keynesianism redux, by murray rothbard

8/3/2019 Keynesianism Redux, by Murray Rothbard

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L U ~ GINSTITUTE

TheFreeMarket JanuaryVolumeNumb

Regulatory Attack on the Market . . . . .What 's in the Review . . . . . . . ,The Mandated,Benefits Scheme

The Truth About Economic Forecastingby Graeme B. Littler

Astrologers, palmists, and crystal ..ball gazers are scowhile professional economists are heralded for their scienachievements. Yet the academics are no less mystical in trto predict the direction of interest rates, economic growth,the stock market.

Forty years ago, Thomas Dewey was defeated by HTruman, stunning the political experts and journalists

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Keynesianism Reduxby Murray N. Rothbard

One of the ironic but unfortunately en ..during legacies of eight years of Reaganismhas been the resurrection of Keynesianism.From the late 1930s until the early 1970s,Keynesianism rode high in the economicsprofession and in the corridors of power inWashington, promising that, so long asKeynesian economists continued at thehelm, the blessings o f mode rn mac ..roeconomics would surely bring us perma..nent prosperity without inflation. Thensomething happened on the way to Eden:th e mighty inf lat ionary recession of1973 .. 74.

Keynesiandoctrine is, despite its algebraicand geometric jargon, breathtakingly simpleat its core: recessions are caused by under..spending in the economy, inflation is causedby overspending. Of the two major catego..ries of spending, consumption is passive anddetermined, almost robotically, by income;hopes for the proper amount of spending,therefore, rest on investment, but privateinvestors, while active and decidedly non..robotic, are erratic and volatile, unreliablydependent on fluctuations in what Keynes called their "animalspirits. "

Fortunately for all of us, there is another group in theeconomy that is just as active and decisive as investors, but whoare als()--.-if guided by Keynesian economists-scientific andrational, able to act in the interests of all: Big Daddy govern..ment. When investors and consumers underspend, govern..ment can and should step in and increase social spending viadeficits, thereby lifting the economy out of recession. Whenprivate animal spirits get too wild, government is supposed tostep in and reduce private spending by what the Keynesiansrevealingly call "sopping up excess purchasing power" (that'sours).

In strict theory, by the way, the Keynesians could just as wellhave called for lowering government spending during inflation..ary booms rather than sopping up our spending. But the veryidea of cutting government budgets (and I mean actual cut..cuts, not cuts in the rate of increase) is nowadays just as

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Dr. Murray N. Rothbard is th e S.J. Hall distinguishedprofessor of economics at th e University of Nevada, LasVegas, an d vice president for academic affairs of theLudwig von Mises Institute.Dr. Graeme B. Littler is scholar in residence at th e Ludwigvon Mises Institute's Lawrence Fertig Student Center.LlewellynH. Rockwell, Jr., is founder and president o fth eLudwig von Mises Institute.Jeffrey A. Tucker, a graduate s tudent in economics atGeorge Mason University, is managing editor o f t he FreeMarket.Sheldon L. Richman, an adjunct scholar of the Ludwigvon Mises Institute, is director of public affairs for th eInstitute for Humane Studies at George Mason Universi ...ty.

Ever since the October stock...market crash, governmentofficials have demandedmore control over the securities indus ...try. As usual, their claim has been bolstered by "disinterested"scientific analysis by economists.

In its study, th e Securities an d Exchange Commissionblamed stock ...index futures, an d advocated higher marginrequirements and more regulatory powers for itself Th e NewYork Stock Exchange's study condemned futures, especiallyportfolio ...insurance programs, and also advocated higher mar..gins on stock...index futures and more enforcement authority forthe SEC.President Reagan's commission, headed by now..TreasurySecretary Nicholas Brady, implicated portfolio insurance, mu...

tual fund redemptions, computers, a nd u nc he ck ed .priceswings. It urged that the Federal Reserve be given supra...reg...ulatory powers over stocks, futures, and options, and that pricecontrols ("circuit...breaker mechanisms") be instituted in case ofmassive market movements.In accord with these domestic developments, Great Britain's

