Redeeming Economics: How Federal Budgets Affect the American Family

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By John D. Mueller

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John D. Mueller, Lehrman Institute Fellow in Economics at the Ethics and Public Policy Center, presented the following lecture at the Family Research Council in Washington, D.C., on April 11, 2012.

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I’d like to thank the Family Research Council for its gracious invitation to deliver this lecture, and to Rob Schwarzwalder for both his generous introduction and his leadership. The topic I’d like to discuss this afternoon is “Redeeming Economics: How Federal Budgets Affect the American Family.” ISI Books recently published my book, Redeeming Economics: Rediscovering the Missing Element. As I will explain, the original element missing from modern economics is the one that describes our interpersonal relations of love and hate. I should add that my relationship with FRC goes back a long time. In fact, the substance of several of the chapters originated in articles and research published in FRC’s Family Policy journal. I see Bob Patterson in the audience, who developed it from a monthly newsletter into a first-rate journal. Though I’ve attended many events here at FRC, I think my last formal presentation was in 2008, when I presented a paper on “Causes and Cures of Demographic Winter” for a panel when the film “Demographic Winter” was screened here.

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I’d like to accomplish three things today which might at first sight seem unrelated.

First, I’d like to offer “a brief, structural history of economics,” in order to show that the most important element of the original scholastic economics has been missing since its deliberate omission by Adam Smith, and how its absence has caused several major problems with today’s neoclassical economics, particularly its understanding of marriage and the family. I’ll illustrate with two such problems: the first offered by Steven D. Levitt and John J. Donohue III’s famous claim that legalizing abortion in the 1970s must have reduced crime rates starting in the 1990s, and the second explaining the failure of existing economic theory to explain the “demographic winter” which has already engulfed the rest of the developed world.

Second, I’d like to pose the question, not “WWJD?” but “WDJD: What Did Jack Do?” referring to Jack Kemp, for whom, as Rob mentioned, I worked for ten years before and during both Reagan administrations. I believe that posing this question will help us understand why the fiscal policy devised by Jack Kemp and implemented by Ronald Reagan was both politically and economically successful, and also why conservatives since abandoning it have so often seemed to snatch defeat from the jaws of victory.

The third and final part of my talk might be called “Benefits or Babies: The Obama and Ryan Budgets and the U.S. Birth Rate.” I’ll show that the choice our government is now making is whether the United States will join the rest of the developed world by sinking into “demographic winter” and steadily declining in relative size and importance, or else maintain the demographic component of American exceptionalism.

 

1. A Brief, Structural History of Economics

Economic theory has been taught continuously at the highest university level since the mid-thirteenth century, when it was first fully integrated within the scholastic natural law. Yet we must begin with two simple but widely overlooked facts: First, the logical and mathematical structures of scholastic, classical, and neoclassical economics differ fundamentally. Second, few economists today are aware of these differences, in large measure because American university economics departments, led by the University of Chicago in 1972, abolished the requirement that students of economics master its history before being granted a degree.[2] This requires a brief, structural history of economics.

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What is economics about? Jesus once noted (I interpret this as an astute empirical observation, not divine revelation) that since the days of Noah and Lot people have been doing, and until the end of the world presumably will be doing, four kinds of things. He gave these examples: “planting and building,” “buying and selling,” ‘marrying and being given in marriage,” and “eating and drinking” (Luke 18:27-28). In other words, we humans produce (that’s the “planting and building, exchange (that’s the “buying and selling”), give (“marrying and giving in marriage”), and use (or consume) our human and nonhuman goods (that’s the “eating and drinking”).

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That’s the usual order in our action: producing, exchanging, distributing and consuming. But as Augustine first explained, the logical order is different in our planning. First we choose For Whom we intend to provide; next What to provide as means for those persons.[3] Finally, as Aquinas would later elaborate, we choose How to provide the chosen means, as described by Aristotle’s theories of production (always) and exchange (almost always). Thus economics is essentially a theory of providence: it describes how we provide for ourselves and the other persons we love, using scarce means that have alternate uses.

Scholastic ‘AAA’[4] economics (c.1250-1776) began when Thomas Aquinas first integrated the four elements of production, exchange, distribution, and consumption, all drawn from Aristotle and Augustine, into an outline of personal, domestic, and political economy, both “positive” (that is, descriptive) and “normative” (prescriptive), within the natural law.[5] The scholastic economic system is comprehensive, logically complete, mathematical, and empirically verifiable. It was taught at the highest university level for more than five centuries by every major Catholic and (after the Reformation) Protestant economic thinker—notably Lutheran Samuel von Pufendorf, whose work was used by Adam Smith’s own teacher to teach Smith economics and was also highly recommended by Alexander Hamilton, who penned two-thirds of the Federalist.[6]

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Classical economics (1776-1871) began when Adam Smith drastically simplified the theory by cutting the four scholastic elements to two, trying to explain specialized production (which he poetically but inaccurately called “division of labor”) with the elements of production and exchange alone. Smith and his classical followers like David Ricardo undoubtedly advanced those two elements. But Smith also dropped Augustine’s theory of utility (which is necessary to describe consumption) and replaced Augustine’s theory of personal distribution (gifts and their opposite, crimes) as well as Aristotle’s theory of domestic and political distributive justice with the mere (often false) assumption that “every individual…intends only his own gain,” as Smith put it in his famous “invisible hand” passage in the Wealth of Nations.[7] (In his earlier Theory of Moral Sentiments, Smith had already banished benevolence and beneficence from rational economic theory to emotional psychology.)

