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The collapse
of the Soviet Union in December of 1991 was the best news of my
lifetime. The monster died. It was not just that the USSR went down.
The entire mythology of revolutionary violence as the method of
social regeneration, promoted since the French Revolution, went
down with it. As I wrote in my
1968 book, Marxism was a religion of revolution, and Marxism
died institutionally in the last month of 1991.

Yet we cannot
show conclusively that “the West” defeated the Soviet
Union. What defeated the Soviet Union was socialist economic planning.
The Soviet Union was based on socialism, and socialist economic
calculation is irrational. Ludwig von Mises in 1920 described why
in his article, “Economic
Calculation in the Socialist Commonwealth.” He showed in
theory exactly what is wrong with all socialist planning. He made
it clear why socialism could never compete with the free market.
It has no capital goods markets, and therefore economic planners
cannot allocate capital according to capital’s most important and
most desired needs among by the public.

Mises’s argument
was not taken seriously by the academic community. Socialism was
so popular by 1920 among academics that they did not respond to
Mises for over 15 years. When finally one major economist, who really
was not a major economist, but was simply a Polish Communist, wrote
a response to Mises, it got a great deal of publicity. His name
was Oscar Lange. He was a hack. He taught at the University of Chicago.
He had no theory of economics. Immediately after World War II, he
returned to Poland, renounced his American citizenship, and became
a major Polish government bureaucrat. He was Stalin’s hand-picked
first Polish ambassador to the United States. He was a Marxist.
He was a Communist. He was a hack. He spent his career with his
finger in the wind, seeing which way it was blowing. As for his
critique of Mises, Poland never adopted his so-called practical
organizational answer to Mises, and neither did any other Socialist
Commonwealth nation.

So, the only
major supposed academic refutation of Mises was made by a hack who
switched sides to Communism when he got a better offer. Yet he was
heralded as a brilliant economist because he had supposedly refuted
Mises. The academic world never admitted what Lange was, which was
a hack Communist. It never admitted that no socialist nation ever
implemented his supposed alternative to the free market system.
The academic world simply clung for over 50 years to his completely
hypothetical alternative to free market capital allocation. The
academic world would not learn the truth.

Finally, when
it became clear in the late 1980s that the Soviet economy was bankrupt,
a multimillionaire socialist professor named of Robert Heilbroner
wrote an article, “After
Communism,” for The New Yorker (Sept. 10, 1990),
which is not an academic journal, in which he admitted that throughout
his entire career, he had always believed what he had been taught
in graduate school, namely that Lange was right and Mises was wrong.
Then, he wrote these words: “Mises was right.” Heilbroner
wrote the most popular textbook on the history of economic thought
that has ever been written, The
Worldly Philosophers. He became a multimillionaire off the
book royalties. In that book, he did not even mention the existence
of Mises. He, too, was a hack Â– a polished hack (though not Polish),
but still a hack. Yet he was widely respected in academia. Academia
made him rich.

The academic
community is intellectually corrupt. It goes with fads, and it does
not react to the truth. It suppresses the truth. I realized this
very early in my career, long before I got a Ph.D. The guild in
every university department operates as a guild, and it has no commitment
to truth in matters controversial until one side or the other loses
power. When one side is perceived as possessing power, which the
Communists were perceived as possessing, 1917-1991, there is never
any direct challenge by the academic community. Academia argued
about this or that aspect of the Soviet system which was wrong,
which generally related to freedom of speech. But, with respect
to the basic operations of the Communist economic planning system,
there was never anything like a comprehensive critique of that system,
and never did anybody inside the academic community look for the
weakness of Communism in Mises’ 1920 article.

The Soviet
Union was always economically bankrupt. It was poverty-stricken
in 1991. It was, in conservative journalist Richard Grenier’s magnificent
phrase, Bangladesh with missiles. Outside of Moscow, Russians in
1990 lived in poverty comparable to mid-19th century America, but
with far less freedom. Yet this was never told to students during
the years that I was in school, which was in the 1960s. There were
a few economists who did talk about it, but they got little publicity,
were not famous, and their books were not assigned in college classrooms.
The standard approach of the academic community was to say that
the Soviet Union was a functioning economy: a worthy competitor
to capitalism.

Paul Samuelson
was the most influential academic economist of the second half of
the twentieth century. He wrote the introductory textbook that sold
more than any other in the history of college economics. In 1989,
as the USSR’s economy was collapsing, he wrote in his textbook that
the Soviet Union central planning system proves that central planning
can work. Mark Skousen nailed him on this in his book Economics
on Trial in 1990. David Henderson reminded readers in the
Wall Street Journal in 2009.

Samuelson
had an amazingly tin ear about communism. As early as the 1960s,
economist G. Warren Nutter at the University of Virginia had done
empirical work showing that the much-vaunted economic growth in
the Soviet Union was a myth. Samuelson did not pay attention.
In the 1989 edition of his textbook, Samuelson and William Nordhaus
wrote, “the Soviet economy is proof that, contrary to what
many skeptics had earlier believed, a socialist command economy
can function and even thrive.”

The creator
of the so-called Keynesian synthesis and the first American winner
of a Nobel Prize in economics was blind as a bat to the the most
important economic failure of the modern world. Two years later,
the USSR was literally broken up, as if it had been some bankrupt
corporation. Samuelson never saw it coming. People who are conceptually
blind never do.

