December

751 Ludwig van Beethoven's Joyous Affirmation of Human Freedom by Jim Powell Commemorating the 225th anniversary of the birth of one of music's titans. 758 Experiencing Socialist Britain by Alastair Segerdal Eloquent insights from a former miner and dentist. 763 Economics of Russian Crime by Yuri Maltsev The rise in economic crime-and ways to combat it. 771 No Thanks, Uncle Sam by Elizabeth Larson Rejecting government perquisites in favor of economic opportunity. 775 Liberty and Immigration by Thomas E. Woods, Jr. Should we uncritically accept the "open borders" position? 777 Coming to America: The Benefits of Open Immigration by Thomas E. Lehman Countering arguments against a liberal immigration policy. 781 Thinking Carefully About Macroeconomics by Steven Horwitz Why Austrian insights are essential to a defense of economic freedom. 785 Why Economists Need to Speak the Language of the Marketplace by James C. W Ahiakpor Coming to terms with Keynes.

COLUMNS Center NOTES from FEE-Love and Envy by Hans F: Sennholz 756 IDEAS and CONSEQUENCES-The Quackery of Equality by Lawrence W Reed 769 POTOMAC PRINCIPLES-In Praise of Train Wrecks by Doug Bandow 788 ECONOMICS on TRIAL-The Stagnation Thesis Is Back! by Mark Skousen DEPARTMENTS 746 Perspective-Peter J. Boettke, Guest Editor 791 Book Reviews •The Foundations ofAmerican Constitutional Government compiled by Robert D. Gorgoglione, reviewed by Daniel F. Walker; Leviathan at War edited by Edmund A. Opitz, reviewed by Robert Higgs; Alien Nation by Peter Brimelow, reviewed by Gregory P. Pavlik; The Casefor Free Trade and Open Immigration edited by Richard M. Ebeling and Jacob Hornberger, reviewed by Robert Batemarco; Simple Rules for a Complex World by Richard A. Epstein, reviewed by William H. Peterson; Liberty and the Great Libertarians edited and compiled by Charles T. Sprading, reviewed by Daniel Klein; Public Policy and the Quality ofLife: Market Incentives versus Government Planning by Randall G. Holcombe, reviewed by Jane M. Orient; A Trade Policy for Free Societies: The Case Against Protectionism by Robert W McGee, reviewed by Joseph T. Salerno; Discovering a Good Society Through Evolution and Design by Martti Vihanto, reviewed by Kyle S. Swan.

THEFREEMAN IDEASON LIBERTY Published by The Foundation for Economic Education Irvington-on-Hudson, NY 10533 Phone (914) 591-7230 FAX (914) 591-8910 E-mail: freeman@westnet.com President: Hans F. Sennholz Managing Editor: Beth A. Hoffman Guest Editor: Peter J. Boettke Editor Emeritus Paul L. Poirot Lewisburg, Pennsylvania Book Review Editor Robert Batemarco Marymount College, Tarrytown, New York Assistant Editor Gregory P. Pavlik Columnists Doug Bandow Cato Institute, Washington, D.C. Robert James Bidinotto Lawrence W. Reed Mackinac Center for Public Policy Midland, Michigan Mark Skousen Rollins College, Winter Park, Florida Contributing Editors Charles W. Baird California State University, Hayward Doug Bandow Cato Institute, Washington, D.C. E. Calvin Beisner Covenant College, Chattanooga, Tennessee Peter J. Boettke New York University Donald J. Boudreaux Clemson University Clarence B. Carson American Textbook Committee Wadley, Alabama Thomas J. DiLorenzo Loyola College, Baltimore, Maryland Joseph S. Fulda New York, New York Roger W. Garrison Auburn University Bettina Bien Greaves Resident Scholar, FEE Robert Higgs The Independent Institute, Oakland, California John Hospers University of Southern California Tibor R. Machan Auburn University Ronald Nash Reformed Theological Seminary Maitland, Florida Edmund A. Opitz Chatham, Massachusetts James L. Payne Sandpoint, Idaho William H. Peterson Adjunct Scholar, Heritage Foundation, Washington, D.C.

Jane S. Shaw PERC, Bozeman, Montana Richard H. Timberlake University of Georgia Lawrence H. White University of Georgia The Freeman is the monthly publication of The Foundation for Economic Education, Inc., Irvington-on-Hudson, NY 10533. FEE, established in 1946 by Leonard E. Read, is a non-political, educa tional champion of private property, the free market, and limited government. FEE is classified as a 26 USC 501(c)(3) tax-exempt organization. Copyright © 1995 by The Foundation for Economic Education. Permission is granted to reprint any article in this issue, except' 'Ludwig van Beethoven's Joyous Affirmation of Human Freedom," provided appropriate credit is given and two copies of the reprinted material are sent to The Foundation. The costs of Foundation projects and services are met through donations, which are invited in any amount. Donors of $30.00or more receive a subscription to TheFreeman. Student subscriptions are $10.00 for the nine-month academic year; $5.00 per semester. Additional copies of singleissues of The Freeman are $3.00. For foreign delivery, a donation of $45.00a year is suggested to cover mailing costs.

Bound volumes of The Freeman are available from The Foundation for calendat years 1972 to date. The Freeman is available in microform from University Microfilms, 300 N. Zeeb Rd., Ann Arbor, MI 48106. PERSPECTIVE Whose Economics, Which Economic Liberalism? Robert Lucas, a professor of economics at the University of Chicago, was awarded the 1995 Nobel Prize in Economic Science in October. The Swedish Royal Academy of Science de clared that Lucas was "the economist who has had the greatest influence on macroeconomic research since 1970." To economists of my generation, Lucas' approach to economic sci ence has been treated as the methodological gospel. But as pundits quickly pointed out, Lucas' theories had a tremendous public-policy influence by bursting the Keynesian hubris of the profession that was dominant in the 1950sand 1960s. Lucas' theoretical innovation was to insist that the behavioral assumptions of so-called macro economic theory had to be consistent with those employed in microeconomic theory. Economic actors cannot be assumed to be persistently fooled by policymakers. Rational actors will come to know the model of the economy that policymakers are employing in designing policy.

