also worries
about the creation of what he called a Bureaucratic

durance of the model causes a pro-bureaucracy bias. He pointed out, for example, that 83% of economists favor anti-trust legislation. The Aus trian school theory, in contrast, argues that much
of what is objectified and static under conventional

International, a means by which Russian and Ameri

can counterparts conspire to preserve their posi tions of power. They have more in common with

economic theory is actually subjective and dynamic in real-world markets. His theory argued that state administrators have neither the will nor the way to do what they claim to do, that is, improve the oper
ation of the free-market economy.

Applying dieory to American history, Professor Jeffrey Herbener of Washington and Jefferson Col lege argued that bureaucratic growth occurred dur ing critical episodes, from the civil war to the present administration. The government's strategy
for growth is to create a crisis which has to be

Yuri Maltsev, RichardKite, and Hans lloppc enjoy an outdoor

luncheon at the

bureaucracy con ference.

solved by more intervention. He placed a special

each other than with the taxpayers of their respec

tive countries.

holders. Moreover, under democracy, politicians have an incentive to loot as much as they can re

Concentrating on domestic bureaucrats, Dr. David Fand of George Mason University demon strated the faulty bureaucratic thinking that led to the S&L crisis. Non-bank banks, since their inception

gardless of how that affects the economy at large.

He contrasted this with monarchism, under which

in the 1930s, were treated with special privilege. Reg ular banks were thought to support big business, but S&Ls were thought to serve the poor. Moreover, reg ulators thought it was important to give special privi
leges to those investing in the real estate market, since they thought active land markets were some how critical to preventing recession. Bad invesunents were overlooked and possible only because of die de posit insurance provided by government, which pri vatized gains and socialized losses. These conditions created opportunities for political graft and as a re sult the taxpayer is paying for the S&L debacle. The result will be even more bureaucracy in the banking
and financial industries.

the ruler has incentive to protect the common wealth from mass looting in order that his children and dynasty continue as a wealthy country. The monarchy creates a consumption statethe family itself lives off the taxpayerbut that is better than democracy, which collapses into a redistributive
state in which the distinction between the ruler and
the ruled is obscured.

Some papers will appear in a book on bureau cracy and others will be reprinted in the series "Is sues in Political Economy." a

Book Reviews

The American education bureaucracy was the subject of an attack by Dr. Thomas Fleming of
Chronicles. American education, he said, is in a de

Money, Method, and the Market Process: Essays by Lndwig von Mises
Richard M. Ebeling, editor
Boston: Kluwer Academic Publishers, 1990

plorable state because the autonomy of local school boards has been drastically diminished, and the role of consuming parents has been all but totally
removed from the formation of curriculum, disci

Reviewed by Hans-Hermann Hoppe

pline, and administration. He predicted failure for any reform programs. For example, school voucher programs would end the autonomy of any private
school that received them, and the same would be

true of tax credits. School reform programs have been proposed and implemented every generation since the mid-19th century with no substantial ef
fect. What is needed is radical decentralization and

T w o decades after his death, all of Ludwig von Mises's major works are still in print. This success is remarkable given that except for a few years during the late 1930s in Switzerland, Mises never occupied a regular university post. He was barred from all positions of academic power in his
native Austria as well as in the United States, his

a total dismantling of the state education apparatus. Professor Hans-Hermann Hoppe of the Univer sity of Nevada, Las Vegas, gave the most controver sial paper, "Bureaucracy and Time Preference." He argued that increased bureaucratization lowers the time horizons of the public; property and wealth becomes less secure and people are less will ing to save and plan long-term. This occurs with welfarism, which encourages short-term thinking
and redistribution away from wealth holders, which reduces the amount of money invested in

second home, primarily because of his principled opposition to a rising tide of intellectual relativism, represented in particular by historicism and positiv ism, and its political outgrowth: statist nationalism, interventionism, social engineering, and socialism. Throughout his life, Mises relied exclusively on the power of his wordsand his unwavering convic tion that even the most rampant forms of statism, and the most relentless statist propaganda of a steadily growing class of "public educators" in
schools and universities, could not stamp out the

long-run projects. Bureaucratic interventionism leads to shorter production projects, fewer techno logical advancements, and reduced prosperity. Majoritarian democracy itself, argued Hoppe, tends to have a corrupting influence on the secu rity of property. Once the right to vote is given, or even conceded, the political arena becomes the area for advancement at the expense of property

human desire for independent thinking, logic, and truth. Each of Mises's books is exemplary in its dis play of lucidity and argumentative rigor (there are
few dissertations being written on "What did Mises

really mean?" because Mises says what he means, clearly, and with little room for confusion). The lasting success of his books attests to the endurance
of human rationality.

