Alan Greenspan’s The Age of Turbulence contains a chapter titled The Modes of Capitalism which is full of revelations which Mr. Greenspan unfortunately failes to recognize. The chapter describes the various forms Capitalism has taken in a number of countries, mostly North American and European. Of course, that such various forms of Capitalism have been implemented in different countries is not news. But what Mr. Greenspan fails to notice is that similar chapters could not be written about physics, chemistry, geology, meteorology, astronomy, physiology, botany, astronomy, etc. but could easily be written about Christianity, Islam, Hinduism, Buddhism, and even astrology. The point is, science does not have sects, but ideologies do. Of course, economists shun the word sect, preferring instead the euphemism school in an attempt to gloss over the non-scientific nature of economics. Mr. Greenspan’s modes of Capitalism are nothing more than sects, and no endeavor that is comprised of sects is a science.

Mr. Greenspan’s attempts to explain the existence of these sects begins to reveal just how unscientific economists can be. He writes, “To me, the degree of willingness to take risks is in the end, the major defining characteristic that separates countries into the various modes of capitalism.” Mr. Greenspan ranks “the United States as the most ‘free’ of the larger economies” and believes, apparently, that therefore, Americans are less risk averse than people elsewhere. But there is not a lick, jot, fleck, or speck of evidence to support this belief. So although it may be true that the United States is the most free of the larger economies, other reasons for which there is considerable evidence can be cited as more likely explanations. The most obvious of these is differences in educational systems. It may be, for instance, that Americans support this freer economic system because they are poorly educated and therefore more gullible than people in countries that have better educational systems.

There is no question that the American educational system is inferior to the educational systems in many other countries. The will-publicized country-by-country comparisons that invariably show that American students are less competent in many areas of study need not be repeated. But there are far more telling examples of American educational inferiority. When graduates of some of America’s most prestigious universities, such as the current crop of presidential candidates, can openly reject evolution and when various branches of the national government routinely rewrite scientific studies to make them conform to the administration’s political ideology, the failure of the American educational system becomes evident. In America, ideology trumps truth.

An explanation of the failure of even America’s universities to educate their graduates is not hard to find. That America has had a long-standing anti-intellectual culture has been well documented. See Richard Hofstadter’s Anti-Intellectualism in American Life, for instance The American educational system is fractured. Local control of primary and secondary schools, often controlled by school-boards made up of poorly educated people who seek to promote personal agendas, is a tradition dating back to the nation’s founding. The makeup of state school boards is not different, and there are fifty of these. No common standards exist and even state-by-state comparisons are difficult to make. Then, too, American universities were not generally founded to educate people. They were founded to train people for professions; in effect, they were founded as vocational training rather than educational institutions. After the Civil War, the creation of the land-grant university system was explicitly designed for vocational training. As a result, students are taught how to carry out techniques, but rarely taught to critically examine the theories from which those techniques are derived. This description characterizes what goes on in most of the professional schools and colleges attached to our universities. It especially characterizes our graduate departments of economics. One small but revealing example provides anecdotal evidence that supports this view and the view that America’s universities promote ideology over truth is this: Gilles Raveaud, I believe, commenting on Greg Mankiw’s teaching at Harvard has written, “Some of the students I had at Harvard have described Mankiw’s course to me during private conversations as ‘massive conservative propaganda.’ One of them told me that he thought that Mankiw manages to ‘indoctrinate a whole generation.’ In 2003, a protest against a similar course then proposed by professor Marty Feldstein, an ex-adviser to President Reagan, led to the creation of an alternative intro economics course, taught by radical economist Steve Marglin. But while Mankiw’s course gives the required credits to students, Marglin’s does not.” Just as there is no honor among thieves, there is apparently no honor in universities that get huge donations from America’s capitalists who have gotten their fortunes by picking the pockets of consumers and employees and who would be loathe to see their ability to continue to pick those pockets restricted by some idealistic idea of truth.

Mr. Greenspan ignores completely one salient difference between American and Continental educational systems. In the American educational system, analytical thinking prevails. Everything is considered in isolation from everything else. Economic phenomena are examined as though they had no consequences to society in general. In Europe, however, phenomena are considered together as a gestalt. The consequences of changes in one social environment are related to the effects those changes have in other social environments. Whereas American economists think almost exclusively in terms of economic growth, Europeans think in terms of society as a whole. American economists can always find ways of excusing the adverse human consequences of an economic process; the Europeans emphasize the adverse consequences to society as being more important than the economic process. This distinction has been evident in economic circles since the formation of the so-called historical school, and Mr. Greenspan should have recognized it.