At first blush, the policy implication of Lucas' "rational expectations hypothesis" was that tra ditional Keynesian policies of fine-tuning were flawed because they failed to take into account how economic actors would anticipate govern ment policy. Ifunemployment, for example, rises by a couple of percentage points, then traditional Keynesian theory suggests that the Federal Re serve should ease monetary policy to combat this rise. But if union leaders watch Fed policy, they will notice that loosening monetary policy will lead to inflation and thus will adjust future wage demands upwards. In doing so, they will offset completely the intended effect of the fine tuning policy. Unemployment will not be re duced, but inflation will persist. Only unantici pated policies willhave an effect on the economy; anticipated policies will be fully incorporated in the decisionmaking of economic actors. Sta ble and predictable rules in policy will outper form the discretionary fine-tuning of Keynesian economic policy in terms of combating inflation and unemployment, and promoting economic growth.

Subsequent developments in economic theory have questioned this first-blush policy impli cation, but the technique of "rational expec tations" became part of the staple tool-kit of modern economists. On a theoretical level, 746 Lucas led a revolution intended to eliminate the unnecessary split between microeconomic and macroeconomic theory, and the loose theorizing that resulted from that split. On a policy level, Lucas dealt the old Keynesian system its final blow. Mises and Hayek had challenged the theory at its core (and were largely ignored). Milton Friedman had shown its internal theoret ical and empirical weaknesses, James Buchanan had demonstrated the shortcomings of its polit ical economy, but Lucas destroyed the logic of the entire enterprise. In this sense, Lucas harked back to the pre-Keynesian theories of monetary economics and appeared to be offering a "neo Austrian" theory. In fact, Lucas acknowledged this influence in the early 1970s. With the failure of the Keynesian system, it was time to reassess the writings of scholars such as Mises and Hayek, especially Hayek's work on the business cycle.

Lucas' translation of Hayek's project into modern technical economics, however, was chal lenged quite quickly by such contemporary Aus trian economists as Gerald O'Driscoll, Roger Garrison, and William Butos. The model that Lucas had built, which certainly possessed a certain laissez-faire conclusion to it, was not consistent with many of the core claims of Austrian economics from Menger to Mises. Aus trians no doubt rejected the split between micro economics and macroeconomics, and they pos tulated that economic actors learn and adjust their behavior accordingly through time. But Lucas treated choice as a mechanical procedure; the choice environment was not one of uncer tainty and ignorance, but rather one of risk and rational search. Moreover, the theoretical and policy implications of the logic of this situation were unsettling to economists of Austrian sensi bilities-e.g., money was assumed to be neutral and simply a veil, not the essential link in transactions.

No doubt the logic of Lucas' argument was impeccable, and no doubt the implication of his economic logic was largely a non-interventionist position, so why aren't contemporary Austrian economists rejoicing in the honor bestowed upon Lucas by the Nobel committee? Austrian economics is not just free-market economics-it is something much more than that. Not all arguments that favor the free market over government intervention are equal. As economic PERSPECTIVE scientists all we are entitled to ask is "How does theoretical innovation improve our understand ing of human action and social cooperation?" On the other hand, as intellectuals and enlightened citizens it is incumbent on us to ask "Whose economics, which economic liberalism?" If we allow modeling techniques to crowd out questions about human behavior which cannot fit into the model, yet are essential for under standing how the market functions to coordinate our decisions, then the simplified model will distort our view of the market. If this "weak"

view of the market economy is then employed as a background to a defense of economic liberal ism, then the case for economic liberalism will also be weak and vulnerable to challenge. Robert Lucas is a brilliant man. But his theory of human behavior fails to account for the diver sity ofindividual perception, his theory of market equilibrium mischaracterizes the economic or der, and the policy implications that flowfrom his theories render the laissez-faire position vulner able on several fronts (something that has already been exploited by New Keynesian economics of the type championed by Joseph Stiglitz and Gregory Mankiw). Modern economic research, as influenced by Lucas, has produced ever more refined tech niques and models, but the cost of this increased specialization has been a loss of relevance for the broader human conversation. Economic science has become increasingly narrow and inaccessible to the layman. But as Ludwig von Mises argued: It is a fateful error on the part of our most valuable contemporaries to believe that eco nomics can be left to specialists in the same way in which various fields of technology can be safely left to those who have chosen to make anyone of them their vocation. The issues of society's economic organization are every citizen's business. To master them to the best of one's ability is the duty of everyone.

Thus, we can agree that Lucas has greatly influenced modern economics, yet-despite sub stantial agreement in the policy arena-still ex press concern that economics has been pushed to become increasingly precise about less and less, thus losing its relevance for the everyday life of business and politics. -PETER J. BOETTKE Guest Editor 747 THEFREEMAN IDEASON LIBERTY The Arts in a Free Market Economy by Tyler Cowen C apitalism has proven to be the most favorable system for the arts, letters, and music. Most renowned Western cre ators, from Michelangelo to Mozart to Monet, succeeded in the marketplace. Shakespeare wrote for profit and marketed his plays to a wide public audience. Marcel Proust did not write bestsellers but none theless lived off the capitalist wealth of his family to produce his innovative Remem brance of Things Past. The essence of capitalism-bringing producer and con sumer together-is a prescription for pro ducing and distributing great art.