First, I’ll discuss some of Kirzner’s arguments about economics. (Part of what Kirzner does isn’t reviewing the book but debating economic theory with Reisman.) Second, I’ll look at a few of Kirzner’s errors. Kirzner is an unreliable narrator, which is a problematic trait for a reviewer who is guiding the opinions of people who haven’t read the book themselves. Third, I’ll make brief comments about what the review is like.
The format I’ll use is block quotes then responses. This helps engage with what people actually said. Yellow quotes are from Kirzner’s review, green are from Capitalism and blue are other sources. I don’t give page numbers; to look up the quotes, please use computer search.
Reisman’s summary rejection of the centrality of individual decisions in defining the nature of economic science
Reisman doesn’t do that (see my Aggregates section below), but let’s continue to the main point.
seems responsible for a deeply disturbing omission that cries out from this massive book. For most economists, certainly for the Austrians, a central (if not the central) analytical challenge with which economic theory grapples is the following: How is it that a multitude of independently-made decisions, informed (or confused!) by a multitude of independently-generated sets of expectations (in regard to a future fraught with Knightian uncertainty), tend, in the free market setting, to become substantially mutually coordinated without central direction? What is it that somehow shapes individual expectations concerning the attitudes (and expectations!) and prospective decisions of other individuals in a way which inspires individual human actions which (a) successfully anticipate and exploit the decisions being made by others, and (b) tend to reveal and to eliminate as-yet unexploited opportunities for mutually gainful exchange? One searches throughout this lengthy volume in vain for direct recognition of the centrality (or even the very existence) of this puzzle.
I successfully searched the table of contents for an answer to how the free market can coordinate or harmonize individual action. I found chapter 6, The Dependence Of The Division Of Labor On Capitalism II: The Price System And Economic Coordination, as well as the sections Coordination of the Division of Labor and The Economic Harmonies of Cost Calculations in a Free Market. Here are the beginnings of those three parts of the book:
The dependence of the division of labor on the price system centers on the coordinating function of prices. The price system coordinates the various branches of the division of labor in a variety of essential respects.
Businessmen and capitalists are responsible for the coordination of the division of labor among the various branches of production by virtue of their striving to make profits and avoid losses. As the discussion of the price system showed earlier in this book, in striving—other things being equal—to make the highest possible rate of profit, businessmen and capitalists are led to counteract the mistake of relative underinvestment and relative underproduction.
We can now understand even more fully than was possible earlier how in a free market the production of each good is carried on in a way that is maximally conducive to production in the rest of the economic system. For we are now in a position to understand more fully how the concern with costs of production promotes the production of other goods every time it leads to the substitution of lower-priced factors of production in limited supply for higher-priced ones, such as the use of unskilled labor where skilled labor was previously required, or the use of a less expensive quantity of aluminum where a more expensive quantity of copper was previously required, and so on. All we have to do is keep in mind that the less expensive factors in limited supply are less expensive because the importance of their marginal products to the consumers is less. To substitute less expensive factors for more expensive ones, therefore, is to make it possible for the consumers to obtain products to which they attach greater marginal importance at the expense of products to which they attach smaller marginal importance. For the more expensive factors are released to uses of greater importance than those from which the less expensive factors are withdrawn.
Thus, the fact that in a free market production is carried on at the lowest possible cost that businessmen can achieve means that the production of each thing is carried on not only with the least possible amount of labor, but with those specific types of labor and other factors of production in limited supply whose use represents the least possible impairment of the satisfaction of alternative wants.
This answers one of Kirzner’s main arguments: Reisman’s alleged failure to explain coordination without central direction. If you’re not fully convinced that this issue is covered, I suggest reading the pages indexed regarding coordination: 137–139, 144–145, 172–218, 267–276, 462, 463–464.
Reisman believes that the central Austrian advances over the classics in marginal utility theory and price theory can be accepted without fundamentally compromising the usefulness and validity of the general classical framework. Economics is concerned, in Reisman’s classical view, exclusively with the production of a carefully and, it is believed, an objectively defined wealth; […] Marginal utility considerations are presented by Reisman with sufficient subtlety, insight, and lawyerlike linguistic skill, as to be able to appear, at least, to retain the classical claim that costs of production are the direct determinants of value.
Kirzner thinks that Reisman is incorrect about price theory and that the Austrian and classical views contradict each other. Reisman’s alleged error is using lawyerlike linguistic skill to make contradictory ideas appear compatible.