But Mr. Greenspan reveals something else about economics that is rarely called attention to—the delusions economists labor under in relation to the real-world economy. When Mr. Greenspan makes risk-taking the characteristic of the American economy, he is delusional. Certainly America has its share of risk-takers. Whether it has more or fewer risk-takers than other nations is questionable. But risk-taking does not characterize the American or any other economy. Economic risk-taken may be thought of as a characteristic of entrepreneurs. But entrepreneurs alone cannot make an economy; if everyone was an entrepreneur, no workers would exist to carry out entrepreneurial ventures. Kurt Wicksell in his Lectures on Political Economy nicely defines the entrepreneurial process: “He who borrows money at interest does not as a rule intend to keep it, but to exchange it at the first suitable opportunity for goods and services, by the productive use of which he hopes to be able to acquire not merely the equivalent of their price but a surplus value. . . .” Although that may be true of entrepreneurs, it is not why most people in today’s real economy borrow money. When people borrow to buy homes, automobiles, appliances, etc., they do not intend to use their purchases in ways that will create surplus value. In fact, these people are not investing at all. The money they borrow is a sunk cost for a place to live, a means of transportation, and other such uses. And although Americans have become a nation of borrowers, they have not become entrepreneurial risk-takers. Any economist who thinks of the economy in terms of entrepreneurial risk-taking is engaged in self delusion.

Mr. Greenspan is also delusional when he writes about creative destruction. Certainly, creative destruction does happen, but not nearly as often as Mr. Greenspan and other economists seem to think. As examples of creative destruction, Mr. Greenspan mentions the telegraph industry’s demise because of the introduction of the telephone, the tin can’s demise when the aluminum can became feasible, which he relates to the demise of the steel industry. Certainly some workers were displaced when the telephone industry replaced the telegraph industry and then the aluminum industry reduced the steel industry. And certainly such displacements cannot be avoided and no attempt should be made to avoid them. But that is not what is happening in America today. When Fisher-Price offshored the manufacturing of toys to China, it was not because the Chinese had developed new toy-making technology. In fact, those Chinese employ older technologies than those what would have been used in America to manufacture the same toys. When computer related industries offshore their helpdesks, it is not because new helpdesk technologies have been developed in the offshored countries. The technology used in offshore places is exactly the same technology that is being used in America or Europe or anywhere else. So although there is a phenomenon known as creative destruction, what is happening in America today is mere destruction. The other half of Mr. Shumpeter’s thesis is entirely absent, and for Mr. Greenspan to think otherwise is delusional.

Again, Mr. Greenspan writes, for instance, that “in a free society . . . the vast majority of transactions must be voluntary, which, of necessity, presupposes trust in the word of those with whom we do business. . . .” And “It is remarkable how much trust we have in the pharmacist who fills the prescription ordered by our physician.” But this is sheer delusion. People don’t trust the businesses they buy from. In the case of the pharmacist, people buy from him because there is no alternative. And does anyone trust the pharmaceutical firms that market the medicines we are prescribed? If they do, they must be wholly ignorant of the revelations that such firms hide from regulators, physicians, and consumers data of adverse effects and even life-threatening dangers. Do I exhibit trust in Microsoft when I purchase one of its operating systems or applications, knowing full well that what I am getting are poorly coded programs containing innumerable bugs and security lapses that Microsoft will attempt to patch by incessant releases of what it euphemistically calls Service Packs? Trust is something that does not exist in business; that is why contracts exist, and why firms such as Microsoft exempt themselves from all liability for damages within their contracts. If Mr. Greenspan trusts the firms he does business with, he is delusional.

But the unavoidable problem with Classical/Neoclassical economics, which Mr. Greenspan glosses, is its immorality. He writes that, “Clearly, not all activities undertaken in markets are civil. Many, though legal, are decidedly unsavory.” But he also writes, “When I was a child, jokes about the scruples of used-car salesmen were widespread, but in truth a flagrantly (italics mine) unscrupulous used-car salesman is one who will be out of business before long.” Mr. Greenspan fails to recognize that this statement is entirely meaningless. It does not say that businessmen are not unscrupulous; it does not say that competition puts unscrupulous businessmen out of business; it does not say just how unscrupulous a businessman must be to be flagrantly unscrupulous.

Everyone knows that businessmen routinely break even the most fundamental moral maxims, and any economist who denies this must explain the neologising and persistent existence of such phrases as Caveat Emptor, a pig in a poke, and letting the cat out of the bag. In an honest economy, these expressions would have no use. As a matter of fact, there is absolutely no reason to believe that people in business are any more honest than the population in general, and there is good reason to believe that business in a free-market promotes crime and vice, both of which are epidemic in the United States. It is no mere coincidence that when the Soviet Union collapsed and when Israel was persuaded by the Reagan administration to abandon its socialist traditions and free-market practices were introduced, both crime and vice emerged as important social problems.

