Introduction

The subject of this book is the principles of economics. Its theme is that the application of these principles to the service of human life and wellbeing requires the existence of a capitalist society.

The purpose of this introduction is to enable the reader to classify the present book in relation to the wider body of procapitalist economic thought and of economic thought as such.

1. Procapitalist Economic Thought, Past and Present

Procapitalist economic thought and economic thought as such are essentially synonymous. The substance of both is to be found in the same two main sources, namely, the writings of the British (and French) classical economists and the Austrian neoclassical economists. All other schools of economic thought are essentially either just prescientific gropings or nothing more than misguided criticisms of the positive truths established by the classical and Austrian schools.

Among the classical economists are, above all, Adam Smith (1723–90), David Ricardo (1772–1823), James Mill (1773–1836), and John Stuart Mill (1806–73), and the Frenchmen Jean-Baptiste Say (1767–1832) and Frederic Bastiat (1801–50). The nineteenth-century Englishmen Nassau W. Senior (1790–1864), John R. McCulloch (1789– 1864), and John Cairnes (1824–75) also deserve mention as important members of this group. Important close allies of the classical school are the Manchester school, led by Richard Cobden (1804–65) and John Bright (1811– 89), who were the parliamentary leaders of the British free-trade movement in the mid-nineteenth century, and the currency school, which included the English economists Lord Overstone (1796–1883) and Robert Torrens (1780–1864), and the American monetary theorists William Gouge (1796–1863) and Charles Holt Carroll (1799– 1890). The classical school incorporated important economic truths previously identified by Richard Cantillon (1680– 1734), David Hume (1711–76), and, above all, the French Physiocrats. The Physiocrats flourished around the middle of the eighteenth century. The leading members of the school are François Quesnay (1694–1774), Pierre Du Pont de Nemours (1739–1817), Robert Jacques Turgot (1727–81), and Mercier de la Rivière (1720–93). The great merit of the Physiocrats was to have identified the existence of natural economic laws (physiocracy means the rule of nature) and, on the basis of their understanding of those laws, to have reached the conclusion that the government should follow a policy of laissez faire, a term which they originated. 1

The most important members of the Austrian school are Carl Menger (1840–1921), Eugen von Böhm-Bawerk (1851–1914), and Ludwig von Mises (1881–1973). Other important members are Friedrich von Wieser (1851– 1926); F. A. Hayek (1899–1992), who was the most prominent of von Mises’s students and who won the Nobel prize for economics in 1974; Henry Hazlitt (1894– 1993); Murray Rothbard (1926–95), who was one of von Mises’s later students; and, among the later students of von Mises who are still alive, Hans Sennholz and Israel Kirzner. 2

Closely allied with the Austrian school on many points

2 CAPITALISM are the major neoclassical English economists William Stanley Jevons (1835–82) and Philip Wicksteed (1860– 1927), the major Swedish economist Knut Wicksell (1851– 1926), and the major mid-nineteenth-century German economist Hermann Heinrich Gossen (1810–58), who had anticipated some of its leading doctrines in a book published in 1854. Other major economists who are more or less significantly allied with the Austrian school are the Americans John Bates Clark (1847–1938), Frank Fetter (1863–1949), Irving Fisher (1867–1947), and Frank Knight (1885–1972), who were prominent earlier in this century. The contemporary Chicago school, led by Milton Friedman, and its offshoot the Public Choice school, headed by James Buchanan, also fall into the category of allies of the Austrian school. (Friedman won the Nobel prize in economics in 1976; Buchanan, in 1986.) Other, less wellknown but important contemporary or recent economists who are more or less significantly allied with the Austrian school and sympathetic to capitalism are Armen Alchian, William Allen, Dominick Armentano, Paul Heyne, Wayne Leeman, John. S. McGee, Mark Skousen, Thomas Sowell, Walter Williams, Leland Yeager, and the late W. H. Hutt (1899–1988) and Ludwig Lachmann (1906–1990). And there are many more, both here in the United States and abroad. Both the Austrian school and its allies have been heavily influenced in turn by the writings of the classical economists.

It should not be surprising that such a large number of those who are recognized as important economists are, at the same time, leading advocates of capitalism. To the extent that an economist really understands the principles governing economic life, and desires that human beings live and prosper, he can hardly fail to be an advocate of capitalism.

The classical and Austrian schools have had important allies in the field of philosophy. Ayn Rand (1905–82), in particular, must be cited as providing a philosophical foundation for the case for capitalism, and as being responsible probably more than anyone else for the current spread of procapitalist ideas. The great English philosopher John Locke, who was a leading intellectual influence on the Founding Fathers of the United States, also deserves an especially prominent mention. And the English philosophers Jeremy Bentham and Herbert Spencer must be cited as well.

The classical and the Austrian schools and their allies have developed virtually all of the great positive truths of economic science. Their ideas, especially those of von Mises, Ricardo, Smith, and Böhm-Bawerk—in that order—together with important elements of the philosophy of Ayn Rand—are the intellectual foundation and inspiration of this book, which seeks to carry the work of these extraordinary individuals a step further by integrating leading elements of it into a logically consistent whole and by incorporating the present author’s own contributions.

Because the whole of this book is itself an exposition of the ideas of the classical and Austrian economists, it is not necessary (nor would it be possible) to explain at this point precisely what it is that these economists maintain, beyond a few generalities. They recognize the gains derived from the division of labor. They explain the nature, origin, and importance of money; the laws governing the determination of prices, wages, profits, and interest; and the vital role of saving and capital accumulation in raising the standard of living. They understand the benevolent nature of self-interest and the profit motive operating under economic freedom, and show how government intervention is the cause of inflation, depressions, economic stagnation, poverty, international economic conflict, and wars. In sum, they support capitalism and oppose government interference and socialism. To a great extent, the views of these authors will become clear in the pages that follow. But, because this is not a book on the history of economic thought, no systematic effort is made to explain precisely which individuals held which specific positions. The reader who is interested in acquiring that knowledge is advised to consult the bibliography, which appears at the end of this book, and to undertake the immeasurably valuable task of reading through the works listed in it.

A subject which must be dealt with here, however, is a brief account of the differences between the classical and Austrian schools. The leading difference concerns the theory of value and price. The classical economists, with exceptions, assigned an exaggerated role to cost of production as an explanation of prices, and, as a consequence, to the quantity of labor required to produce goods. They even went so far as frequently to maintain that wages are determined by “the cost of production of labor.” Wages, they often held, tend to equal the price of the goods necessary to enable a worker to live and to raise replacements for himself and his wife.

