Organized Crime: The Unvarnished Truth About Government


Austrian Political Economy

0001_organized_crime_the_unvarnished_truth_about_governmentThe late Milton Friedman once said that if the average tariff rate in America was a few percentage points lower than it would otherwise be thanks to infl uence of academic economists, that would more than justify all of their salaries and then some because of the wealth-enhancing eff ects of freer trade. Friedman was correct as far as the story goes, but at the time that he made the comment the “mainstream” of the economics profession was mostly involved in supporting the wealth destroying efforts of the parasitic welfare/regulatory state by spinning myriad tales of “market failure” and recommending endless government intervention.

Market failure theorists, whose epicenter was for many years the Harvard and M.I.T. economics departments, had three main characteristics: First, they concocted mathematical models that were usually far removed if not totally detached from economic reality. Indeed, a realistic theory that could explain real-world phenomena was (and is) oft en viewed as pedestrian and unscholarly. Only impossible-to-understand and seemingly trivial mathematical manipulations were said to be worthy of “economic science.”

The mainstream of the economics profession has long suff ered from physics envy and has sought to model the unmodelable—human action—to make their “science” appear to be physics-like and scientific.

Th e second characteristic of the market failure theorists is a consistent application of what UCLA economist Harold Demsetz labeled “the nirvana fallacy.” Th e game is played as follows: First, construct a totally unrealistic theory of “perfect” competition that assumes away all real-world competition with assumptions of perfect information, homogenous products and prices, free or costless entry and exit from industry, and “many” firms. Second, compare real-world markets to this utopian Nirvana state and condemn the markets as “imperfect” or “failed.”

The third characteristic of market failure theories is to recommend intervention by presumably perfect government that is assumed to suffer from no failures and which will correct the failures of the market.

There are two schools of thought in the fi eld of economics that never accepted this statist charade as being legitimate: the Austrian School and the Public Choice School. Th e Public Choice School—at least the “Virginia School” variant of it—uses the economist’s understanding of incentives to study the behavior of government and all of its appendages (voters, bureaucrats, politicians, interest groups, etc.). Understanding how government actually works in this way will cure anyone of the stupidity of simply assuming that government is capable of correcting perceived shortcomings of the market.

The Austrian School never accepted the foolish Nirvana fallacy approach to “economic modeling” for obvious reasons, namely, it is intellectually dishonest. Rather than condemning markets as being “imperfect” because market participants possess less than “perfect” information (as though anyone does), for example, Austrian economists will explore the ways in which market participants make use of the information that is available to them and acquire new information. Th e object is always to understand how the economic world works, not to provide what appears to be a “scholarly” defense of government interventionism, as is the case with the market failure theorists.

Austrian economists also study how government works and do not simply assume that it is some kind of benevolent and omniscient mechanism that serves as a corrector of market failure. Examples would be Ludwig von Mises’ book, Bureaucracy, or the numerous writings of Murray N. Rothbard on the machinations of governments throughout history. There are many more examples in the Austrian literature.

Your author considers this book to be a collection of essays in the tradition of Austrian political economy—a combination of applied economics and the study of governmental reality. Unlike “mainstream” economists who are content to spin mathematical model after mathematical model which explain little or nothing about the real world, your author’s focus has always been just the opposite—to use economic understanding to gain a better understanding of how the political-economic world works. Austrian economics is indispensable to succeed at this task.

The book is divided into six sections: “Coercion and Regulation” analyzes various aspects of government regulation of business; “Politics and Thieves” is of course about the inherent nature of government; “Centralization versus Liberty” discusses the never-ending quest by statists to monopolize and centralize political power so as to isolate themselves as much as possible from public influence; “Money and the State” describes the myriad evils of central banking, which was always thought of by its original proponents in America as an engine of corruption; “Workers and Unions” discusses various labor union myths and superstitions that too oft en cloud the public’s thinking about the reality of labor markets; and “Truth and Lies about Markets” is a taxonomy of some of the main market-failure myths that have long been used to illegitimately advance the cause of economic interventionism, as well as some newer ones.

Thomas J. DiLorenzo
May 2012

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