Neoclassical economics (1871-c.2000) began when three economists dissatisfied with the practical failure of Smith’s oversimplified classical outline (W.S. Jevons 1871 in England, Carl Menger 1871 in Austria, and Leon Walras 1874 in Switzerland) independently but almost simultaneously reinvented Augustine’s theory of utility, starting its reintegration with the theories of production and exchange.[8] They abandoned Smith’s revised outline mostly for three related reasons: without the theory of utility classical economists were unable to answer some important questions (for example, why goods that can’t be reproduced with labor have value); made predictions about others that turned out to be spectacularly wrong (notably the “iron law of wages,” which predicted that rising population would prevent rising living standards); and Smith’s so-called “labor theory of value” directly fostered Karl Marx’s disastrously erroneous economic analysis. Though schools of neoclassical economics have since multiplied, all are derived from these three.

Neoscholastic economics (c.2000—). In my book,I observe that that what (for want of a better term) I call Neoscholastic economics is already revolutionizing and predict that in coming decades will continue to revolutionize economics once again by replacing its lost cornerstone, the theory of distribution: simply because, as with the theory of utility, including this indispensable element does a far better job of empirical description.

Thus Adam Smith’s chief significance lay not in what he added to, but rather subtracted from economics. As Joseph Schumpeter (1954) demonstrated, “The fact is that the Wealth of Nations does not contain a single analytic idea, principle or method that was entirely new in 1776.”[9] The facts about the development of economics seem to indicate that a re-evaluation is overdue and quite likely for both Augustine and Adam Smith, particularly since Smith essentially “de-Augustinized” economic theory to its detriment. Though far from exhaustive, this brief structural history of economics explains why scholastic economics contained all four basic elements, classical only two, and neoclassical economics three: Neoclassical economists restored one element dropped by Smith, utility, but not yet the other, final distribution.

To go a bit deeper, let me explain the structure of scholastic economics, then give an example of the problems in today’s neoclassical economics that are due to its failure to restore the most important element.

Positive scholastic theory. To explain the Two Great Commandments,[10] that we are to love God above all and our neighbor as ourself, Augustine had started from Aristotle’s definition of love—willing some good to some person[11]—but he drew an implication that Aristotle had not: every person always acts for the sake of some person(s). For example, when I say, “I love vanilla ice cream,” I really mean that I love myself and use (consume) vanilla ice cream to express that love; and I use vanilla ice cream in preference, say, to strawberry ice cream or Brussels sprouts, because this order expresses my separate scale of utility, which orders my preference for things). Augustine also introduced the important distinction between “private” goods like the sandwiches we have just enjoyed, which inherently only one person at a time can consume, and “public” goods (like a performance in an ancient amphitheater, a modern radio or television broadcast, national defense, enforcement of justice, or even this lecture) which (at least within certain limits) many people can simultaneously enjoy because they are not “diminished by being shared.”[12] If the acoustics and technology are good enough, the fact that the people in the front row can hear what I am saying does not diminish the ability of those in the back row or in cyberspace also to do so.

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In other words, Augustine’s crucial insight is that we humans always act on two scales of value or preference—one for persons as ends and the other for other things as means: personal love and utility, respectively. In contrast, modern economics abolishes the first scale and lumps persons and nonpersons indiscriminately on the same scale of utility. Moreover, according to Augustine, we express our preferences for persons with two kinds of external acts. Since man is a social creature, Augustine noted, “human society is knit together by transactions of giving and receiving.”[13] But these outwardly similar transactions may be of two essentially different kinds, he added: “sale or gift.”[14] Generally speaking, we give our wealth without compensation to people we particularly love,[15] and sell it to people we don’t, in order to provide for those we do love.[16] For example, if Bob Patterson pays me as an editore an honorarium for an article I write, it’s because our ends disagree—we each want to provide for ourselves and our own loved ones—but the means of our exchange overlap. Since it’s always possible to avoid depriving others of their own goods, this is the bare minimum of love expressed as benevolence or goodwill and the measure of what Aristotle called justice in exchange.[17] But our positive self-love is expressed by the utility of the goods we provide ourselves, and our positive love of others with beneficence: gifts. Conversely, hate or malevolence (bad will) is expressed by the opposite of a gift: maleficence (“doing evil”) or crime.

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The image on the cover of my book is Gustave Doré’s engraving, “Arrival of the Good Samaritan at the Inn.” I also discuss the parable in the central chapter of the book, because, transcending nationality and religion, it illustrates all the possible economic transactions we can have with our fellow man, as described by Augustine: the robbers beating a man and leaving him for dead illustrate crime; the priest and Levite who passed him by illustrate indifference; the innkeeper’s bargain with the Samaritan illustrates justice in exchange; and finally, the Samaritan’s devotion of time and money to restore the beaten man to life illustrates a gift. Crime, indifference, just exchange, and gift: this is the range of possible transactions. (Note the shape of Augustine’s curve tracing them; we’ll recognize it several times in what follows.)

The social analog to personal gifts is what Aristotle called distributive justice,[18] which amounts to a collective gift: it’s the formula social communities like a family or political community under a single government necessarily use to distribute their common (jointly owned) goods. Both a personal gift and distributive justice are a kind of “transfer payment”; both are determined by the geometric proportion that matches distributive shares with the relative significance of persons sharing in the distribution; and both are practically limited by the fact of scarcity.

These possible transactions are traced in the curve I have labeled Augustine’s “personal distribution function” which traces the relation between persons and things. This is “the missing element.” The bottom scale represents shares of our wealth, and the vertical scale represents the number of people among whom we share it. (For purposes of illustration I assume that we love others equally with ourselves, but in fact we can and do love them unequally.)

