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More Reisman Insights Without George Reisman

Plagiarism is no virtue, and plagiarism combined with back-stabbing is even less so.

In an earlier article, I showed how George Reisman is quoted verbatim without getting credit for the quote, and how his views on environmentalism are being used and paraphrased, again without giving him credit. The fact that such a man as George Reisman exists, that he is a long time Objectivist, and that he has revolutionized economic theory, is obviously a closely guarded secret.

When I read Andrew Bernstein’s The Capitalist Manifesto (an excellent book, but that is not the subject of this article), I was quite happy to see that Reisman is quoted extensively in it, and I thought this would be a sign that Reisman is again receiving the recognition he so amply deserves in Objectivist circles. Unfortunately, Bernstein seems to be the exception rather than the rule.

What is great about Reisman’s Capitalism: A Treatise on Economics is of course the integrated whole. But if I have to single out one identification as more important and more fundamental than the rest, I would pick out his identification of the primacy of profits principle. This is discussed at length in Chapter 11, Part C, of Capitalism, and is also presented in shorter form in the essay "Classical Economics versus the Exploitation Theory" (available from The Jefferson School). A short recapitulation will suffice:

It has been assumed, since the days of Adam Smith, that the original form of income was wages, and that profits are a deduction from wages. This mistaken view of course creates the problem of having to show that those deductions are justifiable. What Reisman has proved is that it is actually the other way round: the original form of income was profits, and wages are in fact a deduction from profits. (And this is, of course, a perfectly justifiable deduction.)

I think that this principle is almost self-evident, once it has been stated. But this is the case with many path-breaking principles. (You could take some of Ayn Rand’s discoveries as examples here, e.g. that life is the ultimate standard of value. Once stated and explained, this seems self-evident. But someone had to state it and explain it! Another example, from economics, would be Mises’ analysis of how new inflationary money works its way through the economy, enriching those who are the first to receive it and impoverishing those who are the last to receive it. Once one knows that, it seems odd that nobody had thought about it before. But nobody had! And the examples, I think, could be multiplied.)

The moral point here is that nobody should utter a phrase like "wages are a deduction from profits" without giving credit to George Reisman (just like nobody should say that "life is the ultimate standard" without giving credit to Ayn Rand – or rename Rearden Metal and call it "miracle metal"). Without George Reisman, we simply would not know this!

Now to the plagiarism.

In a recently published volume called The Abolition of Antitrust, Objectivist economist Richard Salsman writes:

Profit is created by intellectual labor, which is most ably exercised by entrepreneurs and capitalists. [...] Indeed, profit is the original form of income, the form that necessarily precedes all other earned incomes – the familiar trio of wages, rent, and interest. (p. 47-48)

Yet profit is the original form of income and the precondition for incomes earned by hired labor (wages), landlords (rent), and bankers (interest). Profit is not a "deduction" from these other incomes; it is yet another form of income – the first form and the form that is earned by mental effort. [...] The status of profit as primary income should be obvious from the common-sense observation that in the long-run, only profitable firms are able to hire and pay laborers, landlords, or bankers, while unprofitable firms – especially those that are likely to fall into bankruptcy – are simply no capable of making such payments. (p. 51)

No reference to George Reisman is given here. Are we to believe that the "primacy of profits" principle should be attributed to Richard Salsman? Apparently not, apparently he wants to give credit for the identification to Jean-Baptiste Say:

In fact profit is not created by physical labor but by mental labor – by the intelligence exercised by entrepreneurs and capitalists. Only one economist in history has recognized this fact and used it to suggest a factual theory of profit. In the early 1800s, Jean-Baptiste Say, a French classical economist, rejected the labor theory of value. Say originated the utility theory of value and price – seventy years before neo-classical economists were given credit for doing so. Yet unlike later utility theorists Say did not confine his insight, about price incorporating a mental estimate, to consumers alone. Nor did he believe that such an estimate "balanced" a value that was "only" created by manual labor. Say showed that entrepreneurs and capitalists contribute the most to wealth creation – indeed, make manual laborers possible – by their intellectual labor. [...] Say's theories were a worthy exception to the falsehoods of British classical economists, since he rejected the labor theory of value and recognized entrepreneurs and capitalists as intelligent producers of profit. Say discovered that these producers earned their unique income and deserved praise. (p. 44)

Since Say’s Traité d’économie politique is available on the net in an English version, I downloaded the book and spent a week reading it. The book is full of valuable insights, and if all Salsman wants to claim is that Say is underrated and deserves to be read, that is perfectly fine with me. But there is not one single sentence in the book to substantiate the claim that it was Say who first identified the "primacy of profits" principle, or even that he has foreshadowed Reisman’s identification of it. (It is true that Say criticizes Smith’s "labor theory of value". But he does not say that profit is the original form of income and that wages are a deduction from profits, which is the essential fact identified by Reisman. What he does say is that profits are a remuneration for the work performed by capitalists, just as wages are a remuneration of the work performed by laborers. This is undoubtedly true. But it is certainly not the same thing as saying wages are a deduction from profits.)

