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Capitalism: A Treatise on Economics

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Capitalism, which appeared in 1998, is the life work of George Reisman, an economist unfortunately hardly known, who teaches at a private American university. This work can rightly lay claim to being one of the most comprehensive and intelligent defenses of capitalism that has ever been written. In over 1,000 closely printed pages, Prof. Reisman not only deals with all conceivable economic subjects, but places special value on demonstrating the errors of anti-capitalistic doctrines - from Marx, to Keynes, to the environmental movement. His foundation is, on the one side, the Austrian school, above all von Mises, with whom he studied, and, on the other side, the Objectivism of Ayn Rand, with whom Reisman was also acquainted and - together with Rothbard - debated. On this foundation he places a crystal clear, convincing structure of thought; in its totality a stirring plea for Laissez-Faire capitalism as the only system that is consistent with the nature of man and a free society. Rothbard and Reisman, incidentally, seem to have become estranged after their studies together. While in the case of Rothbard, to my knowledge, Reisman is never mentioned, Reisman in Capitalism shows Rothbard among others to have accepted the fundamental tenet of the Marxian exploitation theory, namely, that in reality the workers are the producers of goods.

If Reisman deals with Rothbard this way, then one must not be surprised when he deals with the real anti-capitalists in such a devastating way that only tatters remain. All this without ever becoming abusive or polemical, for he is concerned with ideas, not persons. Drawing the conclusion that only irrational dolts could hold the erroneous doctrines just refuted is always left to the reader. And, indeed, I admit it, not a few chapters made me ashamed. I was ashamed of what nonsense I myself had partly believed, had partly simply never questioned. All the more, as after working through a chapter of Reisman's, everything seems very simple and logical. "You too could have gotten there yourself if you had only thought for a moment," one says to oneself. Later the shame gives way to the good feeling of having mined an intellectual treasure.

Reisman devotes special attention and its own chapter to the environmental movement, which he conceives as the ideological heirs of the socialists and for the present the most dangerous enemies. Socialism in its time set out as a movement which claimed reason and rationality for itself alone and proclaimed itself as the only scientific world view. After the catastrophic failure of the socialist experiment, this anticapitalistic movement did not inquire into the rational and economic causes of the failure, but preferred to throw reason as such overboard. The result was a green movement dangerous for freedom, which, for example, in all seriousness and partly with success, can declare inhospitable frozen wilderness in Alaska to be "sacred ground, which must never be desecrated by oil derricks and pipelines."
In view of the new bugbear of the anti-globalization movement, this view seems to be out of date. Nevertheless, one will discover rather that the philosophical foundations of the environmental movement, which Reisman elaborates, appear much more open in the case of the enemies of globalization. Here they also erupt in concrete acts of violence, while in the case of the Greens they are rather obscured, present in the background. They include hatred of the free, productive human being, who applies his reason for the improvement of his condition and sees himself as well as his equals as the only instance constituting value. The anti-globalization scene uses indiscriminately the arsenals of socialists, statists, nationalists, and environmentalists in order to recommend to us mankind, state, nation, or mother earth, indeed, even "animal rights" as the highest, sacred values. The point being, "my concerns shall never be my concern," as Stirner said.

Politically, Reisman is an advocate of the minimal state. In the last chapter of Capitalism, titled "Toward the Establishment of Laissez-Faire Capitalism," a strategy is outlined for achieving the minimal state. This is also certainly worth reading by those anarcho-capitalists who are realistic enough to seek the way to their ideal in the gradual weakening of the state. Hopefully, they will do so in common, up to a point in time who knows how remote, with the advocates of the minimal state.
In short, the approximately 200 marks which I spent for Capitalism have been the best investment of my life in books. One cannot recommend the purchase only to people who enjoy reading the daily newspapers: after the reading of Capitalism, the fallacies of the untaught and the unteachable jump out at one in thick, fat letters, day in and day out-and not only out of the economics section.

I agree with all the praise that has been lavished on GeorgeReisman's Capitalism. I actually think this is the greatesttreatise on economics of all time, greater even than The Wealth of Nations or Human Action.