Such an exaggerated role assigned to cost of production and quantity of labor made it possible later in the nineteenth century for Karl Marx to present himself as the logical heir of the classical economists, devoted merely to developing the implications of their doctrines. Marx was believed, and the consequence was that when the Austrian and other neoclassical economists appeared on the scene around 1870 and propounded the theory of marginal utility as the explanation of value and price, the doctrines of classical economics were abandoned to an extent much greater than necessary, to the great loss of later economic science. Only those doctrines were retained that could be supported either on the basis of the

INTRODUCTION 3 theory of marginal utility or otherwise independently of the basic classical framework. In terms of what was lost intellectually, it was a case of the classical economics baby being thrown out with the Marxist bath water. Ironically, those who threw out the baby were precisely the people who needed it most and to whom it really belonged—namely, the later advocates of capitalism.

Significantly, the abandonment of classical economics was also brought about by the growing influence of socialism. And to this extent, it was clearly a case of the abandonment being caused by classical economics’ antisocialist implications. What I refer to was the altogether unjustified recantation in 1869 of a central pillar of classical economics by its then leading spokesman, John Stuart Mill. In response to utterly flimsy criticisms, easily capable of being answered, and apparently based on nothing more than his own growing attachment to socialist ideas, Mill abandoned the socalled wages-fund doctrine, according to which wages are paid out of savings and capital. In so doing, he cut the ground from under the entire classical perspective on the role of saving and capital in the productive process, including his own previous brilliant contributions to that perspective, and set the stage for the intellectual success of Keynesianism in the 1930s. 3

The theory of marginal utility resolved the paradox of value which had been propounded by Adam Smith and which had prevented the classical economists from grounding exchange value in utility. “The things which have the greatest value in use,” Smith observed, “have frequently little or no value in exchange; and on the contrary, those which have the greatest value in exchange have frequently little or no value in use. Nothing is more useful than water: but it will purchase scarce any thing; scarce any thing can be had in exchange for it. A diamond, on the contrary, has scarce any value in use; but a very great quantity of other goods may frequently be had in exchange for it.” 4

The only explanation, the classical economists concluded, is that while things must have utility in order to possess exchange value, the actual determinant of exchange value is cost of production. In contrast, the theory of marginal utility made it possible to ground exchange value in utility after all—by showing that the exchange value of goods such as water and diamonds is determined by their respective marginal utilities. The marginal utility of a good is the utility of the particular quantity of it under consideration, taking into account the quantity of the good one already possesses or has access to. Thus, if all the water one has available in a day is a single quart, so that one’s very life depends on that water, the value of water will be greater than that of diamonds. A traveler carrying a bag of diamonds, who is lost in the middle of the desert, will be willing to exchange his diamonds for a quart of water to save his life. But if, as is usually the case, a person already has access to a thousand or ten thousand gallons of water a day, and it is a question of an additional quart more or less—that is, of a marginal quart—then both the utility and the exchange value of a quart of water will be virtually nothing. Diamonds can be more valuable than water, consistent with utility, whenever, in effect, it is a question of the utility of the first diamond versus that of the ten-thousandth quart of water.

A fundamental accomplishment of this book, which makes possible almost all of its other accomplishments, is the integration and harmonization of the ideas of the classical and Austrian economists. This has made it possible for me to modernize and reintroduce into economic analysis several of the major doctrines of the classical economists which were abandoned unnecessarily, and thereby to add greatly increased strength to the central ideas of von Mises and the Austrian school. A leading application of the classical doctrines, of which I am especially proud, and which I hasten to name, is a radically improved critique of the Marxian exploitation theory. In my judgment, classical economics makes possible a far more fundamental and thoroughgoing critique of the exploitation theory than that provided by Böhm-Bawerk and the Austrian school, despite the prevailing mistaken belief that it implies the Marxian exploitation theory. 5 It also provides the basis for greatly strengthening the refutation of the ideas of Keynes and of the doctrine that big business implies “monopoly power.”

Among the classical doctrines I have reintroduced is the recognition of saving and productive expenditure, rather than consumption expenditure, as the source of most spending in the economic system. Closely related to this, I have brought back the wages-fund doctrine and have made clear the meaning of John Stuart Mill’s vital corollary proposition that “demand for commodities does not constitute demand for labor.” I have reinstated Adam Smith’s recognition that in a division-of-labor society the concept of productive activity must incorporate the earning of money and that because of its failure to earn money, government is a consumer. I have reintroduced Adam Smith’s and James Mill’s conception of the role of saving in relation to the disposition of “the gross annual produce” between consumers’ goods and capital goods, and James Mill’s conception of what has unjustly come to be known as Say’s Law. 6 Along with this, I have reintroduced Ricardo’s insights that capital can be accumulated not only by saving but also by anything else that serves to increase wealth, and that technological progress operates not to raise the general rate of profit but to reduce prices (and, implicitly, to increase the supply of

capital goods). I have also reintroduced Ricardo’s profound recognition of the distinction between “value and riches” and of the need for the concept of an invariable money as a methodological device in developing economic theories. I have even gone so far as to interpret Ricardo’s proposition that “profits rise as wages fall and fall as wages rise”—a proposition that on its face appears to imply class warfare—in the light of the assumption of an invariable money. I have found that when interpreted in this light, the proposition both serves in the overthrow of the exploitation theory and points the way to a sound theory of profits. I have also found it extremely useful to revive the classical economists’ conception of demand and supply as a ratio of expenditure to quantity sold, and to employ it no less than the contemporary conception of demand and supply as schedules of quantities demanded and supplied at varying prices.

I have used the classical economists’ insights to develop a substantially new theory of the rate of profit and interest; a new theory of saving and capital accumulation; a radically new theory of aggregate economic accounting, which features the role of saving and productive expenditure; new definitions of such fundamental economic concepts as capital goods and consumers’ goods; and a theory of wages that is also new in major respects.