Wilton Park Group-composed of regulators from the tenmajor industrialized countries--has called for global standardson in si de r t ra din g, m ar ke t shutdowns, an d marginrequirements, plus increased sharing of confidential financialinformation. In April, the U.S. orchestrated an agreement

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From the Presidentby Llewellyn H. Rockwell, Jr.The Regulatory Attackon the Market

between the Japanese market and the Chicago Board ofTand in September, between the London market and the Cmodity Futures Trading Commission.As SECChairman David Ruder notes: "I find myself v o

more clearly for intervention...into all kinds of activitiesExcept for 1934, when it banned all new stock issues a

behest of old ...line firms and began to cartelize the secuindustry, the SEC has never been more interventionist. Aknow from economic theory, as well as the history of siactivities, such intervention will undermine the econfunctions of the stock and futures markets.In the academic world, most economists believe tha

financial markets as a collective entity are all ...knowingonly about present events but also about the future.markets discount everything, so there can beno profits or lthrough better or poorer forecasting, only through good oluck. Th e markets are a giant gambling casino, with noeconomic function.

Th e more accurate Austrian view sees securities markeefficient, but also imperfect, functioning as they do in a wof uncertainty. Within the division of labor, there aresuccessful forecasters, and one function of the marketsconvey financial assets from the less efficient in this area tmore efficient. That the far ..seeing profit while others doserves an extraordinarily important economic purpose; it ithe Wall ...Street equivalent of Caesar's Palace.

Th e markets also must coordinate complex price relaships among the many stagesof production over time. It isthat no regulator can perform, no matterwhat his intentiohow many computers he has.

Th e price system is like a communications networktransmits signals about possible profits and losses. Throughnetwork, producers learn from consumers about how they vthe various goods and services available, and therefore howto make use of the available capital, land, and labor.These signals also affect the perceived outlook for com

profits, and therefore stock prices. Entrepreneurs responthe signals by trying to outcompete their rivals in better ming consumerdemand, and thereby reap higherprofits. Bucommunications network ca n only be sensitive to consdesires, and therefore transmit undistorted signals, whenfree and open.Prices--especially in the stock andfutures markets--mu

allowed to reflect real market conditions. Higher stock pfor example, signal that more capital can be raised for aticular industry or firm, and that its output can be expanLower stockprices show us the less desired industries and fand lead to the shifting of resources into more produendeavors.Consumers can change their subjective valuations of g

and services because of their expectations about the futheir preference for a new product over an old, or si


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Evidently, the "cyclically balanced budget" was theKeynesian concept to be poured down the Orwellian memhole, as i t became clear that there weren't going to besurpluses, just smaller or larger deficits. A subtle but impocorrective came into Keynesianism: larger deficits during rsians, smaller ones during booms.But the real slayer of Keynesianism came with the dodigit inflationary recession of 1973 ..74, followed soon byeven more intense inflationary recessions of 1979..80

1981 ..82. For if the government were supposed to step onspending accelerator during recessions, and step on the bduring booms, what in blazes is it going to do if there is arecession (with unemployment and bankruptcies) and a sinflation at the same time? What can Keynesianism say? Steboth accelerator and brake at the same time? The stark fainflationary recession violates the fundamental assumptioKeynesian theory and the crucial program of Keynesian poSince 1973..74, Keynesianism has been intellectually finisdead from the neck up.But very often the corpse refuses to lie down, particular

elite which would have to give up their power positions in

academy and in government. One crucial law of politicsociology is: no one ever resigns. And so, the Keynesiansclung to their power positions as tightly as possible, nresigning, although a bit less addicted to grandiose promA bit chastened, they now only promise to do the best

can, and to keep the system going. Essentially, then, shoits intellectual groundwork, Keynesianism has become theeconomics of power, committed only to keeping the Estabment..system going, making marginal adjustments, babthings along through yet onemore election, and hoping thtinkering with the controls, shifting rapidly back and fbetween accelerator and brake, something will work, at leapreserve their cushy positions for a few more years.Amidst the intellectual confusion, however, a few domi

tendencies, legacies from their glory days, remain amKeynesians: (1) a penchant for continuing deficits, (2) a dtion to fiat paper money and at least moderate inflation,adherence to increased government spending, and (4) annal fondness for higher taxes, to lower deficits a wee bit,more importantly, to inflict some bracing pain on the gre

