To: Students of Supply-Side University
From: Jude Wanniski
Re: Peter Bauer's Review of TWTWW
When the British political economist Peter Bauer died earlier this month, there were so many obituaries praising his lifetime achievements that I hesitated in adding one of my own. I decided to devote today's lesson to him after digging out the review he did of my book, The Way the World Works, when it was first published in May 1978. There are a great many economists I respect for their positive contributions to the literature, a great many I think are undeserving of their prizes, and only a handful I've looked up to for their achievements. When TWTWW was about to be published and bound galleys were available for reviewers, my boss at The Wall Street Journal, Bob Bartley, asked me who I would like to review it for the editorial page. I'd never met Peter Bauer and knew he did not know of me, but that he would review the book if Bartley asked him to do so. That's how much I respected him and his courage in challenging the conventional wisdom of the profession. Here is what Thomas Sowell said in his May 10 memoir of Professor Bauer: "For decades on end, Peter Bauer stood virtually alone in opposing the prevailing dogmas of development economists. They in turn dismissed him as someone far outside the mainstream. But, with the passing years and the repeated and catastrophic failures of policies and programs based on the theories of development economics, the orthodoxy began to erode and finally to collapse."
Here is his review as it appeared on the WSJ editpage on May 10, 1978:
A Theory of the Economic History of Mankind
In his “Principles of Economics” first published in 1890 Alfred Marshall defined economics as the study of mankind in the ordinary business of life. Jacob Viner suggested some years ago that economics is what economists do, regardless apparently of whether their activities are related to reality. The relationship is often rather tenuous.
Jude Wanniski’s wide-ranging and forthright book, “The Way the World Works,” is in some ways an expression of dissatisfaction with much contemporary economics. Mr. Wanniski, associate editor of this newspaper, shows his respect for 19th Century economists in choosing J. B. Say and Leon Walras as comparisons for his two contemporary heroes, Arthur Laffer of the University of Southern California and Robert Mundell of Columbia. Mr. Laffer is a modern Say in arguing that the supply of goods creates the demand for them, and Mr. Mundell is a modern Walrus in attempting to trace the ultimate repercussions of changes in particular economic variables.
Mr. Wanniski commends Mundell and Laffer for recognizing that the breakdown of the Bretton Woods system would have repercussions far beyond the immediate benefits of floating exchange rates. He argues that this disintegration of the Bretton Woods System has unleashed worldwide inflation, the destructive effects of which are exacerbated by the virtually universal progressive taxation, because inflation raises the effective rates of direct taxation.
The ideas of Laffer and Mundell, coupled with observation of the international economic scene since 1971, have inspired Mr. Wanniski to develop a general theory of world economic history, or rather world history, as his interpretation of history is fundamentally economic. The theory is applied to all human history from antiquity to the present day, and indeed beyond, since he extends his vision beyond even the 21st Century.
The book’s principle instrument of analysis is what the author calls the Laffer curve, derived from Laffer’s observation that in any system there are always two different rates of tax which yield the same revenue. This is suggested by the limiting cases. With zero taxes there is no revenue and no government either; society lapses into anarchy. With 100% taxes the economy reverts to barter. In either condition revenue is zero.
According to Mr. Wanniski the task of political leadership is to find the rate of taxation which maximizes production, and is consistent with the distribution of income conductive to welfare. When the rulers understand this central issue and act on it, the society prospers and progresses; when they fail there is decline, conflict and chaos. Moreover, the masses are not misled by the opinion makers; they understand economic realities and they search for appropriate and perceptive leaders. The course of history reflects these forces, notably people’s search for effective and successful leadership. This is the central theme of the book. The examples invoked in its support range in time from the 4th Century before Christ to 1977, and geographically from the United States to Vietnam.
Some of the major insights of the book bear directly on current issues. Much of it is pertinent to the anomalies of current discourse on the level of activity and employment in the United States and elsewhere, notably the practice of discussing unemployment without reference to wages or to social security benefits.
Much current discussion ignores the truth that output, activity and employment depend on the supply of productive services as much as on the demand for them; and in particular, that the supply of labor and the demand for it, both in the aggregate and in specific activities, depend on the price of labor, that is, on the wage.
Mr. Wanniski’s arguments will help to remind readers of what was once an early lesson of economics and still should be, namely that supply and demand depend on price, which seems to escape some of the sophisticates, especially when it comes to applied economics. He also rightly emphasizes the importance of the wedge which government measures, especially fiscal measures, interpose between buyers and sellers, or would-be buyers and sellers. Much of the discussion here is informative, indeed illuminating.
Some other aspects of the discussion are less felicitous. At times Mr. Wanniski puts a greater burden on his analysis than it can bear. The course of history does not reflect simply tension between the growth of income and income distribution. Human motivations and activities are too complex and diverse for so heroic a simplification. How can the Laffer curve, or the tension between maximum production and a distribution of income consistent with welfare, explain the feebleness of the West, including the United States, in the face of Third World countries with negligible resources and no achievements?
Several key points are not made sufficiently clear: That income differences - a far more neutral term that income inequalities - reflect largely the outcome of voluntary transactions. That what is conventionally termed redistribution is in fact confiscation of the incomes produced by certain people for the benefit of others. That the advocates, organizers and administrators of the transfers are among the most significant beneficiaries of the process. And that the promise of redistribution often and perhaps usually involves a pronounced extension of inequality of power between rulers and ruled. And because of the wide differences in physical and social living conditions, and in people’s attitudes and conduct in different parts of the world, attempts at worldwide egalitarianism postulate not only world government, but world government with totalitarian powers.
And even within Mr. Wanniski’s own framework there are grounds for reservations. He regards the attainment of a “distribution of income consistent with welfare” as a cardinal objective of policy. He does not tell us what this distribution is. Nor does he examine the implications of domestic, international and global redistribution, even though he clearly envisages and supports the expansion of redistribution from the domestic to the global level.
It is also inappropriate to refer to the population of every country at all times as the electorate, and to the population of the world as the global electorate, as does Mr. Wanniski. And I think he overlooks the significance of power (which is far from being the same as wealth) and of the desire for power in both domestic and international politics. I think also that the influence of opinion makers, including not only media men but also cultural and religious leaders, is somewhat greater than he suggests.
Mr. Wanniski’s book is thoughtful and also provocative in the best sense of this hackneyed expression. It will, or should, provoke thought, even in those who do not accept all his arguments. He is the sort of man with whom one would like to have a dinner conversation or a Sunday morning walk. Those who have no prospect of this experience can still enjoy a bold, well written and suggestive book on matters of the greatest importance.