Sunday, May 28, 2006

The Sorry State of Our Union

Congressmen no longer read the bills they vote on and thus do not require them to make sense. (The latest example is the passage of a bill by the House of Representatives making “price gouging” illegal while leaving it undefined.) They leave it to the President and the Supreme Court to sort things out.

Unfortunately, the present President sometimes gives the impression of being unable to read.

And, since 1937, the Supreme Court has refused to read. It has refused to read the one thing it should be reading above all: the Constitution of the United States. Instead, its members now look for inspiration to the decisions of foreign courts.

The Sarbanes Oxley Act of 2002 requires corporate executives not merely to read but to certify the accuracy of their companies' financial reports. Why are Congressmen (i.e., both Representatives and Senators) held to a lesser standard? Why are they not required under penalty of perjury to certify that they have read and carefully studied each bill that they vote for? Don't the American people have the right to demand that their legislators know what they are doing?
After all, the stakes are far higher in cases of Congressional nonfeasance or malfeasance than in cases of business nonfeasance or malfeasance. In the latter, the most that one can lose is an investment. In the former, what can be lost is human life, and on a massive scale. And it is much easier to avoid the financial losses inflicted by wayward businessmen than it is to avoid the losses inflicted by wayward Congressmen. To avoid the first, it is only necessary to avoid making a bad investment. There is no such simple way to avoid the harm that can be wreaked by the second.

Yes, let us agree that there is simply no way for a Congressman to read and understand the torrent of legislation that is proposed in every session of Congress. It is simply too vast. And this is even more true of the absolute enormity of legislation that is enacted by the dozens of government regulatory agencies every year, under the authority that has been delegated to them by Congress. Indeed, the enormity of the job was the main reason for creating the regulatory agencies in the first place and delegating the authority to legislate to them.

But still, one leading and downright terrifying fact stands out. And that is that the people's elected representatives do not know what the government is doing. The government is supposed to be of, by, and for the people. The people's elected representatives are supposed to be in control of that government in the name of the people they represent. That is their job.

The situation we are in, and have been in for several generations, is one in which intelligent, representative government is increasingly impossible, simply because of the sheer size and scope of government. If we want a government that is controlled by our representatives, we need a government that is sufficiently limited in size and scope for it to be humanly possible for our representatives to know and understand what it is doing and what is being suggested that it do.

For the people's representatives to regain control of the government, its size and scope must be radically reduced.

A first step should be the refusal to enact any new legislation that the members of Congress are unwilling to swear or affirm under oath that they have read and carefully studied. And along with this, as another preliminary step, the promulgation of any new rule by any regulatory agency should be prohibited except upon that rule having been read, studied and voted into effect by a majority of the House and Senate Committees having jurisdiction over that regulatory agency. Thus, for example, before the SEC or EPA could enact any new rule, a majority of the members of the House and Senate Committees having jurisdiction over them would have to approve the new rule. This measure would effectively place members of Congress in charge of the various regulatory agencies.

Yes, the effect of these proposals would be a radical reduction in the enactment of new laws and new rules and regulations. Exactly that is what is needed if there is to be any hope of the people and their representatives regaining control of their government. As things stand, the government is comparable to a high-speed freight train hurtling down the tracks with no one in the cab of the locomotive and thus with no one to see what lies in front of the train and where it is going. That is our government today: a train wreck, a thousand train wrecks, just waiting to happen.

Comparisons to train wrecks hardly do justice to what's at stake. It's the wreckage of our country that is waiting to happen, and has been happening. And it's been happening and will continue to happen for the very simple reason that the government of the United States is out of control in the most literal sense. It is out of the control of the American people and their elected representatives. That control must be reestablished.

This article is copyright © 2006, by George Reisman. Permission is hereby granted to reproduce and distribute it electronically and in print, other than as part of a book and provided that mention of the author’s web site is included. (Email notification is requested.) All other rights reserved. George Reisman is the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996) and is Pepperdine University Professor Emeritus of Economics.

Thursday, May 18, 2006

Platonic Competition, Part II

This essay originally appeared in Ayn Rand’s The Objectivist, vol. 7, nos. 8 and 9, August and September, 1968. It was posted on May 23, 2006, not May 18.

The doctrine of “pure and perfect competition” marks the almost total severance of economic thought from reality. It is the dead end of the attempt to defend capitalism on a collectivist base.

Ironically, that attempt took hold in economics in the late nineteenth century (and has been gaining influence ever since) through the efforts of Victorian economists to refute the theories of Karl Marx on the subject of value and price. The rationing theory of prices was advanced as the alternative to the Marxian labor theory of value. The irony is that the “pure and perfect competition” doctrine is to the left of Marxism.

Marxism denounced capitalism merely for the existence of profits. The “pure and perfect competition” doctrine denounces capitalism because businessmen refuse to suffer losses. The argument of the supporters of “pure and perfect competition” is not that businessmen make excessive profits through any kind of “monopoly,” but that they are “monopolistic” in refusing to sell their products at a loss—which businessmen would have to do if they treated their plant and equipment as costless natural resources that acquired value only when they happened to be “scarce.”

The “pure and perfect competition” doctrine distorts the facts of reality to a greater extent than did the traditional critiques of capitalism. Those critiques recognized that competition is a fundamental element of capitalism, but they denounced it.

Capitalism, they claimed, is ruled by the “law of the jungle,” by the principles of “dog eat dog” and “the survival of the fittest.” The “pure and perfect competition” doctrine proceeds from the same base as these earlier critiques, and is in full agreement with them in their objections to such characteristics of the process of competition as the continuous improvement in products, the variety of products, advertising, and the existence of idle capacity. Both schools regard all these characteristics of competition as a “waste” of “society’s scarce resources.”

But the “pure and perfect competition” doctrine regards these characteristics as “imperfections” and attacks capitalism on the grounds that capitalism lacks competition.

Every industry, it asserts, is “imperfectly competitive” (with the barely possible exception of wheat farming). Every industry is guilty of “monopolistic competition” or “oligopoly.” In the words of Professor Bach:

“There is a spectrum from pure competition to pure monopoly. Where there are a good many sellers of only slightly differentiated products, but not enough to make the market perfectly competitive, we call the situation ‘monopolistic competition.’” And: “Where there are only a few competing producers so each producer must take into account what each other producer does, we call the situation ‘oligopoly,’ which means few sellers.” (George Leland Bach, Economics: An Introduction to Analysis and Policy, 6th ed., Prentice-Hall, Inc., Englewood Cliffs, New Jersey, 1968, p. 337. Bach expresses the same view in the eleventh edition of his book, published in 1987, pp. 376–377, but not as succinctly.)

The concepts of “monopolistic competition” and “oligopoly” are indistinguishable, both in theory and in practice. As examples of “monopolistic competition,” Professor Bach cites Kellogg and Post in the field of breakfast cereals, and RCA and Philco in the field of television sets—even though these industries are fully as “oligopolistic” as the automobile or steel industry. (Even small retail establishments, a more popular example of “monopolistic competition,” can also be classified under “oligopoly,” since there are only a few of a given kind in a given neighborhood.) In any case, these two concepts embrace virtually all industries, except the few that are called “pure monopoly.”

The competition that capitalism is accused of lacking—as a result of “monopolistic competition” and “oligopoly”—is called price competition.

The nature of price competition, as contemporary economists see it, is indicated in another passage in Professor Bach’s textbook:

“Analytically, the crucial thing about an oligopoly is the small number of sellers, which makes it imperative for each to weigh carefully the reactions of the others to his own price, production, and sales policies. The result is a strong pressure to collude to avoid price competition or to avoid it without formal collusion.” (Ibid., p. 361.)

Capitalism is accused of lacking price competition on the following grounds: if there are few sellers in a market, any seller who cuts his price must take into account the fact that the other sellers will match his cut—so he may be better off if he refrains from price cutting; thus prices will not be driven down to the level of “marginal cost” or to the point where they “ration” the benefit of “scarce” capacity.