The main thing I have discarded in classical economics is any notion that wages are determined by “the cost of production of labor.” On the contrary, I show that the essential economic function of businessmen and capitalists is to go on raising the productivity of labor and thus to raise the standard of living of the average wage earner by bringing about a reduction in prices relative to wages— that is, to bring about a progressive rise in socalled real wages. I have not discarded the role of cost of production as a determinant of the prices of products, however. Ironically, here I have been inspired by Böhm-Bawerk and Wieser, who clearly recognized cost of production as being usually the direct, immediate determinant of prices in the case of manufactured or processed goods and who explained how the determination of price by cost was fully consistent with the principle of marginal utility—indeed, was a manifestation of the principle of marginal utility. 7 When all is said and done, I believe I have succeeded in grounding the work of the Austrian school in foundations supplied by the classical school— foundations, of course, which have been cleared of major errors. Among the major themes of my book that are derived from classical economics, in addition to those already described, are: production, not consumption, is the essential economic problem; production throughout is supported by capital; and the central economic figure is the businessman, not the wage earner and not the consumer. These views are in opposition both to Marxism and, in part, to those of the Austrian school, which, I believe, has overemphasized the role of the consumer.

The consumers, it is true, have the power, by virtue of the pattern in which they spend their incomes, to decide which investments of the businessmen turn out to be profitable and which unprofitable, and thus, in the last analysis, to govern the pattern of investment, as businessmen compete for their favor. The consumers’ valuations and the spending patterns that result from them also determine the relative prices of the factors of production—for example, the wages of skilled labor relative to the wages of unskilled labor, the prices of real estate in one location relative to those in other locations, and the relative prices of capital goods insofar as their production cannot immediately be varied in response to changes in demand. And, of course, they also directly determine the relative prices of consumers’ goods, insofar as the supply of consumers’ goods cannot immediately be varied in response to changes in demand.

Nevertheless, the funds of the consumers come from business and the whole of their consumption is supported by production and the productive process. The individual business is dependent on the consumers because it is directly or indirectly in competition with all the other business firms in the economic system, and it is up to the consumers to decide which business firms to buy from. But from the point of view of the economic system as a whole, it is the consumers who are dependent on business. They have the power to consume only by virtue of making a contribution to production. And whatever funds they so receive, they will assuredly spend, sooner or later, in buying from some business or other. For money qua money is absolutely useless except as a means of obtaining goods or services.

Furthermore, a major finding of this book is that while the consumers determine the relative prices of the factors of production, such as the wages of skilled labor relative to those of unskilled labor, the consumers do not determine the absolute height of the prices of the factors of production. The absolute height of the prices of the factors of production is determined by the extent of saving, and is the greater, the greater is the extent of saving, and the smaller, the less is the extent of saving. Consumption relative to saving, it is shown, is the major determinant of the extent to which the prices of consumers’ goods (and of capital goods too) exceed the prices of the factors of production used to produce them—that is, it is the major determinant of the rate of profit and interest. 8

These views do not represent any real or fundamental break with the views of the Austrian school but, on the contrary, in vital respects are supported by them. For example, it will be shown that a rise in saving and fall in

consumption does not operate to raise the prices of factors of production above the prices of consumers’ goods and thereby plunge the economic system into losses and a depression. What happens is merely what the Austrian school would call “a lengthening of the structure of production.” Greater saving relative to consumption means that there is not only more spending for capital goods and labor to produce consumers’ goods, but also, and even primarily, more spending for capital goods and labor to produce capital goods. The productive expenditure of the greater savings is a deduction not merely from a diminished consumption expenditure, but from an enlarged demand for capital goods, which takes the place of the diminished demand for consumers’ goods. The demand for capital goods is as much a source of business sales revenues as the demand for consumers’ goods. In the last analysis, what happens is that labor comes to be employed in the performance of work that is temporally more remote from its ultimate results in the form of consumers’ goods. 9

I believe that by the time the reader finishes this book, he will share my conviction that in fundamental essentials, the classical and Austrian schools are not in conflict, but represent major, complementary elements of the same great body of truth. I even believe that he will be able to read Böhm-Bawerk and John Stuart Mill on the subject of prices and costs and no longer see any fundamental or essential differences between them. 10

---

One economist above all others must be singled out as the leading intellectual defender of capitalism, namely, Ludwig von Mises. When von Mises appeared on the scene, Marxism and the other socialist sects enjoyed a virtual intellectual monopoly. As explained, major flaws and inconsistencies in the writings of Smith and Ricardo and their followers enabled the socialists to claim classical economics as their actual ally. The writings of Jevons and the early Austrian economists—namely, Menger and Böhm-Bawerk—were insufficiently comprehensive to provide an effective counter to the socialists. Bastiat had tried to provide one, but died too soon, and probably lacked the necessary theoretical depth in any case.

Thus, when von Mises appeared, there was virtually no systematic intellectual opposition to socialism or defense of capitalism. Quite literally, the intellectual ramparts of material civilization were undefended. What von Mises undertook, and which summarizes the essence of his greatness, was to build a systematic intellectual defense of capitalism and thus of material civilization.

Point for point, von Mises developed answers to virtually all of the accusations made against capitalism— from its alleged exploitation of labor and responsibility for unemployment and depressions to its alleged responsibility for monopoly, wars, and racism. He developed a social philosophy of capitalism which demonstrates the benevolent operation of all of capitalism’s leading institutions, especially private ownership of the means of production, economic competition, and economic inequality. He expounded a procapitalist interpretation of modern economic history, and provided a devastating critique of socialism and government intervention in all of its forms. Above all, he demonstrated that a socialist economic system lacks the ability to engage in rational economic planning because of its lack of a price system and thus the ability to perform economic calculation. In making it possible for the more intelligent and honest members of Communist-bloc governments to understand the causes of the chaos and misery surrounding them, the writings of von Mises have played a major role in the growing worldwide efforts to abandon socialism. Nothing could be more deserved than if some of the statues of Lenin, now being removed all across Eastern Europe, were replaced with statues of this man, whose writings clearly proved the destructive consequences of socialism as far back as 1922. Indeed, statues should be erected to von Mises all across the world for saving it from socialism, and for his accomplishments in support of capitalism.

It is to von Mises, more than to any other single source, that this book is indebted. Indeed, the present book could accurately be described as “Misesianism” reinforced by a modernized, consistently procapitalist version of classical economics—it is the ideas of von Mises fused with insights derived from Ricardo and Smith. 11

---

Largely thanks to von Mises, there have been other important recent or contemporary advocates of capitalism. F. A. Hayek and Milton Friedman are the two leading examples. But, in my judgment, neither they nor anyone else begins to compare to von Mises in logical consistency and intellectual breadth and depth in the defense of capitalism. Hayek, for example, finds “a comprehensive system of social insurance” to be consistent with capitalism. 12 Friedman believes that fiat money is consistent with capitalism.

