Interview with Pascal Salin

Summer 1996
Volume 16, number 2

An Interview with Pascal Salin

Pascal Salin, professor of economics at Université Paris-Dauphine, is the current president of the Mont Pèlerin Society. He is the author of five books and many articles in academic journals, including The Review of Austrian Economics. Professor Salin was interviewed by the editors of the AEN at the January 1996 Austrian Scholars Conference at Auburn University in Auburn, Alabama.

AEN: In The Review of Austrian Economics (9, no.1), you wrote a blockbuster that argues against the existence of the income effect. How did this piece come about?

SALIN: I am writing a book on tax theory. In my research, I was struck by the debate surrounding the Laffer Curve. The idea is simple: people will supply more labor at a higher price than a lower one, and that could indeed generate more revenue. Yet among professional economists, there is near unanimity that lowering taxes can cause people to produce less and purchase more leisure. The reason is invariably the "income effect": people produce less because they suddenly have more income. Therefore, if we want high production we should also have high taxes. I had a feeling something rotten was going on. How can a theoretical framework be right if it makes reducing taxes also reduce output? I began to look into it and talk with some of my students. We concluded that the income effect does not exist as a general phenomenon; it is a mathematical illusion in a badly specified world. It depends on specific assumptions which are not spelled out. It also imposes an artificial separation between the theory of consumption and the theory of production. In fact the "substitution effect" is the only one that exists. If another effect appears so that a tax, for example, seems to increase productivity, everything else being equal it is only the process of adjustment from one equilibrium to another, a secondary phenomenon perhaps, but never dominant.

AEN: In the article, you also provide an Austrian critique of the idea of income itself.

SALIN: I found that the problem wasn t so much the "effect," but the concept of "income," which I think is meaningless. Here is a major point of departure between Austrian and neoclassical economics. If you start economics assuming people are "income maximizers," you forget that income is not something which has meaning for the acting person. An actor is attempting to pursue his own objectives, which can be anything at the top of his preference scale and which he can act on, but not income per se. People have the illusion that they understand what income is, since they deal with something called "income" every day and especially at tax time. It seems well defined and it can be measured. One can use it to develop all sorts of relations between it and other variables, and the results appear scientific. Yet there is no reason to use income as the key human motivator any more than to theorize that people seek only to maximize social prestige, gourmet cuisine, and love affairs. Just so, the income effect is a device that allows economists to depart from the correct basis of economic theory, purposive action and marginal utility, and enter into another approach entirely. It is completely arbitrary and incoherent to jump from marginal utility theory to this concept of income. There is no logical link between the two.

AEN: Did you find anything in the literature to back you up?

SALIN: Other than the general theoretical framework of the Austrian School, I was surprised that I didn't find much. I found debates on which effect dominates, income or substitution, but little on the theoretical concept of income itself. But this is not surprising. Economists often end up with the wrong conclusions because they don't think rigorously about foundations and methods. That's why, in my book on taxation, I had to start from the very beginning, and trace the effects carefully. This case shows what happens when economists work solely from mathematics and indifference curves. Curves can be twisted every which way to show anything you want. You can draw an expansion path so that the quantity of labor is increasing, decreasing, or unchanged when its price is decreasing. But this does not give any information about real motivations. If we believe as we should that economics must be coherent with rational logic, we should get rid of any graphical expositions that contradict logic.

AEN: How important is this tax issue for French economic policy?

SALIN: Extremely. In France, people don t know much about economic theory, even classical economics. But they know things like the income effect. Even average people, when discussing the effect of taxation on the supply of labor, will claim it is irrelevant.

AEN: When you say people don't know economic theory, do you mean professional economists?

SALIN: Certainly. Pollsters have found that in Europe and the United States, economists know more economic theory the effects of price controls, for example than the average layman. But in France, it's different. Exactly the same percentage of both groups are wrong. Austrian economics is largely unknown, but so is basic mainstream theory. At best, economists accept a mixture of Keynesian and socialist theory. Even that doesn t capture the level of ignorance. Right now, for example, the consensus among economists is that if we want an economic recovery, we have to increase consumption. Keynes never said that. It is a popular version of Keynes. They still use ISLM as the entire basis of macroeconomics. It is very sad. New generations are more and more inclined to learn new approaches, but the combination between state-funded universities and the state itself is a very difficult cartel to break up.

AEN: Does this make life difficult for dissident economists?