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changing tastes. Regardless, economic efficiency requires aprice system that can accurately reflectthese adjustments inchanges of value on the markets.Only the unhampered market allows entrepreneurs effi..

ciently to meet and even anticipate consumer preferences. Inthe frozen world of government econometric models, all possi..ble economic data, present and future, is known. There is noexperimentation, creativity, or discovery. All consumer pricesare determined by the costs of production---rather than supplyand demand-and the prices of capital are "given." It is notsurprising that these models show no ill effects from regulation.In the real markets, the prices that consumers are willing to

pay determine every price through the many stages of p r o d u c ~tion. This "imputation" process, which enables entrepreneursto build the long..term production processes characteristic of anadvanced economy, cannot take place efficiently when thereare regulatory barriers.As in the rest of the economy, economic f r e e d o ~ in thestock and futures market is essential for productivity, efficiency,

and innovation. More regulation can cause only discoordina..tion and stagnation, as the desires of regulators take precedenceover the buying public.Circuit..breakermechanisms, for example, temporarily block

this flow of information. Radical price corrections, such as theone on October 19th, are just as necessary as small ones. Sincethey are almost always caused by Federal Reserve credit manip..ulation, these radical swings ("clusters of errors," as EA. Hayektermed them) are unnatural phenomena. But that is only morereason why the markets must be allowed to adjust.Highermargin requirements in the futures markets willmake

trading stock index..futures prohibitively expensive and thusreduce competition.All the current attempts to add to the already elaborate

regulatory apparatus are no service to the economy. Ratherthan erecting new barriers, a realistic understandingofmarketsinstead requires elimination of all the present ones.

Keynesianism Redux...from page 1unthinkable, as, for example, adhering to a Jeffersonian strictconstruction of the Constitution of the United States, and forsimilar reasons.Originally, Keynesians vowed that they, too, were in favor of

a "balancedbudget," just as much as the fuddy..duddy reaction..aries who opposed them. It's just that they were not, like thefuddy..duddies, tied to the year as an accounting period; theywould balance the budget, too, but over the business cycle.Thus, ifthere are four yearsof recessionfollowed by four years ofboom, the federal deficits during the recession would be com..pensated for by the surpluses piled up during the boom; over theeight years of cycle, it would all balance out.

Murray Rothbard

Shorn of its intellectugroundwork,Keynesianism hasbecome the pureeconomics of power.


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Keynesianism Redux .. .from page 3selfish, and short...sighted American public.

The Reagan Administration has managed to institutionalizethese goodies, seemingly permanently on the American scene.Deficits are far greater and apparently forever; the differencenow is that formerly free ...market Reaganomists are out...Keynes ...ianing their liberal forebears in coming up with ever moreingenious apologetics for huge deficits. The only dispute now iswithin the Keynesian camp, with the allegedly "conservative"supply..siders enthusiastically joining Keynesians in devotion toinflation and cheap money, and differing only on their call formoderate tax cuts as against tax increases.The triumph of Keynesianism within the Reagan Adminis ...

tration stems from the rapid demise of the monetarists, themain competitors to the Keynesians within respectable aca ...demia. Having made a series of disastrously bad predictions,they who kept trumpeting that "science is prediction," themonetarists have retreated in confusion, trying desperately tofigure out what went wrong and which of the many "M"s theyshould fasten on as being the money supply. The collapse ofmonetarism was symbolized by Keynesian James Baker's take...over as Secretary of the Treasury from monetarist ...sympathizerDonald Regan. With Keynesians dominant during the secondReagan term, the transition to a Keynesian Bush team--...Bushhaving always had strong Keynesian leanings-will be sosmooth as to be almost invisible.Perhaps it is understandable that an Administration and a

campaign that has reduced important issues to sound bites andTV images should also be responsible for the restoration todominance of an intellectually bankrupt economic creed, theverysame creed that brought us the political economics ofeveryAdministration since the second term ofFranklinD. Roosevelt.