Other, lesser defenders of capitalism have even more serious inconsistencies. The socalled supply-siders— Robert Mundell, Arthur Laffer, and Jude Wanniski—apparently want to achieve capitalism without facing the need to reduce government spending and eliminate the welfare state. Much worse, Rothbard, who was widely regarded as the intellectual leader of the younger generation of the Austrian school and of the Libertarian party as well, was a self-professed anarchist and believed that the United States was the aggressor against Soviet Rus—

sia in the socalled cold war. 13

By way of contrast, Henry Hazlitt, a brilliant economist and journalist, had the great merit of providing what are unquestionably the best introductions to the ideas of von Mises and the classical economists that exist. 14 Hazlitt, incidentally, also shared with von Mises the honor of having expounded decades ago, as a virtual intellectual footnote to their major accomplishments, the legitimate substance of what has today become known as “the rational expectations approach”—namely, the recognition that economic phenomena such as interest rates incorporate expectations concerning inflation and thus defeat the objectives sought by the government’s policy of inflation. 15

2. Pseudoeconomic Thought

Little or nothing is known about the state of economic knowledge that may have been achieved by the ancient Greeks and Romans. Some discussions of economic matters took place among scholastic philosophers in the Middle Ages, who appraised economic activity largely from the hostile perspective of the Roman Catholic church and who, accordingly, denounced as unjust such perfectly normal economic activities as the taking of interest on loans, speculation, and, indeed, even the mere changing of prices. The scholastics contributed nothing to sound economics.

The first prominent group of writers on economic subjects were the mercantilists, who appeared on the scene in the sixteenth and seventeenth centuries, following the great intensification of commerce and trade that had taken place subsequent to the end of the Dark Ages. The main concern of the mercantilists was with the socalled balance of trade and the alleged need of governments to secure an excess of exports over imports, as the means of increasing the quantity of money in a country that lacked its own gold and silver mines. 16 The concern of the mercantilists with increasing the quantity of money led them to anticipate the essential fallacy of Lord Keynes in this century, namely, that it is necessary for the government to intervene in the economic system for the purpose of stimulating “demand” and “employment.” The leading members of the mercantilist school were Louis Bodin (1530–96), Thomas Mun (1571–1641), William Petty (1623–87), Josiah Child (1630–99), and the philosopher John Locke (1622–1704).

The positive economic truths later demonstrated by the classical and Austrian schools and their allies have been opposed from a number of quarters. In the first part of the nineteenth century, there were Malthus (1766– 1834) and Sismondi (1773–1842) who, in anticipation of the Marxists and Keynesians, erroneously argued that depressions were caused by overproduction and excess saving and underconsumption. (Malthus was also the author of the mistaken doctrine that increases in population necessarily tend to reduce the productivity of labor and the general standard of living—a doctrine that, apart from Adam Smith and Bastiat, was, regrettably, accepted by most of the classical economists.) In addition, there were the protectionists and the nationalists who, continuing to be committed to mercantilist ideas, attacked the classical economists’ doctrine of international free trade. Foremost in this group were Alexander Hamilton (1755– 1804), who, of course, was the first American secretary of the treasury, and the German Friedrich List (1789– 1848).

Fundamental opposition to classical and Austrian economics came from the German historical school, whose members denied the very possibility of a science of economic laws. This group included Wilhelm Roscher (1817–94), Gustav Schmoller (1838–1917), Lujo Brentano (1844–1931), and Werner Sombart (1863–1941). (Sombart, interestingly, began his career as a Marxist and later became a leading supporter of Nazism.) The essential approach of the German historical school was propounded in the United States by Thorstein Veblen (1857–1929), John R. Commons (1862–1945), and Wesley Mitchell (1874–1948), who are known as the American institutionalist school. The leading characteristic of these schools is a distrust of deductive logic (which is the essential method used in economics for arriving at knowledge), and thus opposition to economic theory as such. They deny the possibility of universally valid economic laws, claim that each country, in each historical period, has its own economic laws, and advance historical research, the study of economic institutions, and the gathering and study of economic statistics as the only legitimate means for arriving at economic knowledge.

The socialists, not surprisingly, are entirely opposed to the fundamental economic truths propounded by the classical and Austrian schools. (This is aside from the labor theory of value and the socalled iron law of wages, which they take over from classical economics and totally distort and twist into a form that the classical economists would not support.) The leading socialists, of course, were Karl Marx (1818–83) and Friedrich Engels (1820–97). Among their most important followers were Rosa Luxemburg (1870–1919) and Rudolf Hilferding (1877–1941). Other prominent socialists, prior to or contemporary with Marx, were Henri de Saint-Simon (1760– 1825), Robert Owen (1771–1858), Charles Fourier (1772–1837), Louis Blanc (1811–82), Pierre Proudhon (1809–65), and Karl Rodbertus (1805–75). It should be noted that the socialists and the other opponents of the doctrines of the classical and Austrian schools substan—

