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Albert Jay Nock believed Gresham's Law operated in ideas as surely as in economics, with error displacing reason from men's minds as inexorably as bad money drives good money from men's markets. Nock's theory seems fast on the way to proof a posteriori, especially in our colleges and universities and particularly in the teaching and textbooks of the "new economics."

The "new economics" — as propounded by Professors Samuelson, Tarshis, Bowman and Bach in these textbooks used in hundreds of America's best-known colleges and universities — is nothing more than Keynesianism, which, in turn, has many points of similarity to Marxism and the theories of that hyperinflationist, John Law. In sum, the "new economics" is simply socialism, not "new" at all, but the same old bird dressed up in the feathers of "compensatory fiscal policy," "national income approach," and the "mixed economy."

Keynes, who popularized but did not spawn the "new economics," frankly admitted his affection for socialism:

The State will have to exercise a guiding influence on the propensity to consume … a somewhat comprehensive socialization of investment will prove the only means of securing an approximation to full employment … the necessary measures of socialization can be introduced gradually….[1]

Today's professors are more cautious. They look down their noses at "socialism," preferring the phrases "public economy" and "welfare economics." All the while they pay ostentatious lip service to the achievements of freedom:

[O]ur mixed free enterprise system … with all its faults, has given the world a century of progress such as an actual socialized order might find it impossible to equal. (Samuelson, p. 746)

[I]it must not be supposed that to seek profits is an act of villainy…. Naturally everyone wants to make as much income as he can…. These actions are not censured. (Tarshis, p. 30)

Traditionally, American ideology has glorified such a [private enterprise] system. Individual initiative and independence are its positive values…. The state exists for the individual rather than the individual for the state. (Bowman and Bach, p. 42)

The Mixed-up Economy

Naturally the professors do not want to kill the free market entirely, else where would they get prices from which to calculate their impressive computations in the "new economics"? But even while embracing "free enterprise" they suffocate it. Their consummation of this love-death is curiously contrived. They begin by assuming that laissez-faire died a deserved and natural death.

[I]nequality in access to profit and job opportunities [implies] an inherent inconsistency in the private-enterprise, free price system itself. (Bowman and Bach, p. 14)

Even if the system worked perfectly … many would not consider it ideal…. The private economy is often like a machine without an effective steering wheel or governor. (Samuelson, pp. 39, 397)

We have given up our psychological and philosophical predilection for laissez-faire reluctantly. Most of us have not welcomed government intervention in economic life…. We have been compelled to call upon the government. (Tarshis, pp. 53–4)

Laissez-faire is dead, long live the "mixed economy!" Unfortunately it is often difficult to tell which is more mixed, the economy or the professors. They try their best to seem as sincerely opposed to "complete" socialism as they are obviously cocksure rugged individualism is gone forever. Their "mixed economy" seems to be a course midway between capitalism and socialism, with careful avoidance of the "bad" in each.

The difficulties they encounter in trying to steer between the Scylla of socialism and the Charybdis of capitalism would be amusing if the implications were not so tragic. Samuelson, for example, begins bravely:

After one has thoroughly mastered the analysis of national income determination, it is not hard to steer one's way with confidence in these seemingly difficult fields (p. 11).

Then, embarking on a carefully calculated Keynesian course, he asserts that private enterprise cannot

guarantee that there will be just exactly the required amount of investment to ensure full employment: not too little so as to cause unenlployment, nor too much so as to cause inflation … the system is without any thermostat … the system is in the lap of the gods. We may be lucky or unlucky … (pp. 261–2)

and so, to prevent the ill luck that might result from private investors following their own inclinations in a free market, Professor Samuelson pompously tells us,

Fortunately, things need not be left to luck. We shall see that perfectly sensible public and private policies can be followed which will greatly enhance the stability and productive growth of our economic system. (p. 262)

Wherewith he plots a pretty series of "propensity-to-consume" and "propensity-to-save" curves based on figures compiled by the Bureau of Labor Statistics taken from a 1944 study of urban families ("with data for all families rounded and smoothed off") and shows us how to compute, numerically, the "marginal propensity to consume (MPC)" and its "Siamese twin" the "marginal propensity to save (MPS)," triumphantly concluding: "We are now prepared for the theory of income determination." But wait, there is a catch coming.

[A] few final warnings are in order…. Suppose my income were to go from $5000 a year to $40,000 a year. Would I spend and save my money in the same way that the budget studies showed $40,000-a-year people spend their money? Not necessarily. Especially at the beginning, I would be a nouveau riche and have different patterns of behavior. (p. 269)

Cake Is When You Eat It

So statistics are too tricky to trust as a basis for generalizations in economic theory. The elaborate equations, graphs, curves and charts, must take into account "important qualifications" and "other reasons why the propensity-to-consume schedule might shift around." Samuelson admits,

[A]t the end of World War II, many economists made a famous wrong prediction. They neglected the fact that people came out of the war with greatly … savings; for this and other reasons, the consumption schedule turned out to be at a higher level than many pessimistic predictions had indicated. Again we are reminded that no social science can have great exactitude. (pp. 269–70)

Wrong again. Economics does have great exactitude, but it is a qualitative, not a quantitative exactitude. The economist cannot know the number or size of all the cakes in the world, or when they will be eaten, but he is dead certain that whoever eats his cake no longer has it.

