COURSE OBJECTIVES

1. To provide the student with a comprehensive knowledge of the operations of a free-enterprise, division-of-labor society, with special emphasis on the phenomena of money, production, real wages and the productivity of labor, profit, saving and capital accumulation, and economic progress. The consequences of government intervention with respect to these phenomena will be considered in depth.

2. To teach the student to think of economic phenomena in terms of their long-run effects on all groups, not merely their short-run effects on those directly concerned.

OVERVIEW OF THE COURSE

The course will focus on the current or recent problem areas of the banking system, unemployment, economic stagnation, budget and trade deficits, and inflation, in the light of the contrasting analyses of the Keynesian and “Classical” schools (the latter including the Chicago and Austrian schools). Policy solutions to these problems will be explored—in particular free-market wage rates, balanced budgets with low taxes, and limitation of money-supply growth versus expansionary fiscal and monetary policy.

Two leading themes of the course will be 1) The possibility of continuous capital accumulation and economic progress based on the combination of economic freedom, private ownership of the means of production, division of labor, saving, and technological progress. 2) The ethical implication of the harmony of the rational self-interests of all men under these conditions.

BOOKS FOR THE COURSE

A. George Reisman, Capitalism: A Treatise on Economics. Ottawa, Illinois: Jameson Books, 1996.

B. Henry Hazlitt, Economics In One Lesson (paperback).

C. George Reisman, editor, Supplementary Readings in Macroeconomics (to be distributed in class). [The essays contained in this title appear below with references to their original sources.]

D. Paul Samuelson and William Nordhaus, Macro-Economics (paperback), 15th Edition, (New York: McGraw Hill, 1995).

E. (Optional) Ludwig von Mises, Human Action (paperback), Third Edition.

COURSE CONTENT AND READING ASSIGNMENTS

(Note: This course meets just once a week, for four academic hours. This explains why the midterm examination coincides with the seventh class session.)

Week 1

Orientation/review. The dependence of the division of labor on money. The vital connection between money making and productive activity in a division-of-labor society. Money-making and the distinction between production and consumption, productive expenditure and consumption expenditure, capital goods and consumers' goods. The quantity theory of money. The increase in the quantity of money as the cause of rising prices.

READINGS

Reisman: pp. 141–144; 441–462

Optional: Samuelson, Chapters 1 and 4

Weeks 2&3

The origin and evolution of money and the contemporary monetary system: from barter to media of exchange, to gold and silver commodity money; 100 percent reserve banking and fractional reserve banking; standard money, fiduciary media, and fiat money. Central banking: the Federal Reserve System and its powers of money creation. The quantity of money, the demand for money, and the business cycle.

READINGS

Reisman: Chapter 12

Samuelson: Chapter 9 (to p. 173), Chapter 10

Frederic Bastiat “The Balance of Trade” and “A Petition” in Supplementary Readings in Macroeconomics. [Frederic Bastiat, Economic Sophisms, pp. 51–60]

Optional: Adam Smith “Of the Principle of the Commercial or Mercantile System,” in Supplementary Readings in Macroeconomics. [Adam Smith, The Wealth of Nations, Book 4, Chapter 1]

Week 4

The economic problem and its denial: production versus consumption—the scarcity of wealth versus the alleged scarcity of the need or desire for wealth; the making of goods versus the making of work. Opposite appraisals of the causes of depressions, and of the economic effects of machinery, worker competition, war, government spending, population growth, advertising, foreign trade, imperialism, and technological progress.

READINGS

Reisman: pp. 42–49, 54–61, 542–559

Hazlitt: pp. 7-102 (chaps. I-XIV)

Week 5

Say's Law. Monetary demand and real demand; why only more production and supply can increase real demand. Say's Law and the harmony of long-run self-interests. Say's Law and the impossibility of a general overproduction; why falling prices caused by increased production do not represent deflation.

READINGS

Reisman: pp. 559–599

Optional: James Mill, “Consumption” and “Of the National Debt” in Supplementary Readings in Macroeconomics [James Mill, Commerce Defended, reprinted in James Mill Selected Economic Writings]; Optional: Samuelson, Chapter 12

Week 6

Mass unemployment: the causes and the remedy.

Real wages and the productivity of labor. Is government intervention to promote labor unions and raise wages in the self-interest of the wage earners or is its actual effect to cause unemployment and hold down the rise in real wages?

READINGS

Reisman: pp. 613–663

Hazlitt: pp. 134-151 (chaps. XIX-XXI)

Samuelson: Chapter 14

Week 7

Following midterm: Aggregate production and aggregate expenditure: the classical view versus the Keynesian view.