11113456 CSSmFeeofe.eerm M aHHnbeeu eennrrxrrrspayy oyo HHf s Ntaiahtz.zei oRll Riinttotat a,,tt h“EnioIbdcsna oc Iarnnrdliof Et,li mFaqxtupoiicoeers n coa it nNf aN t Otheieocenwe nde ssL oLs sicaecbtrshreysioron?to”ney l( s,F,N oi rnnefeec twewhimd eY ee aMdnon. tr2e a(kr,Nl: cln Myaeo,nw .aa t2r ciYel6mi Ro s(itSrolskle,ba :spe nAetr,eet r1 BmAl9inab7drge3artrmo)o .2, nI RS2n Hm,o t 1hboi9ateuh5trs ,bt2e WLo,) ,u1oe pc9kapa7,l .sRt9 h,8) oTo 8;t fhi0hN do–beam8amt2riado,,s Tanw Snhsra,deor GbtLgekeur:.n e“d 4taEw,,t a m ciIngdhpd eavi apNroi s(nce.1 a iM19ll –Wl5yi81s,a e ;[t lhs2rl,eea: H3v cm–.eu eo2.m d(s0It. a9 w wpn]ua.Ai sSrbchlleiti ktiesooe ha nn,el m,sod 3ot oued bsn teethdi dlaneo.tt rwr em etrh,vvy ce.e hr (tneiCatftpliheeo.ri n1Tceani2ismgc,t soe,em es: W c Htoo.s ie4 lSt inl.m aRrmypu Reunre eBilagsalno cgenkor ,ayv Nn eCderno wNm., oY 1er9ond6rthk t6ah:)u rA,so p rtuplhgi.rn h7ogo7utu6ogt–nh t7 ohH7ueo, tt 7uwth9seie2sn,– wt1i99eo3t6rh.k6 A c )we.mnilatluz brieny g tholay tsh, baees 1e a3nnt th eh leeod Uqitunieoitnnet dr ca Sothmtaetmre tseh”na (tnpa .rt o2y 8 toh7ne; t imhteao slrtieac trsee i oncef o ncroti g1ni4tnetamhl e)p.d oIinrtai sorhyna ,er upcnoelsnetos cmso onitcthrsea, wrswt htoiisl teeh steht aUet renaditt.ie oTdnh Saistla e itsxe bpsee, cwcathauitscieoh in hts ba aesp tstpuerpro rpaeocpshree hdsaleysn cbtose mtehnee m etoror broee rw sre athgrlaaitrk tdewe edov agesen an t hemraaantj iNooran azsni o dGf p esrtroumfdoaeunnnytsd, Rh sacovhtheob ohala roddf t d eoec esoncndroiubmreeid ca t tth hteho eSu ohgvahnite,d ttssh oienf o tPvhreeor ffwo. lShloaemlwmiunineggls tmoernem,r iwst :oh “foB v, eoufnno tMrile ni Wsoetso m arlnaddn W yth yaeer A aIIru,s ss atorg idoae,n vw socatheso dtho wel s astsoi lSlle tg aaoluientsh tlooar rp.g)eealcye u tnhraetc hoeg fnaiizleedd .t oT hmuask, eS aadmeuqeulastoen p arnodv Nisoiordnh aaguasin, isnt tthheei rN sealzfi-patrtaocckla. i.m . e. dN “oatu othnolyri wtaatisv teh”e aren dn “oc oRmuspsrieanh eenxspiavnes”io tenx wtbhoaotke ivnecrl uapdaer “t Rfraotmio tnhael Eexxipgeenctcaiteiso onfs Mdeafceartoinecgo Gneormmiacns”y ,i nb tuhte tihre “ FSaomviielty U Trneioen o ft Eimceo annodm aigcsa”in a nleda dneevdo otve ae fr ublal cakpwpaerndd tiox atov doiidsc aunsysi cnogl idt .o Yr ehto tth weya mr waikthe athlme oWset snto” m(pe.n 2t9io4n). of the Austrian school or von Mises; the Austrian school does not even appear in the index. See Paul Samuelson and William Nordhaus,E conomics, 13th ed. (New York: McGraw-Hill, 1989, in particular the inside back cover). The leading

tially overlap in their criticisms of capitalism. For example, virtually all of them share the belief that depressions are the result of “overproduction” and excess saving.

For want of a better place to classify him, mention must be made here of Henry George (1839–97), an American economist who developed certain half-truths of the classical school concerning land and land rent into a doctrine calling for the nationalization of land. Surprising as it may seem, in all other respects, George and most of his followers claim to be supporters of capitalism. 17

Marshallian Neoclassical Economics: The

Monopoly Doctrine and Keynesianism

In the present-day United States, the leading opposition within the economics profession to the ideas of the classical and Austrian schools, and to capitalism, derives from the ideas of a late-Victorian British neoclassical economist named Alfred Marshall (1842–1924), and two other figures associated with Britain’s Cambridge University and heavily influenced by the ideas of Marshall: John Maynard Keynes (1883–1946) and Mrs. Joan Robinson (1903–83). Marshall superficially accepted the concept of marginal utility while opposing the fundamental approach of the Austrian school. At the same time, he abandoned the fundamental ideas of the classical school while wrapping himself in the guise of the defender of classical economics against the criticisms of the Austrian school. The result of his work, his bequest to subsequent generations of economists, was a hodgepodge of confusions, which took the place of sound economics.

Both the classical and the Austrian schools study economic phenomena from the point of view of their effects on all members of the economic system, not just on those directly involved. In contrast, Marshall advanced the doctrine known as “partial equilibrium,” which is the attempt to study the behavior of individual consumers, individual firms, and individual industries divorced from the rest of the economic system. His approach was one of disintegration, resulting in the present-day existence of two allegedly separate branches of economics: “microeconomics” and “macroeconomics”—the first studying the actions of individuals apart from their relationship to the rest of the economic system, and the second studying the economic system as a whole, apart from the actions of individuals.

Marshall and his followers coupled the doctrine of partial equilibrium with a total confusion between the concepts of cost of production and supply, making it impossible to distinguish between cases in which prices are determined by supply and demand and cases in which, in the first instance, they are determined directly on the basis of cost of production. The result was the loss of the knowledge gained by the classical economists (and recognized by Böhm-Bawerk and Wieser) that prices are in fact frequently determined in the first instance directly by cost of production. The result was also the inability to grasp the contribution of the Austrian school (substantially anticipated by John Stuart Mill) that the prices which constitute the costs of production are themselves always ultimately determined by supply and demand. It is Marshall’s confusions which underlie the widespread belief that economic law does not apply to the pricing of most manufactured or processed goods—that the prices of such goods are “administered prices,” precisely because they are determined directly on the basis of a consideration of cost of production rather than by the combination of demand and supply.

In propounding the doctrine of partial equilibrium, Marshall introduced the perverse concept of the “representative firm”—an alleged average firm, some multiple of which was supposed to constitute an industry. This concept destroyed economic theory’s ability to recognize even the possibility of competition. This was because if all firms in an industry were in fact perfectly equal, no basis could exist for any of them winning out in competition, or, therefore, for attempting to compete in the first place. Not surprisingly, the acceptance of the concept of the representative firm led some decades later to the conclusion (regarded at the time as a revolutionary discovery) that no reason existed for a sizable firm ever to cut its price, except in conditions in which it would pay a single-firm “monopoly” to do so. This was because its competitors, all of whom were supposed to be just as efficient as it was, would immediately match its cut. Thus, it would have little or nothing to gain by cutting— certainly not the business of its competitors.