Before my wife and I were married, our individual behavior probably approximated the point that modern economics assumes for everyone, at which a person consumes all the goods purchasable with that income. After I got married, before our children were born and while they were young, I earned nearly all our family’s income, and assuming we shared equally, it meant I was loving two people equally with myself in economic terms. But then we had three children, and so our income had to be divided first three, then four, and then five ways. The more people among whom we share our scarce resources, the less we can use ourselves.

In the extreme, it is literally the case that no one has greater love than to lay down his life for his friends. True, it is something that can be done only once. Yet it is done almost every day, for example, in Iraq or Afghanistan when a soldier hurls him- or herself on an explosive device to save the lives of colleagues.

Now that our kids are grown, my wife’s and my incomes are more equal again. But at every stage, no matter where the income came from, my wife and I faced the same choice: how much money we would devote to each person’s needs—the kids’ playclothes, replacing my suit or my wife’s dress, or paying for tuition. This figuring out of the family budget is what Aristotle meant by “domestic distributive justice,” which amounts to a kind of joint gift. Likewise, what Congress is arguing about in setting the Federal budget is a similar exercise in “political distributive justice.” In both cases, the question is, from whom does the money come, and to whom does it go?

That’s “positive” scholastic economics in a nutshell: describing what is, not necessarily what ought to be.

B. “Normative” scholastic theory. We naturally love ourselves, Augustine pointed out. All other moral rules are derived from the Two Great Commandments because these measure the degree to which our love is “ordinate”: rightly ordered.[19] If a good were sufficiently abundant we could and should share it equally with everyone else. But with such goods as time and money, which are “diminished by being shared”[20] (i.e., scarce), this is impossible. Therefore “loving your neighbor as yourself” can’t always mean equally with yourself: “Since you cannot do good to all,” Augustine concluded, “you are to pay special regard to those who, by the accidents of time, place, or circumstances, are brought into closer connection with you.”[21]

Aquinas extended Augustine’s insight to Aristotle’s corresponding analysis of all communities: Common goods are necessary to the existence of both families and governments. But the fact of scarcity requires that most common goods be owned by families, not governments, because of the two advantages noted by Aristotle (greater social peace and productivity) and the third added by Aquinas (greater order).[22]

Political distributive justice and/or justice in exchange are violated by what Aristotle described as, and James Madison later termed, “faction.” Each faction has an ideology, which Hannah Arendt succinctly defined as a world-view that requires its adherents to create a “fictitious world” that distorts reality to the advantage of its members.[23] For example, Karl Marx’s collectivist ideology collapsed all justice to distributive justice, as if all goods were both common and political; Smith’s individualist ideology collapsed justice to justice in exchange, as if all goods were personal, private, and never given or shared.

The neoscholastic model is a powerful tool of analysis at every level: personal, domestic, and political. I suggest several promising applications in the book. But I wish to focus here on only two, which provide strong empirical evidence for Augustine’s theory of personal distribution and illustrate the empirical superiority of (neo-) scholastic to neoclassical economics Without the theory of distribution, neither classical nor neoclassical economics can fully describe any state of equilibrium. The necessity of describing all four facets of any economic event with at most three explanatory equations has condemned classical and neoclassical economists frequently to resort to circular logic and/or empirically false assumptions.

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The first illustration is the strong inverse tradeoff between rates of ‘economic fatherhood’ and crime. In a famous paper co-authored with John J. Donohue III and featured in his book Freakonomics, Levitt argued that after abortion was legalized by several states starting in the late 1960s and nationwide by Roe v. Wade in 1973, millions of fetuses were killed who, when old enough, would have been disproportionately likely to commit crimes.[24] Their culling by legalized abortion should therefore have lowered crime rates according to Levitt and Donohue. To prove this, Levitt and Donohue looked at crime rates 15-18 years after Roe and claimed to have found the drop they had predicted.

However, Levitt and Donohue actually found their results indistinguishable whether they used 1970s or 1990s abortion rates to try to explain overall ’90s crime rates. When both were included the models became unstable (“standard errors explode due to multicollinearity”).[25] This occurs when research is “misspecified,” typically by omitting necessary variables. Failing even with the help of Nobel laureate Gary S. Becker to uncover any valid evidence for either a 20-year lag or for no lag, Levitt and Donohue replaced the missing facts with an arbitrary assumption: “Consequently, it must be recognized that our interpretation of the results relies on the assumption that there will be a fifteen-to-twenty year lag before abortion materially affects crime.”[26]

They justified their assumption by quipping that “infants commit little crime.”[27] But this overlooks the fact that nearly all violent crime is committed by men (women are equal only in nonviolent crime rates) precisely the ages of the fathers of aborted children. In recent statistics, seventy-seven percent of all persons arrested and 93 percent of all convicted prisoners were men. The relation between abortion and crime rates is strong for all crimes, but stronger for violent crimes, and strongest for the most violent crime of all, homicide.[28]

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In short, the missing variable is “economic fatherhood.” “Economic” fatherhood is defined not by biological paternity nor residency with but provision for one’s children.[29] The relationship between economic fatherhood and crime is a straightforward application of Augustine’s personal “distribution function” to the most valuable scarce resource of mortal humans: our time.