Consider the evasion entailed in the accusation that capitalism lacks price competition. Every decade, since the beginning of the Industrial Revolution, commodities have become not only better, but also cheaper—if not always in terms of paper money (the value of which has been constantly reduced by the policies of governments), then in terms of the labor and effort that must be expended to earn them. What is it that has made producers lower their prices for the last two hundred years? Blankout.

Actual price competition is an omnipresent phenomenon in a capitalist economy. But it is completely unlike the kind of pricing envisioned by the doctrine of “pure and perfect competition.” It is not the product of a mass of short-sighted, individually insignificant little chiselers, each of whom acts to cut his price in the hope that his action won’t be noticed by any of the others. The real-life competitor who cuts his price does not live in a rat’s world, hoping to scurry away undetected with a morsel of the cheese of thousands of other rats, only to find that they too have been guided by the same stupidity, with the result that all have less cheese.

The competitor who cuts his price is fully aware of the impact on other competitors and that they will try to match his price. He acts in the knowledge that some of them will not be able to afford the cut, while he is, and that he will eventually pick up their business, as well as a major portion of any additional business that may come to the industry as a whole as the result of charging a lower price. He is able to afford the cut when and if his productive efficiency is greater than theirs, which lowers his costs to a level they cannot match.

The ability to lower the costs of production is the base of price competition. It enables an efficient producer who lowers his prices, to gain most of the new customers in his field; his lower costs become the source of additional profits, the reinvestment of which enables him to expand his capacity. Furthermore, his cost-cutting ability permits him to forestall the potential competition of outsiders who might be tempted to enter his field, drawn by the hope of making profits at high prices, but who cannot match his cost efficiency and, consequently, his lower prices. Thus price competition, under capitalism, is the result of a contest of efficiency, competence, ability.

Price competition is not the self-sacrificial chiseling of prices to “marginal cost” or their day by day, minute by minute adjustment to the requirements of “rationing scarce capacity.” It is the setting of prices perhaps only once a year—by the most efficient, lowest-cost producers, motivated by their own self-interest. The extent of the price competition varies in direct proportion to the size and the economic potency of these producers. It is firms like Ford, General Motors and A & P—not a microscopic-sized wheat farmer or sharecropper—that are responsible for price competition. The price competition of the giant Ford Motor Company reduced the price of automobiles from a level at which they could be only rich men’s toys to a level at which a low-paid laborer could afford to own a car. The price competition of General Motors was so intense that firms like Kaiser and Studebaker could not meet it. The price competition of A & P was so successful that the supporters of “pure and perfect competition” have never stopped complaining about all the two-by-four grocery stores that had to go out of business.

Competition is the means by which continuous progress and improvement are brought about. And nothing could be more pure and perfect—in the rational sense of these terms—than the competition which takes place under capitalism.

The ideal of the “pure and perfect competition” doctrine, however, is a totally stagnant economy—the “static state,” as it is called—in which production and consumption consist of an endless repetition of the same motions. (For a valuable discussion of the influence of this “ideal” on contemporary economics, see von Mises, Human Action.)

It is in the name of this “ideal” that the supporters of “pure and perfect competition” attack the constant introduction of new or improved products, the evergrowing variety of products, and the advertising required to keep people abreast of what is being offered.

And only from the standpoint of this “ideal” can one declare that idle capacity is a “waste”—for only in a “static state” would there be no need for any unused capacity.

A capitalist economy is not “static.” Producers know that they must respond to changes in conditions. They endeavor always to have a margin of idle capacity, which can be brought into production if and when it is needed. Under capitalism, the normal state of production requires the possession of extra machines and tools in every industry, to meet every foreseeable change in demand. This is not a “waste,” not any more than the fact that consumers under capitalism own more shirts than the ones they happen to be wearing.

What the “pure and perfect competition” doctrine seeks is the abolition of competition among producers. Its “ideal” is a state in which no producer is able to take any business away from another producer. If a man is producing at full capacity, he cannot meet the demand of a single additional buyer, let alone compete for that demand. And if he is not producing at full capacity and is charging a price equal to his “marginal cost,” he still cannot compete for the demand of any additional buyers because he is forbidden to “differentiate” his product or to advertise it.

The “pure and perfect competition” doctrine seeks to replace the competition among producers in the creation of wealth, with a competition among consumers in the form of a mad scramble for a fixed stock of existing wealth. It seeks a state of affairs in which no additional buyer can obtain a product without depriving some other buyer of the goods he wants—for that is what competition at full capacity would mean. It seeks to make men competitors in consumption rather than in production. It seeks to transform the competition of human beings into a competition of animals fighting over a static quantity of prey. In other words, when it denounces capitalism, it is denouncing the fact that capitalism is not ruled by the law of the jungle.

The supporters of “pure and perfect competition” are aware of the fact that their doctrine is inapplicable to reality. This does not trouble them. Their view is expressed by Professor Wilcox, who observes casually (in a passage immediately following his alleged definition—the list of conditions I quoted earlier):

“Perfect competition, thus defined, probably does not exist, never has existed, and never can exist. . . . Actual competition always departs, to a greater or lesser degree, from the ideal of perfection. Perfect competition is thus a mere concept, a standard by which to measure the varying degrees of imperfection that characterize the actual markets in which goods are bought and sold.”

This “concept” divorced from reality, this Platonic “ideal of perfection” drawn from non-existence to serve as the “standard” for judging existence, is one of the principal reasons why businessmen have been imprisoned, major corporations broken up and others prevented from expanding, and why economic progress has been retarded and the improvement of man’s material well-being significantly undercut. This “concept” is at the base of antitrust prosecutions, which have forced businessmen to operate under conditions approaching a reign of terror.

Such are the effects of mysticism when it is brought into economics. Non-existence has no consequences; but those who advocate it, do.

George Reisman, Ph.D., is Pepperdine University Professor Emeritus of Economics and is the author of
Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996). His web site is This essay is available as a pamphlet from The Jefferson School of Philosophy, Economics, and Psychology. The author wishes to note that his book Capitalism contains a far more comprehensive and detailed treatment of the subjects dealt with here (see in particular, pp. 425-437). Where possible, references have been updated to conform with those in Capitalism.
Copyright © 1968 by The Objectivist; Copyright © 1991, 2005 by George Reisman. Provided that credit is given to the author and he is notified by
e-mail, permission is hereby granted to post this essay on the internet and otherwise noncommercially distribute it electronically or in print, other than as part of a book. All other rights reserved.

Wednesday, May 17, 2006

Platonic Competition, Part I

The following essay originally appeared in Ayn Rand’s The Objectivist, vol. 7, nos. 8 and 9, August and September, 1968.

The doctrine of “pure and perfect competition” is a central element both in contemporary economic theory and in the practice of the Anti-Trust Division of the Department of Justice. “Pure and perfect competition” is the standard by which contemporary economic theorists and Justice Department lawyers decide whether an industry is “competitive” or “monopolistic,” and what to do about it if they find that it is not “competitive.”

“Pure and perfect competition” is totally unlike anything one normally means by the term “competition.” Normally, one thinks of competition as denoting a rivalry among producers, in which each producer strives to match or exceed the performance of other producers. This is not what “pure and perfect competition” means. Indeed, the existence of rivalry, of competition as it is normally understood, is incompatible with “pure and perfect competition.” If that is difficult to believe, consider the following passage in a widely used economics textbook by Professor Richard Leftwich:

“By way of contrast, intense rivalry may exist between two automobile agencies or between two filling stations in the same city. One seller’s actions influence the market of the other; consequently, pure competition does not exist in this case.” (Richard H. Leftwich and Ross D. Eckert, The Price System and Resource Allocation, 9th ed., The Dryden Press, Chicago, 1985, p. 41.)