It is no accident that the same Administration that managedto combine the rhetoric of "getting government off our back"with the reality of enormously escalating Big Government,should also bring back a failed and statist Keynesianism in thename of prosperity and free enterprise.

Economic Forecasting... from page 1were certain Dewey was.going to win. While questions about"scientific" polling techniques naturally arose, one journalistfocused on the heart of the matter. In his November 22, 1948,column in Newsweek,. Henry Hazlitt said the "upset" reflectedthe pitfalls of forecasting man's future. As Hazlitt explained:"The economic future, like the political future, will be deter..mined by future human behavior and decisions. That is why itis uncertain. And in spite of the enormous and constantlygrowing literature on business cycles, business forecasting willnever, any more than opinion polls, become an exact science."

We know how well economists have done during the

eighties: from the 1982 recession and the employment boothe Crash of 1987, no major forecasting firm came clopredicting these turns in the market. And following the Cvirtually everyprofessional forecaster revised his economiccasts downward, all.because the historical data suggestedthe stock market was a reliable barometer of future econactivity. Since then, the economy has continued to expanthe stock market has continued to muddle along.After President Eisenhower's heart attack on Septembe

1955, the stock market experienced a massive drop. Themarket later recovered as the president recovered; like 11955 turned out to be one of the statistically best yeaeconomic history.Despite the sorrowful record, most economists remain

hard advocates of forecasting. Most have spent years in coand graduate school learning the tools of their trade, andbring themselves to admit their own entrepreneurial errorone investment advisor put it: "Nomatterhow many timesfail, their self..assurance neverweakens. Their greatest (ortalent is for speaking authoritatively."Of their errors, the forecasters contend that it's only a moftime before theymaster the techniques. Though that da

never arrive, economic forecasting remains an integral pthe economics mainstream. The original motto of the Emetric Society still holds sway: "Science is Prediction."Whether one uses a ruler to extend an economic trend

the future, or a sophisticated econometricmodelwith dozeequations, the problem is still the same: there are no conrelations in human affairs.Economics, unlike the natural sciences, deals with hu

actions, plans, motivations, preferences, and so on, nowhich can be quantified. Even if it were possible to quathese things, changing tastes (and all the factors that atastes) would make the data almost instantaneously uselethe forecaster. And then there are the millions of "unimable" things, like Eisenhower's heart attack, which constcrop up, influencing people in unpredictable ways.Economic statistics (i.e., history) do not imply any

about the future. Because data show the relation betweenand supply to be one way for one period of time doesn't mthat it cannot change. As Mises pointed out, "externalnomena affect different people in different ways" andreactions of the same people to the same external events vSome economic forecasters like to argue that econ

forecasting is not unlike predicting the weather (and shalso be equally difficult). Not only is the nature of theseproblems entirely different, but one can reasonably expecas scientific methods becomemore sophisticated, weatherdiction could theoretically approachperfection. This is becthere are constant relations among physical and chemevents. By experimenting in the laboratory, the natural stist can know what these relations are with a high degr