That is more than the Keynesians seem to know. Their theory implies you cannot have your cake until you do eat it. You can spend your way into prosperity. The formulas say so:

Could a nation fanatically addicted to deficit spending pursue such a policy for the rest of our lives and beyond? … the barrier to this would not be financial. The barrier would be political. (Samuelson, p. 416)

There is no sign that a high debt exhausts the credit of the government…. And since as a last resource "it can borrow from itself," there need be no fear on this account. (Tarshis, p. 535)

Even the Brannan Plan fits into the "new economics":

Government programs to limit crops … and to raise the price to the producer while keeping it low to the consumer are all understandable in terms of diagrams of supply and demand. (Samuelson, p. 452)

As for the problems of increasing American investment in foreign lands (i.e. the problem of the "dollar shortage"), Professor Tarshis has the typical Keynesian answer:

If we could only export one of the printing presses used for the manufacture of Federal Reserve notes to, let us say, China, our foreign investment would be enormously higher. (p. 391)

This "new economics" is neither new nor economics. Instead, it is a concatenation of statistics, mathematics and social philosophy used in support of the age-old sophistries of government inflationism. Every one of these old nostrums, served up with formulas and charts, was exposed long ago. The "periodic business crises," lamented as an inherent deficiency of free enterprise, have been shown to be nothing more than inevitable periods of deflation following repeated periods of inflation brought on by government-directed credit expansion. These followers of Keynes forget, when they reiterate the necessity of "maintaining full employment," that labor is more scarce than the material factors of production, that in a truly free market there can be no such thing as prolonged mass unemployment.

They forget, when they apply their formulas and extend their curves, that there are no constant magnitudes in economics, that statistics of "national income" are merely data of history not useful for the development of economic theory. They forget that trying to maintain a high "national income" with printing-press money is as hopeless and as helpless for people as trying to cure sick patients by writing unfilled prescriptions. And they forget, when advocating government intervention, that government does not own anything which is not first taken from the people, that government can only help some people at the expense of others or, by inflationism, make matters worse for everybody.

These advocates of a "mixed economy," well meaning and sincere though they may be, fail to realize that there can be no such thing as a "mixed economy" — part capitalistic and part socialist. Production is directed either by the market or by a National Production Authority. One ends by precluding the other. In the long run Americans will have either economic freedom or socialism in toto. Textbooks like these will certainly not help them retain what measure of freedom they have left.

Absent-Minded Professors

Through all the record of history is strewn the wreckage of nations ruined by inflationism. Yet these Keynesians stubbornly pursue their will-o'-the-wisp of managed money and the magic of a multiplier. When, under a government-induced inflation of the money and credit supply, unemployment shrinks or completely disappears, the phenomenon does not corroborate the "triumph" of their theories. It is due, simply, to the fact that the rise in wage rates has lagged sufficiently behind the rise in prices to cause a drop in real wage rates, precisely as the classical economists have long insisted. The Keynesians forget this obvious fact. Theirs is the economics of oblivion.

One can explain the widespread popularity of socialist ideas, despite their inconsistencies, among the uninformed masses. But the authors of these textbooks claim competence in economics. Presumably they are as familiar with Böhm-Bawerk, Jevons, Walras, Wicksell and Mises as they are with Marx and Keynes. One would not think so, to read their books.

What is even more inexplicable is their insisting they do not want socialism when their hero, Keynes, served notice more than thirty years ago:

[T]he sharp distinction, approved by custom and convention during the past two centuries, between the property and rights of a State and the property and rights of its nationals is an artificial one, which is being rapidly put out of date … and is inappropriate to modern socialistic conceptions of the relations between the State and its citizens.[2]

and sixteen years later added,

It will be, moreover, a great advantage to the order of events which I am advocating, that the euthanasia of the rentier, of the functionless investor, will be nothing sudden, merely a gradual but prolonged continuance of what we have seen recently in Great Britain and will need no revolution.[3]

Apparently Gresham's Law is functioning — as Albert Nock felt it would — upon the minds of Professors Samuelson, Tarshis, Bowman and Bach.

[bio] See his [AuthorArchive]. Comment on the blog. This review originally appeared as "Economics of Oblivion" in The Freeman, April 7, 1952. Titles reviewed: Economics: An Introductory Analysis, by Paul A. Samuelson. New York: McGraw-Hill • The Elements of Economics: An Introduction to the Theory of Price and Employment, by Lorie Tarshis. Under the editorship of Edgar S. Furniss. Boston: Houghton Mifflin • Economic Analysis and Public Policy, by Mary Jean Bowman and George Leland Bach. New York: Prentice-Hall. You can subscribe to future articles by [AuthorName] via this [RSSfeed].