How Capitalism Failed or Succeeded; M. Skousen

Indeed, according to the new conventional wisdom, the primary purpose of studying economics was to achieve "short-run stabili zation" of the capitalism system. Postwar textbooks abound in the study of cyclical fluctuations, while burying the study of ecoDr. Skousen is an economist at Rollins College, Department of Economics, Winter Park, Florida 32789, and editor of Forecasts & Strategies, one of the largestinvestment newsletters in the country. nomic growth and development in the back pages. The Volatility of Capitalism? If you look at Graph #1 at the top of the next page, you might agree with this focal point: The business cycle appears to be vol atile and the primary problem facing the United States. This graph, published in Mi chael Parkin's popular textbook, shows real GDP fluctuations from 1869 to 1992. Graph #1 suggests that the U.S. economy has run amok, suffering untold boom and bust over the past century and a half. According to the critics, capitalism has failed and needs to be tamed.

Is this an accurate picture of the U.S. economy? We all know that games can be played with charts and graphs. Darrell Huff, in his classic book, How to Lie With Statistics (W. W. Norton, 1993 [1954]), described the distortions that can occur with a "one dimensional" picture. The Long-Term View Favors Economic Growth Now let's look at Graph #2, which tells quite a different story. This graph highlights real GDP, 1869-1992,rather than changes in real GDP. Amazingly, Graph #2 also comes from Parkin's textbook. It uses the same statistics, but paints an entirely different picture. Here the overwhelming conclusion is not that the 508 HAS CAPITALISM FAILED OR SUCCEEDED? 509 Graph #1: Real GOP Fluctuations, 1869-1992 40. :u I 30. j WI 20. .j ~ 10. t:. .j 1-20 • ~ ~ -30. (,!) 1-40. •1869 Year •1889 Greal Depression ~ • •1909 1929 WorldWorll \ •1949 •1969 recession ••1989 The unevenpace of increaseof real GOP is illustratedby tracking its fluctuationmeasuredas the percentagedeviationof real GOP from trend.Rapid expansionof real GOP' which occurredduring both worldwars,puts real GOP abovetrend.Decreasesin real GOP, whichoccurredduringthe 1890srecession,the Great Depression,ind the threemost recentrecessions,puts real GOP belowtrend.The real GOP nuctu alionsdescribethe courseof the businesscycle.

Source: Michael Parkin, Economics, 2nd ed. (Addison-Wesley, 1994), p. 596. U.S. economy is subject to violent fluctua tions, but that it has grown dramatically over the past century or more. In this graph, the periods of inflationary booms and recessions are relatively minor. Even the Great Depression is dwarfed by unrelenting economic progress over the long term. The key point is that Americans have enjoyed a dramatic in crease in their standard of livingover the past century. Capitalism works! Graph #2: Real GOP, 1869-1992 OPEC recession Between1869 and 1992real GOP grewat an annualaveragerate of 3.3 percentButthe growthrate was notthe same in each year. In some periods,such as the years duringWorldWar II, real GOP expandedquickly.In otherperi ods, such as the Great Depressionand, more recentlv, followingthe OPEC oil pricehikes, the Volckerinterestrate increas es, and in 1991,real GOP declined.Therewere several periodsof declinein the nine"

teenthcenturyas well, one of whichis markedin the figure. ••1989•1969•1949•1929 / Greal Depression •1909 Trend' 1890s recession •1889 1991 recession WoridWorll ........ •1869 Year 7000. Source: 1869-1929:ChristinaD. Romer. -The PrewarBusinessCycle Reconsidered:NewEstimates01 GrossNationalProduct 1869-1908:JourllalofPoliticalEcollomy97.1198911-37;and NathanS. Dalkeand RobortJ. Gordon."The Estimationor PrewarGross NationalProduct:Methodologyand New Evidence."JoumalofPoliticalECOIlOmy97.(1989)38-92.lhedata used are an averageor the estimatesgivenin these two sources. 192!1-1958:EcollomicROPOItof"'0Prosidolll.1991. 1959-1992:EcollOmicReportoftll8 Presidenl.1993.Tho datalor 1869 to 1958alo GNP lind those lor 1959 to 1992arc GOP. The dillerencebetweenthese two measuresis smalland is explainedin Chapler23. pp. 619-620. Source: Michael Parkin, Economics, 2nd ed., p. 595.

510 THE FREEMAN • AUGUST 1997 The Economics Profession Alters Its Viewpoint For decades, the American economics pro fession worried about recession, unemploy ment, and income inequality. Economists endorsed "compensatory" fiscal policy (defi cit spending and government expansion) as a way to tame the business cycle. Meanwhile, economic growth slowed relative to other nations. Now the pendulum has swung back. More and more economists are recognizing the paramount importance of economic growth and rising standards of living rather than business fluctuations and inequality of income distribution. Greg Mankiw, a new Keynesian at Harvard, is a case in point. He places the classical model of economic growth upfront in his Macroeconomics textbook, ahead of Keynesian businesscycle theory. He high lights the success stories of countries that have grown dramatically since the end of World War II. It's another sign that free-market economics has triumphed in the academic worl~ D 1. Gregory Mankiw, Macroeconomics, 2nd ed. (Worth Pub lishers, 1994), preface.

2. Paul A. Samuelson, Economics, 8th ed. (McGraw-Hill, 1970), p. 337. Back in Print! GOVERNMENT-AN IDEAL CONCEPT by Leonard E. Read New Introduction by Hans F. Sennholz To Leonard Read, government was neither a manager of economic activity nor an almoner of gifts to the people, but a necessary instrument of social order. Its only basis is justice, not pity. Government is represented by agents who are expected to enforce and defend man's natural rights and protect him against wrongs of his fellowmen. But these agents should not do what the individual must not do. The agents of government should be men and women of integrity. Unfortunately, Read observed, political office tends to rob a person of modesty, humility, and integrity, which make it advisable never to accept a political office. Leonard Read's eloquent discussion of the nature of government and a new beginning in freedom will endure as a principled work of great value. It is a guidepost for readers seriously interested in the limits of public regimen and the cause of liberty.

152 pages, indexed, paperback $12.95 A few years before Leonard E. Read authored this book, he created The Foundation for Economic Education. He was convinced that every generation must defend its freedom anew against the intellectual forces that seek through ever new devices to enslave it. Therefore, he dedicated his great strength and ability to the study and dissemination of freedom ideas. He managed the Foundation from its beginnings in 1946until his death in 1983.