SALIN: France has a highly centralized educational system. It is very difficult to get a position, anywhere, when you are not in the mainstream. What is called economic research is dominated by civil servants who come mainly from the Ecole Polytechnique and the Ecole Nationale Administration. They offer an administrative or accounting approach to policy issues. To solve some national problem, they begin by getting statistics, getting international comparisons, and finding the right measures to make our numbers look as good as those of other countries. They are very clever, but they are not doing economics.

AEN: Yet France has produced some great economists over the centuries.

SALIN: In the 18th and 19th centuries in particular. Murray Rothbard writes brilliantly on these people in his two-volume work An Austrian Perspective on the History of Economic Thought. Very fascinating. But, today, the likes of Frederic Bastiat are completely forgotten. A friend of mine published a small collection of writings by Bastiat. Only 600 copies sold. There is a Bastiat Club, but the followers of this tradition are a very small group. Most people who know who he is would say he is merely an old-fashioned economist.

AEN: How can this decline in intellectual life be explained?

SALIN: This is the key question. How did the ideas of statism come to replace classical liberal ones? And why is Austrianism a small presence in France, the country that produced Say and Bastiat? Ultimately we have to talk about method. I agree with the methods of Mises, Hayek, Rothbard, and apriori deductivism generally. But positivism, the very opposite view, is dominant in the social sciences. I was struck when I read what Hayek said about France. I think he gave the best explanation. At the turn of the 19th century, we had the best scientific establishment in the world. People were amazed at the biological advances made by scientists. They thought the same track was available for economics. They adopted the competitive-positivist approach of Auguste Comte and Saint-Simon. French academics have since acquired this idiot view that positivism can save all fields of knowledge.

AEN: Positivism and science are supposed to go together.

SALIN: That's the mythology. People say positivism lends prestige because it requires rigorous methods and training. But the truth is that economics and the social sciences are far more difficult. The process of thought by which one reaches true conclusions is hard. It requires a level of abstraction which, quite possibly, many people are unable to sustain. Mathematical economists mainly need formal rigor, the ability to shift logically from one statement to the other. But they do not need conceptual rigor, which is the ability to fully understand the meaning of the words one is using. Austrians need both sorts of rigor. We need the ability to reason scientifically about meaningful concepts in the social science. I have long believed that the methodological problem is the main one for the future of liberty. France is dominated by intellectuals with formal rigor but no conceptual rigor. They lack the ability to understand complex human relationships like free exchange and investment. Today, for example, we have a very famous school of mathematical social engineers and economists. And it is quite fantastic that someone like Nobelist Maurice Allais, who in France is considered a libertarian, is seen as the model.

AEN: Austrians have been interested in Allais because of his price theory and opposition to fractional-reserve banking.

SALIN: His is a patchwork form of economics. Some of what he has written is quite acceptable and other parts are not. But there are no links between the parts. He has no theory of man, no theory of society, and no theory of rationality. He has a mathematical and formal approach of interrelations between units, which are called individuals, but in fact are not. To that, he adds his own impressions, prejudices, and wishes. It is quite true that he has an inclination toward knowing what the free market is. But he sees the market as merely an instrument to something more, which is general equilibrium. To him, private property is useful only because it makes it possible to reach equilibrium and promote efficiency. This view of liberty is purely instrumental and not principled. That's why he ends up favoring state intervention in areas like scientific research and housing. It's a completely random choice. When you see the list, it is hard to tell the difference between Allais and a socialist. To me this is very characteristic of economists of our time in France.

AEN: Yet how can we distinguish between Hayek's concessions to the state and those of Allais?

SALIN: We may find that Hayek is not completely coherent, and that he doesn't always test his conclusion against his theory. For instance, his proposed Constitution is more activist than it should be, and he is often in contradiction with himself in areas of policy. Hayek provides a framework for understanding liberty so we can arrive at our own conclusions. It is much worse with Allais. He has no theory against which he allows himself to be measured. He offers no theory of human behavior. We have to depend on the master to inform us of what to think on every issue since his thought is utterly unpredictable.

AEN: How is the lack of economic sophistication in France affecting the political situation?

SALIN: It affects it greatly. People cannot imagine that there might be another way to solve economic problems. The only solutions they can imagine are administrative solutions and Keynesian-inspired solutions. There is no difference in the economic policies of the left and the right. They all pursue the common approach to reform: tax increases, attempted spending cuts, regulatory reforms. And they approach all policy problems as if incentives do not matter. If there is a budget deficit in the Social Security System, they increase taxes. They could decide to reduce public expenditures, of course, but there is too much political resistance. Moreover, people do not understand that resources will be freed up to provide for economic growth if the government stopped taking them. At the very time when budget deficits are reaching 6 percent of GDP, government spending is increasing by 4 percent. Productivity is increasing only at 1 or 1.5 percent. Then the government is forever shocked that public revenues are less than they expected.

