Review: The Politically Incorrect Guide to Economics

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David Gordon
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The Politically Incorrect Guide to Economics
by Thomas J. DiLorenzo
Regnery Publishing, 2022; xx + 242 pp.

Like Ludwig von Mises and Murray Rothbard, Tom DiLorenzo is an economist with an extraordinary knowledge of history, and this shows to great advantage in his brilliant new book. In it, he stresses that economists who fail to grasp how the free market works often devise elaborate theories to show “market failures,” but when examined in the light of historical evidence, these theories fall to the ground.

As a prime example of this, Paul Samuelson in his Economics, for decades the most influential university textbook, indicted the market for its failure to conform to the welfare ideal of “perfect competition.” Concerning this, DiLorenzo says:

That never-to-be-realized-anywhere-on-earth state of perfect competition is one where all products in every industry are identical; they are produced by “many” business firms; everyone charges the same price; everyone has perfect information … and there is free or costless entry into every industry and every exit out of it. Several other equally unrealistic assumptions were added over the years, but these were always the main ones. This pipe dream became the new understanding of what constituted “competition,” at least among academic economists. (pp. 30–31)

Supporters of this view used the perfect competition model to demand that large firms be broken up. Couldn’t “monopolists” engage in “predatory pricing” to secure their position against competitors? DiLorenzo finds no historical evidence that such a thing has ever taken place.

In fact, to this day there is no record of any business achieving a monopoly through predatory pricing! There have nevertheless been hundreds of antitrust lawsuits based on this theory, most of them private lawsuits with one company suing a competitor for lowering its prices. Think about that: in the name of protecting the consumer, antitrust regulation allows businesses to sue to “protect” customers from their competitors’ lower prices. (p. 38)

Unfortunately, perfect competition is far from the only case of an alleged “market failure.” Critics charge that “public goods,” goods that are both nonrival and nonexcludable, cannot be adequately supplied in the free market. As an example, a guided-missile defense system protects everyone within a territory, not just customers willing to pay for it; and, given the large numbers of consumers of this good, people could in a free market “free ride,” imagining that others would bear the burden. General awareness of this phenomenon will make everyone reluctant to pay, since even those who want the good would rather not pay for it.

“Away with this flimsy theory!” says DiLorenzo: it too lacks historical support.

Another problem with the theory of the “free-rider problem” is that there are examples all around us of private individuals and groups providing myriad types of goods and services that are “nonrival” and “nonexcludable.” Americans are probably the most charitable people in the world…. The very existence of the many privately funded charities proves that the free-rider problem is not nearly as severe a problem as students of economics are led to believe…. Especially at the state and local levels of government, it is hard to think of any service provided by governments that is not also provided by private businesses (or private nonprofit organizations), usually at a fraction of the cost and with higher quality and customer service to boot. (pp. 67–69)

DiLorenzo finds a general pattern that underlies the failure of all the various attacks on the free market. In the free market, entrepreneurs have an incentive to satisfy consumers, as that is the path to profit. Government bureaucrats have no such incentive; to the contrary, they are free to seek “power and pelf,” as Murray Rothbard used to say. DiLorenzo puts this key insight in this way:

Profits and losses are the measuring rods of how good a job a business is doing with regard to serving its customers. Growing profits mean that a better and better job is being done in that regard; losses mean the opposite. No one is forced to buy anything from anyone in a free market…. In government bureaucracies, failure is success. The worse the public schools get, the more money they get in next year’s budget. The longer government fails in the War on Poverty, the more money the poverty agencies get. The longer the failed wars that are never won go on, the more enriched is the Pentagon and the military-industrial establishment. And on and on. (pp. 121–23)

If the free market is better than a centrally directed economy, we must in choosing proper policy beware that we have the genuine article, not a counterfeit. As an example, DiLorenzo first aptly brings out the fallacies of protectionism. “Chief among them is the ‘Buy American’ scam designed to make people believe that protectionism will somehow save American jobs. The truth is that protectionism may temporarily preserve some jobs in the protected industry, but always at the expense of destroying other American jobs elsewhere and plundering American consumers with higher prices” (p. 178).

But, he says, international trade agreements like the North American Free Trade Agreement (NAFTA) do not in fact promote free trade but subject it to government control.

Just because politicians call something a “free trade agreement” doesn’t make it one. They always choose wonderful-sounding names for their legislation, which in reality is usually the work of scores of greedy plunder-seeking lobbyists. This was the case with NAFTA, which was some 2,400 pages of bureaucratic regulation and central planning of the trade between the United States, Canada, and Mexico and the rest of the world. It contained nine hundred pages of tariffs, the opposite of free trade. (pp. 181–82)

As mentioned above, DiLorenzo has a wide knowledge of history, and this he puts to exemplary use in his discussion of the federal income tax, which, he aptly reminds us, the great Old Right author Frank Chodorov called “the root of all evil.” However much we hate to pay taxes, Chodorov’s phrase may seem exaggerated, but, DiLorenzo reminds us, he had a point.

Americans were literally turned into slaves of the state, said Chodorov, for what the government was now saying to its citizens was: “Your earnings are not exclusively your own. We have a claim on them, and our claim precedes yours. We will allow you to keep some of it, because we recognize your need, but not your right … The amount of your earnings that you may retain for yourself is determined by the needs of the government, and you have nothing to say about it.” In other words, the income tax was the biggest attack on the principle of private property in American history. (p. 163)

Relying on the great book of Felix Morley, Freedom and Federalism, which he calls “the best book ever written about American federalism” (p. 165), DiLorenzo says that the federal income tax bypassed the authority of the states over their citizens. Further, “it essentially turned most state governments into puppets of the ‘federal’ government once the federal government had enough funds with which to bribe or threaten the states to bend to its will by either granting or withholding ‘aid to the states’” (p. 165).

Tom DiLorenzo’s masterful book brings out in unsurpassed fashion that the free market rests on mutually beneficial exchange. He quotes Adam Smith: “Whoever offers to another a bargain of any kind proposes to do this: Give me that which I want, and you shall have that which you want, is the meaning of every such offer; and it is this manner that we obtain from one another the far greater part of those good offices which we stand in need of” (p. 5). (Smith, by the way, here alludes to the Latin do ut des, “I give that you may give,” important in the Roman religion and civil law.). The book is, as David Stockman says, a worthy successor to Henry Hazlitt’s Economics in One Lesson.