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SAM PELTZMAN, “ Economics of the Free Society ” - Ralph Raico, New Individualist Review [1961]

Edition used:

New Individualist Review, editor-in-chief Ralph Raico, introduction by Milton Friedman (Indianapolis: Liberty Fund, 1981).

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Liberty Fund, Inc. is a private, educational foundation established to encourage the study of the ideal of a society of free and responsible individuals.


“Economics of the Free Society”1

SAM PELTZMAN*

AS ONE OF the chief architects of West Germany’s post-war “economic miracle,” Wilhelm Roepke has exerted a powerful influence on contemporary practical affairs. However, it is in his role as an academic economist that Professor Roepke comes to us in this book. Economics of the Free Society is the English translation of what has become a popular textbook on the Continent. In a very few pages, it is able to cover just about every aspect of the workings of the free market system, always with a view to demonstrating the superiority of this system over its collectivist rivals. The book is aimed at the reader with no formal training in economics—the “intelligent layman”—and many in this audience will find it a good, easily-read introduction to the problems a modern economy must solve and the means by which a system of free markets solves them. Beginner or not, however, the reader will be satisfied only in inverse proportion to the degree of logical rigor he demands.

Roepke sets forth his arguments almost exclusively by analogy and example. While this can be helpful and certainly contributes to the readability of the book, it is no substitute for lucid logical argument. At those points in the exposition where some central theoretical concept is being elucidated, a geometric presentation could usefully be inserted into the text. This would do much more for the book than simply clothe it in the trappings of elegance. The Cartesian plane remains the basic tool of the economist, and, even for the beginner, it is an invaluable device for tying together diverse concepts into a logical whole. By his almost exclusive reliance on analogy and anecdote, Roepke seriously dilutes the content of economics, sometimes to the point of permitting himself to make glib assertions he might not care to defend under a more rigorous analysis.2 While it might be claimed that glibness and superficial analysis are tolerable in a book for beginners, it is precisely this audience which can most benefit from a good grounding in the logical requirements of economic analysis. To the extent that a knowledge of the methods of economic analysis equips one to refute the numerous collectivist fallacies, Roepke is doing a disservice to the cause he champions.

The cause he is championing, it must be noted, is not the laissez-faire capitalism of the last century (a period Roepke identifies as the era of “paleo-liberalism”). Roepke recognizes the inherent social efficiency of a competitive market system, and for the attainment of such a system Roepke is willing to use the power of the state to destroy or regulate private monopoly. Though he is unspecific as to methods, Roepke also advocates use of state power in some form to gain a more equitable distribution of income (p. 197 ff.). Yet, in this respect, Roepke differs hardly at all from certain other supporters of the free market system, e.g., Henry Simons. It is when he charges that the logic of capitalist development, entailing as it does a rapid extension of the specialization of economic functions, has contributed to the “inhumane,” depersonalized condition of modern industrial society, that Roepke differs from most of his intellectual bed-fellows. This is a charge, of course, often made by the collectivist critics of capitalism, particularly those of the fascist stripe; it is one seldom made by a defender of capitalism like Roepke. At the same time, however, Roepke takes great pains to point out the futility of hoping for, much less seriously advocating, a return to some pre-Raphaelite utopia. The rapid extension of specialization has been the motive force behind a great increase in the productivity of modern industry, but this very development has made possible an equally great increase in population, which population is consequently dependent for its very existence on the productivity of the specialized industrial system. Thus, every contemporary social system, collectivist or otherwise, is constrained to preserve the present degree of specialization, for “to turn back the clock would be tantamount to ordering the destruction of millions of lives.” While one may agree or disagree with Roepke’s pessimistic view of the social effects of specialization (and I do think he tends to greatly underemphasize some of the contributions to a “good society”—the unprecedented extension of general education to all strata of society has been made possible only because the specialized economy has been productive enough to release the necessary human and material resources), his analysis should serve as a strong antidote to policy recommendations based on “the fond reveries of economic romanticists and autarkists.”

