BOOK REVIEW
by Frank Forman
Published in Full Context in 1998

George Reisman, Capitalism: A Treatise on Economics
(Ottawa, IL: Jameson Books, 1996, 1045 pp., $95).
Available from the publisher, Box 738, Ottawa, IL
61350, at a current discount of $69.95, plus $5
domestic postage or $10 international postage. Fax:
(815) 434-7907.

"Hire your pastor to read the first volume for you. But
don't miss the second." Thus ends H.L. Mencken's
celebrated review of Theodore Dreiser's An American
Tragedy. The words apply to George Reisman's defence
of laissez-faire capitalism, Capitalism: A Treatise on
Economics, except that far more than the equivalent of
one out of two volumes is superfluous to the book's real
contribution, a new vision of the economy as a whole,
with the producer put back into the central place, which
led him to develop a new system of national income
accounting. It is the stuff of a revolution in economics
and a Nobel Prize for whoever carries it off. I recommend
the huge double-columned book, however, only to
someone who already knows a good deal of economics
and who is ambitious about carrying forward Reisman's
ideas.

Capitalism and Objectivism

Capitalism is being touted as an integration of economics
and Ayn Rand's Objectivism. Had the book done this, it
would have been an even greater achievement than the
revolution the author has begun in putting the producer
into central place in economics (about which more anon).
To be sure, her ideas are discussed repeatedly in the
book, but it does not deal with her most tantalizing idea
having to do with economics, namely that of
"philosophically objective value," as opposed to the
market-determined "socially objective value, i.e., the sum
of the individual judgments of all the men involved in
trade at a given time."^ She notes that if a stenographer
"spends all her money on cosmetics and has none left to
pay for the use of a microscope (for a visit to the doctor)
when she needs it, she learns a better method of
budgeting her income; the free market serves as her
teacher.... The only thing that a capitalist system requires
of her is the thing that nature requires: rationality, i.e.,
that she live and act to the best of her own judgment."
Ayn Rand speaks of the free market, "which teaches
every participant to look for the objective best within the
category of his own competence, and penalizes those
who act on irrational considerations."
   ^["What Is the Capitalism?", reprinted in Capitalism:
The Unknown Ideal]

Reisman does speak of "imaginary goods," such as
rabbit's feet and tarot cards, but all he says is that "the
economic principles that apply to such goods, such as
the laws of price determination, are the same as that
apply to genuine goods" (p. 41). So if it is true that
rabbit's feet do not lead to satisfaction of objective (in
some sense) desires, then the demand for such feet will
fall and so, very likely, their price.

There has always been a tension in economics over the
range of applicability of its supposed principles. On the
one hand, economics presupposes conditions of peace
and the absence of force and fraud. On the other hand,
economists, including Reisman, regularly analyze the
economic consequences of government intervention
using the various principles that presuppose their
absence. A second reading of Ludwig von Mises' Human
Action left me overwhelmed with the sleights of hand he
performed in this regard: for example, businessmen,
through a mysterious process called "understanding"
(Verstehen), can readily calculate the effects of
technology-induced changes in the money supply but are
totally miffed by government-induced inflation! Reisman,
much to his credit, does not engage in this bit of
hermeneutic, phenomenological metaphysics of
Verstehen; still, an axiomatic treatment could bring out
the precise range of economic principles.

Now if this ambiguity of the range of economics is
problematic, much more so will be the distinguishing of
Ayn Rand's "philosophically objective value" from her
market-determined "socially objective value." The
philosophically objective value of an action is not
something that can be directly read off; rather, its
discovery requires rational thought and investigation, just
as in the discovery of an improved production process.
Both require effort, sometimes considerable. Whether this
effort constitutes a kind of "cost," I am not prepared to
say and am not sure how Reisman would treat this
matter either, but clearly an integration of economics and
Objectivism would require consideration of the notion of
objectivity in consumption as well as production. By
contrast, neo-classical economics by and large
presupposes consumer rationality and has no concern at
all with rationality of ends, except to dismiss it as forever
beyond its purview.

There is a large literature in economics about the costs of
technological innovation, mostly consisting of trite
statements about optimizing this or that; I suppose one
could generate any number of trite, mathematics-filled
papers on rationality in consumption. (It's hard, at times,
to blame Reisman and other Austrians for their disdain for
mathematics, but they vastly overdo it.) The larger
problem of just what rational desires are would remain
after all these papers were generated, and I am afraid
that Objectivists have not gone beyond stating that all
desires, if they are rational, need to conform to human
nature and need to promote virtue and character
development. (This second need has been articulated
only poorly so far.) It may be high foolishness to suppose
that Objectivism ought to be more than a well-organized
body of abstract principles and produce algorithms to
enable one to make specific consumption strategies or
career choices. Still, I would not arbitrarily demarcate
philosophy from the rest of human inquiry as an excuse
for intellectual laziness.