The notion of the representative firm and the inability to see how cost of production normally acts as the direct determinant of the prices of manufactured or processed goods have served as the foundation for the widespread acceptance since the 1930s of the thoroughly malicious and destructive doctrine of Joan Robinson and Edward Chamberlin. That doctrine states that with a few, limited exceptions, such as wheat farming, the whole of a capitalist economic system is tainted by an element of monopoly. The solution for this alleged state of affairs is supposed to be a radical antitrust policy, which would fragment all large businesses, or else the nationalization of such businesses and/or government control over their prices—and further policies that would force firms in the same industry to produce identical, indistinguishable products. Since the 1930s, this doctrine and its elaboration have constituted the substance of the theoretical content of most textbooks of “microeconomics.” At the same time, little or nothing of the sound price theory

developed by the classical and Austrian economists is presented in these textbooks.

The abandonment of classical economics and Marshall’s concentration on what later came to be called microeconomics created a temporary intellectual vacuum. In the 1930s, this vacuum was filled by Keynes, by means of the resurrection of the long-refuted fallacies of the Mercantilists, and Malthus and Sismondi, alleging that capitalism causes depressions and mass unemployment through overproduction and excess saving. On this thoroughly erroneous foundation, Keynes argued for the need for inflation and deficit-financed government spending to counteract or prevent the evils of depressions and mass unemployment. The elaboration of the Keynesian doctrines has constituted the theoretical substance of the textbooks on “macroeconomics.”

Mathematical Economics

Another prominent school of economic thought is that of mathematical economics, which is characterized by the use of calculus and simultaneous differential equations to describe economic phenomena. The principal founder of mathematical economics was Léon Walras (1834–1910), a Swiss, who also independently discovered the law of diminishing marginal utility shortly after Menger and Jevons. Vilfredo Pareto (1848–1923), an Italian, succeeded Walras at the University of Lausanne and elaborated his approach.

Mathematical economics is fundamentally a matter more of method and pedagogy than of particular theoretical content. And although neither the classical nor the Austrian schools is mathematical in the above sense, there are mathematical economists who are allied with their teachings and their support of capitalism. Walras, Jevons, and Gossen are important cases in point.

Regrettably, the use of calculus and differential equations to describe economic phenomena represents a Procrustean bed, into which the discrete, discontinuous phenomena of actual economic life are mentally forced, in order to fit the mold of mathematically continuous functions to which the methods of calculus can be applied. This has consequences which represent a matter of theoretical content, as well as method.

One major consequence is the aid given to the perpetuation of a false theory of the determination of the prices of the factors of production: namely, the theory that the prices of the factors of production are directly derivable from the value of the consumers’ goods they help to produce. For example, the wages of automobile workers, and the prices of automaking equipment, steering wheels, brakes, spark plugs, and all other factors of production necessary to produce an automobile, are regarded as being derivable directly from the price of automobiles, by means of calculating the loss in the value of an automobile that would accompany the withdrawal of a unit of any of the factors of production necessary to produce it.

Such a derivation of value, of course, must encounter the same difficulty as attempting to derive from the value of a pair of shoes a separate value for the right and left shoes—namely, the fact that the value of the combined product is capable of being alternatively attributed to any of the elements necessary to its production or enjoyment, and that on this basis the sum of the derived values of the factors of production must far exceed the value of the product. In the case of the shoes, for example, the loss of either shoe destroys the whole value of the pair. If the value of each shoe were derived by calculating the loss in value of the pair resulting from its removal, the sum of the value of the two shoes considered separately would be twice the value of the pair. In the case of the automobile, the entire value of the automobile would have to be attributed to each of many different components, such as each of the four wheels, the carburetor, the steering wheel, etc.

Mathematical economics creates the illusion that this problem can be solved by making believe that what are withdrawn are not discrete units of the factors of production, such as one whole shoe or one whole wheel, but infinitesimally small quantities of them. In this case, the loss in the value of the product could be regarded as a partial derivative of the reduction in the quantity of the factor of production, and the theorem would be applicable that the sum of the partial derivatives does not exceed, but is equal to the total derivative.

The area of a room, which is determined by the product of its length and width, can serve as an illustration. If the length of the room is ten feet and the width is ten feet, then the entire area of the room is lost if either the length or the width shrinks to zero. If one adopts the procedure of alternatively attributing to the length and the width the area that is lost when it is lost, then one would have to attribute a total of two hundred square feet of area lost, despite the fact that the actual area of the room is only one hundred square feet. If, however, one assumes that what is lost is not all of the length or, alternatively, all of the width, but only a small fraction of the length or width, then the difference between the sum of the two separate losses and the actual total loss diminishes. For example, if what is lost is one foot of length out of ten or, alternatively, one foot of width out of ten, the sum of the two separate areas lost is twenty square feet. The area lost by the simultaneous loss of a foot of length and width is nineteen square feet. Thus the difference between the sum of the two partial losses and the total loss has sharply diminished. It would approach

zero, as the reduction in length and width became smaller.

Unfortunately for this approach, the actual problem in the real world is how does one evaluate the effect of the loss of a whole shoe or wheel, not the tip of the shoelace or the effect of a scratch on the hubcap.

The result of such distortion of the actual problem is that mathematical economics has operated to conceal the true proposition, grasped by Ricardo and endorsed by Böhm-Bawerk and Wieser, that typically it is not the price of the product that determines the prices of the factors of production used to produce it, but the other way around. The price of automobiles and virtually all other manufactured or processed goods is determined on the basis of the wage rates, equipment prices, and parts prices that enter into their production. However, wage rates, which are the prices that most fundamentally determine costs of production, since they enter into every stage of production, are themselves determined by the supply of and demand for labor operating throughout the economic system. The same is true of the prices of the various raw materials whose supply cannot be immediately increased or decreased in response to changes in demand. The wage rates of the different types of labor relative to one another, above all the wages of skilled labor relative to those of unskilled labor, and the relative prices of such raw materials, reflect the relative marginal utilities of these factors of production in the economic system as a whole. Thus it is mainly in this indirect way that marginal utility operates to determine prices. 18

A second and even more serious consequence of mathematical economics is that it leads to an undue concentration of attention on states of final equilibrium, which are all that its differential equations are capable of describing. It thus takes attention away from the real-world operation of the profit motive and of the market processes by means of which the economic system continually tends to move toward a state of full and final equilibrium without ever actually achieving such a state. The economic system never actually achieves such a state because of continuous changes in the fundamental economic data. For example, there are changes in the state of technology, changes in the size of population, changes in the relative valuation of the various consumers’ goods, changes in the relative valuation of present enjoyment versus provision for the future, and numerous other such changes which occur continuously and which operate to change the final state of equilibrium toward which the economic system is tending. 19