In light of the dramatic vindication of Mises by

viofley,
Method,
and the
Market Process

the collapse of full

blown socialism across

die globe (which he predicted as early as

1919), Mises and his

F.>aay by
Luclwig von Mile*

work may at last re ceive dieir proper rec ognition within the academy, as one of die great intellectual he
roes of our time and

Historical data may provide an illustration of eco nomic laws, but it "can neither prove nor disprove the teachings of economic theory" (p. 12). Indeed, it would involve a categorical mistake to consider economic theory as verifiable or falsifiable by histor ical experience. Economic theory logically precedes history and constrains historical interpretations. It restricts the range of possibly correct interpreta tions of sequences of historical events much in the same way as the laws of logic restrict and constrain the range of possibly correct observations.

the paradigm of a new age defined by a renaissance

of economic reason.

The publication of Money, Method, and the Mar ket Process is particularly fortunate. The volume, ed ited and with a knowledgeable introduction by Richard Ebeling, contains 21 articles written by Mises between 1930 and 1969, many of which are previously unpublished. For the Misesian expert, there is nothing fundamentally new in these es saysbecause there is no such thing as Mises I, II,
or III because Mises remained consistent. Yet this

volume is undoubtedly the best introduction to Misesian thought, and it rewards even the experi enced Mises reader with fresh perspectives. His magnum opus, the monumental Human Action, which contains Mises's system of economic theory and so cial philosophy in its most fully developed form, is extremely demanding of its reader and largely inac
cessible to the first-time reader of Mises. His other

The essays in the section on "Money" explains the function of money as a medium of exchange, and uncertainty as the necessary condition for its emergence. Mises demonstrates why the demand for a medium of exchange "presupposes an already existing objective exchange value" (p. 58), why money can only originate as a commodity money, and why once a directly useful barter commodity "has become money, then the specific demand for money can tie into an already existing exchange re lationship between money and goods in the mar ket, even if the demand for the money-good, as motivated by the other use, disappears," (ibid). That is, money, once established, can also be sev ered from its commodity origins.
Mises clarifies the categorical difference be tween deposit banking and loan banking; why the banking system becomes inherently bankrupt; and the cause of recurring boom-bust cycles, as soon as these two functions are no longer strictly separated. That is, as soon as deposit banks deviate from a pol icy of 100% reserves (as he plainly called for in his 1952 addendum to The Theory of Money and Credit) and loan out their deposits while retaining their contractual obligation of instant redeemability. In
conclusion, writes Mises, "it is not the old classical

major booksTheory of Money and Credit, Socialism, and Theory and Historyand his many smaller ones,

only deal with parts of his system. The present work fills an important gap by offering an introduc tion to all major aspects of the Misesian system, in
cluding those in which Mises made his most original contributions.

The book accomplishes this task with a bal anced selection of pieces, organized under five headings. In the essays assembled under "Method," Mises explains the nature of economic theory as the logic of action, or as he terms it: praxeology. Eco nomic theorems are propositions that are logically
deduced, or deducible, from the universal, incon-

gold standard, with effective gold circulation, which has failed; what has failed is the gold 'economizing' system and the credit policy of the
central banks of issue."

In the section on "Trade" Mises demonstrates

testably true action axiom: "that man is in a posi

tion to choose among different states of affairs with regard to which he is not neutral and which are in compatible with each other, i.e., which he cannot enjoy together" (p. 20), and a few empirical, and empirically testable, propositions (such as that lei sure is a consumption good). As the conclusions of deductive arguments ultimately derived from
an incontestable axiom, economic laws are shown

once again the truth of the Ricardian insight "that free trade only ensures the highest productivity of the economic efforts and diat every kind of protec tionism must necessarily result in a reduction of the output of capital and labor" (p. 114). He shows that "division of labor and war are incompatible" (p. 117) and, mutatis mutandis, why governmental restrictions

on the freedom of migration, imports and exports

create nationalism and international conflicts as well

as lower living standards at home and abroad. The essays on "Comparative Economic Sys tems" demonstrate Mises's vigor as a defender of

to be apodictic, true a priori synthetic propositions.

laissez-faire capitalism and private property, and saving and capital accumulation as indispensable to prosperity and progress. Socialism, the collective ownership of factors of production, by outlawing a capital goods market, and hence capital goods prices, makes cost accounting impossible and thus leads to permanent misallocations, capital consumption, and impoverishment Nor is a mixed economya "social" market economy or welfare state systema viable so cial order. For any interference with die operation of
free markets invariably produces more of the same

Indeed, if the sweeping vision of the essays col lected here were absorbed by a new generation of intellectuals, there is no reason for despair, but
rather reason for hope, a

Reflections on a Keynesian Concordance

Keynes's The General Theory of Employmerit, Interest, and Money: A Concordance
Fred R. Glalie, editor Rowman and Littlefield, 1991

problems it was designed to cure, and hence eidier leads to full-blown socialism or else requires a return
to free-market policies and capitalism as the only gen uinely "stable" social order.
In the final section on "Ideas" Mises restates

Reviewed by Roger W. Garrison

the Humean insight, which has only recently re

ceived another dramatic confirmation with the sud

concordance is more at home in literary criti cism and theology than in economics. So for

den collapse of the seemingly impregnable power

of the communist rulers of the Soviet Union, that

no government can last without majority support, be it active or passive. Once this support is gone, even the most ruthless tyrant will be toppled. In the last resort, then, the course of history and the outcome of man's ceaseless struggle for liberty will
be decided in the realm of ideas.