HELPFUL AS ROEPKE’S analysis of particular economic and social problems may be, one can hardly fail to be disappointed by the inattention to rigorous analysis which pervades his book. Nowhere is this more evident than in his section on “The Impact of Keynesianism” (p. 221 ff.). Roepke totally eschews a frontal attack on the logic or the empirical relevance of Keynes’ analysis. In fact, he concedes that “the services which Keynes rendered to the advancement of theory . . . . are considerable,” and further “we will readily concede that the use of Keynesianism as a logical apparatus . . . in the struggle against inflation is (and was) thoroughly legitimate . . . .” If the reader wonders why Roepke is ready to concede so much to the Keynesian analytic system, he need only turn back a few pages to Roepke’s presentation of his own theory of business cycles. It bears a close family re-resemblance to the Keynesian theory. Roepke: “Expansion and contraction of investments, which go hand in hand with expansion and contraction of the supply of credit, constitute the real core of the cyclical movement” (p. 212). Keynes: “The Trade Cycle is best regarded, I think, as being occasioned by a cyclical change in the marginal efficiency of capital [the demand curve for investment] . . . .”3 Given such close agreement between Roepke and Keynes on the analytical level, there would seem to be little room for Roepke to take issue with Keynes as an economist. What Roepke proceeds to do, then, is to attack Keynes on several irrelevant fronts: in contrast to the “deistic moralist,” Adam Smith, who left us, “in addition to his magnum opus on the Wealth of Nations (1776) a book on the Theory of Moral Sentiments (1759),” Keynes was a (presumably amoral) “exponent of positivistic scientism,” who can claim only “a monograph on the theory of probability” in addition to his ecomonic works. With absolutely no analysis of the substantive content of Keynes’ works, Roepke permits himself to label them “the end product of a process of disintegration in which the crisis of an exclusively rationalistic society finds its ultimate expression.” Not only is Keynes’ economics to be discredited because he failed to write books on morality, but he must be saddled with the immorality of his followers as well:

. . . the real tragedy of the Keynesian legacy is that what Keynes regarded as intellectual “working capital,” i.e., ideas easily shifted from the service of one ideal to that of another, became for his less flexible disciples intellectual “fixed capital,” the profits of which were protected by every means available, including that of monopolistic exclusion. Keynes cannot be spared the reproach of having failed to take this fateful result of his writings and teachings into account.

(p. 225, italics supplied.)

We are thus asked to blame the doctor for the death of his patient when the latter takes a prescription for moderate exercise as license for an attempt at the four-minute mile. Such procedure, I would submit, is simply inadmissable in any rational evaluation of economic theories. If Roepke were concerned to give us a critical biography of Keynes, he should have made his intention clear. To pass off a few derogatory remarks on Keynes and the Keynesians as a sufficient critique of the substance of Keynes’ economics is, however, a form of intellectual laxity which contributes little either to biography or economics. The fact is that Adam Smith’s economics qua economics stands solely on its ability to give us a useful, i.e., empirically relevant, framework within which to analyze economic problems, not on the fact that Smith happened to be a deist or that his followers were prudent men. It is on this same basis that Keynes’ economics should and will ultimately be judged. Personal and social values may well find themselves confirmed in economic writing, and conversely we may reject recommendations which conflict with our values though they are founded on good economic reasoning. It is important, however, especially in a book about economics, to make a distinction between economics and ethics. Roepke, especially in his discussion of Keynes, has failed to do this, and it detracts greatly from his book.

AT A TIME when various collectivist programs gain ever greater acceptance among the most influential groups in our society, there can be no doubt of the need for a good introductory economics textbook which explicitly emphasizes the method by which the free market solves economic problems. Economics of the Free Society is an attempt to fill this need, but it does so only partially. There are areas in which its analysis can be quite effective, but these are too lightly interspersed in a book which avoids logical analysis at almost every point. Since most collectivist programs suffer precisely from a deficiency in their underlying logic, it is to be regretted that Roepke chose not to exploit this weakness.

[1 ] A review of Economics of the Free Society by Wilhelm Roepke (Chicago: Regnery, 1963), 273 pp.

[* ] Sam Peltzman is Business Manager and Associate Editor of New Individualist Review.

[2 ] An example of this may be found on page 149 where Roepke claims: “It is quite possible . . . that a fall in agricultural prices may provoke an increase rather than a reduction in cultivation as a consequence of each farmer seeking to compensate for price declines by raising his output.” A farmer can compensate for a price decline by an increase in output only if the costs of the additional output are at least covered by the receipts from the additional output at the new, lower price. However, if such a situation in fact obtains, the farmer would surely have been able to cover the costs of the added output by the receipts from its sale at the original, higher price. He would thus have expanded his output previous to any fall in price. Unless Roepke is willing to claim that farmers are less interested than others in making money, the quoted assertion is sheer nonsense.

[3 ] Keynes, John Maynard, The General Theory of Employment, Interest and Money (New York: Harcourt, Brace, 1936), p. 313.