By Mark Skousen
Business One Irwin
Economics on Trial caught my attention because of its
provocative title and because I suspected its author, Mark Skousen,
was heavily influenced by the modern Austrian school of economic reasoninga
point of view that has always intrigued me.
Reading the book brought me to the conclusion that indeed it did have
a fine chapter on the Austrians. Entitled 'The Next Economics" this portion
of Skousen's book briefly, simply and chronologically sets out the evolving
ideas of the Austrian school from Carl Menger through Eugen von Bohm-Bawerk,
Ludwig von Mises and my favorite, Nobel prize winner, Friedrich Hayek.
Skousen brings us up to date by identifying today's standard bearers:
Murrary Rothbard (who can't seem to make Who's Who in Economics),
Israel Kirzner, Lealand Yaeger and, among others, our own George O'Driscoll
of the Federal Reserve Bank of Dallas.
The tenets of Austrian economics are evident in nearly every Skousen
argument. There is a direct or implied emphasis on entrepreneurship, limited
government spending and a definite inclination to begin economic reasoning
by considering factors of production (supply), over those of consumption
It's difficult to categorize Skousen's book. Clearly, he's fashioned
himself as an economic iconoclast. He has surveyed the top college textbooks
and concluded they are in sad shape because they don't properly portray
the way the world works. According to Skousen, the problem lies with academic
economists who are not general practitioners in the economy, "in fact,
many of them eschew the necessity of pragmatic application, dismissing
it as unscientific storytelling. They teach what they have learned from
textbooks authored by professors who in turn learned economics from a
previous generation of textbooks and professors. The vast majority of
articles in the professional journals are highly mathematical exercises
in pure theory, far removed from practical values. When economists turn
to evidence for their theories, they rely on complex econometric models
and impersonal statistical research. It's a hapless cycle in academia...,"
You can see that Skousen doesn't pull his punches, and he does come
out punching. After his first shot he then pictures himself as a "practical
economist," with "widespread experience in the business and financial
world." Because of his practical dimension, and his own experience in
academia, Skousen decided to write Economics on Trial "to
point out the chief omissions made by today's economists, that is, the
good economics they often fail to teach in colleges and in books. Second,
to show the fallacies of certain theories frequently taught in economics
courses as well as certain misguided policy recommendations." By any measure,
that's an ambitious undertaking considering how the mainstreamers labor
mightily for the smallest breakthrough. But out the window it must all
go, says Skousen. "It is my contention that the core of neoclassical economics
is unsound, primarily in macroeconomics, but also in certain aspects of
microeconomics. If the economics profession is going to come up with an
original Samuelson-style text, it must start over, with the kind of practical
economics found in this book."
At this point, Skousen launches into a multi-chapter discussion of basic
ideas and concepts commonly found in "principles of" textbooks. He begins
with the very definition of economics which usually is some version of
the allocation of scarce resources among competing ends. A better place
to begin one's economic reasoning Skousen claims, would be to say that
"Economics is the study of how individuals transform natural resources
into final products and services that people can use."
After redefining economics, Skousen moves on to discuss alternatives
to supply and demand curves, a different national statistic beside gross
national product (GNP) that would describe economic activity, an alternative
explanation of inflationary recession, advantages of a pure gold standard
and a revisit of the Great Depression.
Who could make best use of this information? It's doubtful the academic
economists that Skousen KO'd in the first few chapters will stay with
the book long enough to benefit from his handiwork. The book's insulting
tone to the gatekeepers of economic orthodoxy will surely put them off.
It might be useful to another set of people interested in economics.
They are the teachers who try to demystify these economics concepts to
a point where they become comprehensible to college and high school students.
Some are stuck, but most keep an open mind to different approaches and
just might find the one or few ideas that will help them connect. It might
be like going to the next workshop or national meeting. You know 95 percent
of what's about to happen and you may agree or disagree with that, but
it's the unknown five percent that attracts you and makes the trip potentially
It's likely that the economists of this bank would take issue with nearly
every paragraph of Economics on Trial. But interestingly,
here and there Skousen argues a point that's exactly on the markby
their reasoning. One example might be Skousen's comment when discussing
a run on the dollar. He says, "Federal Deposit Insurance ... has actually
destabilized the U.S. banking industry even more by creating the illusion
that bank deposits are risk-free and customers do not have to be concerned
about the quality of a bank's portfolio." That is more or less the essence
of this bank's argument that the United States should move to a system
of co-insurance, relying on market discipline rather than greater regulation.
Another of Skousen's observations that wouldn't be disputed is the notion
that economics textbooks have a serious shortage of international coverage,
especially of the Pacific Basin. We find a great hunger for international
material from teachers who participate in our bank-directed, economic
education programs. As our economy rapidly globalizes, so also does the
need grow for information on the subject. No doubt the texts lag in this
A question that begs to be answered is: Why not simply take the positive
approach and write a proper textbook, rather than a critique of the existing
ones? Anticipating the question, Skousen says that it would be a "long,
uphill battle" because his text would be "revolutionary." Anyone wanting
to write a major textbook is subject to standardizing pressures that force
the authors back to the central core of economics: the standard neoclassical
models. That happens, Skousen says, because it is the basis of standardized
Later, Skousen acknowledges that the texts generation-to-generation
are not entirely static. Compared to the "monolithic years of the Keynesian
era," he feels today's textbooks allow many more new concepts. He points
to the texts of Dolan, Gwartney and Stroups as progressive with discussions
about monetarism, supply side economics, rational expectations, and Marxism.
Not surprisingly, he charges they're all a bit shy on Austrian material.
We do find a note of bad news for the Federal Reserve in Economics
on Trial. Arguing for a pure commodity standard (gold), Skousen
says "there would be no need for such central banks as the Federal Reserve,
the Bank of England, the Bank of France, or any discretionary authorities
at all." This would not bode well for The Region magazine.
One last point and it may be a Freudian slip or just a typo. Skousen
says that in 1944 Hayek wrote the controversial tract The Road to
Selfdom. Wasn't that Serfdom?