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precision. However, human society is not a controlled l a b o r a t o ~ry. This fact makes the forecaster's job of accurately predictingfuture events impossible.Forecasters try to get around this problem by linking events

in historical chains, and randomly guessing that ifone variablereoccurs, then the others will necessarily follow. But this is asophisticated version of the logical fallacy, post hoc ergo propterhoc (after this, therefore, because of this). This has led majorforecasters to seriously study astrological patterns and to buildmathematical models that correlate weather patternswith b u s i ~ness cycles. Once the forecaster throws out economic logic,anything could have caused anything else, and all variables inthe universe are open to study. One mainstream forecastingtheory for investors, for example, is based on the rate at whichrabbits multiply.Does this mean we can know nothing about the future? No,

the best forecasters are successful businessmen, whose e n t r e p r e ~neurial judgment allows them to anticipate consumer tastes andmarket conditions. As Murray N. Rothbard points out: "Thepretensions of econometricians and other ' m o d e l ~ b u i l d e r s ' thatthey can precisely forecast the economywill always flounder onthe simply but devastating query: 'If you can forecast so well,why are you not doing so on the stock market, where accurateforecasting reaps such rich rewards?'" Forecasting gurus, i n stead, tend to disdain successful entrepreneurs.

The myth that economists can predict the future is not justl1.armless quackery, however. Central planners use the sametheories to direct the economy. Yet by setting production goalswith the data collected by the planners themselves, they destroythe very process that directs free ...market production.Central planners try to overcomeuncertainty by substitutingformulas for entrepreneurial judgment. They believe that they

can replace the price systemwith commands, but theymiss thewhole purpose of individual action on the free market. AsLudwig von Mises said, they make "not the slightest referenceto the fact that the main task of action is to provide for theevents of an uncertain future." In that sense, central plannersare no different from professional forecasters.Don't expect unemployment among forecasters, however.

Many have cushy jobs with the Congress, the White House,and virtually every agency of the u.s. government, and willhappily issue predictions to no end.In the Austrian view, on the other hand, economists have

three functions: to further our understanding of the free mar..ket, to identify possible consequences of government policies,and to counter economic myths.Economic forecasting has nothing to do with these objec..., tives. In fact, by presenting itself as the only scientific dimen...ion of economics, forecasting has helped discredit the wholediscipline, and fueled an exodus of economists from the moremundane academic world to the arena of state control andcoercion, to the detriment of every American.

What's in the ReviewofAustrian Economics?by Jeffrey A. Tucker

The Review of Austrian Economics is a scholarly jourunlike any other. Edited by Murray N. Rothbard and WaBlock, sponsored by the Ludwig von Mises Institute, apublished by Lexington Books, it stands out among economscholarship as unusually literate and consistently interestin

The editors have rooted the RAE in the tradition ofAustreconomics, which emphasizes individual action, economlogic, and free markets. And they have also pushed the tration forward to shed light on contemporary problems. Tcontributors explore every important area of economics: phisophical foundations, methodology, theory, history, economliterature, and public policy.

The editors dedicated the new issue-Volume III-toW.Hutt, one of this century's greatest economists, who died1988, andMorganO. Reynoldsopens the volumewitha tribto Hutt, surveying his career and his contributions to economthought.

The Review ofAustrian Economicsa scholarly journal unlike any other. Itstands out among economic scholarshipas unusually literate and consistentlyinteresting.RAE III also contains Professor Hutt's last scholarly artic

"Trade Unions: The Private Use ofCoercive Power." In it, Hargues that economists and the media largely overlook tcoercive power of unions and the detrimental social effectsthe strike...threat system.

On the philosophical foundations of economics, RAEfeatures a fascinating review essay by David Gordon on G.Wells's new book, TheOrigins ofLanguage. Austrian economihave sometimes made an analogy between language and tmarket. EA. Hayek, for example, asserts that both the marand language have evolved spontaneously and without desigIn contrast,Wells's new book argues that languagewas both tproduct of human action and human design: the purposeoutgrowth of nonlinguistic behavior and the conscious desfor more complex communication. Gordon suggests that tnew way of looking at language may imply that the markemore a product of conscious individual planning than Haysuggested.