An achievement of this kind is always an integrated whole. But if I were to single out one insight as the greatest one, it would be the "primacy of profits" principle, the insight that wages are a deduction from profits, not vice versa. This lays the ground for the most thorough and fundamental refutation of the Marxist exploitation theory that is possible; it also lays the ground for what actually constitutes economy-wide profit (the "net consumption" theory of profits) and the actual relationships between profits, wages and investment, and for many other things as well. To make a comparison, I think this discovery ranks with Adam Smith's original discovery of the principle of division of labor, or the early Austrians' discovery of marginal utility. I sincerely hope that this principle gets thoroughly understood by economists in the future.

Some other highlights I could mention merely because they have not been mentioned by the other reviewers:

The demonstration that the rise in the average standard of living rests entirely on lower prices for goods and services (a fact which is merely obscured by the presence of inflation).

Understanding the extent of the gulf between a precapitalist, non-division of labor society and a modern division of labor society. (E.g.: understanding why a rise in population would be a threat in the former kind of society, but a source of great benefit in the latter kind.)

The demonstration that one of the things capitalism is regularly accused for - the concentration of great fortunes in relatively few hands - is actually to the benefit of everybody, not merely the owners of those fortunes.

Plus much, much more.

After reading the book review guidelines, I will refrain from a spiteful comment I wanted to make to an earlier reviewer. But I will say this: Reisman's monumental achievement would not have been possible without a thorough understanding of all his predecessors, from Smith to Mises. But I do not think it would have been possible without a thorough understanding of Ayn Rand's philosophy either. Arguing this point would lead to far, so I will leave it at that - except for saying that the "primacy of profits" principle is the economic implementation of the idea that Atlas carries the world on his shoulders.

The review is by David R. Henderson, research fellow at the Hoover Institution, and is titled THE LATEST CAPITALIST MANIFESTO. It appears in the issue of April 28, 1997, on p. 62. What follows is the verbatim text of the review, with paragraph breaks indicated by a pair of brackets[].

[]EVERY SO OFTEN A BOOK IS PUBLISHED that commands attention for its scope, ambition, and physical size. Capitalism (Jameson Books, $95.00), by Pepperdine University economist George Reisman, is such a book: It's an exhaustive survey and an impassioned manifesto, and is the size and weight of the phone book of an extremely large city. As Reisman writes on page 61 (out of 1,046): "The remainder of this book can be summarized as demonstrating a single proposition: In every possible way, with no valid objection, the solution for the economic problem is capitalism." Reisman backs up his claim. He shows, among other things, why capitalism is necessary to end poverty, mass unemployment, and environmental destruction.

[]Much of what Reisman covers will be familiar to students of economics, but CAPITALISM covers some of the more standard economic topics--the chaos caused by socialism, productivity as the source of large fortunes in a capitalist society, price controls--in a fresh and clever way.

[]Take price controls. Economically literate readers know that price controls, by holding prices below free-market levels, often create shortages. Reisman goes further, presenting at least three insights about the harm done by price controls.

[]First, many observers noted the apparently arbitrary distribution of gasoline due to price controls in the 197Os. In some areas of the country, people lined up for blocks to get gasoline; in others lines were very short. Reisman shows why. In a free market, companies have an incentive to get gasoline to those willing to pay the most. A relative scarcity in, say, New Jersey, causes a higher price there, inducing oil companies to send more gasoline there: But price controls sever the link between price and supply. Why bother sending more gas to New Jersey if you can't get the higher price? Reisman writes: "It largely ceased to matter to the oil companies how their gasoline was distributed."

[]Second, Reisman shows how price controls drive prices to very high levels in uncontrolled sectors of the economy. Consider New York housing. Some apartments are rent controlled; some are not. Assume that without rent control there would be one million apartments. These apartments would be rented to the million people willing to pay the most. Now assume the government regulates rents on half the apartments--some of the people renting the controlled apartments will displace people who would have paid more. What happens to these people? Same of them will shift over to the uncontrolled market, competing with the half million people already renting in this market. As a result, rents in the uncontrolled sector are higher.