So much for the plagiarism. Now to the back-stabbing. (The person who sent me those quotes quite correctly prefaced this one with the words "Be prepared to vomit!")

The latest Austrian effort, by a student of Mises, further sabotages sound profit theory by insisting that profit is determined by the personal consumption of capitalists. [Here, a footnote refers to Reisman’s Capitalism.] Older anti-capitalists, such as John Maynard Keynes, Michael Kalecki, and Joan Robinson, propounded this same theory. As Say pointed out two centuries ago, consumtion is the destruction of wealth and thus can never be the cause of its creation. (p. 46)

Those of you who have read Reisman could make it an exercise to figure out just exactly how many things are wrong with this short quote. To begin with the most obvious, the theories of Kalecki and Robinson are explicitly discussed by Reisman (p. 801–803), and were it not for this discussion, Salsman would not know enough to even make this sleazy, underhanded criticism.1)

Secondly, this quote misunderstands (or misrepresents) the theory it purports to attack. What Reisman’s theory explains is not the individual profits made by individual entrepreneurs or capitalists, but the rate of profit in the economy as a whole. When an innovator in a branch makes an exceptionally high profit, thanks to his own efforts, this is always off-set by less profits (or losses) by his competitors. But this does not change the general rate of profits. This is ultimately determined by time preference. This fact has been recognized by "Austrians" since the days of Böhm-Bawerk; what Reisman adds to this is that time preference works through the consumtion of capitalists. (I won’t go through the deduction of this principle, since Reisman’s book is actually available for those interested.) It is worth mentioning, however, that a possible misunderstanding of this theory – that one or a few individual capitalists could raise profit by simply consuming more – is dealt with explicitly by Reisman, on p. 737.

Finally, Salsman is certainly right in saying that "consumtion is the destruction of wealth and thus can never be the cause of its creation". But is this something denied or even disputed by Reisman? Certainly not. One of the points of Reisman’s theory is that, while individual profits by one capitalist shows that this individual capitalist has done a good job, a rise in the general rate of profit on the contrary shows that the economy is on its way downhill. And this is explained so thoroughly in his book that no honest reader could possibly miss it.

There is also an unstated, but very dirty, implication of what Salsman says here: that Reisman is trying to diminish or denigrate the productive contributions by capitalists. Those who know Reisman’s work also know that this is nonsense. Let me just mention a point repeated many times in Capitalism: that the productive activities of capitalists and businessmen is the source of all spending in the economy.

All in all, this is nauseating. I have not yet vomited, but I sure feel like I should.2)

I have seen dishonest criticisms of Reisman before, but those have come from "Austrians" who do not like his departures from "Austrian orthodoxy". Bad as they are, no one has had the cheek to plagiarize his insights and claim them as their own.

It might be thought that Salsman is making mere "errors of knowledge" here. That would be possible, if we assume that Salsman is stupid (or illiterate). But I do not think he is.3)

What is Salsman’s motivation? Since I am not telepathic, I simply do not know. Neither do I know what makes Leonard Peikoff deliver a lecture such as the one I analyzed in an earlier article. Nor do I know what makes Harry Binswanger dismiss those who take a firm moral stand in defense of George Reisman as "moral agnostics" (as if certainty and knowledge were species of "agnosticism"). Nor, by the way, do I know what makes Nathaniel Branden write such a piece as "Benefits and Hazards" (although I have some ideas about it). I only know that my comparison here is apt.

Now, I believe that Objectivists, by and large, are good and honest people who will repudiate falsehoods as soon as they see them as falsehoods. But few Objectivists are also experts on economic theory and doctrine history. Salsman has obviously set himself up as such an expert. There is certainly a risk that other Objectivists, not so knowledgeable, "buy" his criticism without bothering to really investigating the matter. And – since George Reisman is the Objectivist economist of the century – this would be a tragedy.

Digression on Jean-Baptiste Say

The closest quotes I found in Say’s treatise are the following:

To the labour of man alone he [Adam Smith] ascribes the power of producing values. This is an error. A more exact analysis demonstrates, as will be seen in the course of this work, that all values are derived from the operation of labour, or rather from the industry of man, combined with the operations of those agents which nature and capital furnish him. (Introduction, 1.59.)