The effect of the dominance of mathematical economics and of the fact that it ignores market processes has been that all the major principles which explain how prices are actually determined, and which were discovered by the classical economists, have been virtually forgotten. Among the principles lost have been recognition of the tendency toward a uniform rate of profit on capital invested throughout the economic system, recognition of the tendency toward the establishment of uniform prices for the same goods throughout the world and over time, and recognition of the tendency toward the establishment of uniform wage rates for labor of the same degree of skill and ability in the same market. These principles have virtually disappeared from contemporary economics textbooks. 20

Third, mathematical economics has come to serve as a mechanism for the erection of a sort of exclusive “Scholars’ Guild,” which, as was the case in the Middle Ages, seeks to shut out all who do not first translate their thoughts into its esoteric language. Higher mathematics is no more necessary to the discussion or clarification of economic phenomena than was Latin or Greek to the discussion of matters of scientific interest in previous centuries. One can, for example, say that the amount of bread people will buy at any given price of bread depends both on the price of bread and on the prices of all other goods in the economic system. Or one can say that the quantity demanded of bread is a mathematical function of all prices in the economic system, and then write out a nonspecific mathematical function using symbolic terminology.

If one merely writes such an equation and stops at this point, all that has taken place is an act of intellectual pretentiousness and snobbery—a translation into a present-day equivalent of Greek or Latin. If, however, one goes further, and believes one can actually formulate a specific equation—that, for example, the quantity demanded of bread equals ten thousand divided by half the square of the price of bread minus the price of butter and the average age of grocers, then one is led into major errors. This is so because no such equation can possibly hold up in the face of changes in the fundamental economic data. New goods are introduced. People’s ideas and valuations change. Their real incomes change. Population changes. The belief that an equation could be constructed that would take such changes into account is totally opposed to reality. It is tantamount to a belief in fatalistic determinism and implies, in effect, that a mathematical economist can gain access to a book in which all things past, present, and future are written and then derive from it the corresponding equation. Whatever it may be, such a view is definitely not within the scientific spirit.

3. Overview of This Book

I have divided the present book into three major parts. Part 1, The Foundations of Economics, explains the

nature of economics and capitalism, including the role of a philosophy of reason in economic activity. It then shows that, based on his nature as a rational being, man possesses a limitless need for wealth. This, in turn, is shown to give rise to the central problem of economic life, which is how steadily to raise the productivity of human labor, that is, the quantity and quality of the goods that can be produced per unit of labor. Next, it is shown why the continuing rise in the productivity of labor is not prevented by any lack of natural resources, indeed, how man is capable of progressively enlarging the supply of useable, accessible natural resources as part of the very same process by which he increases the production of products. The part concludes with a lengthy critique of the ecology doctrine, which, it shows, represents a direct and major assault on the value of economic progress and thus on the very foundations of economics, and has replaced socialism as the leading threat to economic activity and economic progress.

Part 2, The Division of Labor and Capitalism, opens with a demonstration that the existence of a division-of-labor society is the essential framework for the ongoing solution of the problem of how continually to raise the productivity of labor. It then goes on to demonstrate that a division-of-labor society is a capitalist society, totally dependent on the operation of a price system, which in turn totally depends on private ownership of the means of production. Private ownership of the means of production is shown to be the foundation both of the profit motive and of the freedom of competition, which are respectively the driving force and regulator of the price system. This part, which incorporates almost all of my previously published The Government Against the Economy, develops all of the leading principles of price theory and applies them to understanding major events of the present and recent past. 21 It clearly explains the factors leading to the collapse of socialism around the world and the destructive consequences of socialistic government intervention here in the United States in the form of price controls. It shows why, necessarily lacking a price system, socialism is necessarily chaotic economically and tyrannical politically. It shows how price controls were responsible for all aspects of the energy crisis of the 1970s and how they continue to threaten the longterm viability of major industries in the United States, such as electric power and rental housing.

Very importantly, this part explains the actual, benevolent nature of capitalism, in that it shows how the existence of the division of labor profoundly influences the operation of private ownership of the means of production, economic competition, and economic inequality, in ways that render these institutions thoroughly benevolent in their effects on the average person. In essence, this part shows that beneath the division of labor it is capitalism that is the essential framework for economic progress and a rising productivity of labor, and that capitalism is characterized by a harmony of the rational self-interests of all men under freedom. The part also includes critiques of all forms of the doctrine that capitalism results in monopoly. It shows that monopoly, properly understood, is not a product of capitalism but is imposed on the economic system by government intervention. In addition, it includes an exhaustive critique of the Marxian exploitation theory. It shows that under capitalism there is no economic exploitation, that capitalists, far from exploiting wage earners and appropriating as profits what is rightfully wages, make it possible for people to live as wage earners, and to live ever more prosperously. It shows that this is because capitalists create wages and the demand for labor in tandem with reducing the share of sales proceeds which is profit, and go on steadily increasing the supply of goods that the wage earners can buy. It shows that socialism is the system both of the exploitation of labor and of universal monopoly.

Part 3, The Process of Economic Progress, centers on the explanation of the process of economic progress under capitalism. It explains the quantity theory of money and the essential role of the quantity of money in determining aggregate monetary demand, that is, total spending in the economic system. In full confirmation of Say’s Law, it shows that in contrast to mere monetary demand, real demand—that is, actual purchasing power—is increased only by virtue of increases in the production and supply of goods. Along the same lines, it shows that real wages are increased essentially only by virtue of increases in the productivity of labor and thus increases in the supply of goods relative to the supply of labor. This part explains the vital role of capital accumulation in raising the productivity of labor and real wages. It explains the dependence of capital accumulation itself on saving, technological progress, and everything else that is necessary to economic efficiency, from freedom from government regulation at home to free trade abroad. It shows that the ultimate foundation of capital accumulation and economic progress is the existence of a capitalist society and its cardinal values of reason and freedom. Part 3 also explains the determinants of the average rate of profit and interest and the relationship between the rate of profit and interest, on the one side, and capital accumulation and falling prices caused by increased production, on the other side. It shows that capital accumulation and such falling prices do not reduce the rate of profit or interest and thus do not interfere with or retard the process of economic progress in any way.