[]Third, by creating shortages, price controls change the relationship between buyer and seller. The seller no longer needs any individual buyer and thus "views the buyer as a petty chiseler seeking values without payment." The buyer "views the seller as an omnipotent tyrant whom he must beg for favors or threaten with reprisals." Reisman illustrates with a shortage-era quote printed in the New York Times from a gas station attendant: "If he's that stupid, he waits in line an hour and doesn't know the rules, l let him get to the pump and then I break his heart."

[]Beyond such classic subjects, CAPITALISM includes much that's new, including a witty critique of the textbook model of perfect competition and Reisman's own theory of investment. His critique of environmentalism, in which he argues that environmentalists constitute the greatest current threat to capitalism, is especially vigorous. "The green movement," he writes, "is the red movement no longer in its boisterous, arrogant youth, but in its demented old age."

[]By and large, Reisman backs up his indictment of environmentalists. He quotes a National Park Service biologist who claims that people are a cancer on the earth and hopes for "the right virus to come along." Reisman notes that these aren't just ideas of the lunatic fringe; John Muir, the founder of the Sierra Club, said similar things, and mainstream environmentalists have not disowned such inhumane sentiments. Reisman also points out that the environment has changed dramatically for the better in many ways with the advance of capitalism. For example, the places in the world with the safest drinking water are places with modern purification plants. Before capitalism, streets served as sewers; before cars, horses created an enormous pollution problem. This is all obvious, but what's striking is how rarely anyone says it.

[]Overall, Capitalism is a book you would want in your library if you want to know what a consistent, intelligent advocate of capitalism would say on almost any economic issue.

This brilliant exposition of capitalist economic theory belongs on the bookshelf of anyone interested in either liberty or economics. Professor Reisman's treatise offers a thorough understanding of capitalism, a synthesis of Austrian and classical economics bristling with new insights into the bargain, and refutations of the major opposing camps. (The chapter on the "environmentalism" may be the only writing on this subject, other than Ayn Rand's own, clearly to identify the anti-human motivations of the "green" movement.)

My only misgiving is that Reisman's introduction, footnotes and bibliography continue the Objectivist tradition of unfairly criticizing Murray Rothbard.

Neither Rand nor her followers have ever come thoroughly to grips with the claims of anarchocapitalism that defense and court services can be provided by the market without a central government; nor have they adequately faced the difficulties (if not actual contradictions) inherent in the creation of a State from scratch without violating anyone's rights in the process; nor do they ever seem to have grasped why Rothbard describes many of the actions of the U.S. government in the twentieth century as "imperialistic." There is thus a little hubris in dismissing Rothbard's work as egregiously self-contradictory.

(And who ever said -- as Reisman implies in his bibliography -- that Rothbard's _Man, Economy and State_ should be read as a "substitute" for Ludwig von Mises's _Human Action_?)

Reisman does not accept Mises's neo-Kantian and ethically subjectivist foundations (as Rothbard also did not), yet he recommends that students of economics read _all_ of Mises's works. Would that he showed the same generosity toward another of Mises' most brilliant students.

But these are small issues that do not affect the main thrust of Reisman's presentation. Anyone who wants to defend capitalism should study this outstanding treastise in detail.

I should say that a couple of weeks ago I read with enthusiasm and thanks Professor Reisman's book "The Government Against the Economy" (a work incorporated into the present volume consisting of several chapters), and am in the process of reading the author's "Capitalism."

One thing I wish is that the present work could be subdivided and published as a series of more convenient-to-hold volumes, perhaps in quality paperback. Professor Reisman is, without question, the most interesting, most readable economist I have ever read, even including the great Ludwig von Mises himself. I remember reading Mises' "Socialism" to great effect some thirty years ago, but was never able to make it all the considerable way through "Human Action." It functioned more as an abstruse reference work, not as a workaday compendium of useful arguments, close analyses, and well-chosen illustrative examples that one might use in ordinary conversation, in writing letters to the editor or Congressman, or explaining to one's children, or giving to one's college students who are likely as not to be assigned texts in college designed to obscure or make unintelligible a subject Reisman's work illuminates brightly and clearly.

Professor Reisman is an excellent writer, and I am simply awestruck at the simple hard work--the indefatigable labor--"Capitalism" represents, and it deserves the wider audience a more portable edition would make possible. I have written to Professor Reisman about this concern. Perhaps if others find his work as compulsively readable --you read that correctly--as compulsively readable as I do, you might want to contact him or the publishers.