While competition as normally, and properly, understood rests on a base of individualism, the base of “pure and perfect competition” is collectivism. Competition, properly so-called, rests on the activity of separate, independent individuals owning and exchanging private property in the pursuit of their self-interest. It arises when two or more such individuals become rivals for the same trade. The concept of “pure and perfect competition,” however, proceeds from an ideology that obliterates the existence of individuals, of private property, and of exchange. It is the product of an approach to economics based on what Ayn Rand has characterized as the “tribal premise.” (Ayn Rand, Capitalism: The Unknown Ideal, The New American Library, New York, 1966, p. 7.)

The tribal premise dominates contemporary economic theory, and is, as Miss Rand writes, “shared by the enemies and the champions of capitalism alike . . .” The link between the concept of “pure and perfect competition” and the tribal concept of man, is a tribal concept of property, of price and of cost.

According to contemporary economics, no property is to be regarded as really private. At most, property is supposedly held in trusteeship for its alleged true owner, “society” or the “consumers.” “Society,” it is alleged, has a right to the property of every producer and suffers him to continue as owner only so long as “society” receives what it or its professorial spokesmen consider to be the maximum possible benefit. As Professor C. E. Ferguson, a supporter of the “pure and perfect competition” doctrine, declares in his textbook: “At any point in time a society possesses a pool of resources either individually or collectively owned, depending upon the political organization of the society in question. From a social point of view the objective of economic activity is to get as much as possible from this existing pool of resources.” (C. E. Ferguson, Micro-economic Theory, 5th ed., Richard D. Irwin, Inc., Homewood, Illinois, 1980, pp. 173f.)

According to the tribal concept of property, “society” has a right to one hundred percent of every seller’s inventory and to the benefit of one hundred percent use of his plant and equipment. The exercise of this alleged right is to be limited only by the consideration of “society’s” alleged alternative needs. Thus, a producer should retain some portion of his inventory only if it will serve a greater need of “society” in the future than in the present. He should produce at less than one hundred percent of capacity only to the extent that “society’s” labor, materials and fuel, which he would require, are held to be more urgently needed in another line of production.

The ideal of contemporary economics—advanced half as an imaginary construct and half as a description of reality, with no way of distinguishing between the two—is the contradictory notion of a private-enterprise, capitalist economy in which producers would act just as a socialist dictator would wish them to act, but without having to be forced to do so. (For an account of the origins of this alleged ideal, see Ludwig von Mises, Human Action, 3rd ed. rev., Henry Regnery, Chicago, 1966, pp. 689-693.) In accordance with this “ideal,” contemporary economics tears the concepts of price and cost from the context of individuals engaged in the free exchange of private property, and twists them to fit the perspective of a socialist dictator. It views the system of prices and costs as the means by which producers in a capitalist economy can be led to provide “society” with the optimum use and “allocation” of its “resources.”

A price is viewed not as the payment received by a seller in the free exchange of his private property, but as a means of rationing his products among those members of “society” or the “sovereign consumers” who happen to desire them. Prices are justified on the grounds that they are a means of rationing, superior to the issuance of coupons and priorities by the government. Indeed, rationing itself is described by Professor George Stigler, in his popular textbook, as “non-price rationing,” prices allegedly being the form of rationing that exists under capitalism. (George J. Stigler, The Theory of Price, rev. ed., The Macmillan Company, New York, 1952, p. 83.)

Similarly, a cost, according to contemporary economics, is not an outlay of money made by a buyer to obtain goods or services through free exchange, but the value of the most important alternative goods or services “society” must forego by virtue of obtaining any particular good or service. On this point, Professor Ferguson writes:

“The social cost of using a bundle of resources to produce a unit of commodity X is the number of units of commodity Y that must be sacrificed in the process. Resources are used to produce both X and Y (and all other commodities). Those resources used in X production cannot be used to produce Y or any other commodity. To use a popular wartime example, devoting more resources to the production of guns means using fewer resources to produce butter. The social cost of guns is the amount of butter foregone.” (Ferguson, op. cit., p. 173.)

On the basis of this concept of cost, contemporary economics holds that the only relevant cost of production is “marginal cost.” As a rule, and roughly speaking, for the concept can only be approximated, “marginal cost” is held to be the cost of the labor, materials and fuel required to produce an additional unit of a product. Their value is supposed to represent the value of the most important alternative goods or services that “society” foregoes in obtaining this additional unit.

The concept of “marginal cost” excludes the cost of existing factories and machines. The reason for this exclusion is that these assets are “here,” they were paid for in the past and, therefore, their cost is not regarded as a concern of “society” in the present.

All prices, according to this view, should be scarcity prices, i.e., prices determined by the necessity of balancing a limited supply against a comparatively unlimited demand.

Supply, in the context of this doctrine, means the goods that are here—in the possession of sellers—and the potential goods that the sellers would produce with their existing plant and equipment, if they considered no limitation to their production but “marginal cost.” Demand means the set of quantities of the goods that buyers will take at varying prices. Every price is supposed to be determined at whatever point is required to give the buyers the full supply in this sense and to limit their demand to the size of the supply.

The essence of this theory of prices is the idea that every seller’s goods and the use of his plant and equipment belong to “society” and should be free of charge to “society’s” members unless and until a price is required to “ration” them. Prior to that point, they are held to be free goods, like air and sunlight; and any value they do have is held to be the result of an “artificial, monopolistic restriction of supply”—of a deliberate, vicious withholding of goods from “society” by their private custodians. After that point, however, the value they may attain is limited only by the importance which buyers attach to them.

On this view, every price is supposed to be an index of the intensity of “society’s” need or desire for a good—an index of the good’s “marginal social utility.”

Thus the tribal view of property, of price, and of cost leads to the view of competition held by contemporary economics.

Competition is viewed as the means by which prices are driven down either to equality with “marginal cost” or to the point where they exceed “marginal cost” only by whatever premium is necessary to “ration” the benefit of plant and equipment operating at full capacity.

This is not competition as it exists in reality. The competition which takes place under capitalism acts to regulate prices simply in accordance with the full costs of production and with the requirements of earning a rate of profit. It does not act to drive prices to the level of “marginal costs” or to the point where they reflect a “scarcity” of capacity. The kind of “competition” required to do that, is of a very special type. Literally, it is out of this world. It is “pure” and “perfect.”

No one has ever defined “pure and perfect competition”—the procedure is merely to present a list of conditions which it requires. A fairly full list of these conditions is presented by Professor Clair Wilcox (who is not an advocate of capitalism) as if it were a definition of “pure and perfect competition.” He writes:

“The requirements of perfect competition are five: First, the commodity dealt in must be supplied in quantity and each unit must be so like every other unit that buyers can shift quickly from one seller to another in order to obtain the advantage of a lower price. Second, the market in which the commodity is bought and sold must be well organized, trading must be continuous, and traders must be so well-informed that every unit sold at the same time will sell at the same price. Third, sellers must be numerous, each seller must be small, and the quantity supplied by any one of them must be so insignificant a part of the total supply that no increase or decrease in his output can appreciably affect the market price. . . . Fourth, there must be no restraint upon the independence of any seller or buyer, either by custom, contract, collusion, the fear of reprisals by competitors or the imposition of public control. Each one must be free to act in his own interest without regard for the interests of any of the others. Fifth, the market price, uniform at any instant of time, must be flexible over a period of time, constantly rising and falling in response to the changing conditions of supply and demand. There must be no friction to impede the movement of capital from industry to industry, from product to product or from firm to firm; investment must be speedily withdrawn from unsuccessful undertakings and transferred to those that promise a profit. There must be no barrier to entrance into the market; access must be granted to all sellers and all buyers at home and abroad. Finally, there must be no obstacle to elimination from the market; bankruptcy must be permitted to destroy those who lack the strength to survive.” (Clair Wilcox, “The Nature of Competition,” reprinted in Joel Dean, Managerial Economics, Prentice-Hall, Inc., Englewood Cliffs, New Jersey, 1951, p. 49. An essentially identical list of requirements appears in the much more recent textbook The Price System by Leftwich and Eckert, op. cit., pp. 39–41.)