Including “economic fatherhood” as a variable not only invalidates Levitt’s claim but reverses it. One can see this in the chart comparing homicide rates and economic fatherhood, the latter defined by the Total Fertility Rate for the same demographic mix as prisoners (though measured for women, it’s almost exactly the same for men) minus men in prison (who cannot provide for children) and children on welfare (who aren’t supported by fathers). Though strong for all categories of crime, the trade-off with economic fatherhood strengthens with the crime’s violence, and is strongest for the most violent of all, homicide. As far back as data exist, rates of economic fatherhood and homicide have been strongly, inversely “cointegrated”[30]—a stringent statistical test characterizing inherently related events, like the number of cars entering and leaving the Lincoln Tunnel. The statistical tests for cointegration are quite strict,[31] and the correlation of economic fatherhood and homicide passes them.[32] Donohue and Levitt’s correlation is thus shown to be a “spurious regression,” which was misspecified by omitting a crucial variable: the one describing Augustine’s personal “distribution function.”[33]

Thus, legalizing abortion didn’t lower homicide rates 15-20 years later by eliminating infants who might, if they survived, have become murderers: it raised the homicide rate almost at once by turning their fathers back into men without dependent children—a small but steady share of whom do murder. The homicide rate rose sharply in the 1960s and ’70s when expanding welfare and legal abortion sharply reduced economic fatherhood, and it dropped sharply in the ’90s partly due to a recovering birth rate, but mostly because welfare reform and incarceration raised the share of men outside prison who were supporting children. This scenario didn’t occur to Levitt not because of a lack of ingenuity or data but because of the inherent weakness of the theory he was trying to apply, which Nobel Prize-winning economists Stigler and Levitt’s mentor, Becker, called the “economic approach to human behavior.” Levitt was unable to see the true correlation between abortion and crime because he was among the first victims of the epic change in the teaching of economics I mentioned earlier, which was orchestrated by Stigler with Becker’s support.

The second application I’d like to discuss is the “Neoscholastic” fertility model, which is also more accurate than existing neoclassical models by including the element of distribution. Just four factors explain most variation in birth rates among the countries for which sufficient data are available (comprising only about one-third of all countries, but more than three-quarters of world population).[34] The birth rate is strongly and about equally inversely proportional to per capita social benefits and per capita national saving (both adjusted for differences in purchasing power), which represent provision by current adults for their own well-being.

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When these factors are taken into account, a legacy of totalitarian government is also highly significant in reducing the birth rate, by about 0.6 children per couple.

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Finally, the birth rate is strongly and positively related to the rate of weekly worship. This is because all gifts of scarce resources—whether rearing a child or worship—require the same lowering of self and raising of others in our scale of preferences for persons. On average throughout the world recently, a couple which never worshipped had an average of 1.2 children; but the average couple which worshipped at least once a week had 2 children more, or about 3.2 children.

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Regular worship is not only positively related to fertility in a roughly linear fashion. It is also inversely related to the incidence of abortion, which (like crime in general) rises exponentially as the rate of worship declines.[35]

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There are four main reasons, then, for “demographic winter,” in order of importance: First, low rates of religious observance, which are associated with low birth rates and high incidence of abortion; second, social benefits so high as to displace gifts within the family, particularly the gift of life; third, legacies of totalitarianism; and finally, finally, heavy reliance on so-called “consumption” taxes, which penalize investment in “human capital.”

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I’d like to turn now to the second part of my talk. “What would Jack do?” is a question I often hear, as Congressman Jack Kemp’s staff economist during his last 10 years in elected Federal office. (Kemp died in 2009 after serving nine terms in the Congress, where he played a key role in designing and enacting President Ronald Reagan’s 1981 and 1986 tax reforms. After leaving elected office, he served as Secretary of Housing and Urban Development under the first President George [H.W.] Bush, and as vice presidential candidate to former Senator Bob Dole in 1996.)

Many venture to answer the question “what would Jack do?” And curiously, the answers almost always coincide with the agenda of the interest group to which the person answering the question currently belongs. Yet few ask or can answer the much more instructive question: What did Jack do? And here the answers often confound those who so confidently say what Jack would do.

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First, Kemp sought to, and did, reform—not abolish—the income tax. The 1981 Kemp-Roth tax-rate cuts were “across the board”—that is, they applied equally to labor and property income. In devising the GOP’s tax reform prototype, Kemp rejected the 1981 Hall-Rabushka plan, which would shift the tax burden entirely to labor income. This plan became the prototype for most versions of the “flat tax.” Perhaps Jack’s finest hour was securing the votes to save the Tax Reform Act of 1986, which equalized income tax rates on wages, interest, dividends, and capital gains. But a differential between rates on labor and property income was reintroduced by President George H.W. Bush in 1991 and this difference was increased under presidents Clinton, George W. Bush, and Obama.

It’s important to note that while subscribing to the same catch-phrase, most “supply-siders” meant something by it than Jack did while he was a Congressman. Nearly all supply-siders apart from Jack, including some of the most talented to work for or with him, failed to apply the same reasoning to people as to property. Theodore W. Schultz coined the term “human capital” in 1960 to describe investments in people, theorizing that this factor accounted for most of the growth that economists who measured national income were unable to explain. After years of research, John W. Kendrick proved that Schultz was right. But this was after Norman Ture was educated, who helped John F. Kennedy devise the 1961 investment tax credit, later served in the Reagan Treasury, and promoted his understanding as founder of the Institute for Research on the Economics of Taxation. Norman’s understanding of “tax neutrality” assumed that the only form of capital is nonhuman capital. In another article published in FRC’s Family Policy, I called this the “stork theory of economics,” because it assumes that workers appear out of the blue as if brought by a large stork.[36]

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Second, Kemp frequently observed that “When you tax something, you get less of it, and when you subsidize something, you get more of it.” He borrowed this formula from economist Arthur Laffer to help President Ronald Reagan shape his economically and politically successful 1980s fiscal policies.