Normally, I take a book to read with me for those occasions when I have to wait for others, or grab a quiet meal when I am out and about. I really miss not having a portable version of "Capitalism" to take with me. The book is that good!

I have considered photocopying a few chapters to take with me on those times, but since the publisher and the author would be cheated, I am thinking alternately of taking this massive and heavy tome and tearing it up into convenient-to-hold sections.

Let us hope a publisher hears of this problem. I would love to make gifts of separate volumes, each with its own title, in hopes I could spread the enlightenment Professor Reisman's great gift to humanity has made possible.

Capitalism: A Treatise on Economics is an exhaustive defense of laissez-faire capitalism as prerequisite for continued progress of material
civilization.

By integrating forgotten but sound principles of such classical economists as Smith, Ricardo, Say, and James and John Stuart Mill with equally sound principles of such Austrian economists as Menger, Bhm-Bawerk, Wieser, and Mises, Reisman develops powerful and highly original theories of aggregate profit and interest, saving and capital accumulation, wages, and aggregate economic accounting. In the course of presenting these theories, he demonstrates the role of technological innovation in reducing prices and increasing the supply of capital goods. He demonstrates that the economic function of businessmen and capitalists is to raise the productivity of labor and thereby the standard of living of the average wage earner. By applying his developed theories in scholarly but compulsively readable detail, Reisman dismantles Marxism, Keynesianism, the "monopoly" and "oligopoly" doctrines, environmentalism, and all fundamental forms of socialism and interventionism. This book is at once an introductory, intermediate, and advanced text on economic theory, as well as a mine of information on current political and economic issues.

TO PUT THE EXTENT OF GEORGE REISMAN'S INTELLECTUAL ACHIEVEMENT into a single sentence: for a full understanding of economic institutions of laissez-faire capitalism the reading and very careful studying of his Capitalism: A Treatise on Economics is absolutely essential. Nowhere will one find a clearer, more comprehensive, more rigorous, more persuasive and thus exactly for these reasons absolutely enthralling description and explanation of all leading economic institutions of capitalism.

Most of Capitalism's content is presented in the framework of a highly original and integrated theoretical system. In terms of doctrinal pedigree and analytical substance, Reisman conceives his system as a synthesis of the fundamental ideas of Austrian (particularly of Eugen von Boehm-Bawerk and Ludwig von Mises), British Classical economists (Adam Smith, David Ricardo, and John Stuart Mill), and, quite significantly, of the novelist-philosopher Ayn Rand whose conclusions are greatly reinforced and whose analytical coherency are enormously magnified by Reisman's own numerous theoretical innovations. These innovations constitute the binding elements, as it were, which preserve what is true and discard what is false in the doctrines of both schools. Like a skillful sculptor, Reisman develops his argument all the while masterly cutting through doctrines and theorems, meticulously extracting and explaining the positive value of some and mercilessly exposing the analytical and empirical fallacies of others.

Exemplary of Reisman's intellectual vigor and independence, while acknowledging and praising highly Adam Smith's very valuable discussion of the distinction between productive and unproductive labor (p. 456 in Capitalism), is his devastating critique of Smith's ideas on the origin and nature of profit and wages, which found its most consequent logical development in the Marxian exploitation theory (pp. 475-482). Reisman credits numerous ideas of David Ricardo, acknowledges their significant impact on the direction and development of his own views on numerous problems in economics , but at the same time rejects emphatically Ricardo's theory of the relationship between machinery and unemployment (Ricardo-effect) , shows exhaustively that there is no tendency for the rate of profit to fall.

The Austrian school is credited with the discovery of the principle of marginal utility, thus laying the groundwork for a correct theory of price formation. He shows how the principle of marginal utility analysis, as developed chiefly by Boehm-Bawerk in his neglected essay Value, Cost, and Marginal Utility , leads to the important conclusion, almost entirely lost to contemporary microeconomics, that prices of commodities (i.e. reproducible goods which cover both capital and consumers' goods) are in most instances determined by their costs of production rather than directly by the marginal utility of the commodity in question. Austrians are furthermore credited with the discovery and elaboration of the important insight that under freedom of competition consumers and consumer spending help to direct, though by no means maintain, production and production plans of business firms.