In fact, free-market economics institutionalizes immorality, which is proven by the mere fact that puffery is an acceptable practice. Businesses that employ puffery to market products will, without batting an eyelash, discharge an employee who is found to have puffed up his resumé. I’m not talking about sophisticated moral philosophies such as Kant’s Categorical Imperative, but those simple maxims embodied in the Decalogue and the Golden Rule. These immoral practices of business are widespread and far-reaching and they contradict many of the favorite clichés of economists.

Mr. Greenspan claims, that free markets increase material well-being to a greater extent than regulated markets. But tell me, how does the marketing of bottled water, which is never tested and whose source is rarely identified, increase the well-being of the people who are snookered into buying it, especially when ordinary tapwater is regularly tested, comes from a well-known source, and is considerably cheaper? In fact, doesn’t it reduce that well-being, since the money wasted on it could have purchased something that provided a real material benefit? The same questions can be asked about numerous other products—the McDonalds hamburger, Taco Bueno’s tacos, pizza from numerous pizza vendors—the list is endless. But there’s more. The Fox affiliate in Dallas regularly runs a feature called “Deal or Dud.” The channel buys products heavily advertised on television and has them tested by ordinary viewers. If a product works as advertised, it’s called a Deal, if not, it’s called a Dud. Every so often the channel comes up with Deals, but most products tested are Duds. As a matter of fact, Mr. Greenspan’s book is itself a dud. It was not published because of the merit of its content; it was published merely because of the notoriety of its author. Mr. Greenspan’s name on the title page can be likened to other forms of puffery. So how does manufacturing and marketing products that don’t work increase the material well-being of consumers? And consider the snake-oils people are sold that are classified as dietary supplements? The manufacturers of these products could easily have them double-blind tested to determine their effectiveness. But they don’t. Is it because they know that if they did, the products couldn’t be sold?

Mr. Greenspan and other economists claim that the free market results in the most efficient allocation of capital. But how can anyone claim that the capital expended on the products mentioned in the previous paragraph is efficiently allocated? In fact, one could easily claim that it is completely wasted, as is the capital lost during economic downturns. So anyone who believes that American business are generally honest are as deluded as the insane person who believes he’s Napoleon.

Not only is free-market economics immoral, there is some evidence that it could not exist if the immorality were removed. In an impressive new book, The Social Conscience, Michel Glautier asks whether a caring society can exist in a market economy? His analysis suggests that recent and continuing changes to the market economy are putting the achievement of a caring society beyond reach. And the following passage comes from an abstract of a paper by Andrei Shleifer: Explanations of unethical behavior often neglect the role of competition, as opposed to greed, in assuring its spread. Child labor, corruption, “excessive” executive pay, corporate earnings manipulation, and commercial activities by universities all promote censured conduct. When unethical behavior cuts costs, competition drives down prices and entrepreneurs’ incomes, and thereby reduces their willingness to pay for ethical conduct. Unfortunately, both authors are ambivalent when it comes to drawing hard conclusions.

In a rational society, a distinction would be made between scientific enterprises, always keeping in mind that all science is a work in progress, and enterprises grounded in mere belief. The political system would defer to scientists in matters involving the former and allow the people to decide the kind of society they would prefer in matters involving the latter. So the choice of an economic system ultimately comes down to what kind of society people not only want for themselves but for their progeny in future generation. Do we really want an economic system that institutionalizes prevarication and encourages greed, crime, and vice? Those who answer this question affirmatively should, perhaps, have 666 tattooed on their foreheads.

In the second chapter of The Age of Turbulence, Mr. Greenspan writes that he “discovered that some of the scientists in the Manhattan Project subscribed to a philosophy called logical positivism. . . . The mathematician in me embraced this stark analytical credo. . . . The world became a better place, I thought, if people focused exclusively on what was knowable. . . .” Unfortunately somewhere alone the way, Mr. Greenspan lost this focus and became an apologist for the free-market system when he “decided to engage in efforts to advance free-market capitalism.” We are all now faced with the consequences of his decision.

Wise men know the importance of periodically asking themselves, What if what I believe to be true is wrong? It is time that our economists start asking themselves this question.

© 2008, John Kozy

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About Author

John Kozy -
About the Author:

Retired professor of philosophy and logic who blogs on social, political, and economic issues at http://johnkozy.mindsay.com. Tries to avoid mere opinion and propaganda and emphasizes logic, facts, and evidence. All or any part of his articles can be cited or distributed.