It is a maxim with Smith and those of his school, that human labour was the first price, – the original purchase-money, paid for all things. They have omitted to add, that for every object of purchase, there is, moreover, paid, the agency and co-operation of the capital employed in its production. Is not capital itself, they will say, composed of accumulated products, – of accumulated labour? Granted: but the value of capital, like that of land, is distinguishable from the value of its productive agency; the value of a field is quite different from that of its annual rent. When a capital of 1000 dollars is lent, or rather lent on hire, for a year, in consideration of 50 dollars more or less, its agency is transferred for that space of time, and for that consideration; besides the 50 dollars, the lender receives back the whole principal sum of 1000 dollars, which is applicable to the same objects as before. Thus, although the capital be itself a pre-existent product, the annual profit upon it is an entirely new one, and has no reference to the industry, wherein the capital originated.

Wherefore when a product is ultimately completed by the aid of capital, one portion of its value must go to recompense the agency of the capital, as well as another to reward that of the industry, that have concurred in its production. And the portion so applied is wholly distinct from the capital itself, which is returned to the full amount, and emerges in a perfect state from its productive employment. Nor does this profit upon capital represent any part of the industry engaged in its original formation.

From all which it is impossible to avoid drawing this conclusion; that the profit of capital, like that of land and the other natural sources, is the equivalent given for a productive service, which though distinct from that of human industry, is nevertheless its efficient ally in the production of wealth. (Book II, Chapter VIII, paragraphs 41–43.)

All of which is true. But I can rest my case here, for this does not tell us that wages are a deduction from profits, but merely – as I have already pointed out – that profits are quite as justifiable as wages.

But this is not the only inaccuracy in Salsman’s account. He writes: "Say originated the utility theory of value and price – seventy years before neo-classical economists were given credit for doing so." Now, it is true that Say does ascribe value and price to utility, and this is a step forward from Smith’s "labor theory". But the revolution inaugurated by Carl Menger in 1871 did not consist in merely identifying this fact, but in explaining the phenomenon of marginal utility and resolving the age-old "value-paradox" (why diamonds are so much more expensive that water, although water has far greater utility). It was also Menger who, in this connection, introduced the distinction between "goods of the first order" and "goods of higher orders", which is nowhere to be found in earlier writings (including those by Say). – Of course one should not criticize Say for not making those discoveries, but neither should one ascribe them to him, when he actually did not make them.

By the way, Eugen von Böhm-Bawerk, in his Capital and Interest, does give Say credit for having at least foreshadowed Menger’s later insight on this point. (Book I, p. 124f.) But then, Aristotle foreshadowed many of the insights of Ayn Rand; this does not mean he made those identifications – merely that he pointed in the right direction.

Digression on Salsman’s historical acumen

I simply cannot resist telling the following:

In a lecture, Salsman once told that Adam Smith was heavily influenced by Jeremy Bentham. Obviously, he did not even bother to look up Bentham’s years (1748–1832), before he made this statement. Bentham was 26 when Wealth of Nations was published. And I do not think this book was completed in a week, nor even in a year. (The actual fact is that Smith began expounding his theories in lectures at the Glasgow University in 1752. I learned this last, by the way, from a footnote in Say’s treatise. Simple subtraction, of course, will tell you that Bentham was four years old at the time. Well – I should not belabor the obvious.)4)

A special thanks to Carl Svanberg, a promising young Objectivist in Sweden, for drawing my attention to this matter.

1) It actually reminds me of a scene in a novel I once read, where the torturers have to ask their victim for advice about how to run the torturing machine. - As for John Maynard Keynes, I do not believe he even had a theory of profit.

2) "Watch your stomach, kid," said Mike, "just watch your stomach. A man can't get sick just because he oughta." - The Fountainhead.

3) Part of my disappointment with Salsman is the fact that I have read some things by him that are actually good. I liked his book Gold and Liberty - although I think Reisman's treatment of the subject of gold in Capitalism is far superior. And although Murray Rothbard is, in many respects, a very bad guy, I would not hesitate to recommend his short pamphlets What Has Government Done to Our Money? and The Case for a 100 Percent Gold Dollar. - Salsman has also written an excellent refutation of the idea that the gold standard was somehow responsible for the Great Depression; it appeared in The Intellectual Activist, Vol. 9, Nr 1, January 1995. - I have not listened to Salsman's lectures on the "Austrian School", simply because I cannot afford to buy them. I had always been curious about what they may contain; today, my curiosity is gone.

4) If it is of any interest, I have seen worse. In a newspaper article in a big Swedish daily, a person of great learning told us that Adam Smith was heavily influenced by the French Revolution. You might recall that Smith died in 1790. He did not have much time to get influenced!

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