Let me urge any scholar willing to tackle the problem of
objective ends to read David Schmidtz's Rational Choice
and Moral Agency (Princeton University Press, 1995).
Schmidtz argues that we choose not just means to ends
but what he calls "maieutic" ends, which are ends to find
final ends (ends in themselves) to live for as well. Thus, I
want a career and a wife to devote myself to. The
important thing is not to dally too long in picking the best
career and the best wife but to get on with it and let
these ends grow from being means to the satisfaction of
my desires to being ends in themselves around which my
desires are organized. This echoes Francisco d'Anconia's
statement that the worst man was one without a
purpose.

These larger questions about final ends are general ones
for Objectivists, whereas Reisman says, "I define
economics as the science that studies the production of
wealth under a system of division of labor" (p. 15). But
the issues of career choice and rationality of consumption
ends are relevant to economics proper. Will a rational
consumer merely purchase what strikes his fancy, or will
his purchases partake of purposefulness every bit as
much as his career? Unfortunately, I have never seen
Ayn Rand's article on why she collected stamps and
therefore in what sense she found her collecting to be
rationally purposeful. I urge that the article be made
widely available.

David Hume, characterized by Miss Rand as "the
Bertrand Russell of his day" (in contrast to the
heavyweight Immanuel Kant), was nevertheless wise
when he spoke of man's need for work, rest, and
relaxation. Recall that the residents of Galt's Gulch did a
certain amount of high-minded relaxing (going to concerts
and ballets, listening to lectures), but it did not take the
form of goofing off. I suggest that the "science of the
production of wealth" will discover that purposeful
relaxation redounds to this production of wealth, while
goofing off to some extent may reduce it.

Reisman's Signal Achievement

Enough complaints about what the book did not do and
on to its achievements. What is revolutionary in his
actual accomplishment is his way of keeping his focus on
all the activity of the economy rather than just upon the
consumer goods that come out at the end of the process.
Sales between businesses for raw and intermediate
products are several times the size of the end products,
and consideration of the whole keeps the producer in
central place rather than at the margins, whereas too
many economists take production as a given, to be
distributed by "society" (political pressure groups or "the
aristocracy of pull").

Reisman develops a new method of national income
accounting on, as he calls it, "an Aristotelian base" as
opposed to the "Platonic-Heraclitean" view implicitly held
by other economists. Paraphrasing one of Ayn Rand's
favorite sayings (which goes back only to the Middle
Ages, not to Aristotle, by the way), he tells us that "the
demand for A is the demand for A," whence it is
improper to lump flour, wheat, and labor services into the
final product (bread) and count the last only when
measuring the Gross National Product. Instead, he adds
sales of these intermediate and final products up, adds in
wages, and calls the sum Gross National Revenue. He
takes the reader through a great many exercises to show
how his new accounting methods work. His accounts
somewhat resemble the input-output tables of Wassily
Leontief (Nobel Prize, 1973) and the earlier Tableau
�conomique (1st ed., 1758) of the French Physiocrat
Fran‡ois Quesnay, but Reisman shares not at all their itch
to engage in social planning. Reisman is, of course, a
laissez-faire capitalist.

The upshot of his analysis is several remarkable and
counterintuitive conclusions (though not as
counterintuitive as those of Keynes' "multiplier"!). Three
of the most important are that all this spending in the
Gross National Revenue accounts depends on how much
money there is, not upon how productive the economic
system is. And profits, as well as interest rates, are
determined, not by productivity, but by the proportion of
investment to consumption, which is ultimately tied to
the (time) preference for present goods to future goods.
Time horizons broaden as men are more rational and
property is secure. In such a case, the rate of profit and
interest is low, under three percent per year during large
stretches of the nineteenth century. Third, he puts to rest
the Marxist notion that profits necessarily decline over
time. This last is so at variance with the facts that its
continued propagation is a real puzzle, but it has been
supported by (I learned from Reisman) a very large
number of bad but influential arguments.