This part contains refutations of all the leading economic fallacies concerning alleged overproduction, over—

INTRODUCTION 11 saving, and underconsumption. Under this head, it includes a chapter-length refutation of the doctrines of Keynes and critiques of virtually all other fallacies underlying demands for inflation and government spending. The part makes a consistent case for a full-bodied gold standard as the ideal monetary system, which would exist under laissez-faire capitalism and which would operate to prevent inflation, deflation and depression, and mass unemployment. It shows that all of these destructive phenomena are caused by government intervention in the economic system, not by the nature of the economic system itself—that is, not by capitalism. It shows consistently that the establishment of economic freedom, of laissez-faire capitalism, is the solution for all such problems.

Finally, the Epilogue outlines a longterm political and educational strategy for the achievement of a society of laissez-faire capitalism.

---

This book is useable as a textbook in virtually any economics course. Those who must conform to the arbitrary division of economics into microeconomics and macroeconomics will find that Chapters 1–10 can easily serve in the micro portion, while Chapters 11–19 can easily serve in the macro portion. 22 Chapter 20, although best read after all of the other chapters, is suitable for use in either portion.

Use of this book in any economics course will provide the most efficient means both of advancing positive economic truth and of refuting the manifold errors in the prevailing views of economics, including those in the present generation of textbooks

Notes

1. For an excellent account of the doctrines of the Physiocrats, see Adam Smith, The Wealth of Nations (London, 1776), bk. 4, chap. 9; reprint of Cannan ed. (Chicago: University of Chicago Press, 2 vols. in 1, 1976), 2:182–209. From now on, specific page references to the University of Chicago Press reprint will be supplied in brackets.

2. The present author was also one of the later students of von Mises. However, because of the profound influence of the classical economists on my thinking, it would be more appropriate to describe my views as “Austro-classical” rather than as “Austrian.”

3. On the wages-fund doctrine and the consequences of its abandonment, see below pp. 664–666 and 864–867.

4. Smith, Wealth of Nations, bk. 1, chap. 4 [1:32–33].

5. For confirmation of this claim, see below, pp. 475–485. See also the whole of Chapter 14.

6. The contributions of James Mill are among the least recognized in the history of economic thought. Their best statement appears in his little known work Commerce Defended (London, 1808), chaps. 6 and 7, which are respectively titled “Consumption” and “Of the National Debt.” The complete work is reprinted in James Mill Selected Economic Writings, ed. Donald Winch (Chicago: University of Chicago Press, 1966).

7. Cf. below, pp. 414–416, where Böhm-Bawerk is quoted at length on this subject.

8. Strictly speaking, the consumption in question is what I term net consumption. See below, pp. 725–736.

9. See below, pp. 838–856.

10. See Eugen von Böhm-Bawerk, Capital and Interest, 3 vols., trans. George D. Huncke and Hans F. Sennholz (South Holland, Ill.: Libertarian Press, 1959), 2:168–176, 248–256; 3:97–115. See also John Stuart Mill, Principles of Political Economy, Ashley ed. (1909; reprint ed., Fairfield, N. J.: Augustus M. Kelley, 1976), pp. 442–468.

11. For a related description of the ideas of von Mises, see above, pp. xlii–xliii. The ideas of Böhm-Bawerk also play an important role.

12. See Friedrich A. Hayek, The Road to Serfdom (Chicago: University of Chicago Press, 1944), p. 121.

13. Cf. Murray N. Rothbard, For a New Liberty (New York: Macmillan, 1973). In that book, Rothbard wrote: “Empirically, the most warlike, most interventionist, most imperial government throughout the twentieth century has been the United States” (p. 287; italics in original). In sharpest contrast to the United States, which has supposedly been more warlike even than Nazi Germany, Rothbard described the Soviets in the following terms: “Before World War II, so devoted was Stalin to peace that he failed to make adequate provision against the Nazi attack. . . . Not only was there no Russian expansion whatever apart from the exigencies of defeating Germany, but the Soviet Union time and again leaned over backward to avoid any cold or hot war with the West” (p. 294).

14. See Henry Hazlitt, Economics in One Lesson, new ed. (New Rochelle, N. Y.: Arlington House, 1979); idem, The Great Idea (1951; rev. ed. published under the title Time Will Run Back, New Rochelle, N. Y.: Arlington House, 1966).

15. See Henry Hazlitt, “Is Inflation Necessary?” Freeman 2, no. 26 (September 22, 1952), pp. 880–882, and Ludwig von Mises, Human Action, 3d ed. rev. (Chicago: Henry Regnery Co., 1966), pp. 776–777, 792–793. Amazingly, as an eloquent commentary on the state of contemporary economics, while the rational expectations approach has come to be regarded as a major and profound school of economic thought, the overwhelming merit of von Mises and the Austrian school still goes largely unrecognized. Thus, Samuelson and Nordhaus, in their self-proclaimed “authoritative” and “comprehensive” textbook include “Rational Expectations Macroeconomics” in their “Family Tree of Economics” and devote a full appendix to discussing it. Yet they make almost no mention of the Austrian school or von Mises; the Austrian school does not even appear in the index. See Paul Samuelson and William Nordhaus, Economics, 13th ed. (New York: McGraw-Hill, 1989), in particular the inside back cover. The leading members of the Rational Expectations school, incidentally, are Robert Barro, Robert Lucas,

12 CAPITALISM

Thomas Sargent, and Neil Wallace. (I wish to note that my references to Samuelson and Nordhaus throughout this work will be to the 13th edition rather than to the more recent 14th edition, unless otherwise stated. This is because it better represents the errors that two generations of students have had to endure at the hands of Prof. Samuelson, who, until not many years ago, was the sole author.)

16. For an exposition and critique of the doctrines of the Mercantilists, see Adam Smith, Wealth of Nations, bk. 4, chaps. 1–8 [2:3–209]. See also below, pp. 526–536.

17. In private conversation with the present author, Leonard Peikoff once aptly described the position of the Georgists as advocating the government allowing a person to own a piano and do anything he likes with it, except put it down without its permission.

18. For elaboration of these points, see below, the discussions of the relationship between prices and costs on pp. 200–201, 206–209, and 411–417.

19. Cf. von Mises, Human Action, pp. 244–250.

20. For an explanation of these principles, see below, pp. 172–201.

21. George Reisman, The Government Against the Economy (Ottawa, Ill.: Jameson Books, 1979). A few pages of this book, which demonstrate the limitless potential of natural resources, are incorporated in Chapter 3.

22. Logically, Chapter 11 belongs in Part 2, where it is. Nevertheless, from the point of view of the division of economics into “microeconomics” and “macroeconomics,” the chapter is far more essential in a course on the latter than in one on the former.