AEN: How coercive is the tax system?

SALIN: It is not very easy to drop out of the official system. It is more difficult than in Italy or other places. The tax administration is powerful, arbitrary, and very large. Rates can run as high as 80 percent. Because taxes are so high, the system is also extremely complex. Along with job insurance and the minimum wage, it is the main cause of unemployment. But it is difficult to make people understand that.

AEN: Did you think Jacques Chirac would push policy in a different direction?

SALIN: I did have some hope. Sometimes he sounded like a classical liberal. But that was because some of his speeches were written by a close friend of mine, Alain Madelin, whose support may have played a major role in Chirac's victory. In one Chirac speech I even recognized a sentence of mine. So I was overjoyed. I thought: now here is a case of an intellectual involved in French politics and the only real libertarian. So I was very happy when Chirac was elected. I was quite certain that Madelin would be in a position to push this tax reform. He was made head of the ministry on economics and finance. But Chirac put the heads of bureaucracies lifetime civil servants in charge of solving the unemployment problem. At that moment, I knew there was no hope. In fact, Madelin had no influence and he resigned.

AEN: That story sounds familiar.

SALIN: Yes, because it is a constant problem we have as classical liberal reformers. Even if Madelin had been in a position of influence, he would have been surrounded by people who do not understand such basic concepts as incentives, economic growth, and the market economy. It's still worth the effort to fight it out in politics where you can do some good. But our more basic problem is an intellectual problem. In many ways, I feel French intellectual life is as closed and homogeneous as it must have been in the old Soviet Union. The media, universities, and politics converge to defend the same statist system. They constitute a big cartel, and not the good type that I defend in the upcoming Review of Austrian Economics (9, no. 2).

AEN: Let's talk about the EC. Let's say France transfers some of its monetary and fiscal authority to Europe. Would that be a good thing for liberty?

SALIN: I have long opposed European monetary integration. In 1980, I wrote "European Monetary Union: For Whose Benefit?" with a forward by F.A. Hayek. At that time, I was the only economist in France to oppose this artificial sort of monetary integration. My theory is that it would merely substitute a supranational monopoly of money creation for the existing national monopolies. This is no improvement, and it risks increasing the likelihood of inflation over the long term. There is nothing in the Maastricht Treaty on how money would be managed by a European central bank. Perhaps it would be tolerable. Perhaps a German-style tight money regime would prevail. But if it is democratic, the bank would also be managed by the French, Italians, and everyone else. So we can t know the outcome. That itself creates uncertainty. We might end up with the same sort of problems plaguing the existing situation: exchange controls, inflation, and worse. At least with the present system, we have competition between currencies. France has a long history of inflating away public debts at the people's expense. Today only the desire to compete with the Deutschmark compels the French authorities to pull back. I would rather have a gold standard than the present system, but I ll take what we have now over further steps toward artificial monetary integration. In order to comply with the long-term plan, the government wants to reduce the deficit, but through a tax increase. It is also attempting to maintain a parity with the Deutschmark by use of artificially high exchange rates, whereas France should probably actually devalue its currency within Europe. In both these respects, Maastricht is having a negative impact in the short run.

AEN: In reality, monetary integration seems no more likely now than ten years ago.

SALIN: It may never happen. It is very difficult to forecast but my guess is that the deadlines will keep being pushed back. People in France, partly for nationalistic reasons, are less willing than in the past to participate. But there are many bureaucrats and intellectuals who think a currency is something that can be created by coalitions of governments. They will keep trying.

AEN: Are there other reasons you oppose Maastricht?

SALIN: Libertarians and Austrians should be skeptical about all attempts at government centralization. I favor economic integration through competitive free markets, but not political integration. The French intellectuals who were active in building this supposed dream of a unified Europe all favored interventionist and socialist policies. There is a certain logic here. Making socialism Europe-wide is one way of avoiding having to pay a domestic price for statist policies. At the same time, steps toward economic integration have liberalized some sectors in France air transportation for instance. To me, integration should only mean economic competition, which builds on economic exchange between countries, and not closer links between government agencies.

AEN: France has had many difficulties with the question of immigration.