Reading Mises and reflecting on his life-long fight against the prevailing trends of social and eco nomic thought I was reminded of a passage from Staniskav Andreski's scathing attack on the sociol ogy profession in his Sociology as Sorcery:
Despite die advanced stage of cretinization
which our civilization has reached under the im

eign is this particular research technique to economists that many will reach for their dictionary before they get past the title page. My Webster's Ninth defines concordance as "an alphabetical index of the principal words in a book. . . ." The word "principal," though, must be understood to exclude only articles, conjunctions, prepositions and pronouns and all forms of the verb "to be." All other words used by Keynes in his General Theory [2] are listed in alphabetical order together with
the total number of times each is used and the iden

tification by page and paragraph of each use. We can note, for instance that Keynes used the word
"same" 209 times and the word "different" 120

times. He used the word "optimistic" three times and the word "pessimistic" only twice. Even the ifs
(566), ands (2,123), and buts (496) and other "ex
cluded" words are listed widi their total word counts.

pact of the mass media, there are still some peo ple about who like to use their brains without the lure of material gain; . . . people interested in ideas, and prepared to think diem through and express them regardless of personal disadvan

tage, have always been few; and if knowledge

could not advance without a majority on die right side, there would never have been any progress at allbecause it has always been easier to get into die limelight, as well as to make money, by charla tanry, doctrinairism, sycophancy and soothing or stirring oratory than by logical and fearless think ing. No, the reason why human understanding has been able to advance in die past, and may do so in the future, is diat true insights are cumula tive and retain their value regardless of what hap pens to their discoverers; while fads and stunts may bring an immediate profit to the impresa rios, but lead nowhere in the long run, they can cel each other out, and are dropped as soon as

This 280-page index plus a two-page preface by the editor and a two-page introduction by Kenneth E. Boulding make up the concordance. Why a concordance of die General Theory}or of any book, for that matter? A concordance is offered
as a research tool, as a means to an end. A compre

hensive listing of the words Keynes used may help us to understand how Keynes thought, why he believed
what he did, and what his message really was. Of

course, we need help in these directions only if the al ternative means of reading the words in die sequence in which Keynes himself arranged them proves un suitable for achieving diese ends. Let's give Keynes a chance to answer a few simple questions and possibly
render this concordance superfluous.

their promoters are no longer there (or have lost dieir power) to direct the show. Anyway, let us
not despair, (p. 17)
10

Q: Please, Professor Keynes, what do you mean by

"involuntary unemployment'"?

A: My definition is ... as follows: Men are

involuntarily unemployed if, in die event of a small rise in the price of wage-goods relative to the moneywage, bodi the aggregate supply of labour willing to work for the current money-wage and the aggregate demand for it at that wage would be greater than the existing volume of employment (p. 15).
Q: Please, ProfessorKeynes, what governs private in vestment in a market economy? A: Our conclusions can be stated m the most gen
eral form . . . as follows: No further increase in die

rate of investment is possible when die greatest amongst die own-rates of own-interest of all available assets is equal to die greatest amongst the marginal ef
ficiencies of all assets, measured in terms of the asset

that market adjustments in circumstances of economywide disequilibrium may need to be augmented with or supplanted by policy pre scription? Is the assumption of fixed or sticky prices and wages critical to Keynes's argu ments, or is it merely a convenient means of making those arguments? Is the standard text book rendition of Keynesianism, which largely abstracts from problems of economic uncer tainty, faithful to Keynes's theory, or is the no tion that capital markets are debilitated by pervasive uncertainty an important part of his
central message?

whose own-rate of own-interest is greatest (p. 236). Q: Please, ProfessorKeynes, doesn't monetary expan sion trigger an artificial boom ?

A: [A]t this point we are in deep water. The wild duck has dived down to the bottomas deep as she can getand bitten fast hold of the weed and tangle and all the rubbish that is down there, and it would need an extraordinarily clever dog to dive down and fish her up again (p. 183).
Please, Professor Glahc, provide us with a con
cordance.