The economic claim that Kirzner seems to disagree with is that prices are set to the cost of production plus a markup, in some cases (the case of goods that are “reproducible at will”, in Böhm-Bawerk’s words).
I suggest reading the section Ricardo and Böhm-Bawerk on Cost of Production Versus the Elasticity of Demand in Capitalism. Here’s an excerpt following a lengthy explanation quoted from the Austrian economist Eugen Böhm-Bawerk. At the end of this quote, Reisman explains the error (by Jevons) that he’s contradicting:
What Böhm-Bawerk has shown in these passages is that when the price of goods such as fan belts, or anything else whose own, direct marginal utility is extremely high, is determined on the basis of cost of production, precisely then is its value determined on the basis of marginal utility—the marginal utility of the means of production used to produce it, as determined in other, less important employments. The buyer of a fan belt, or whatever, does not pay a price corresponding to the value he attaches to his car, but a much lower price corresponding to the marginal utility of the materials and labor required to produce fan belts or whatever—a marginal utility that in turn is determined by the marginal utility of products other than fan belts or whatever. As Böhm-Bawerk develops the law of diminishing marginal utility, it is no more surprising that the price of vital components and parts, or any necessity, is in conformity with its cost of production rather than its own direct marginal utility than it is that the marginal utility of the water on which our physical survival depends is no greater than the utility of the marginal quantity of water we use. Determination of price by cost is merely a mechanism by means of which the value of supramarginal products is reduced to the value of marginal products. The only complication is that the marginal products in this case are physically different and lie in other lines of production.
Views on costs very similar to those of Böhm-Bawerk are expressed by Friedrich von Wieser, another leading member of the early Austrian school of economists. Wieser flatly declares “. . . on the whole, the cases where costs directly determine value predominate.”
It should be clear that the notion that cost of production has no significant explanatory role in economics does not come from Böhm-Bawerk and Wieser. It comes from Jevons. It was Jevons who held that the only possible connection between cost of production and price was through the intermediary of variations in supply and that every price is actually determined by the specific demand for and supply of the individual good in question.
Reisman, Böhm-Bawerk and Wieser aren’t making the error of disagreeing with the Austrian theory of marginal utility, nor of advocating something it contradicts. Instead, in Böhm-Bawerk’s words, they’ve recognized that cost of production is “an abbreviation which is as accurate as it is convenient” (in some cases, but not others, which they explain).
If you’d like more info after reading this section in full, I suggest the section Compatibility With the Austrian Theory of Value.
But surely this entire classical perspective was, in revolutionary fashion, utterly rejected by Menger! Menger was responsible for an entirely different view of the economic system as a whole, one in which the economic meaning attached to each and every element in the system of production, is derived strictly and exclusively from its role in serving, directly or indirectly, the specific prospective needs of the consumers. From this Mengerian perspective, the very notion of a level at which production can be considered “as a whole” is highly problematic.
This is partly a criticism of Reisman’s view of pricing (covered in the previous section) and partly a criticism of his use of aggregates. Kirzner devotes considerable attention to these themes. I’ll give one more quote:
Nowhere, in this macroeconomics [of Reisman’s], is there recognition of possible problems arising out of failures of individual decisions, or of groups of decisions, to dovetail with those of other individuals (or groups of individuals), or to generate mutually sustainable sets of expectations. Nowhere is there awareness of any doubts as to the economic meaningfulness of these aggregate magnitudes (as seen from the subjective, Austrian, vantage point of ultimate consumer satisfaction).
Kirzner’s comments about generating mutually sustainable sets of expectations are related to the coordination problem addressed above.
Kirzner doesn’t point out any specific error by Reisman but takes issue with his discussion of aggregates. He thinks Reisman’s analysis isn’t individualist enough. However, the text “individual” appears 1,174 times in Capitalism, and I provide quotes below where Reisman considers individuals.
Kirzner specifically accuses Reisman of nowhere recognizing possible problems with aggregates and having no awareness of doubts. This is incorrect. For example, Reisman wrote:
Money is important within the economic system, as the means of individuals exchanging their goods and services and as the basis of their performing economic calculations. It has no significance as a measure of the production of the economic system as a whole. Contemporary economics fails to see the real significance of money—in the activities of individuals—and focuses instead on the illusory significance of money as a measure of aggregate production.