To summarize these conditions: uniform products offered by all the sellers in the same industry, perfect knowledge, quantitative insignificance of each seller, no fear of retaliation by competitors in response to one’s actions, constant changes in price, and perfect ease of investment and disinvestment.

To understand the alleged need for all these conditions and what they would mean in reality, it is necessary to project them on a concrete example. This is usually not done at all, and is never done fully—if it were, neither the theory of “pure and perfect competition” nor the rationing theory of prices could be propounded. So I shall use an example of my own, which will not be of a kind used by their supporters, but which will express accurately the meaning of these theories.

Imagine a movie theater with 500 seats. The picture is about to go on; the projectionist, the ushers and the cashier are all in their places. “Society” has the alleged right to the occupancy of 500 seats. If they are not all occupied for this performance, no future satisfaction can be obtained by any storing up of the use of the seats for a future time. The seats, the theater, the film, the necessary workers are “here.” “Society,” supposedly, “has them” and now it demands the full benefit from its alleged property.

If the film is not run, the only thing that “society” can save is the electric current which might be made available elsewhere, or the coal which must be consumed to generate the current. The costs of the theater, the film, the workers are all “sunk costs”—“water over the dam,” as the textbooks say— and, since “bygones are bygones,” the only thing which counts for “society” now is the cost of the electric current.

The theater, according to the tribal-rationing theory, should charge an admission price which will guarantee the sale of 500 tickets for the performance. If droves of people are standing in line for admission, it should raise the price to whatever point is required so that only 500 people will be able to afford it. If all the people in line have identical incomes, the same medical disabilities, and natures of equal sensitivity, such a price, supposedly, will mean that the 500 people who want to see the film most, will see it. If they are unequal in these respects, that is already supposed to be an “imperfection,” as Professor Wilcox would say, in the justice of the “market mechanism.”

If, however, there are few people standing in line, the theater should begin reducing its admission price. It must keep on reducing its admission price until it has attracted 500 customers. If an admission price of only two cents is required to get this many customers, then, supposedly, that is what should be charged, provided only that the revenue brought in at the box office covers the cost of the electric current.

If the theater persists in charging its standard price of, say, one dollar, at which it sells less than 500 tickets, then, according to the tribal-rationing doctrine, it is guilty of “administering” its price and of “monopolistic restriction of supply.” It is engaged in a process of “price control”—in violation of the “laws of supply and demand”—and in creating an “artificial scarcity” of seats by “monopolistically” withholding a portion of its supply from the market to maintain a high price on those seats for which it does sell tickets.

If the theater cannot sell 500 tickets even at one cent per ticket, then, according to this theory, it must either open its doors for free or cancel the performance. In this case, a theater seat is, allegedly, a free good—it is no longer “scarce” in relation to the demand for it, and so there is no longer any need for a price because there is no longer any need to ration theater seats. If there are 100 people who want to see the movie and who are prepared to make it worth the theater owner’s while, he should perhaps run the film—contemporary economics would hold—provided he sells the remaining 400 tickets at whatever price is required to unload them, including zero. This, however, would be another “imperfection” in the “market mechanism”—price discrimination. The “ideal solution” in such a case, it is alleged, would be to have the government nationalize the theater, charge nothing and subsidize the loss.

In the process of adjusting its price to attract customers, the theater must not, of course, send anyone out in the street to tell people about the movie it is playing or the price it is charging. That would be another “imperfection”— advertising. Advertising, according to this theory, is a wasteful and vicious means of “demand creation”—it makes the “consumers” act differently than they really want to act. So, as the theater is reducing its price, it must be careful not to be too obvious about it. Simply changing the price in the cashier’s window should be enough.

However, while advertising by the theater is an “imperfection,” “perfection” requires that all potential customers of the theater possess perfect and instantaneous knowledge of its price changes and of the picture it is showing. It is another “imperfection” in the operation of the “market mechanism” if people about to enter other theaters, or riding in their automobiles, or making love, do not receive instantaneous communication of the price changes, so that they may speedily alter their plans. And, presumably, it is an “imperfection” if they have not already seen all the movies many, many times—to be perfectly informed about them.

Because the theater owner wants to “maximize his profits,” he will not act in accordance with the theory’s tribalistic precepts. However, he would, it is argued, if knowledge were perfect and automatic, if people did race back and forth between theaters in response to penny price differences, and if a number of further conditions were also fulfilled. If, for example, there were 401 identical theaters in the same neighborhood, all showing the same movie, and all in the same position with regard to empty seats, then, it is argued, the cunningly clever, “profit-maximizing” businessman would reason as follows: “At my standard price of one dollar, I can sell only 100 tickets today. But if I charge 99.999 . . .9¢ (it is a standard assumption of the theory that all economic phenomena are mathematically continuous and thus capable of treatment by calculus) I can sell all 500 tickets. For in response to this insignificant price change, which is infinitely close to my present price, I could attract away one customer from each of the 400 other theaters. This would be very good for me, and none of the other theater owners would really notice the loss of just one customer, and thus no one would match my lower price. So that is what I will do.”

The same thought, however, will be racing simultaneously, it is assumed, through the heads of the other 400 theater owners, and so everyone’s price will be trimmed just so much, and no one will end up with any additional customers drawn from other theaters. Each theater may attract one percent of an additional customer who otherwise would not have gone to the movies, but that is all.

The same process is repeated at the infinitesimally lower price, as each theater owner seeks to “maximize his profit,” led by the idea that his insignificant price change will draw an unnoticed amount of business from each of many competitors, who will not reduce their prices in response to his action. This process of infinitely small price reductions is supposedly performed with infinite rapidity—presumably through the “automatic market mechanism”— and so, instantaneously, the price is brought down either to marginal cost or to the point where one’s theater is jammed to capacity, which circumstance alone, in the eyes of the theory’s supporters, would justify the price being above marginal cost.

According to the theory of “pure and perfect competition,” the large number of sellers is the main condition required to drive prices to “marginal cost,” or else to the point where they reflect a “scarcity” of the capacity that is “here.” If the individual seller were a significant part of the market and were in a position to handle a major part of the business done by his competitors, then, supposedly, he would never cut his price because he would know that as a result of his action others will lose so much business that they will have to match his cut and that he will thus be left basically only with the lower price. When there is a large number of small sellers, every price cut is also matched, but, the argument is, not because of one’s own price reduction, but because the other sellers are led to cut their prices independently, guided by exactly the same thought.

The significance of all sellers having an identical product is supposed to lie in the greater responsiveness of customers to price changes. If each theater is playing a different movie, customers are not likely to shift their business among the various theaters in response to infinitesimal price differences, and so a theater owner will have less incentive to trim his price. The significance attached to perfect knowledge is similar.

This portrait of the economic world of perfection is not yet complete, however. There remain two other major requirements if “society” is to derive the maximum benefit from its “scarce resources.” It must be possible, as Professor Wilcox puts it, for investment to “be speedily withdrawn from unsuccessful undertakings and transferred to those that promise a profit. There must be no barrier to entrance into the market . . .” This condition would be achieved if movies were shown in tents, with projectors using candlelight instead of electricity. Then, whenever demand changed, theater owners would merely have to unfold or fold up their theaters, and light or blow out their candles.

This would be “perfection,” but not quite in its full “purity.” For in addition, “the market price,” as Professor Wilcox says, “uniform at any instant of time, must be flexible over a period of time, constantly rising and falling in response to the changing conditions of supply and demand.” This would be achieved if, after leaving the theater and going to a restaurant for dinner, one were not given a menu, but were seated in front of a ticker tape—and were offered a futures contract on dessert; and if afterward, on leaving the restaurant and walking back to one’s apartment, one would not know whether one could afford to live there that night, or whether the rentals of penthouses had collapsed. Only then would the world be “purely perfect.”