This second phrase is unduly neglected, but helps explain the so-called “jobless recoveries” of 1991-92 and 2009-12. Regular unemployment insurance benefits typically equal half of previous pay for up to 26 weeks, or six months. But in each recession since 1958, Congress in its wisdom has extended benefits—recently up to 99 weeks. Benefit extensions have increased the unemployment rate almost one-for-one, and voters have held the sitting president responsible for the resulting “jobless recoveries.”

The Department of Labor unfortunately doesn’t publish weekly extended benefits data before 1986. But we can quantify the increased unemployment since then caused by both regular and extended benefits. As the chart shows, total UI claimants peaked at 7.0% of the labor force in September 2009, and extended claimants at 3.8% in August-October 2010. Recently, extended claimants comprised 2.7 percentage points, on top of the 2.5% attributable to regular benefits: a total of more than 5%. The next successful president will thus avoid extending UI benefits. This is why the next successful president will also end extended unemployment benefits.

Third, when in 1988 Pete Dupont proposed to replace pay-as-you-go Social Security retirement pensions with tax-favored individual retirement accounts, Kemp opposed him.

Martin Feldstein, who influentially claimed that pay-as-you-go Social Security had reduced U.S. private saving, was a “stork theorist.” And Peter Ferrara, who designed Pete Du Pont’s plan to replace Social Security with private accounts, faithfully followed Feldstein’s “stork theory.”

I myself initially thought that Feldstein was correct. I even drafted a speech to that effect for Jack (as I recall for delivery at an event at the Lyndon Baines Johnson Memorial Library). When Jack declined to deliver the speech, and insisted on supporting the system of pay-as-you-go Social Security retirement pensions, I set out to prove that he was wrong and I was right. But in the attempt I discovered that, just as with those supply-siders who failed to incorporate the theory of “human capital” into their theory of taxation, Feldstein had not done his homework failing to make the same adjustment. After working through the issue I wrote an article in Policy Review, then published by the Heritage Foundation, explaining my change of mind.[37]

Kemp maintained, “I am firmly convinced that the most consistent conservative position is to make Social Security work—not to phase it out—while continuing to expand private retirement saving. The inescapable fact is that phasing out pay-as-you-go Social Security would either increase the national debt several trillion dollars or impose a several trillion dollar tax increase on the baby boom generation over its lifetime. And it would hit traditional families hardest, by removing or offsetting benefits for spouses, widows and dependents.”[38] Jack described Dupont’s plan in one presidential debate exchange, accurately in my view, as “forcing young people to invest twice, once in an IRA and once in Social Security.”[39]

The chart that shows the relation between voters’ family income and their party self-identification shows why the Reagan-Kemp fiscal strategy of combining a low-rate, broad-based income tax with a downsized but balanced pay-as-you-go Social Security retirement program was both an economic and political success: Fairness unites a majority of Republicans, independents and “Reagan Democrats.” Today’s presidential candidates will rediscover this fact after they get tired enough of losing.

Finally, Kemp attempted to reform U.S. monetary policy by introducing a bill to restore the gold standard.[40] Ending the gold standard has caused three problems: loss of Federal budget discipline, episodes of financial, commodity, and real estate speculation, and loss of U.S. international competitiveness. (I have some charts illustrating all three problems, but I will defer them to our Q&A session.)

3. Benefits or Babies: The Obama and Ryan Budgets and the U.S. Birth Rate

 

Now I’d like to move to the final section of my talk, “Benefits or Babies: The Obama and Ryan Budgets and the U.S. Birth Rate.” As most of you know, the budget designed by House Budget Committee Chairman Paul Ryan passed the House but was defeated in the Senate, and President Obama has highlighted his opposition to the Ryan approach.

But as I have already explained, my research in and since my book has shown a strong inverse relationship world-wide between the birth rate and both per capita social benefits and per capital national savings. (Both represent provision by today’s adults for their own future well-being, while fertility entails a commitment of resources to the children.) I’d like to apply that model to compare the effects of the Obama and Ryan Budgets.

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But first I’d like to note the impact of legal abortion on U.S. society and the Federal budget. One of the studies I published in FRC’s Family Policy was an article in 2000 called “The Socioeconomic Costs of Roe v. Wade.” I had to undertake the task of estimating what the U.S. population and economy would have looked like without legal abortion. Among other things, I showed that the entire prospective Social Security deficit was the result of legal abortion, without which the system would have remained in surplus indefinitely. As a chart drawn from that article (also incorporated in my book) indicates, the main reason is that legal abortion has reduced by about one-third the ratio of workers paying in to Social Security relative to the beneficiaries.

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Yet as I have also shown, the impact of abortion is not confined to the United States. At the Moscow Demographic Summit last June, I showed that the birth rate is below the replacement rate but above the replacement rate before abortions in nearly every developed country in the world,. In other words, children are still being conceived at rates that match the later Baby Boom in the United States. The children just aren’t being born.

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Based on CBO projections, President Obama’s budget would substantially increase Federal social benefits as a share of GDP (from about 16.7 in 2010 to 23.1 percent of GDP in 2085).