This is not to say that a system of aggregate economic accounting is of no value. As will be shown later in this book, it is of very great value, but as a means of improving understanding of the functioning of the economic system, not as a system of measuring the production of the economic system.
This directly refutes Kirzner’s criticism that “Simply adding up flows of expenditures does not assure a meaningful economic (as distinct from financial) quantity.” Yes, Reisman knew that and said so.
Reisman sometimes talks about aggregates because it’s useful to do so. He’s capable of both individual and aggregate analysis and uses them as appropriate. He’s not neglecting individual or non-aggregate issues. For example:
It is appropriate to observe here that while my analysis is carried on in terms of aggregates and averages, it is vital that the individual wage rates of all specific occupations and industries, in all their particular locations, be free to fall to the varying extents that are necessary. While isolated wage rigidities will not prevent the achievement of full employment, their effect is to require greater than necessary reductions in wage rates elsewhere and to cause unnecessary disproportions in the relative production of the various goods, and inefficiencies in the methods of production that are used. This is because […]
Here’s another example of Reisman doing analysis from an individual perspective:
I now must reconcile the perception of individuals, that the way to raise their standard of living is by earning more money, with the productivity theory of wages, which shows that the general standard of living does not rise by virtue of the earning of more money, but by virtue of the rise in the productivity of labor and the consequent fall in prices relative to wages.
When an individual increases the productivity of his own labor, whether by becoming more efficient in a given job or by raising his level of skills to the point of being able to perform a more demanding job, the likely result is that he will increase his money income. What enables the individual to increase his money income in this way is partly the fact that, at the same time that he is increasing his productivity, the quantity of money and volume of spending in the economic system are also probably increasing. But this is not the major reason for people concluding that greater productivity means correspondingly more money income. A close connection between the individual’s improvement in his productive ability and an increase in his money income would exist even if the quantity of money and the volume of spending in the economic system remained constant. It would exist insofar as the improvement in the productivity of the individual’s labor is an improvement relative to the productivity of labor of his competitors in the rest of the economic system.
So, Reisman does know about the limitations of aggregates, does analyze individual perspectives, and also discusses their relationships.
[…] Reisman would himself surely maintain that the arguments against capitalism with which he grapples have not, for the greater part, been answered except by virtue of his aggregate-wealth argumentation.
I’d be surprised if Reisman himself would agree with that. Kirzner, as a hostile and critical reviewer, shouldn’t speak for Reisman.
Reisman’s extensive criticism of the Marxist labor theory of value is separate from his aggregate-wealth argumentation, so that’s a counterexample to Kirzner’s claim. Further counterexamples can be found throughout the book, such as in chapter 18, Keynesianism: A Critique. There, for example, Reisman criticizes Keynesian context dropping (not an aggregate-wealth point) in the section The Declining-Marginal-Efficiency-of-Capital Doctrine and the Fallacy of Context Dropping.
services are, in classical fashion, excluded from the scope of production, and thus from the scope of economics
That isn’t Reisman’s position. From Capitalism:
It is true, of course, that there could be no wealth without the rendition of services—above all, the performance of labor. But this does not give services an equal position with wealth in economics. Although economics is concerned with services, it is so only insofar as they are necessary to the production, enjoyment, or acquisition of wealth, or depend on the use of wealth. Economics is not at all concerned with the rendition of services apart from their connection with wealth. For example, when two people hold an interesting conversation, they are rendering a service to each other. But economics is not concerned with activities of this nature except insofar as they can be connected with wealth.
This does not exclude services in general from economics as Kirzner claims. It simply gives services a secondary and less prominent role. And it excludes some services, such as personal conversations.
Reisman includes services like construction, banking, insurance, transportation, mining, farming, and manufacturing. He further includes cleaning and repair of goods, and selling goods in retail stores. He also includes services less connected with business such as haircuts, vacation flights, and personal telephone use. (All those examples are from the book.)
Reisman proceeds to insist that this dependence of business on consumers holds only “at the level of the individual firm and industry.” At the “level of the economic system as a whole,” Reisman asserts, “the competition of the individual firms and industries is mutually offsetting, and there the consumers are dependent on business” (ibid.). To generalize from the microeconomic dependence of the individual business and industry on the consumers to a macroeconomic dependence of business as a whole on consumers, is to commit the fallacy of composition.