But as with Classical economics, wherever Reisman finds analytical or empirical inconsistencies in Austrian economics, he mercilessly exposes them and brings the science of economics closer to a greater analytical tidiness and higher level of integration with observable facts and phenomena. For example, the highly influential Austrian time-preference approach to the phenomenon of originary interest (or profit), as originated again in the work of Boehm-Bawerk and brought to perfection in the writings of Fetter, Mises and Rothbard, is shown to be completely inadequate to both furnish a coherent explanation of the phenomenon of interest and remain consistent with wider conditions of the market (pp. 792-797).

For the sake of greater accuracy and to avoid confusion, it is necessary to make clear that Reisman regards the concept of time-preference as such as the "second major principle of valuation that closely bears on the subject of scarcity." (pp. 55-58) Indeed, Reisman's own theory of profit/interest depends critically on the fundamental idea of time-preference. The difference between what Reisman calls the traditional Austrian time-preference theory of Boehm-Bawerk et al and his own theory is that the traditional theory seeks to explain the phenomenon of profit/interest directly on the basis of intertemporal valuation of units of physical goods, while time-preference in Reisman's theory is an indirect determinant of the rate of profit/interest. "Time-preference, writes Reisman, determines the proportions in which people devote their income and wealth to present consumption versus provision for the future." (p. 743-744)

Briefly, the chain of causation runs as follows. A given degree of time preference will manifest itself inversely in a given provision for the future, i.e. savings, relative to present consumption. Under modern conditions of industry and trade, (money) savings usually enter the factor markets as money capital. It is precisely this capital that constitutes the financial means for the demand of factors of production (capital goods and labor services) in the economic system. And so, for example, the greater proportion of aggregate sales proceeds is saved and invested, echoing a lower degree of time-preference, the lower is the rate of profit/interest. The less capital invested, the higher is the rate of profit/interest. Thus, the concept of time-preference in Reisman's system enters the explanation of the rate of profit/interest via his equally original theories of saving and capital accumulation that describe and explains the process of income formation and distribution in a previously unknown and exciting way.

Naturally, in light of the consistently pro-reason and pro-capitalist tone of the book, one will find in Capitalism virtually nothing in favor of the economic doctrines of Marxism, Keynesianism as well as broad segments of neoclassical economics, particularly Samuelson's neoclassical synthesis in macroeconomics. Not a single important doctrine is neglected or dealt with insufficiently. To the contrary, chapters are devoted to very detailed, step-by-step expositions followed by no less detailed and absolutely devastating analytical blows against the structural integrity of those doctrines. Only after having read and absorbed Reisman's masterful exposition and critique of Marx and Keynes, I was able to follow through the actual mechanics and appreciate the full range of ideas in Das Kapital and The General Theory.

Perhaps the best place to grasp the essence of our author's distinctive analytical approach is his critique of the Marxian exploitation theory. The standard criticisms of Marxian system of economics focus on isolated instances of inner contradictions between the system and observed facts. For example, Boehm-Bawerk's famous, and widely perceived as the strongest criticism of Marxian economics, Karl Marx and the Close of His System , identifies and skillfully exploits a contradiction between Marxian labor theory of value of Das Kapital I and the average rate of profit of Das Kapital III.

Reisman goes much further into the substance and offers a much more comprehensive critique which, incidentally, is fully integrated into and informed by his overall analytical framework. The critique opens with a careful dissection of the fallacies in the distinctive conceptual-analytical core of the Marxian system and ends up with a complete implosion of its substance. According to Reisman, the ultimate source of all the numerous errors, contradictions, and equivocations in Marx's theoretical system is to be found in the entirely incompatible conceptual framework with the actual facts of economic life under capitalism (pp. 477-484, 603-613).

Marx viewed capital and accumulation of capital as "begetting" profits by a process of surplus value appropriation. By virtue of having monopolized the bulk of the means of production, capitalists are in the position to appropriate the total value created by workers. They are able to extract surplus value (profits) from the application of fresh labor power that creates the entire value of commodities by paying workers, the true producers, merely subsistence wages. Significantly, in developing this explanation of the origin of profit income, Marx builds upon the fundamental conceptual sequence as originally formulated by Adam Smith and accepted by all major economists since. Reisman shows the error in the conceptual sequence in the following way.