Week 8

The role of saving in spending and income payments. Saving versus hoarding. Saving and aggregate economic accounting: the national income/net national product identity. J. S. Mill's proposition that demand for commodities is not demand for labor and the issue of double counting.

READINGS

Reisman: pp. 673–699, review of 441–447, then 699–715

Hazlitt: pp. 177-190 (chap. XXIV)

Samuelson: Chapter 5; Optional: Samuelson, Chapter 11

Ludwig von Mises, “Capital Supply and American Prosperity” in Supplementary Readings in Macroeconomics. [Ludwig von Mises, Planning for Freedom, pp. 195–214]

Week 9

Capital accumulation and its causes. The role of saving. The role of technological progress and the productivity of capital goods. The role of economic freedom. Critique of the secular-stagnation doctrine. National income and consumption.

READINGS

Reisman: review of 622–642

Optional: Samuelson, pp. 326–333.

Week 10

Capital, the productive process, and the rate of profit. Profit and net consumption. Net investment and the rate of profit. Net investment and the increase in the quantity of money. The nominal and real rate of return on capital. Money supply growth and production growth. The springs to profitability. The inherent monetary profitability of business in the aggregate, in the absence of financial contractions.

READINGS

Reisman: 719–787

Optional: Samuelson, pp. 326–333.

Week 11

Applications of the net consumption theory: why there is no tendency toward a falling rate of profit with capital accumulation; why falling prices due to increased production do not reduce the rate of profit. The fundamental neutrality of technological progress with respect to the rate of profit. Analysis of the effects of taxation, budget deficits, and the balance of trade on the rate of profit and interest. Implications for the theory of saving.

READINGS

Reisman: pp. 809–838

Library reading: Ludwig von Mises, Human Action, Third Edition (Chicago: Contemporary Books, 1966), pp. 524-537. (The library at the Orange County Center has approximately a dozen copies of this book.)

Optional library reading: Eugen von Böhm-Bawerk, Capital and Interest, Huncke & Sennholz translation, Vol. II, pp. 77-118. (Please note: The library at the Orange County Center has at least a dozen copies of this book too.) Also recommended but not required: Vol. I, pp. 74-121; Vol. II, pp. 257-381.

Week 12

Relationship of the net-consumption/net-investment theory to the time-preference and productivity theories. The alleged problems of underconsumption and lack of “investment opportunities.” How the demand for capital goods and labor can permanently exceed the demand for consumers' goods and the rate of profit be positive. More on why savings cannot outrun the need for savings; the automatic adjustment of the rate of saving to the need for capital.

READINGS

Reisman: pp. 787–797, 838–859

Week 13

Keynesianism and Neo-Keynesianism. Exposition and critique of the Keynesian analysis: the unemployment-equilibrium and the IS curve; the consumption and savings functions; the diminishing marginal efficiency of capital; liquidity preference and the liquidity trap; compensatory fiscal policy and the multipliers. The economic consequences of Keynesianism.

READINGS

Reisman: Chapter 18

Samuelson: Chapters 6–8 (to p. 142)

Optional: Samuelson, Chapter 15

Ludwig von Mises “Stones Into Bread, The Keynesian Miracle” and “Lord Keynes and Say's Law” in Supplementary Readings in Macroeconomics. [Ludwig von Mises, Planning for Freedom, pp. 50–71]

Optional: Adam Smith, “Of Public Debts” in Supplementary Readings in Macroeconomics. [Adam Smith, The Wealth of Nations, Book 5, Chapter 3]

Week 14

Inflation. Exposition and critique of alternative theories of rising prices, leading to the conclusion that the quantity theory of money is the only valid explanation. The meaning of inflation. Its roots in deficits, the welfare state, and the unemployment and easy money arguments.

Further effects of inflation: a. growth in government, including wage and price controls; b. the redistribution of wealth and income; c. the undermining of saving and capital accumulation and the productivity of labor; d. how inflation sets the stage for depression and deflation—why it is not a cure for unemployment or a source of capital; e. why inflation tends to accelerate to the point of destroying credit and ultimately money itself.

The current state of inflation.

READINGS

Reisman: Chapter 19

Hazlitt: pp. 164-176 (chap. XXIII)

Ludwig von Mises, “Wages, Unemployment, and Inflation” and “The Gold Problem” in Supplementary Readings in Macroeconomics [Ludwig von Mises, Planning for Freedom, pp. 150-160, 185-194]

Library reading: Ludwig von Mises, Human Action, pp. 466-478.

Samuelson, Chapter 13