(To be concluded in my next posting.)

George Reisman, Ph.D., is Pepperdine University Professor Emeritus of Economics and is the author of
Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996). His web site is This essay is available as a pamphlet from The Jefferson School of Philosophy, Economics, and Psychology. The author wishes to note that his book Capitalism contains a far more comprehensive and detailed treatment of the subjects dealt with here (see in particular, pp. 425-437). Where possible, references have been updated to conform with those in Capitalism. Copyright © 1968 by The Objectivist; Copyright © 1991, 2005 by George Reisman. Provided that credit is given to the author and he is notified by e-mail, permission is hereby granted to post this essay on the internet and otherwise noncommercially distribute it electronically or in print, other than as part of a book. All other rights reserved.

Thursday, May 11, 2006

Is Bernanke An Admirer of Galbraith?

In today’s New York Times, Robert H. Frank, who is described as “the co-author, with Ben S. Bernanke, of `Principles of Economics,’” writes that Galbraith should have won the Nobel Prize—for the ideas expressed in the The Affluent Society.

In case anyone needs a refresher about Galbraith, and the fascistic nature of his ideas, be sure to see my
"Galbraith's Neo-Feudalism," which recently appeared on this very blog.

What makes this matter important is that it almost certainly sheds light on the thinking of Bernanke himself. Call it guilt by association if you wish, but I don't see how anyone can write a textbook with someone else and not be in agreement with him on at least the great majority of points pertaining to the subject of the textbook, which in this case, of course, is the principles of economics. Until I hear to the contrary from Bernanke, I have to assume that his views about Galbraith don't radically differ from those of his co-author. Perhaps he should step up and give a statement on the subject, to make clear where he stands.

It's not a comforting thought having someone in a position to wreak havoc on the economic well-being of the American people and likely being an admirer of an author who had no compunctions about doing precisely that if it appeared to serve the interests of the State. Bernanke can wreak havoc with his powers of money creation, and it looks like he's already started to do so. He needs to assure the American people that he holds no brief for Galbraith.

If there were any other men of courage and principle in Congress besides Ron Paul, Bernanke would be brought before Congress and called upon to do so.

This article is copyright © 2006, by George Reisman. Permission is hereby granted to reproduce and distribute it electronically and in print, other than as part of a book and provided that mention of the author’s web site is included. (Email notification is requested.) All other rights reserved. George Reisman is the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996) and is Pepperdine University Professor Emeritus of Economics.

Wednesday, May 10, 2006

Gasoline at 10 Cents a Gallon and Falling

Does gasoline at 10 cents a gallon and falling sound impossible in today’s world?

Well, if you think it’s impossible, you’re wrong. Because that’s where gasoline actually is, and it looks like it’s going even lower.

Of course, it’s not 10 cents a gallon in today’s paper money. But it is 10 cents a gallon in the Constitutional money of the United States, which is gold coin and bullion.

Gold is now at $700 per ounce, and rising. Above is a picture of a $20 United States gold coin known as a Double Eagle. If you look carefully, at the bottom of the coin, you can actually see where it says “Twenty Dollars.”

This coin contains approximately one ounce of actual gold, which means that at today’s market price of gold, it’s worth $700. And this means that one gold dollar is worth $35 of today’s paper dollars. And that means that one gold dime is worth $3.50 in today’s paper money. This last, of course, is roughly what a gallon of gasoline costs in today’s paper money. Which means that a gallon of gasoline costs just 10 gold cents.

So why does a gallon of gasoline cost $3.50 in the paper money? Well, one explanation is that we’re expressing the price of gasoline in terms of a money that is itself very cheap and getting cheaper. Just think: if $20 gold dollars are worth $700 paper dollars, one paper dollar is worth only one thirty-fifth of a gold dollar. That’s less than 3 cents. It shouldn’t be surprising that buying things with 3-cent dollars is going to require a lot of such dollars.

The key point here is that our money is getting cheaper and that’s why prices are rising. Don’t be surprised if in the future, gasoline is a lot more expensive in paper money than it is today and, at the same time, cheaper than it is today in our Constitutional gold money. Look for $5 per gallon gasoline in the paper and 7 cent per gallon gasoline in gold. That’s a real possibility.

This article is copyright © 2006, by George Reisman. Permission is hereby granted to reproduce and distribute it electronically and in print, other than as part of a book and provided that mention of the author’s web site is included. (Email notification is requested.) All other rights reserved. George Reisman is the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996) and is Pepperdine University Professor Emeritus of Economics.

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Monday, May 08, 2006

Bolivian Gas Nationalization OK According to The New York Times

A truly Orwellian op-ed piece in The New York Times of May 6, says of Bolivia’s nationalization of the natural gas industry in its territory:

Nor is this a classic nationalization in the sense of the confiscations that took place in the region in the 50's and 70's. In those days, Latin American governments expropriated everything and kicked out the companies the next day. This time Bolivia will exert greater control over the companies, including significantly higher taxes and 50 percent-plus-one state ownership, but Mr. Morales has pledged to create an environment conducive to private profit-making, and the government has repeatedly stated that it is a "nationalization without confiscation," with no expulsion of foreign companies nor expropriation of their assets.
So, raising taxes and grabbing 51 percent ownership, in return for nothing, is not confiscation. No. It’s a policy “to create an environment conducive to private profit-making.”

To The Times’ writer, these mind-boggling contradictions are so self-evident and reassuring that he feels a need to explain why the Bolivian army was used to impose this "nationalization without confiscation" that is profitable to its victims. Not being a real confiscation, but a source of profit to its victims, the use of the army and the presence of its deadly weapons was necessary merely as a show “to placate masses of radicalized Bolivians who demand `confiscation without compensation’ to the companies.” This last, of course, is a policy very different from that of Mr. Morales, who merely takes property in exchange for nothing.

This article is copyright © 2006, by George Reisman. Permission is hereby granted to reproduce and distribute it electronically and in print, other than as part of a book and provided that mention of the author’s web site is included. (Email notification is requested.) All other rights reserved. George Reisman is the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996) and is Pepperdine University Professor Emeritus of Economics.

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Sunday, May 07, 2006

“Price Gouging”: Setting the Record Straight

The Washington Post reports that the House of Representatives this week overwhelmingly passed a measure imposing severe penalties for “price gouging,” an alleged phenomenon it was unable to define and has left to the Federal Trade Commission to define. Once the Federal Trade Commission figures out what price gouging is, it is authorized to impose fines of up to $150 million for wholesalers and $2 million for retailers. Two year jail penalties for both retailers and wholesalers are also authorized, though presumably imposition of jail time would still require a jury trial in an actual criminal court, not a mere hearing before the FTC.

The causes of the recent run up in gasoline and crude oil prices are not hard to find. There is a rising global demand for crude oil, in large measure because of rapid economic expansion in China and elsewhere in Asia. At the same time, the supply of crude oil is sharply restricted by the fact that most of the world’s supply has been nationalized by various governments. This greatly reduces incentives and the ability to find and develop new oil supplies. And this applies in large measure even to the United States, in which vast land areas are owned by the Federal government, which has progressively reduced the ability of the American oil industry to develop petroleum deposits on government-owned land. The leading examples, of course, are the North Slope in Alaska and the continental shelf in the Gulf of Mexico and off the coast of California. These problems of government-caused lack of supply are compounded by threats to the existing supply in Iran, Nigeria, and Venezuela.

Besides these problems affecting the price of crude oil, there are also special, additional problems affecting the price of gasoline. One is the fact that since 1976, because of environmental regulations, not a single additional oil refinery has been constructed in the United States. As a result, according to Oil and Gas Journal, total oil refining capacity in the US today is less than it was in 1981: 16.8 million barrels per day versus 18.6 million barrels per day. Add to this the devastation of Hurricane Katrina, from which Gulf Coast refinery operations have not yet fully recovered. Add to that, the further problems caused by the government’s compelling the production of specially reformulated gasoline, to meet environmental requirements. (For an excellent account of these problems and how they further restrict the supply and raise the price of gasoline, see the April 28 posting by Ben Zycher on his blog “The Reform Club.)