The fallacy of composition means inferring that the whole is like a part. For example, generalizing from a microeconomic fact (part) to a macroeconomic fact (whole).
However, Reisman claims (in this case) that macroeconomics is different than microeconomics, not the same, so it can’t be that fallacy. Kirzner made a misstatement about what Reisman said and based his fallacy accusation on that.
We also learn [from Reisman’s preface] that while Mises served as the faculty member primarily responsible for the approval of the dissertation, he did not, in fact, approve of the classical framework which Reisman had adopted.
This is misleading. Here’s what Reisman said:
Mises believed that because of my resurrection of the classical economists, I was indirectly resurrecting Marx. (Happily, he changed his mind on this subject two years later, after hearing my lecture “A Ricardian’s Critique of the Exploitation Theory.”
So what we learn from Reisman’s preface is that Mises initially disapproved, but changed his mind two years later. Kirzner incorrectly suggests broad disagreement between Mises and Reisman which was admitted by Reisman in his own words, but that’s contrary to Reisman’s actual words.
[Reisman’s] rejection of wertfreiheit has not only led to the “ideological” flavor of the book in its case for capitalism […]
Reisman didn’t say his book had an “ideological” flavor, yet that word appears within quotation marks, suggesting the word is actually in Capitalism in some relevant way. It’s not. (I used computer search to check.)
Reisman’s (implicit) refusal to recognize the centrality of the entrepreneurial role in the Misesian system (the term “entrepreneur” is used only very rarely in the book, and is not assigned an entry in the Index) […]
Reisman discusses this extensively using synonyms for entrepreneur like “businessman”. For more info, see my Refutation of Tabarrok’s Criticism of Reisman, which is mostly about this issue.
Relatedly, Murray Rothbard criticized Kirzner for misunderstanding entrepreneurs:
As Salerno points out, for all their talk of dynamism and uncertainty, the Hayek-Kirzner “entrepreneur” is curiously bloodless and passive, receiving and passively imbibing knowledge imparted to him by the market. The Hayek-Kirzner entrepreneur is far closer than they like to think to the Walrasian automaton — to the fictional “auctioneer” who avoids all real trades in the marketplace.
This writer would strongly suggest that this patronizing, if not thoroughly contemptuous, attitude [of Reisman’s] towards the entire economics profession of today, can only deepen the skepticism which this volume is likely to generate among unbiased new students of economics, concerning the work’s value and validity (not to speak of its objectivity and impartiality). Like the unfortunately abusive rhetoric used in the book […]
This is representative of other comments by Kirzner. I avoided quotes like these earlier in order to focus on the issues, but FYI that made my previous quotes less representative of the review’s tone and style.
This quote is hypocritical because Kirzner criticizes Reisman for making blunt, offensive, alienating statements (as you can see in this quote, and he says it elsewhere too). But Kirzner himself does that to Reisman throughout the review, including in this quote and the next one.
Intellectual honesty must prevent one from sharing such acceptance.
This is an example of Kirzner calling his opponents (not only Reisman but Reisman’s fans) intellectually dishonest. It comes after Kirzner’s criticisms of Reisman for (allegedly) being too intolerant of people he disagrees with.
It also comes after Kirzner criticized Reisman for criticizing the “willful dishonesty” of the environmentalist movement. I had thought Kirzner meant that questioning people’s honesty was outside the scope of acceptable debate, but then he did it himself.
Note that Reisman wasn’t just throwing out insults. To go with his claim about dishonesty, Reisman presented a direct quote (from Discover magazine) of a leading environmentalist openly advocating being less than “honest”, scaring the public, and leaving out doubts.
[One of Reisman’s ideas] is extremely cumbersome, and not at all necessarily superior to a number of mainstream textbook treatments
This verbose, cumbersome wording is typical of Kirzner’s writing style.
I think these criticisms are adequate to reject the review as incorrect.
I wrote this as part of my attempt to discover if there exists any correct criticism of Capitalism. I haven’t found one. For example, Reisman refuted Alexander Tabarrok’s criticism and I refuted Tabarrok’s followup. Please contact me if you know of unaddressed criticism of Capitalism.
My conclusion is that there are no known major errors in Capitalism. No one has discovered and explained one. So, along with the works of Ludwig von Mises (Reisman’s teacher), Capitalism should be accepted as some of the best economics knowledge currently in existence.