Meanwhile the Ryan budget would prevent such an increase by fundamentally reforming Federal health care programs. Because of the strong inverse relation between the birth rate and per capita social benefits, I project that the U.S. birth rate will fall significantly under current law, from about 2.1 to about 1.75 children per couple in 2085. These projections indicate that the Obama budget is likely to shift U.S. society to conditions approximating the Trustees’ High-Cost Assumptions. The same projections indicate that the U.S. birth rate would remain almost exactly at the replacement rate of 2.1 under the Ryan budget—thus approximating the Social Security Trustees’ Intermediate Assumptions. Though neither the Obama nor Ryan budget directly addresses Social Security, the difference in projected birth rates under the Obama and Ryan budgets has obvious implications for balance of the pay-as-you-go Social Security retirement pension system.

In general, my findings therefore support Congressman Ryan’s emphasis on reform of medical entitlements. Other approaches might in theory achieve results similar to his, but in fact none seems to be on the table; and without reforms of the same magnitude as Congressman Ryan proposes, there will be no way to prevent a sharp decline in the U.S. birth rate, and thus a decline in the relative size of the U.S. population and economy. (The U.S. remains third in population after China and India, just as it was 50 years ago, though the first two ranks are expected to reverse over the next 50 years.)

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At the same time, my analysis offers a note of caution on reforming pay-as-you-go Social Security. I project that substituting private accounts for PAYGO Social Security retirement pensions, without reforming medical entitlements, would actually lead to a lower birth rate at least through 2050 than under the current law policy mix that President Obama proposes. (The main reason is the additional forced saving represented by individual retirement accounts, which may not be used to raise children. The private accounts option involves little paring back of promised benefits under the existing system, while requiring today’s workers to save for their own retirement. I joined with others in proposing an alternative approach to Social Security and income tax reform and updated this approach in chapter 15 of my book.)

Conclusion. I have covered a lot of ground in bringing together what might at first seem three different topics: Presenting a brief history of economics, asking “What did Jack [Kemp] do?” and contrasting the Obama and Ryan budgets. But I think the three are related. What I have called the “missing element” from modern neoclassical economics turns out to be central to our understanding of everyday reality in 21st century America. Asking “What did Jack [Kemp] do?” helps us explain the political and economic successes of the Kemp-Reagan policies in the 1980s, the failure of conservatives to match those successes since, and provides a roadmap for any presidential candidate who wishes to repeat those successes. And finally, the question of “benefits or babies” will determine the shape of American society and whether American exceptionalism continues or disappears.

John D. Mueller is the Lehrman Institute Fellow in Economics at the Ethics and Public Policy Center.

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References

Aguirre, M.S. (2004). The Family and Economic Development: Socioeconomic Relevance and Policy Design, in Love, S. (Ed.), Family and Policy, World Family Policy Center.

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[1] John D. Mueller is The Lehrman Institute Fellow in Economics at the Ethics and Public Policy Center (http://www.eppc.org/programs/economics-and-ethics/) and president of LBMC LLC (http://www.lbmc.llc/), a financial-market forecasting firm, both in Washington D.C.

[2] This change culminated a long campaign that George J. Stigler had started in 1955. “In 1972, he [Stigler] successfully proposed that the history of thought requirement be dropped at Chicago. Most other economics departments later followed suit…At the same meeting Stigler unsuccessfully proposed that the economic history requirement also be dropped.” Leeson (1997), endnote 62. Leeson (1997) was subsequently incorporated into Leeson (2001). In his campaign for the change, Stigler rejected Aquinas’ view that a scientist is defined by whether he understands his subject rather than having a degree. Stigler claimed instead that every science is continuously defined by a self-governing elite calling themselves scientists. From this sociological definition, Stigler said it was obvious that “one need not read in the history of economics-that is, past economics-to master present economics.” Instead, “the young theorist…will assume…that all that is valid in earlier work is present-in purer and more elegant form-in the modern theory,” and that “the history of the discipline is best left to those underendowed for fully professional work at the modern level.” But as the text indicates, the young economist who assumed this would be underendowed for fully professional work because he wouldn’t know his subject. (Stigler, 1969, reprinted in Stigler, 1982, p. 107).

[3] Among prominent modern economists, only Jacob Viner (1978) seems correctly to have identified Augustine’s main technical contribution to economic theory, distinguishing separate scales of preference for persons (love and justice) and non-persons (utility), and both of these from the absolute metaphysical scale of being: Augustine deals “simultaneously with three scales of value, relating to order of nature, utility, and justice.” Viner (1978), p. 55.

[4] In his otherwise magisterial History of Economics Analysis, Schumpeter (1954) incorrectly wrote that Augustine “[n]ever went into economic problems” (p. 72) and Aquinas’ economics was “strictly Aristotelian.” (p. 93). As we’ll see, Aquinas not only combined Aristotle’s contributions with but also subordinated them to Augustine’s, in both “positive” or descriptive and “normative” or prescriptive theory.

[5] On Augustine’s theory of personal distribution, see Augustine (396/397) and Augustine (395/396), cited below; Aristotle’s social distribution (distributive justice): Ethics V,3 in Aristotle 1954 (350 BC); Augustine’s theory of utility (consumption): City of God XI,16 in Augustine 1984 (413-426-427); Aristotle’s theory of production of people and property: Politics I,4 in Aristotle 1962 [c. 350 BC]; Aristotle’s justice in exchange (equilibrium): Ethics V,5. In Aquinas, three of these four elements (the distribution function, the utility function, and the equilibrium conditions) are described (and the production function implied) in Aquinas 1993 [1271-1272]. Personal distribution: Book V Lectures IV-IX, pp. 293-318; social distribution: p. 294; the “equilibrium conditions”: pp. 294-296 and pp. 297-299, the “utility function” and analysis of money, pp. 312-315. The production function is described in his commentary on Aristotle’s Politics I, 1-3: Aquinas 2007 [1271-1272]. The same analysis is also scattered throughout his Summa theologiae in Aquinas 1981 [1271-1272], especially in his commentary on the seventh commandment.