SALIN: As a libertarian, I am in favor of the free movement of peoples. France has benefited from immigration for a very long time. Immigrants have long contributed to our civilization. To me the liberty of individuals is so important because the ultimate source of wealth is the human mind. Societies are harmed when they restrict the right to move. But in France, it is impossible. We do not live in a libertarian world. Private-property rights are not enforced. We have an enormous welfare state. Right now we have a high quantity of immigration, but very low quality. The people who come have low incomes and low skills. Then they get government subsidies. In the end, they take more from society than they contribute, which complicates the issue enormously. It's true that France has very strict rules. But immigrants have learned how to manipulate them. People come for welfare while claiming that they have political problems at home. They claim the need to reunite families, but they are reuniting families that already have several wives. If the present law were obeyed strictly, immigration would be stopped. But that is not what happens. Millions of people come without authorization and then learn how to manipulate the system. After ten years or so, you can't send them back. The problem of immigration continues to be a very difficult one for France, but with no clear answers, even from a libertarian point of view.

AEN: Why has it proven so difficult to enact free-market economic reforms in democratic societies?

SALIN: It is true that it has been difficult, and in some specific cases, for example Chile, the authoritarian systems have been better for that purpose. In the case of France, we have a welfare system that is managed by the trade unions and the government in a corporatist fashion. We also have a bureaucracy which is a captive of union power. The trade organizations and large businesses collude. They have the same world view and defend each other's bureaucratic powers. Any change in the system creates the risk of strikes, so no government, right or left, proposes far-reaching changes. The social democratic system may be socially unstable, but politically, it is very strong. The elites all realize they would have less power in a society in which the welfare state became smaller.

AEN: It's incredible that this continues even after the fall of the Berlin Wall.

SALIN: When socialism collapsed, I felt like we were victorious. At last it would be recognized that Mises and Hayek were the great minds of the century. Yet the reverse happened. The core error, which we didn't expect, was that people confused liberty with democracy. The socialists in France have the idea that the political changes in the former Soviet Union and Eastern Europe were about overthrowing one-party rule, not the system of social and economic planning. These countries have become social democracies. In Europe, if you say that democracy is less important than liberty, you will be in deep trouble and called extreme right.

AEN: Last night, Ralph Raico argued that achieving the goal of a free society will require more than education and political action. There are also certain cultural preconditions. Did that provoke any thought in you?

SALIN: It was a very challenging paper. When I discovered the Austrian stream of thought, I was overwhelmed and persuaded immediately. But that's not true for other people. How is it that some people are inclined toward clarity and truth in the social sciences but others are not? I don t know. Hayek and Mises thought that people are wrong about liberty because they have not been exposed to the truth. The problem is even worse because the intellectual game is rigged against us. Our ideas are dangerous to the elites. They use every means possible to exclude Austrians and libertarians from public and academic discussion. They call us extreme and marginal and so on. In French universities, liberal intellectuals cannot get courses on their chosen subjects or get scholarships for their students. The trade unions keep the system locked up to prevent threatening ideas from getting in. There is a strong link between the public school system and the difficulties of spreading good ideas. I tell my students, if they are going to write a dissertation with me, they are going to suffer. They will have a difficult time getting published and finding a position. There is no freedom of expression in French academia. A student recently came from Bulgaria to Paris to write a dissertation on the French classical liberal tradition. She expected to find convinced capitalists everywhere. After a couple of weeks, she concluded it was the same as in Bulgaria.

AEN: You also mentioned that the media is a problem.

SALIN: Television is almost entirely public, so there is no competition. The one private station relies heavily on the government. The same is true of the media generally. A good newspaper in France is La Figaro, and it has published articles on the Austrian School, Hayek and Mises, and favorable reviews of Rothbard's works. But it is not a reliable outlet. They had planned to publish work by some of my students opposing tax increases. But they canceled at the last minute because they decided to support the government. Even within private circles the government can exert this kind of pressure.

AEN: Given all this, what led you to the Austrian School?

SALIN: I was educated at the University of Paris by a more or less Keynesian department. After five years, I had the feeling that I had not learned anything at all. But then, with some friends, I organized a seminar named after J.B. Say. Our professors saw it as a provocation. We knew we were taking a risk, since we had to pass a nation-wide competition for appointments. Once we were accused of being liberal and following in the wake of Anglo-Saxon imperialism. Why? Just for reading The Journal of Political Economy! I hadn't even been exposed to the Austrians yet. Then I read a booklet by F.A. Hayek. From the very first page, I was fascinated. It created a sort of intellectual revolution in my mind. The same was true of later Austrian work. I remember reading The Denationalization of Money. After two or three pages, I was so excited that I wrote several pages on the subject before I could continue with my reading. After that exposure, I was an Austrian for life.