THE KEYNESIAN
ERA IS COMING TO A CLOSE

I say this
to give you hope. The Keynesians seem to be dominant today. They
are dominant because they have been brought into the hierarchy of
political power. They serve as court prophets to the equivalent
of the Babylonians, just before the Medo-Persians took the nation.

They are in
charge of the major academic institutions. They are the main advisors
in the federal government. They are the overwhelmingly dominant
faction within the Federal Reserve System. Their only major institutional
opponents are the monetarists, and the monetarists are as committed
to fiat money as the Keynesians are. They hate the idea of a gold
coin standard. They hate the idea of market-produced money.

There was no
overwhelming outrage among staff economists at the Federal Reserve
when Ben Bernanke and the Federal Open Market Committee cranked
up the monetary base from $900,000,000,000 to $1.7 trillion in late
2008, and then cranked it up to $2.7 trillion by the middle of 2011.
This expansion of the money supply had no foundation whatsoever
in anybody’s theory of economics. It was totally an ad hoc decision.
It was a desperate FOMC trying to keep the system from collapsing,
or least they thought it was about to collapse. The evidence for
that is questionable. But, in any case, they cranked up the monetary
base, and nobody in the academic community except a handful of Austrians
complained that this was a complete betrayal of the monetary system
and out of alignment with any theory of economics.

The Keynesians
are eventually going to face what the Marxists have faced since
1991. Literally within months of the collapse of the Soviet Union,
when members of the Communist Party simply folded up shop and stole
the money that was inside the Communist Party coffers, any respect
for Marxism disappeared within academia. Marxism became a laughingstock.
Nobody except English professors, a handful of old tenured political
scientists, and a tiny handful of economists in the Union of Radical
Political Economists (URPE), were still willing to admit in late
1992 that they were advocates of Marxism, and that they had been
in favor of Soviet economic planning. They became pariahs overnight.
That was because academia, then as now, is committed to power. If
you appear to have power, you will get praised by academia, but
when you lose power, you will be tossed into what Trotsky called
the ashcan of history.

This is going
to happen to the Keynesians as surely as it happened to the Marxists.
The Keynesians basically got a free ride, and have for over 60 years.
Their system is illogical. It is incoherent. Students taking undergraduate
courses in economics never really remember the categories. That
is because they are illogical categories. They all rest on the idea
that government spending can goose the economy, but they cannot
explain how it is that the government gets its hands on the money
to do the stimulative spending without at the same time reducing
spending in the private sector. The government has to steal money
to boost the economy, but this means that the money that is stolen
from the private sector is removed as a source of economic growth.

The Keynesian
economic system makes no sense. But, decade after decade, the Keynesians
get away with utter nonsense. None of their peers will ever call
them to account. They go merrily down the mixed economy road, as
if that road were not leading to a day of economic destruction.
They are just like Marxist economists and academics in 1960, 1970,
and 1980. They are oblivious to the fact that they are going over
the cliff with the debt-ridden, over-leveraged Western economy,
because they are committed in the name of Keynesian theory to the
fractional reserve banking system, which cannot be sustained either
theoretically or practically.

The problem
we are going to face at some point as a nation and in fact as a
civilization is this: there is no well-developed economic theory
inside the corridors of power that will explain to the administrators
of a failed system what they should do after the system collapses.
This was true in the Eastern bloc in 1991. There was no plan of
action, no program of institutional reform. This is true in banking.
This is true in politics. This is true in every aspect of the welfare-warfare
state. The people at the top are going to be presiding over a complete
disaster, and they will not be able to admit to themselves or anybody
else that their system is what produced the disaster. So, they will
not make fundamental changes. They will not restructure the system,
by decentralizing power, and by drastically reducing government
spending. They will be forced to decentralize by the collapsed capital
markets.

When the Soviet
Union collapsed, academics in the West could not explain why. They
could not explain what inherently forced the complete collapse of
the Soviet economy, nor could they explain why nobody in their camp
had seen it coming. Judy Shelton did, but very late: in 1989. Nobody
else had seen it coming, because the non-Austrian academic world
rejected Mises’s theory of socialist economic calculation. Everything
in their system was against acknowledging the truth of Mises’s criticisms,
because he was equally critical about central banking, Keynesian
economics, and the welfare state. They could not accept his criticism
of Communism precisely because he used the same arguments against
them.

The
West could not take advantage of the collapse of the Soviet Union,
precisely because it had gone Keynesian rather than Austrian. The
West was as compromised with Keynesian mixed economic planning,
both in theory and in practice, as the Soviets had been compromised
with Marx. So, there was great praise of the West’s welfare state
and democracy as the victorious system, when there should have been
praise of Austrian economics. There was no realization that the
West’s fiat money economy is heading down the same bumpy road that
led to the collapse of the Soviet Union.

It was not
a victory for the West, except insofar as Reagan had expanded spending
on the military, and the Soviets stupidly attempted to match this
expenditure. That finally “broke the bank” in the Soviet
Union. The country was so poverty-stricken that it did not have
the capital reserves efficient to match the United States. When
its surrogate client state, Iraq, was completely defeated in the
1991 Iraq war, the self-confidence inside the Soviet military simply
collapsed. This had followed the devastating psychological defeat
of the retreat of the Soviet Union out of Afghanistan in 1989. Those
two defeats, coupled with the domestic economic bankruptcy of the
country, led to the breakup of the Soviet Union.

Read
the rest of the article

August
27, 2012

Gary
North [send him mail]
is the author of Mises
on Money. Visit http://www.garynorth.com.
He is also the author of a free 31-volume series, An
Economic Commentary on the Bible.