From the essentially correct fact that productive and purposive human labor is the primary means to transform nature-given resources into physical means to sustain and improve material conditions of human life and well-being, Marx, following Smith, impermissibly concludes that the wage income is the natural and primary income category of (manual) labor and that all other categories of income (profits, interest, dividends, rents) existing under capitalism are by necessity deductions from what naturally and rightfully should belong to the wage earners. And so, if it were not for the "appropriation of land and accumulation of stock" by a few, so Smith and Marx, the total value of products would exhaustibly be all wages and really belonged to the wage earners. The ascendancy of the marginal utility theory of value did not materially change this understanding. Reisman openly declares and provides a proof of his case that the Smith-Marx framework is actually fully in accord with the otherwise quite different positive theory of interest of Marx's strongest 19th century critic - Eugen von Boehm-Bawerk. Boehm-Bawerk merely provided a strong critique of some aspects of Marx's theory, not the whole of it. The legacy of Smith and Marx on the subject of profits/interest and wages continued to live on totally unchallenged even in the writings of Marx's staunchest critics, including Mises, Hayek, and Rothbard.

What is wrong with Marx's conceptual and substantive description of capitalist economic reality? The basic error, begetting all other errors in the Marxian system, consists in the implicit equivocation between manual labor and wage income.

It should be obvious that merely to work and produce things is not the same as to work for money and receive wages for the work performed. The two pairs are brought into a definite relation only if there is someone willing and able to invest the necessary money funds as wage payments. Furthermore, the more capital is invested in form of wage payments and/or acquisition of capital goods the greater is the extent of the division of labor, the greater is the productivity of labor and thus the higher will be the standard of living, above all of the wage earners. In no way can profit be attributable to the exploitation of labor (let alone manual labor) by capital and capital accumulation. To the contrary, with respect to the process of (nominal and real) income formation, Marx attaches to the accumulation of capital a role which is exactly opposite to the actual one.

In absence of buying for the purpose of subsequently selling on the markets for outside-labor and capital goods, there is simply no physical basis for the division of labor, and its corollaries - the markets for labor and capital goods, to develop. And since productivity of labor and living conditions depend directly on a high and increasing degree of division of labor, (money) capital and capital goods are absolutely indispensable contributing elements. In the nexus of market exchange in a developed division of labor economic system, the extent of both money and real wages, Reisman shows persuasively, are crucially dependent on funds saved and productively invested, i.e. the amount of money capital invested, relative to sales revenues in the economic system as a whole. In making the point even more clearer, it is perhaps best to quote Reisman's argument in full:

"Thus, in the precapitalist economy imagined by Smith and Marx, all income recipients in the process of production are workers. But the incomes of those workers are not wages. They are, in fact, profits. Indeed, all income earned in producing products for sale in the precapitalist economy is profit or "surplus-value"; no income earned in producing products for sale in such an economy is wages. For not only do the workers of a precapitalist economy earn product sales revenues rather than wages, but also those workers have zero money costs of production to deduct from those sales revenues.

"They have zero money costs precisely because they have not acted as capitalists. They have not bought anything in order to make possible their sales revenues, and thus they have no prior outlays of money to deduct as costs from their sales revenues. Having made no productive expenditures, they have no money costs... (p. 478)

"Smith and Marx are wrong. Wages are not the primary form of income in production. Profits are. In order for wages to exist in the production of commodities for sale, it is first necessary that there be capitalists. The emergence of capitalists does not bring into existence the phenomenon of profit. Profit exists prior to their emergence. The emergence of capitalists brings into existence the phenomena of productive expenditure, wages, and money costs of production.

"Accordingly, the profits that exist in a capitalist society are not a deduction from what was originally wages. On the contrary, the wages and the other money costs are a deduction from sales revenues--from what was originally all profit. The effect of capitalism is to create wages and to reduce the relative amount of profits. The more economically capitalistic the economy--the more the buying in order to sell relative to the sales revenues--the higher are wages relative to sales revenues, and the lower are profits relative to sales revenues.