Reisman's Other Achievements

Much of the book--too much--is given over to refuting
bad arguments rather than constructing something
positive. But the refutation of Marx's still highly-
influential theory of exploitation by capitalists is original.
To show this, Reisman goes back to fundamental
concepts, something that Ayn Rand endlessly
encouraged: profits are just revenues minus the costs^ of
the things produced, and wages are monies paid in
exchange for the performance of labor not for the
products of labor. A businessman is, therefore, not a
wage earner, even if some economists "impute" a wage
to him that he supposedly pays himself. This means that
farmers, artisans, and everyone who did productive work
were all businessmen and earned profits (selling their
products for more than they paid for the raw materials),
until the first capitalist employed a laborer for hire.
(Strikingly and long before Reisman, the great German
sociologist, Max Weber, demarcated capitalism by the
free mobility of labor--that is, by how the capital was
used--not by trade or the free mobility of money itself,
both of which are quite old.) The upshot is that there is
no "exploitation" here but instead the benevolent (one of
Reisman's favorite words and more apt than "beneficial")
offering of opportunities to sell one's labor rather than its
products.
   ^[Costs are just outlays here, not so-called opportunity
costs, a notion Reisman makes mince meat of. This is
another side accomplishment of his book.]

There are other refutations aplenty, from Keynesianism
(focuses almost entirely on the consumer), alleged free-
market monopoly (even so, buyers would shift to long-
term contracts), wage and price controls (not even
politicians believe in this anymore), the oil "crisis" (also a
dead issue), and environmentalism (at least the zanier
aspects), to various ideas held by earlier economists, esp.
those of Smith, Ricardo, and Mill, from which Reisman
extracts the best and makes it his own.

Indeed, some of his criticisms of other economists, whole
schools of them even, are so strong that I am not sure
what is left standing. Neo-classical economics (what I
had in graduate school) comes in for especial criticism,
but I did not learn from Capitalism whether there is any
merit to those handy supply-and-demand diagrams and
less-handy indifference curves, and, if so, how they can
be deployed legitimately. Just what are the fundamental
concepts and assumptions of neo-classical economics
anyhow? I've seen certain mathematical treatments, but
these are never connected to the world via semantic
assumptions (correspondence rules) in any rigorous
fashion, as Mario Bunge insists in his monumental
Treatise on Basic Philosophy that they should be.

Some Criticisms

I can get a little suspicious about some of Reisman's own
conclusions, too, for his own lack of rigor. The numerical
examples he takes the readers through may work only
because he has built in assumptions that make them
work. (Hint to future scholars: back-calculate the
underlying production functions.) Economics, after all, is
an empirical science, and any science must connect up to
the world at multiple places and not just to contrived
examples and to the broad historical generalizations
Reisman offers. A genuine science must also lay out its
assumptions in the best possible fashion using the
axiomatic method, and a genuine scientist must keep up
to date with the literature.

As an example, I am particularly suspicious of one of his
central conclusions, namely that profits depend entirely
upon time preference. This is a standard theme in
Austrian economics, but I am not convinced that the
degree of risk aversion is also immaterial. If true, its
demonstration cries out here more than usual for the full
use of the axiomatic method, backed up with empirical
tests. (See, esp., Mario Bunge, "The Axiomatic Format"
and "Examples and Advantages of Axiomatics," chapters
7 and 8 in Mario Bunge, Philosophy of Physics
(Dordrecht, Holland: D. Reidel, 1973). These chapters
deal with science generally, not just physics.)

Furthermore, the economic realm is continuous, while our
concepts are discrete. So it is not good enough to just
decree what gets counted in the money supply and what
is merely "near money," as Reisman does on page 540.
But on pages 995-6, he recognizes that different
definitions of money can differ in explanatory power. Yet
he rather often speaks disparagingly of "so-called
empirical research" that might test for just this
explanatory power and seems wholly unaware that there
are several formulae for constructing weighted averages,
the merits of which make up a large sub-literature in
economics journals.

Ayn Rand's notion of a true definition (foreshadowed by
the great Charles Peirce) as capturing those
characteristics of the thing defined that maximize
(scientific) explanatory power is well-recognized by
Reisman. But just to proffer definitions is not enough:
one must demonstrate that the purported definition
indeed has this property of maximizing explanatory
power. As it happens, concept refinement is every bit as
important to science as the usual undertakings of
induction and deduction. Forming concepts takes hard
work and whenever a purported definition departs from
the true one even slightly, our sciences stray farther and
farther away from reality at a geometric rate as we
merrily proceed link by link down long deductive chains.

Who Should Read the Book?

Again, a reviewer should not complain too much about a
book's omissions. (I peppered my copy of the book with
enough critical remarks to give anyone seeing them a
severe to fatal sneezing fit.) In the end, it's the
achievements that count. The refutations are generally
very fine, but far more important is the book's
tremendous potential, a Nobel Prize even, for a scholar
who wants to develop the positive ideas on revamping
the national income accounts and, effectively, redoing
macro-economics from the ground up. As for integrating
economics and Objectivism, it's Objectivism that needs
to be better developed, especially in the realm of
psychology.