If a reading of the text-as-is doesn't resolve diese questions, maybe a concordance can help. We can now be sure, for instance, diat the word "trap," as in "liquidity trap," does not appear in the book. (The term was actually introduced by Dennis Robertson in a critique of Keynes's theory of interest) However, if
we cross-check the word "absolute" (16) with the

word "liquidity" (44) or "liquidity-preference" (47), we find two overlapson pages 191 and 207. The first overlap reference leads us to a discussion con cerning "die rate of interest at which liquidity-prefer
ence becomes absolute"; the second to a similar

In 1959, Henry Hazlitt [1] provided a virtual page-by-page critique of the General Theory, expos ing many contradictions, fallacies, and confusions in Keynes's arguments. But The Failure of the "New Economics" was largely dismissed by the economics profession partly on the grounds that Hazlitt was not a (degreed) economist and partly on the grounds that his focus was too narrow. The journalist-turned-Keynesian-critic, it was claimed, never perceived the underlying theme nor understood the central message of Keynes's book. For several decades, now, Keynesian interpret ers wdio have overlooked the problems identified by Hazlitt in order to get the big picture have got ten many different and conflicting big pictures. Well-credentialed Keynesian scholars can be found on both sides of key issues: Is the General Theory a continuation of the work begun in Keynes's Trea tise on Money, or is it a revolutionary break from his earlier book? Does the so-called liquidity trap, which prevents a falling wage rate from reducing unemployment and renders monetary policy im potent, figure importantly in Keynes's case for fis cal activism, or is it only a curious extreme with no historical or practical importance? Does Keynes actually contend that the economy can be suffering from widespread unemployment and nonetheless be in equilibrium, or is he saying
11

passage in which "liquidity-preference may become virtually absolute. . . ." We haven't exacdy identified the true significance of absolute liquidity preference in the General Theory, but at least, the concordance helped us find the relevant passages. Was Keynes an equilibrium theorist or a dis equilibrium theorist? Here, the concordance pro
vides information that would otherwise be difficult

to come by. The word equilibrium is used 77 times; the words disequilibrium and disequilibria are used once apiece. A quick check of the two instances in which Keynes appended the prefix "dis-" provides no support for the claim that Keynes was interested in disequilibrium. Of course, there is still room for the claim that Keynes used the tools of Marshallian partial equilibrium analysis, which were the only tools he knew about, to analyze an economy in macroeconomic ^equilibrium. All in all, it is probably true that the very exis
tence of this concordance tells us more about

Keynes's book than even the most competent and

inspired use of the concordance can tell us. The fact

that there is (presumably) a demand for the concor dance implies that researchers are now stopping just short of tea leaves and dream analysis in their efforts to decode Keynes's message. Further, the fact that this concordance is being supplied carries its own message. Time-saving and cost-saving developments in computer technology

have shifted the efforts of at least one economist

ideas of Silvio Gesell, whose inflationist schemes

away from more conventional research to the pro duction of a concordance. A digital scanner and word processor have accomplished a task that would otherwise have occupied an army of monks for many a fortnight. The computer sorts and counts words mindlessly. Boulding notes in his introduction that the word "in
terest" is the second most used non-trivial word in the

Keynes endorsed, were distributed in San Antonio.

Other, less obvious but more serious, instances

The General (103) Theory (225) of Employment (615), In terest (712), andMoney (505). But two of die first ten ref
erences to the use of the word "interest," we discover,
are instances where the word means "aroused atten

tion." "Ricardo expressly repudiated any interest in

the amount of the national dividend . . ." (p. 4, em

of splitting a two-word name or term make the con cordance less than useful that it might otherwise be. Keynes's concept of "user costs," for example, is sometimes identified as a key subjectivist insight and a link between the thinking of Keynes and the thinking of the more thoroughgoing subjectivists of the Austrian school. But "user cost" does not ap pear as a single entry. "User" appears 97 times; "cost" and "costs" appear 294 and 45 times, respec tively. The cross-checking required to identify every instance of "user cost(s)" would be tedious.

phasis altered). And "Queen Victoria was a better queen but not a happier woman than Queen Elizabedia proposition not widiout meaning and not with out tnteres/" (p. 40, emphasis added).
The concordance includes entries that may puz
zle idle browsers. For instance: "san (1) 355:1." This

All such problems aside, it can be said diat among major twentiedi-century contributions to economics, the General Theoryand probably only the General Theoryremains enough of an enigma to justify a con
cordance at all. Two cheers for Glahe for bestowing upon Keynes diis unique honor.
References

means diat the word "san" is used only once in Keynes's book and that it appears in the first para

graph of page 355. Few users of die concordance will

link this entry with a much earlier one: "Antonio (1) 355:1." According to Keynes, literature touting the

Hazlitt, Henry, The Failure of the "NewEconomics." Princeton, N.J.: D. van Nostrand, 1959. Keynes, John Maynard, TheGeneral Theory of Employment, Inter est, and Money. New York: Harcourt, Brace, 1936.

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