"Thus, capitalists do not impoverish wage earners, but make it possible for people to be wage earners. For they are responsible not for the phenomenon of profits, but for the phenomenon of wages. They are responsible for the very existence of wages in the production of products for sale." (p. 479)

It is therefore not an accident that in primitive non-capitalist societies of past and present, capital and capital accumulation are either negligibly low or absent entirely while the standard of living of those societies merely oscillates around stagnant levels.

Consistent with the analytical substance of his critique of exploitation theory, Reisman's model explains the observed strong correlation between low capital accumulation and low standard of living by the absence of the class of profit-seeking businessmen and capitalists. Their enormous productive contributions consist in creating the division of labor by organizing and managing business firms that continuously introduce new and improved products and services, in supplying capital funds that raise the monetary demand for labor (nominal wages) and the demand for capital goods, in striving to economize on human labor in industry after industry by replacing it with machinery, raising thereby the productivity of the unit of labor supply (real wages).

To a society consisting exclusively of self-employed farmers and artisans working with their own means of production not only the notion of a labor market is completely alien. Economically, what takes place is simply everybody producing whatever goods and services he can produce with the most primitive tools of production and his own labor. To the extent money is used at all, it serves merely to facilitate the trade with the consumers' goods only. No money outlays are used to buy capital goods or labor services to be subsequently employed in the production. Thus, for example, no raw leather or wooden tools are bought in order to employ them in the production of leather pants. In one sentence, markets for factors of production are non-existent. (Money) incomes earned in such an economy are all profits because there are no money costs to be deducted from sales revenues.

A self-employed farmer when he brought his crops to the market and exchanges them for money received sales revenues, not wages. Only to the extent that a portion of sales revenues is used for the purpose of paying outside labor, the income category of wage income is present. Wage payments, alongside expenditures for capital goods, are a cost factor to be subtracted from sales revenues. It is therefore absolutely erroneous to think of profits as being somehow a subtraction from wages. Profits are the difference between sales revenues and costs of production and their magnitude is positively and linearly proportional to the former and negatively to the latter.

In short, everything that serves to increase sales revenues tends to raise profits, and everything that serves to increase the outlays for factor of production tends to lower profits. If there are no investment outlays to pay wages or purchase capital goods, assuming fixed aggregate sales revenues, the rate of profit is infinite and the aggregate amount of profit equals the full (100 percent) volume of sales revenues, quite simply because capital invested, and consequently costs of production, is zero. At the same time, the extent of division of labor is rudimentary, productivity of labor and real wages are consequently very low. As a rule, high profits will be found in societies with low standard of living, while low profits and wages high in rapidly progressing economies.

In light of these considerations there is no escape from the conclusion that exploitation theory's description of the mechanics of the process and determinants of income formation and distribution under capitalism has the facts of economic reality exactly backwards.

On a number of important junctions, the reader must already have noticed the extreme originality of Reisman's system. Its freshness and unorthodoxy will strike one as even more remarkable once one begins to realize that the system puts forward a tightly integrated description of all leading micro- and macroeconomic phenomena. As such, I see the system as consisting of several major blocks whose development is aided by a number of highly potent analytical techniques such as the assumption of invariable money (pp. 538-540) or Reisman's single-handedly developed system of national income accounting.

In the remainder of the review I will very briefly discuss only three of them.

There is first of all the highly original theory of profit/interest which Reisman calls the Net-Consumption/Net-Investment Theory of Profit (Chapter 16). The theory really serves as an analytical transmission belt connecting all other elements of his system into one unified whole.

In particular, on the basis of the Net-Consumption/Net-Investment Theory of Profit the second block - the extremely original and powerful theories of saving and capital accumulation are developed and successfully applied in the author's dynamic theory of economic progress (Chapter 17).