And then, serving to drive up not only the price of oil and gasoline, but prices throughout the economic system, is the increase in the money supply caused by the Federal Reserve System. This increase, and the prospects for further increase, have become so substantial that they are more and more reducing the desirability of owning dollars. This further adds to the rise in prices, as dollars previously held are unloaded into the market and are then spent rather than held by those who receive them.

If Congress were serious about rising prices, it would return us to the gold standard. It would also eliminate the obstacles it has placed or allowed to be placed in the way of expanded oil and gasoline production. And rather than investigate oil companies, it would investigate the environmental movement and its policy of operating as a persistent pest, which uses the judicial system and government regulatory agencies to come between man and the actions he needs to perform to support and promote his life.

This article is copyright © 2006, by George Reisman. Permission is hereby granted to reproduce and distribute it electronically and in print, other than as part of a book and provided that mention of the author’s web site is included. (Email notification is requested.) All other rights reserved. George Reisman is the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996) and is Pepperdine University Professor Emeritus of Economics.

You Can Earn College Credit for Studying the Works of George Reisman and Ayn Rand! Click here for Details.

Wednesday, May 03, 2006

Today’s New York Times’ Headline: “Energy Crisis: Many Paths but No Solutions”

The above headline, “Energy Crisis: Many Paths but No Solutions,” appears on page one of the print version of The Times’ National Edition. I can’t find it on the web version of The Times, however. (To wit: “Your search for Energy Crisis: Many Paths but No Solutions in all fields returned 0 results.”) Perhaps it was withdrawn to avoid embarrassment.

The headline should be embarrassing because it suggests either gross dishonesty or gross stupidity. This is because the solution to the energy crisis is so blindingly obvious. The solution is: allow the oil companies to drill for oil—in Alaska, in the Gulf of Mexico, off the coast of California, on all the land mass of the United States now set aside as “wild-life preserves” and “wilderness” areas. Allow the construction of new atomic power plants! Stop interfering with the strip mining of coal! Stop interfering with the construction of refineries, pipelines, and harbor facilities necessary to the supply of oil and natural gas! This will increase the supply and reduce the demand for oil (this last because substitutes for it will be more readily available). All this can be summed up in very few words: Politicians and environmentalists, get the hell out of the way!

Instead, we are told that the oil companies are responsible for the scarcity of oil and its high price and should be punished for it. No! The truth is that the environmentalists and the politicians who support them are responsible.

Perhaps they will claim that they act out of fear: the fear of rising sea levels a hundred years from now. If that’s the reason, then they should say so. They should say that the energy crisis could easily be solved but that they are more afraid of flooding in Bangladesh in a hundred years than of Americans not being able to afford to drive their cars and heat their homes today. Let them have the honesty to say that this is why they choose to prevent the energy crisis from being solved.

This article is copyright © 2006, by George Reisman. Permission is hereby granted to reproduce and distribute it electronically and in print, other than as part of a book and provided that mention of the author’s web site is included. (Email notification is requested.) All other rights reserved. George Reisman is the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996) and is Pepperdine University Professor Emeritus of Economics.

Tuesday, May 02, 2006

Where Has “Austrian” Economics Eliminated Poverty?

ALBATROZ (an internet identity): "And I would like to repeat my challenge to all of you:

"Would anyone be so kind as to tell me in which countries poverty was eliminated by means of your (Austrian) enlightened theories?..."

MY REPLY: Taking "Austrian" economics in its political application to mean private ownership of the means of production and respect for individual rights, including property rights, the answer is (and this should be understood as only a partial list):

Great Britain, the United States, Canada, Australia, New Zealand, France, Belgium, Holland, Germany, Switzerland, Denmark, Norway, Sweden, and more recently, Japan, South Korea, and Taiwan.

In these countries, thanks to the substantial application of the free-market principles of Austrian economics (and before that, Classical economics), saving and capital accumulation were tremendously encouraged along with scientific and technological progress. On this foundation the productivity of labor rapidly increased, resulting in more abundant supplies of food, clothing, and housing per capita, and improved sanitation and hygiene. As a result infant mortality radically declined, life expectancy greatly increased, the average person became able to afford to work fewer hours, child labor was progressively eliminated, and for the first time in human history, it became possible for the average person to have access to books, music, art, and education.

Please let me know if you have any further questions.

George Reisman is the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996) and is Pepperdine University Professor Emeritus of Economics. His web site is

Does Krugman Read The New York Times?

Yesterday’s New York Times carries a piece by op-ed columnist Paul Krugman called “Death by Insurance.” It’s a rant in favor of the "single-payer system," i.e., explicit socialized medicine along the lines of Canada and other countries. The article concludes with the words:

So here we are. Our current health care system is unraveling. Older Americans are already covered by a national health insurance system; extending that system to cover everyone would save money, reduce financial anxiety and save thousands of American lives every year. Why don't we just do it?
Here’s part of the answer to Krugman’s question:

From The New York Times, February 20, 2006:

Ruling Has Canada Planting Seeds of Private Health Care

TORONTO, Feb. 19 — The cracks are still small in Canada's vaunted public health insurance system, but several of its largest provinces are beginning to open the way for private health care eventually to take root around the country.

Last week Quebec proposed to lift a ban on private health insurance for several elective surgical procedures, and announced that it would pay for such surgeries at private clinics when waiting times at public facilities were unreasonable.

The proposal, by Premier Jean Charest, who called for "a new era for health care in Quebec," came in response to a Supreme Court decision last June that struck down a provincial law that banned private medical insurance and ordered the province to initiate a reform program within a year.

The Supreme Court decision ruled that long waits for various medical procedures in the province had violated patients' "life and personal security, inviolability and freedom," and that prohibition of private health insurance was unconstitutional when the public health system did not deliver "reasonable services."

Comments on Krugman copyright © 2006, by George Reisman. Permission is hereby granted to reproduce and distribute them electronically and in print, other than as part of a book and provided that mention of the author’s web site is included. (Email notification is requested.) All other rights reserved. George Reisman is the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996) and is Pepperdine University Professor Emeritus of Economics.

Monday, May 01, 2006

Galbraith's Neo-Feudalism

[Editorial Note: The following is a fitting remembrance for John Kenneth Galbraith, whom today's New York Times reports as having died on April 29.]

Material progress and individual liberty have once again been made the targets of a crude, sniper attack. In his book, The Affluent Society, John Kenneth Galbraith, Harvard social commentator, has indicated that he views with grave displeasure the “sense of urgency" which is attached to “the craving for more elegant automobiles, more exotic food, more erotic clothing, more elaborate entertainment—indeed for the entire modern range of sensuous, edifying, and lethal desires [sic].” (p. 140.) He has proclaimed that there are things of greater importance, such as more public schools, public parks, public roads, and anything else which “public authority” may deem to be in “relative need.” (pp. 311f.) And he has let it be known that the liberal should cease being “a co-conspirator with the conservative in reducing taxes." (p. 314.)

Were it not for the fact that Mr. Galbraith and his followers will exercise considerable power and influence in the new [Kennedy] Administration, there would be no purpose in discussing the ideas of this man. For as a thinker, Mr. Galbraith is not overly distinguished. His procedure is to combine an immense moral pretentiousness with a rather limited understanding of the teachings of the economists. And though he depicts himself as a daring innovator writing in defiance of an overwhelmingly hostile intellectual environment, his practical position is in essence no different from that of the typical leftist club-woman; nor has it been for quite some time. However, the recent Democratic victory at the polls means that the attempt will be made to implement policies based on the theories of Mr. Galbraith; and, therefore, his ideas bear closer examination.