[6] According to Ross (1995, pp. 53-4), Adam Smith’s teacher Frances Hutcheson taught him from an annotated edition of Pufendorf (1991 [1673]). As with Aquinas and the earlier scholastics, Pufendorf’s Protestant version of the natural law contains all four basic elements of economic theory, organized according to personal, domestic and political economy, and integrating prescriptive with descriptive theory by the Two Great Commandments. Personal distribution, Pufendorf, (1991 [1673]), pp. 64-67; social and political distribution, ibid., p. 32 and pp. 61-63; utility, ibid. pp. 94-96; production of and by human and nonhuman factors, ibid., pp. 84-89; society organized around family household, ibid., pp. 120-131; justice in exchange or equilibrium equating product values and factor compensation, ibid., p. 31 and pp. 94-95. The Two Great Commandments integrating description and prescription. Ibid., 11-12. The fact that Pufendorf was a Lutheran who wrote a critical history of the Catholic Church and that his theories were taught at the Calvinist University of Glasgow demonstrates that the scholastic outline of economic theory was broadly known and accepted. Pufendorf was widely read in the American colonies and recommended by Hamilton (1775). Hamilton had penned two-thirds of the Federalist papers and as first Treasury Secretary would reject Smith’s specific economic advice in the Wealth of Nations to the United States (Smith (1966 [1776]), Book II, Ch. 5); Hamilton (1791).

[7] Smith (1966 [1776]), Bk. IV Ch. 2; Vol. 2, p. 35. In his earlier Theory of Moral Sentiments Smith had already banished benevolence and beneficence to emotional psychology as superfluous social ornaments. Though Smith discusses both benevolence and beneficence in The Theory of Moral Sentiments, in contrast to Augustine, he fails to distinguish them consistently and is concerned to show that benevolence is only a motivating feeling, not an act of the rational will. Without benevolence or beneficence, Smith argues, society “though less happy and agreeable, will not be dissolved,” because “it may still be upheld by a mercenary exchange of good offices according to an agreed valuation.” Adam Smith, TMS II.ii.iii.2. Accessed from http://oll.libertyfund.org/title/192/200110 on 17 October 2009. A highly significant fragment from Smith’s university lectures predating the Theory of Moral Sentiments also survives to reveal his early and consistent reduction of all justice to justice in exchange alone, omitting distributive justice. The fragment is discussed by Raphael and Macfie in appendix II of TMS (382-401; accessed from http://oll.libertyfund.org/title/192/200192/3302081 on 16 September 2009); but is summarized succinctly by Ross: “The lecture fragment indicates [erroneously] that ‘doing good according to the most perfect propriety’ is known ‘in the Schools,’ i.e., in the medieval Scholastic tradition thought of as descending from Aristotle, as ‘distributive justice.’ TMS at VII.ii.I.10 shows how Smith had qualified this bald view. He added a footnote, citing the Nicomachean Ethics (5.2), to make clear that the ‘distributive justice of Aristotle is somewhat different . . . [consisting] of the distribution of rewards from the public stock of the community.’ In the fragment, Smith expresses the view that commutative justice can ‘alone properly be called Justice,’ by which he means the negative form of not harming a neighbour in person, estate, or reputation; and he holds this position throughout his career.” Ross (1995), 119.

[8] Jevons (1871); Menger (1871); Walras (1874).

[9] Schumpeter (1954), p. 184.

[10] “You shall love…God with all your heart…” (Deut. 6:5) and “love your neighbor as yourself” (Lev. 19:18).

[11] Aristotle (1932 [335-322 B.C.]), p. 2, p. 4, pp. 102-103.

[12] Augustine (395-396), viii, 19, p. 146. Private goods are now sometimes called “rival” goods. The formulation “diminished by being shared” is from Augustine (396/397), I, 2.

[13] Augustine (397), p. 398.

[14] Augustine (395/396), p. 131.

[15] To be more precise, love with both benevolence and beneficence.

[16] Or rather, love only with benevolence but not beneficence.

[17] Aristotle 1954 [c. 350 BC], V, v; pp. 117-122.

[18] Aristotle 1954 [c. 350 BC], V, iii; pp. 112-114.

[19] For example, the first three commandments of the Decalogue specify in greater detail how we should love God and the others how we should love of our neighbor; the rest of the natural law proceeds in turn from the Decalogue: all as a matter of reason, not just faith.

[20] Augustine (396/397), I, 1.

[21] Augustine (396/397), I, 28.

[22] “If the responsibility for looking after property is distributed over many individuals, this will not lead to mutual recriminations; on the contrary, with every man busy with his own, there will be increased production all round,” Aristotle (1962 [c. 350 BC]), p. 63. Aquinas listed these two and added a third, greater order resulting from the efficient use of specialized knowledge: peace (“a more peaceful state is ensured to man if each one is contented with his own”); productivity (“every man is more careful to procure what is for himself alone than that which is common to many or all”); order (“human affairs are conducted in more orderly fashion if each man is charged with taking care of some particular thing himself, whereas there would be confusion if everyone had to look after any one thing indeterminately”), Aquinas 1981 [1271-1272], II-II Q66 A2.

[23] Arendt (1967), p. 438.