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What's in the Review...from page 5The methodology of economics is frequently disputed, but

the three articles on the subject in RAE III make profoundcontributions. MurrayN. Rothbard argues that "discipline afterdiscipline, from literature to political theory to philosophy tohistory, have been invaded by an arrogant band ofhermeneuti...cians, and now even economics is under assault." He labels thisintellectual trend a nihilistic, incomprehensible, collectivisticdead ...end. Hans...Hermann Hoppe argues against similar trendstoward "intellectual permissiveness" in his review essay of Do ...nald McCloskey's The Rhetoric of Economics. Hoppe wants toreplace empiricism and relativismwith "extreme rationalism," aview Hoppe shares with Mises.Also on methodology, J. Patrick Gunning defends Mises'smethod against criticisms recently leveled by Bruce Caldwelland others. In the process, Gunning gives us a compact andlucid presentation ofMises's method of doing economics, andof his careful distinction between theory and history.In 1912, Mises theorized that credit expansionwas the causeof the business cycle. Hayek then elaborated on his foundations

to produce the Austrian theory of the business cycle. Today, thetheory remains as timely as ever and RAE III contains severalarticles on the subject. The first is seminal: Roger Garrison's

Volume III of the hardbound Review of Austrian Economics isavailable to Free Market readers this month for the specialprice of $30, which includes postage and handling.

"The Austrian Theory of the Business Cycle in the LiModem Macroeconomics." Garrison introduces new dtions, clears up oldconfusions, and defends the Austrian tagainst its critics among the New Classicists, the Keyneand the Monetarists (with special reference to LeijonhuTullock, and Yeager). Garrison's defense rests on the obtion that "the Austrians were and continue to be thschool to focus on the market for capital when theorizingthe business cycle." His appeal is for the "economics profto put capital theory back into macroeconomics." Thisalso makes the theoretical case against the wave ...theorbusiness cycles popular in some investment circles.Also on business cycle theory is the exchange beJoseph Salerno and Gordon Tullock on Tullock's critiqpearing in last year's RAE. Salerno says Tullock's critiflawed because he misunderstands the theory; Tullock resthat if this is so, it is understandable since Austrians uterm "depression" in a peculiarway which judges its causrestrictively. Another contribution on the topic bySkousen looks at the present economy in light of Aubusiness...cycle theory and concludes, contrary to Friethat "while the United States and other western countriebe depression ...resistant, they are not depression ...proof,""the banking system is built on a volatile, destabilizing,tionary policy coupledwith a fragile fractional reserve sySkousen theorizes that a Federal Reserve attempt to msudden demand for cash could end in "economic collapIt is a common perception that the Reagan administhas not enforced antitrust statutes. Dominick Armentagues in his contribution that "antitrust regulation in the mof the 1980s is still very much alive and welL" And ecologic has yet to purge the fallacious doctrines of antitrusthe economics profession, despite some positive trends idirection. Annentano t a c k l e ~ the neoclassical theory odatory pricing" and shows that "predatory behavior canlogically distinguishedfrom benign competitive behaviorby intent or by any price...cost rules." Government interv"serves only to inhibit the discovery of consumer preferand reduce economic efficiency.Austrians observe that other economists would havemore to say about human behavior if they wouldn't try toevery action into a model built around restrictive equiliassumptions. Yet the large and growing literature on thnomics of crime has failed to appreciate this insight. S

Cameron, in his contribution, "A Subjectivist Perspectithe EconomicsofCrime," wants these misguided economrealize that crime doesn't fit into a market model of suppdemand. People don't enter and exit the market as thedictates, entrepreneurial opportunities aren't exploitedthe market, and police don't respond to consumer demaway market producers do. Cameron offers a temperednative that highlights individual valuations in the detoward criminality.


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A n example of an academic theory that has made inroadsinto the popular press is the "Efficient..Markets Hypothesis" of'''-"'tocks, or EMH for short. EMH holds that prices of financialdssets in securities markets contain all relevant information andt ha t n o individual ca n out ..guess other traders. All strategies forpicking stocks are equally bad, says EMH; the best on e is "buyand hold." E.C. Pasour, Jr. shows that this theory is fatallyflawed. Like other mainstream economic theories, it assumesthat prices contain perfect information, it forgets th e purpose ofentrepreneurship, and it loses sight of the purpose of trading inthe market. Pasour relies on Kirzner's theory of competition tocarve ou t a place for a rational Austrian investment theory thatresides between the EMH world of no n..action and crystal..balleconometric predictions.