The thesis of The Affluent Society is a variant of the Marxian dialectic. Our social morals, economic science and political institutions are, in Galbraith’s eyes, the products of an age of scarcity. When men had to contend with cold and hunger, when they had to devote all of their energies to securing their bare, physical survival, production was of paramount importance. It was natural, therefore, that productivity and industriousness should be regarded as virtues, while anything which reduced the supply of goods in the hands of private individuals, such as taxes, should be considered an evil. Thus, Galbraith explains, the businessman and business efficiency were held in high esteem, while the government was viewed with suspicion and forced to bear the burden of proof for the need of every tax dollar; every transfer of resources from private individuals to the government required a specific, affirmative act of the legislature.

Now, however, the underlying economic reality has changed, leaving behind an outmoded political and ideological superstructure which Galbraith calls “the conventional wisdom." For, in America, at least, we have reached an age in which "affluence is rendering the old ideas obsolete . . . ." (p. 143.) In the future, it will be college professors and government officials, not businessmen, to whom the public will grant prestige. (pp 184ff., pp. 194f.) And what is required fiscally is “a system of taxation which automatically makes a pro rata share of increasing income available to public authority for public purposes. The task of public authority, like that of private individuals, will be to distribute this increase in accordance with relative need. Schools and roads will then no longer be at a disadvantage as compared with automobiles and television sets in having to prove absolute justification." (pp. 311f.)

What is Galbraith saying? Stripped of the veneer of pseudo-scientific disinterestedness, he is blatantly arguing for the institution of a modern brand of Prussian feudalism! It is possible that he himself is unaware of this. For he imagines that somewhere, off in the stratosphere as it were, there are private individuals, “public authority," “increasing income," and “relative need." In his eyes, it is a question of mere technical expediency whether “increasing income" is to accrue to private individuals or to “public authority"; in either case, it will be distributed in accordance with “relative need." Affluence now dictates that a pro rata share of “increasing income" accrue to “public authority."

Thus, Galbraith is not for one moment bothered by such mundane questions as to whom does the "increasing income" belong, and whose “relative need" is to determine its distribution? There is simply "increasing income” and “relative need.” The fact that private individuals have produced the goods which constitute the “increasing income" is not considered a valid reason for them to determine its disposal. As was the case with the feudal lords of the pre-capitalist era, “public authority" is to have an unquestioned claim to a regular share of the fruits of others' industry; it will distribute the products of others in accordance with what it, and not they, deems to be in “relative need." And, just as in old Prussia or Czarist Russia, the servants of public authority—the government officials and their intellectual flunkies in the tax supported schools and universities—will have prestige, while the businessman, who supports them, if not considered vulgar, will be regarded as unimportant.

In Galbraith's words: “To the extent that problems of military defense, foreign policy, agricultural administration, public works, education, and social welfare are central to our thoughts, so the generals, foreign service officers, administrators, teachers, and other professional public servants are the popular heroes." (p. 184.)

The chain of reasoning by which Galbraith proceeds from the existence of affluence to advocacy of an irresponsible “public authority" having arbitrary power to spend a pro rata share of the increasing income of the individual is somewhat involved. He begins by citing the law of diminishing marginal utility, according to which the importance an individual attaches to the possession of any given quantity of means of provision diminishes as the total quantity of means of provision at his disposal increases. Thus, according to the law of diminishing marginal utility, a man attaches less importance to the possession of a gallon of water if he has 1000 gallons than he would if he had but ten gallons. Likewise, an individual attaches less importance to $100 if his wealth is $10,000 than he would if his wealth were but $5,000.

Galbraith, in defiance of the most explicit testimony on the part of the leading theorists of marginal utility (see the works of Menger, Böhm-Bawerk, and, Wieser), would have his readers believe that economics as a science has tried to hide the
fact that the marginal utility of wealth in general as well as that that of particular goods diminishes. (Chap. X.) And after overcoming the straw man of an incorrect version of the marginal utility theory, and showing that it must apply to wealth in general as well as to particular goods, he draws two totally unwarranted, conclusions:

(1) He infers from the law of diminishing marginal utility, as applied to wealth in general, that the acquisition of wealth becomes progressively less important as the amount of wealth increases. Here he makes an enormous equivocation between the importance of a concrete amount of wealth as the total amount of wealth increases and the importance of acquiring wealth as its total amount increases. For while the importance of the former diminishes with the increase in the amount of wealth, the importance of the latter does not. The very purpose of acquiring wealth and the source of the importance of so doing consist precisely in the reduction of the marginal utility of wealth. The achievement of a progressively lower marginal utility of wealth is one of the main goals of every rational individual. For the ability to achieve an ever lower marginal utility of wealth is identical with the ability to make an ever greater and more complete provision for the maintenance and enhancement of one’s life and wellbeing. It was the desire to be able to reduce the importance attached to bearskins, animal bones, and caves which brought man out of the depths of savagery; and it was the desire to be able to reduce the importance attached to rags, breadcrusts, and primitive hovels which brought man to modern civilization.

Yes, it is true, bearskins and rags no less than the “more erotic clothing" of modern times afford protection against the cold; it is true, animal bones and breadcrusts no less than the “more exotic food" of our day provide nourishment; it is true, caves and hovels no less than the luxurious American homes with air conditioning and swimming pools offer shelter from the elements. And it is also true that if such a catastrophe should ever occur and people be forced to choose, they would attach greater importance to the means of bare, physical survival than to the qualitative differences which distinguish the products of modern industry from those of primitive toil. But does this mean that man should have stayed in the cave, or have stopped upon reaching the hovel ? And does it mean that he should rest content with what he has today? Are life and productive achievement to give way to a passive stupor, merely because one has a full belly and is no longer at the mercy of wind, rain, and cold?

(2) Galbraith's second inference is that the reduced marginal utility of wealth is an argument for the enlargement of the role of the government in satisfying the wants of consumers. This conclusion in no way follows. For not only are the services of the government fully as much subject to diminishing marginal utility as everything else, a point which he seems to overlook, but they are also always of lower marginal utility than the alternative private goods and services. If people must be forced to pay for them under the threat of a jail term for non-payment of taxes, that is the proof. In fact, however, Galbraith's argument is not based on the law of diminishing marginal utility, but only appears to be.

Not diminishing marginal utility, but the alleged determinism of advertising is the cornerstone of his argument. For the proof he offers of the unimportance of production is the fact that had they not been advertised, there would have been no demand for a great many of the products now being produced. Without advertising and salesmanship to “contrive a sense of want for them, he declares, the marginal utility of such products would have been zero. (p. 160.)

If goods which require advertising and salesmanship satisfy only “contrived” wants, what then is Mr. Galbraith's standard by which goods satisfy legitimate, non-"contrived" wants ? Apparently, his standard is that the buyers must know precisely what they want and precisely from whom to obtain it without the benefit of advertising and salesmanship. “A man who is hungry need never be told of his need for food. If he is inspired by his appetite, he is immune to the influence of Messrs. Batten, Barton, Durstine & Osborne. The latter are effective only with those who are so far removed from physical want that they do not already know what they want. In this state alone men are open to persuasion." (p. 158.)

The absurdity of this standard is immediately evident. If a man is suffering from pneumonia, need he never be told of his need for penicillin? If a man desires to travel, need he never be told of the existence of automobiles, airplanes, railroads, and steamships and from whom they or their services are available? If a man desires artificial light, need he never be told of the existence of electricity and electric lights and where to obtain them? Or if he is hungry, need he never be told of the hundreds of different kinds of food and where to come by them ? Or must men be born with a knowledge of all these things and where to acquire them, before they can be considered to satisfy non-"contrived" wants?

Indeed, advertising and salesmanship do bring about the desire for goods. More than that, they are even responsible for giving to what would otherwise be mere things, the very character of goods. For in order for a thing to become a good, three conditions must be fulfilled. Not only must it satisfy a human need, but also one must, know that it satisfies one's need, and one must have disposal over it. Advertising and salesmanship provide the knowledge that it does satisfy a human need and where to obtain disposal over it. Needs are original with the buyers; advertising and salesmanship transform needs into desires for concrete goods by providing knowledge: knowledge of what things satisfy the various needs and where to obtain them.