[24] Donohue and Levitt 2001, 379-420 (cited hereafter as QJE). Earlier versions had been widely circulated, including Donohue and Levitt 1999 and Donohue and Levitt 2000 (hereafter cited as NBER). Levitt further promoted the claim in Levitt and Dubner (2005), pp. 117-144.

[25] Donohue and Levitt (2001), p. 402.

[26] Donohue and Levitt (2001), p. 402.

[27] Donohue and Levitt (2001), p. 394.

[28] U.S. Dept. of Commerce, Statistical Abstract: 2006, tables 339 and 313. The age distribution of persons arrested matches the age distribution of women having abortions quite closely. This is especially apparent after allowing for the fact that young men fathering children are typically two years older than their female sexual partners. Arrest rates by age and sex from Sourcebook of Criminal Justice Statistics; Ages of women having abortions from Elam-Evans et al. (2003). Fathers older than the age at which women are typically fertile are about eight years older than the mothers; see Statistical Abstract: 1998, p. 112.

[29] “Economic fatherhood” is the Total Fertility Rate, with fertility rates for white and nonwhites mixed in the same proportion as among men admitted to prison, removing children on welfare from the numerator and men in prison from the denominator. Annual data on the homicide rate go back to 1900, on white and nonwhite age-specific fertility rates back to 1917. Total Fertility Rate calculated from U.S. population by single year of age, sex, and race (since 1900, U.S. Census Bureau); age-specific fertility rates (since 1940 from annual National Vital Statistics Reports and beginning 1917 from Princeton University’s Office of Population Research). Data on persons arrested, starting in 1932, and admissions to Federal and state prisons, starting 1926, are from U.S. Dept of Commerce (1975), Part 1, updated in annual Statistical Abstract of the United States and in (Eds.) Pastore, A.L. and Maguire, K; on federal and state prisoners back to 1925 from http://www.albany.edu/sourcebook/. Data for children supported by welfare begin in 1936: children on public assistance before 1970 from U.S. Dept of Commerce (1975), Part 1, p. 356; more recent statistics from U.S. Department of Health and Human Services (2004).

[30] The regression tested is log(homicide rate) = c1 + c2 * log(economic fatherhood).

Coefficient Standard error t-statistic Prob.

c1 2.480789 0.022910 99.59044 0.0000

c2 -0.771135 0.031829 -24.22761 0.0000

Adjusted R2 = 0.903073 D-W=0.487996 F-statistic=586.9769 Prob(F-statistic) 0.000000

The complete multivariable model of the homicide rate is not reproduced in this paper, but its results remain dominated by the “economic fatherhood” variable.

[31] Cointegration can be detected with the Augmented Dickey-Fuller (ADF) test, which tests the likelihood that the two series will ever drift apart. While a “good” regression is one which holds at least 19 times out of 20, the ADF test must exceed 99 cases out of 100.

[32] The ADF Test Statistic for the unit root test on the residuals of the regression of economic fatherhood on homicide is -3.752339; the Mackinnon critical value for the hypothesis of a unit root at the 1% level is -3.5380. (At the 5% level the critical value is -2.9084, and at the 10% level the critical value is -2.5915.) Therefore, the series for economic fatherhood and homicide are cointegrated.

[33] Granger and Newbold (1974). Spurious relationships are characterized by high “autocorrelation” of residual forecasting errors, which can usually be detected by a statistical test known as the Durbin-Watson (D-W) statistic. Ideally, D-W should be close to a value of 2, but autocorrelation is reflected in a low D-W (e.g., 0.5).

[34] The model was first published in John D. Mueller, “How Does Fiscal Policy Affect the American Worker?” Notre Dame Journal of Law, Ethics and Public Policy Vol. 20 No. 2 (Spring 2006), 563-619; available at http://www.eppc.org/publications/how-does-fiscal-policy-affect-the-american-worker/

[35] As Augustine noted, a crime is the opposite of a gift: the taking from other persons their own goods. As with “legal” abortion, the objective facts remain the same whether or not the crime is recognized as such by human law. Augustine, On Christian Doctrine 3. 10. 16 (Grand Rapids: Christian Classics Ethereal Library), pp. 396-97,http://www.ccel.org/ccel/augustine/doctrine.xi_2.html.

[36] John D. Mueller, “The Stork Theory of Economics: Why Economists want Moms on the Payroll, Family Policy, January-February 2001, http://www.eppc.org/publications/pubID.2265/pub_detail.asp

[37] John D. Mueller, “A Subsidy for Motherhood: Why I Now Support Social Security,” Policy Review, October 1987, http://www.eppc.org/publications/a-subsidy-for-motherhood-why-i-now-support-social-security/

[38] Kemp, J. (1988), 110.

[39] Recounted in Presidential Debates: The Challenge of Creating an Informed Electorate By Kathleen Hall Jamieson, David S. Birdsell, 210. http://books.google.com/books?id=tZuHDG-EbRkC&pg=PA210&dq=pete+dupont+tax+plan&hl=en&sa=X&ei=FhOHT_zLIaKq8AHgraGCBw&ved=0CGsQ6AEwBzgK#v=onepage&q=pete dupont tax plan&f=false

[40] On June 29, 1984, Kemp introduced H.R. 5986, the Gold Standard Act of 1984, which would have defined the dollar as a fixed weight of gold, restored gold convertibility of Federal Reserve notes and deposits, and provided for gold coinage. Kemp’s explanatory statement and Lewis E. Lehrman’s Wall Street Journal op-ed column of that day, which Kemp inserted into the Congressional Record, remain valid.