In true Misesian fashion, RAE III does no t neglect th e studyof history. Ralph Raico's contribution shows why history is sonecessary: it helps illustrate that economic theory has co n..sequences in the real world. Within his review essay, Raicobrings to mind Britain's forgotten World War I naval blockadeagainst Germany, which. resulted in the deaths of nearly amillion civilians. Th e Britisheffort was systematic, broke inter .national law, and deepened German resentment toward th eAllied powers, which helped spurnationalism. It also illustratesthe horrible consequences ofstarvation and war t hat can resultfrom violating th e principles of free trade.

There is still more in RAE III. In Walter Block's analysis of(he book edited in h on or o fLudwig Lachmann, he reveals itsheights (Garrison and Kirzner) and its depths (almost everyone

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The Mandated ...Benefits Schemeby Sheldon L. RichmanIf there is a salutary side to th e mammoth federal budgetdeficits of the Reagan years, it is that they have inhibited thosewho would otherwise be proposing big new spending programs.

When the government is already $250 billion in the red, it'sharder to make a case for spending billions more for some pork..barrel project or another.In the old, pre..Big Deficit days, interventionistswould thinknothing of proposing that the government provide a variety of

goodies to the allegedly suffering masses: health care, foodstamps, and the like. But with the budget in such disarray,what's a social engineer to do? Never fear: those who lust afteryourpaycheck areno t so easilybeaten. Theyhave come upwitha formula that must seem to them as potent as any witchmagic chant: mandated benefits.Ifwe can't have the government pay for things outright, the

reasoning goes, let's have it mandate that others--employers-provide them. Budget outlay: zero. Ingenious!

Th e first of these mandated benefits has already beenacted. With the blessing of President..elect George Bush, Cogress ordered that businesses give 60..days' notice to uniobefore closing a plant or executing a big layoff Th e nmandated benefit will likely be health insurance. A bill spsored by Senator Edward Kennedy would require employersprovide health coverage to all employees working 17 Y1 hoursmore a week. This idea has been adopted in Massachusetts awas part ofMichaelDukakis's late presidential campaign. Otmandatory benefits being talked about include parental lea

O f course, just because a program doesn't cost the fedegovernment anything does no t mean it is free. Medical insance is no t found superabundant in nature; someone has tofor it. Th e only question is who. Th e simplistic answer is temployers will pay. Let's tracethis out: Assume that employmust pay $200 a month per employee to provide health insance. Where does that money come from? Obviously it wcome out of the workers' pay. An y expenses associated witworker-Social Security, workman's compensation, unemplment insurance, medical benefits-are part of that workcompensation package. Providing insurance on top ofworkers' current paywould be to give them a raise. But ifa rwere economically justified for all workers, the competitlabor market would already have bid wages up to the amounthe health.. insurance premium.Many people have trouble understanding this, but thernowhere else for the money to come from. As the great eco

mist W. H. Hutt wrote in The Strike ..Threat System, worbenefits are "amenities which are purchased.. .for the worout ofhis earnings, by a decision which he is unable individuto influence.... Th e partition of labor's remuneration betwpecuniary and nonpecuniary forms is obviously independenthe factors which determine labor costs.... Fringe rights abenefits are an alternative to cash receipts.... "Employers could try to raise prices to recoup the added cfrom consumers. But that is no t a promising move. Presumthat consumers have no more money than before the law wpassed, they won't be able to pay more for all that they buy.

theywill cut their demand for products. That will cause firmslayoffemployees or even go out of business. These workers wno t only be without health insurance, they will also be withwages. Mandated benefits become mandated pauperism.Perhaps the interventionists think employers should paythe benefits out of their profits. But what is the justification

the forced transfer of property from employers to employeMoreover, when profits drop, so do investment, business expsian, and opportunities. Mandated benefits would chaninvestment from labor.. intensive to capital.. intensive industrand to countries that are more hospitable to business. Allof twould hurt workers here.