AEN: You have written a book about Jacques Rueff, de Gaulle's economic advisor. What was your relationship with him?

SALIN: Rueff is a very interesting case. He was not a professor, but he did give lectures at the Institut d'Etudes Politiques. He was a civil servant. Before he became a liberal thinker, he believed strongly in the state and the planned society. He was proud to be one of the state's servants and to belong to the nomenklatura. Yet he was a truth seeker, largely self-educated. Being an auto didact is a French speciality, you know, so he did not read much from other authors. Over the years, his views began to change and he became more liberal minded. I like his work because everything is linked to his general view, even if sometimes it is difficult to understand his words and internal concepts. Though I was not a student, I was close to him and appreciated his political inclinations. I also appreciated his personal kindness. He was always a gentleman. The first opportunity that I had to meet him was when I was writing my dissertation. I don t know how he heard of me, but he invited me to his home, which was quite nice.

AEN: What would you say are his main intellectual contributions?

SALIN: He was a great balance-of-payments theorist and a precursor of the monetary approach. His monetary theory is linked to the rest of his world view. Even though he was a general equilibrium theorist, he had a philosophical background, and came up with a theory that was somewhere in between the Austrians and the classical economists. He made a distinction between two kinds of interventionism: conforming and nonconforming. Regulations and price manipulations are nonconforming, but, surprisingly, taxation is normal and conforming. This would seem to make him a member of the Chicago School, but I would say he was not too far from Maurice Allais. Both were educated in mathematics and the natural sciences. Both believe there is only one proper methodology, positivism. They believe that science is measurement, and that is that. It all seems to come back to this central error.

AEN: Can you tell about the theory of cartels you have written about in the upcoming issue of the RAE?

SALIN: I've been fascinated by the possibility that cartels are not always inefficient and unstable super-profit makers. They don t always make resources scarcer and increase prices. They can also be the preferred outcome of market competition, if we understand competition properly. Cartels can increase the value of production and the efficiency of the market process. In this article, I modify Rothbard's argument on monopolies, and argue that cartels making substitutable products may have advantages over a single producer.

AEN: Do you enjoy the Mont Pèlerin Society?

SALIN: I can'

t praise it enough. Next year will be the 50th anniversary of the Society. We will have a meeting in Mont Pèlerin and invite the oldest members to come. As you know, Mises was also a founder of the organization.

AEN: Did you ever hear the story, probably apocryphal, about Mises being so exasperated with the socialist thinking of one session that he left the meeting?

SALIN: No I haven't. But I can imagine that Mises, being a very principled and consistent thinker, would be troubled by some statements. The Society is generally classical liberal, but we have many different streams of thought. I have been criticized for making our programs too Hayekian and too Austrian.

AEN: You are at the center of a worldwide movement for liberty. How do you assess its present status?

SALIN: I see enormous growth in the importance of the Austrian School. The attendance and papers at this Austrian Scholars Conference prove that, with so many good minds from around this country and the world. The writings of the Austrians have begun to penetrate. I have only been frustrated that so many sessions are concurrent and I can t attend every one. A few people are capable of doing a tremendous amount of good, so long as they are willing to stick to their principles and use every means at their disposal to advance truth. Some years ago, I could not have imagined it would be possible to gather so many Austrian thinkers in one place and hear so many interesting papers.

AEN: What about your own influence in France?

SALIN: For many years, my friends and I have been completely ignored. During all the years when socialist ideas went unchallenged, I could not break through. But here's a small story that makes me hopeful. When Chirac's economic minister resigned one Friday night, I got a call from Le Monde asking for an article. They wanted it in the morning, and I wrote it between 1:00-2:00am. I explained that there is no real distinction between right and left social democrats; they both favor state planning. The real distinction is between those who favor liberty and those who do not. I was pleasantly surprised. This article was published on the front page and has been widely circulated. Many readers were exposed to something new. Since last September I have had a lot of interviews on television, which is completely new for me. We still live under a totalitarian domination of public and academic opinion. Are we past the point of no return? I hope not. But it is going to require hard work to restore our intellectual tradition, and the policies and society that follow it. Hayek once told me that Austrian thinkers are part of the hope he had in the world. I would say Austrians are the only hope.