I recommend the book urgently to any Objectivist
pursuing a career as an academic economist or
considering it and who is willing to sweat through the
book (not just read it as I did), willing to dig out the
essential arguments and put them on a firm mathematical
and axiomatic basis, and above all willing to argue,
argue, and argue with his peers in the economics
profession. He'll have to keep up to date and fill in on all
the developments in the field since Reisman completed
his dissertation in 1963, developments in the economic
analysis of politics (Public Choice theory), the economic
analysis of law, and new learning about how
businessmen counteract the effects of regulation
(Rational Expectations).^ Above all, he cannot be like
Reisman himself, who (not untypically of certain
Objectivists) would say that Joan Robinson and Michael
Kalecki "are advocates of socialism, while I, of course,
am an advocate of laissez-faire capitalism. Because of
this I could never conceive of cooperating with them in
any manner, and thus I never attempted to contact Mrs.
Robinson" (p. 803).
   ^[Regards Rational Expectations, see J.W. Henry
Watson and Ida Walters, "The New Economics and the
Death of Central Banking," Liberty 10.6 (1997 July): 19-
26, for a fine summary.]

For any other reader, I cannot so strongly recommend the
book. This is not for what it does accomplish, nor for
what it refutes, nor for the picture it gives of how the
economy works, nor for the wit that pops up frequently,
but because it is too long and reading it comes at the
"cost" of not reading a dozen shorter books. When
Mencken called Dreiser's novel "this present shapeless
and forbidding monster--a heaping carload of raw
materials for a novel, with rubbish of all sorts intermixed-
-a vast, sloppy, chaotic thing of 385,000 words--at least
250,000 of them unnecessary," he could have been
thinking, with some exaggeration, of George Reisman's
Capitalism. A very great deal of it is written at the level
of high school students, yet other parts presuppose an
advanced knowledge of the history of economics thought
and the technicalities of both micro- and macroeconomics
as taught in graduate schools. Indeed, it is hard to
discern the target audience for the book.

It would be better for most prospective readers to read a
dozen other books on economics and wait for a
condensed version of this one. I am not the best to
recommend current books to learn economics, since I
have actually read very few of those now in print and
sold, say, by Laissez Faire Books. Go through a text in
price theory and actually do the homework. Beyond that,
aim for as broad an understanding of the economist's
way of thinking as you can. Economics is not all that
intuitive, since our hunting past seems to have instilled in
us the general perspective of command economies--not
so far from the truth when getting on with the work by
following orders was not much better or worse than
innovating from a very small knowledge base. (I hasten
to add that command economies became obsolete, surely
by the time of agriculture, if not already by the time that
hunting bands coalesced into tribes.) Thinking like an
economist, in other words, requires disciplined study.

The first book I ever read on economics, Henry Hazlitt's
Economics in One Lesson, remains an excellent first
choice. I can commend any book by Gordon Tullock and
urge you later on to read Richard Posner's Economic
Analysis of Law, not to further enlighten you but to show
you how disciplined thinking can lead to "educated
incapacity": to me, this book is a bad caricature of the
economist's mind-set! Definitely include James M.
Buchanan's What Should Economists Do? In my own
specialty within economics, Public Choice theory (the
application of economics to group decisions), I'd include
the first two classics, Anthony Downs, An Economic
Theory of Democracy, and Buchanan and Tullock's The
Calculus of Consent. Follow them with Buchanan's
magnum opus, The Limits of Liberty. Try some books
that inspire, such as Burton W. Folsom, Jr., The Myth of
the Robber Barons (in print) and John Chamberlain, The
Enterprising Americans (out of print). I do not have to
recommend Ayn Rand's Capitalism: The Unknown Ideal,
to the readers here.

I am sorry to render the verdict that readers not start
their study of economics with Reisman's book, but if the
right reader already knowledgeable of the field can be
found, the enormous effort put into Capitalism by the
author will have been more than rewarded. And so will
the economics profession and the world. Mencken on
Dreiser again: "It takes a kind of skill that is surely not
common. Good writing is far easier." Original thinking in
economics is also far easier than good writing. Reisman's
book contains a great many original thoughts but is badly
overwritten in most places and underwritten where it
matters most. It takes someone with a fair amount of
knowledge to grasp what may or may not be original and
merits further development. Get the knowledge needed
to fully profit from Reisman's book first; then, if you are
ambitious, get Reisman.

----------

Frank Forman went to graduate school in economics at
the University of Virginia during 1966-9 and studied
under James M. Buchanan and Gordon Tullock. He wrote
his dissertation under Buchanan at George Mason
University (Ph.D., 1985) and expanded it into The
Metaphysics of Liberty (Dordrecht, Holland: Kluwer
Academic, 1989). He has published articles and reviews
in Association for Recorded Sound Collections Journal,
Constitution Political Econmy, Menckeniana, Public
Choice, and Vera Lex.