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Mandated Benefits... from page 7So the ingenious plan goes awry somewhere, and the inter..

ventionist mind can't understand why. A radio commentatorwho favors mandated benefits, after being confronted withthese arguments, said in exasperation, "Why can't employersjust treat it as a cost of doing business?" That's precisely whatemployers will do. To the interventionist a cost of doing busi...ness is a mere bookkeeping phenomenon without con ...sequences. The interventionist thinks wages, and all otherprices, are arbitrary inventions of businessmen. If businessmendon't want to provide these benefits, it's because they're stingy.Butwages are not arbitrary; they are set by themarket. Along

with the prices of all factors ofproduction, wages are reflectionsofhowbadly consumers want the product or service in questionversus all other products and services in the market. A firmcannot pay workers more than their contribution if it is to stayin business. If the law requires it, some workers will be paidmore only at the expense of others w)1.o will be paid not at all.

The interventionist thinks wages, and allother prices, are arbitrary inventions ofbusinessmen. If businessmen don't wantto provide these benefits, it's becausethey're stingy.

The law will have distributed wealth not from business to labor,but from one set ofworkers to another. This is presumably notwhat the idealistic proponents of mandated benefits had inmind.As we've seen, mandated benefits violate the freedom of

choice of workers by dictating the form their compensationmust take. If the law requires health insurance to be provided,the benefit will displace money income that the employeesotherwise would have gotten. Some employees, however, prefercash to insurance-for instance, young, healthy workers andthose who already have coverage through parents or spouses.These people will be worse off, thanks to this "humanitarian"legislation. Mandating benefits is wrongheadedwhen you con ...sider that workers already have the freedom to convert some oftheir wages into benefits. Ordinarily, employers would have noobjection; on the contrary, they might prefer that workersspend their money on things aimed at keeping them healthy.

The legislation removes the workers' choice.Similarly, a mandated 60...days' notice for plant closing

expense that will be made up one way or another: lowesalaries, fewer jobs, fewer plants, etc.In a competitive labor market, some firms may choo

bear a portion ofthe extra burden in the hope ofkeepingworkers from being bid away. In this case, mandated bewill reduce competition because the relative burden is gfor smaller firms than for big ones. Union pressure has aled many big firms to provide mandated benefits. It maytheir interest to have the government force smaller firms tsimilar costs to reduce the threat of competition.Mandated benefits are a fraud perpetrated on the work

America. The proponents never say outright that they bworkers are not good judges of how to spend their incomshouldhave less choice in the matter. But that iswhat is imby their proposals. As Hutt wrote, "When the magnitudform of the noncash part of labor's remuneration are a magovernmental decision, the dangerof the politicallyweaksacrificed is very real."

What's in the Review... from page 7else). In Block's breezy style, he teaches us a lesson ineconomics with every exposure of a fallacy.There are also exchanges among William Barnett II, L

B. Yeager, and Richard H. Timberlake, Jr., on cost anmarginal utility of money. J. Patrick Gunning meticurefutes Tyler Cowen's and Richard Fink's criticisms of Mtheory of the Evenly Rotating Economy. And finally,Skousen reviews the New Palgrave encyclopedia of econand finds a Keynesian bias but an encouraging 50 contribfrom free ...market economists, including five from MRothbard.Look through the 262 pages ofRAE III and you will no

difference between Austrian economics and the other scEconomic literature, not mathematical maneuvering,nates its pages, in a form comprehensible to academicnonacademics alike. Its content is of lasting value becaurooted in reason and tradition, and not in the latest acafad. Volume III ofthe Review ofAustrian Economics is on ito ,university libraries, scholars, students, and interestedeconomists around the world. The editors shouldbe prouRAE already occupies a permanent place in the histoeconomic thought.

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keynesianism redux, by murray rothbard

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