Significantly, Reisman's theory of saving stipulates that in the absence of a steadily growing money supply (invariable money assumption) net-saving/net-investment must disappear, implying a permanent steady-state capital-income ratio, for the reason that eventually net-saving out of income will bring about a "desired ratio of provision for the future relative to the present". (pp. 834-835) However, the constancy of capital-income ratio would hold only in terms of monetary aggregates while the volume and quality of the real capital stock, hence real income, can go on rising virtually indefinitely, provided the stock of real capital is employed efficiently and the economy's overall capacity to produce capital goods exceeds the ongoing depreciation of the capital stock. In this connection, the role of the technological progress in overcoming diminishing returns to scale of physical capital goods is allotted a particularly prominent role. The in national income statistics observed persistently positive net-saving/net-investment rates are explained by the rate of growth in the quantity of money. Furthermore, Reisman's theory of profit/interest in conjunction with his theory of saving sheds an important light on the precise nature of Solow-residual.

In Reisman's theory of saving alone I see nearly unlimited scope for extremely fruitful research.

The third major block is Reisman's Productivity Theory of Wages (Chapter 14). I have introduced some of its distinctive elements already in the critique of the exploitation theory. But theory's originality has much more in store for us. It describes the process of wages determination from an absolutely original angle. Quite importantly, though close in name, it should not in any way be confused with the neoclassical as well as Austrian marginal theories of factor pricing because Productivity Theory of Wages describes the process of wage determination along very different lines, more in agreement with the logic of classical economics, though by no means entirely.

There are so many absolutely revolutionary contributions to economic theory that a major book alone would be required merely to document and explain them, let alone to develop further its major elements. All in one, in Capitalism we glimpse at the beginning of a new era in theoretical economics. Anyone wanting to be a part of it should immerse himself into the study of its magnificent content.

Reisman defends Capitalism on the only grounds that it should properly be defended on: Reason. His approach is not pragmatic - merely that it is the system that has happened to work, rather he develops theory and then shows the practical results.

This book is a MUST for any serious defender of Capitalism. Among other topics, Reisman destroys the prevailing ideas of Environmentalism and Monopolies.

I found this book an easier read than Rothbard's Man Economy and State. I also enjoyed and was often inspired by Dr. Reisman's fighting spirit. Here is a perfect example of one of my favorite and most inspiring parts:

"The solution to the present problem of massive, overwhelming poverty is nothing other than the science of economics. As should be increasingly clear, economics is a science which can make possible the construction of a social and political system in which human success is a feature of normal everyday life everywhere. It is truly the humanitarian science, and only those who have studied it well and who are prepared to implement its teachings deserve to be called friends of mankind. The most important charity that true friends of mankind can pursue is to disseminate knowledge of this vital subject as widely and as deeply as they know how."

Human beings have evolved to do what is in our best interest. The reason why most of us don't make a conscious effort to strive for a capitalist society is because we simply don't know how capitalism is in everyone's best interest. If someone offers to give you a nice free dinner for pushing a button. It is trivial to realize how pusing the button is in your best interest. Unfortunately understanding how capitalism is in our best interest is not as trivial, but fortunately it's really not hard at all. The survival of mankind depends on capitalism. Read this book and do as Dr. Reisman said above. If you are looking for a short intro read Economics in One Lesson by Hazlitt.

This book is enormous--both in terms of its size an of the achievement it represents. Don't be misled by the 1000 pages: this is NOT a quick read like "Atlas Shrugged," and the amount of text actually makes it more like 2000 pages. Still, before you complain about how long it takes to read it, just remember how long it must have taken Dr. Reisman to WRITE it! That one man could assimilate so much knowledge and convey it in so methodical, coherent, and (yes!) concise a form is truly a testament to the potential of the human mind.

The ideas presented in this book, if heeded, can save the United States--indeed, all of material civlization--from the abyss into which it is now marching. This book is both a warning and a reassurance. It is a warning of the consequences of statism and government intervention in the economy; it is a reassurance that these consequences can be mitigated or altogether avoided if the statist interference is stopped and capitalism restored--either way, it is a promise of things to come. If mankind insists on dragging itself into another Dark Age, it will not be by the default of those who knew better and could have alerted others, but of those who refused to be alerted.

To my knowledge, this book is the most comprehensive, accurate and practical economic defense of capitalism ever written (in textbook form, no less!). George Reisman is perhaps the most profound--and correct--economic thinker of his day, and his achievement makes him worthy of being mentioned in the same sentence as Aristotle, Adam Smith, Ayn Rand, and Ludwig von Mises. The best hope for the future is that Dr. Reisman's profession will someday be worthy of him.