Again, it is the doctrine of the determinism of advertising which is the basis for his conclusion that the role of the government in satisfying the wants of consumers must be expanded.

For not only does advertising compel people to buy the products which are advertised, but also, he alleges, it inevitably tends to prejudice the consumer in favor of private goods and services, even in his capacity as a voter. The result is that “ . . public services will have an inherent tendency to lag behind." (pp. 260f.) And it is this which explains why “The family which takes its mauve and cerise, air-conditioned, power-steered, and power-braked automobile out for a tour passes through cities that are badly paved, made hideous by litter, blighted buildings, billboards, and posts for wires that should long since have been put underground.” And why “They picnic on exquisitely packaged food from a portable icebox by a polluted stream and go on to spend the night at a park which is a menace to public health and morals.” Hopefully, “Just before dozing of on an air mattress, beneath a nylon tent, amid the stench of decaying refuse, they may reflect vaguely on the curious unevenness of their blessings." (p. 253.)

Rarely has such sophistry been employed in an attempt to evade the obvious. Indeed, the material blessings of Americans are uneven, and Galbraith is correct when he says: “The line which divides our area of wealth from our area of poverty is roughly that which divides privately produced and marketed goods and services from publicly rendered services." (p. 251.) But is the reason that advertising causes a voter bias against appropriating funds for government services, or that government
services are provided by individuals using tax revenues, individuals who will make no profit if they are successful, and who will suffer no loss of their own capital if they are unsuccessful? Does the solution lie in devoting still more wealth to an institution inherently unfit to be a producer, the government, or is it not time to ask whether the roads, parks, and sanitation services should not be run on the same principles which have proved so successful in the manufacture of automobiles, food, refrigerators, air mattresses, and nylon tents?

Moreover, is the concept of bias applicable in explaining the voters’ reluctance to appropriate funds for public schools and public parks etc., at the expense of such things as television sets and “erotic clothing?" “The voters" comprise many millions of particular, individual voters. And it is just possible that part of the explanation may lie in the fact that a man prefers his television set to finger-painting materials for someone else's children, or that a woman prefers her new dress to a tree in some park which she herself will rarely or perhaps never visit. Is it a matter of bias for a man to be more concerned with his family's entertainment than with the education of someone else’s children or for a girl to be more concerned with her own appearance than with the appearance of some town’s landscape? It may come as a great shock to Mr. Galbraith: not only are there things of greater importance than “the community’s schools and parks,” but the decision as to what is important to whom is not his to make!

Is there anything at to Galbraith's claim that advertising causes a voter bias in favor of private goods and services, and thus an inherent tendency for public services to lag? The empirical evidence is overwhelmingly against him. Our armed forces, after all, are no longer provided with muskets, but with rockets and hydrogen bombs. And never before has the government had at its disposal so much revenue, both absolutely and relatively, for its various social projects. If anything is true, it is that voters today have a bias against privately produced goods and services and that expenditure for public services, far from having a tendency to lag, has shown a remarkable tendency to increase!

Galbraith's doctrine of the determinism of advertising suffers from a number of other serious shortcomings. For if it were true that advertising determined one to buy, how could the choices consumers make among numerous highly advertised products be explained? How could the fact that people still buy unadvertised products be explained when there are close substitutes which are advertised, as in the case of fresh versus canned vegetables? And how is it possible for Mr. Galbraith to avoid being biased by advertising in the same manner as he alleges the voters to be? By what mysterious means are Mr. Galbraith and “public authority" enabled to rise above the alleged causal forces acting on lesser mortals?

And, finally, even if advertising were deterministic, it must never be forgotten what Mr. Galbraith's alternative is: In the place of the television cartoon and radio voice causing people to prefer private goods and services, he proposes to substitute the tax collector and the whole apparatus of informers, police, jailers and prisons; this will ensure that people will prefer public services. The choice he offers must be made explicit: The alleged determinism of the billboard and poster, or the determinism of the gun and club.

The overwhelming anti-democratic implications of this position cannot be ignored, even if Mr. Galbraith does not pursue them. For what does it mean to. say that the voters are determined (p. 260) while “public authority" and, to be sure, Mr. Galbraith are not? This is nothing but the assertion that he and his friends have the right to make decisions without the consent of the voters, because he and they alone, being exempt from determinism, are in a position to make rational decisions.

Though he has much in common with them, Galbraith is not simply a modern “liberal” or do-gooder. For modern “liberalism” is still characterized by a high degree of secularism, while Galbraith is openly and consistently “anti-materialistic." In spite of this, however, it may appear to the reader of The Affluent Society that Galbraith does base his program on some concept of the individual's happiness on earth, even if reserving to himself the right to lay down wherein that happiness is to be pursued. But this is highly doubtful. For on a number of occasions the mask begins to slip.

The first doubts arise when he advances his arguments on diminishing marginal utility, and then in Chapter XI, when economic activity is compared to the purposeless motion of a squirrel trying to keep abreast of a wheel which is propelled by its own movement. (p. 154, p. 159.) And, earlier in the same chapter, when he compares modern desires for goods to artificially cultivated demons called into being by the goods themselves, and asks if the solution lies with more goods or fewer demons. (p. 153.) This smacks very heavily of the Oriental, mystical view of man. The fact that life requires continuous action to maintain it, that happiness requires continuous progress and improvement, and that no matter how much one has already done, there is still more to do, is looked upon as pointless, and the proposal made that instead, one do nothing.

In Chapter XII, he says something truly remarkable. For there, packed between page upon page of prattle about the importance of more public schools and more public recreational and cultural opportunities, we find that they too appear on the list of “nonessentials,” along with the restaurants, cafes, garages, and movie theaters. This occurs in his discussion of the great allied bombing raid on Hamburg during three nights of July, 1943. “On these three nights of terror their [the inhabitants of Hamburg] standard of living, measured by house-room, furnishings, clothing, food and drink, recreation, schools and social and cultural opportunities, had been reduced to a fraction of what it had been before." (p. 162.) Is this a disaster of the most enormous proportions? Not for Galbraith. For, he concludes: “In reducing, as nothing else could, the consumption of nonessentials and the employment of men in their supply, there is a distinct possibility that the attacks on Hamburg increased Germany's output of war material and thus her military effectiveness." (p. 163.)

Thus, in the last analysis, the only thing really essential, according to Galbraith, is the military effectiveness of the state. Everything else is “nonessential.”

And, finally, in perhaps what is the most amazing slip of all, in his advocacy of the arbitrary spending power of “public authority," Galbraith is on the verge of suggesting that individuals ought to be made to prove their need for things before being allowed to buy them: “But with increasing income, resources do so accrue [automatically] to the private individual. Nor when he buys a new automobile out of increased income is he required to prove need. We may assume that many fewer automobiles would be purchased than at present were it necessary to make a positive case for their purchase. Such a case must be made for schools." (p. 311.)

One must wonder if what Galbraith is really advocating is not simply state power as an end in itself and individual deprivation both as an end in itself and as a means of demonstrating the power of the state. The possible suffering which such a man may inflict on the American people, once having achieved a position of power or influence, is unspeakable. For he seems to combine the mentality of a dictator with a total contempt for the individual.

This article is copyright © 2006, by George Reisman. It originally appeared in Human Events in February of 1961 under the title “Galbraith’s Modern Brand of Feudalism” and was soon thereafter reprinted as a pamphlet under its present title. Permission is hereby granted to reproduce and distribute it electronically and in print, other than as part of a book and provided that mention of the author’s web site is included. (Email notification is requested.) All other rights reserved. George Reisman is the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996) and is Pepperdine University Professor Emeritus of Economics.

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