WEBVTT NOTE An Investor's Introduction to Austrian Economics 1 00:00:00.000 --> 00:00:04.000 It's a pleasure to be here at last, in a slight detour. 2 00:00:04.000 --> 00:00:08.000 I'm not going to really go into the history of Austrian economics at this point. 3 00:00:08.000 --> 00:00:15.000 I wanted to concentrate on an introduction to Austrian economics for people who are investment-oriented 4 00:00:15.000 --> 00:00:20.000 and how it differs from other schools of economics. 5 00:00:20.000 --> 00:00:27.000 The School of Austrian Economics, as Mark said, was founded in 1871 by Carl Menger. 6 00:00:27.000 --> 00:00:33.000 was succeeded by Eugen von Boehm-Bawerk, who later became finance minister of Austria, 7 00:00:33.000 --> 00:00:37.000 put the principles into effect by going back to the gold standard, 8 00:00:37.000 --> 00:00:45.000 and taught here for many years, a very distinguished professor and brilliant integrator of capital and interest theory, 9 00:00:45.000 --> 00:00:48.000 along with his brother-in-law, Friedrich von Wieser. 10 00:00:48.000 --> 00:00:51.000 By the way, they were both students of Menger. 11 00:00:51.000 --> 00:00:54.000 By the way, even though they were brothers-in-law and they saw each other all the time, 12 00:00:54.000 --> 00:01:07.000 They never discussed economics, they differed on various things, Boehm-Bawerk, which was much sounder in general, and they never discussed economics in public, they argued about it in print, which I thought was a good way of handling their family situation. 13 00:01:07.000 --> 00:01:19.000 At any rate, Ludwig von Mises was a student of Boehm-Bawerk, and so he founded this modern Austrian school, which essentially integrated the macro and the micro. 14 00:01:19.000 --> 00:01:33.000 In other words, the older Austrians dealt only with individual prices and demands and supply and not have, however, deal with money and business cycles and Mises integrated the whole thing into one great structure. 15 00:01:33.000 --> 00:01:45.000 I think one of the things to concentrate on is how Austrian economics particularly differs from every other school of thought, even alleged free market schools of thought, including the Chicagoite, 16 00:01:45.000 --> 00:01:49.920 is that only the Austrian School focuses on the tremendous importance of the entrepreneur 17 00:01:49.920 --> 00:01:54.800 as the major actor, so to speak, in the economy. 18 00:01:54.800 --> 00:02:01.800 The entrepreneur is the one who meets, assumes risks, meets the uncertainty of the world 19 00:02:01.800 --> 00:02:07.000 and the uncertainty of the market, invests capital and tries to gain profits and avoid 20 00:02:07.000 --> 00:02:09.000 making losses, which is not always possible. 21 00:02:09.000 --> 00:02:13.120 The entrepreneur then is the key figure in the whole economic system. 22 00:02:13.120 --> 00:02:18.880 If you look through micro-text, regular micro-textbooks and economics, regardless of the other schools 23 00:02:18.880 --> 00:02:23.680 of thought, let alone, of course, macro-textwork, goes without saying, is never mentioned. 24 00:02:23.680 --> 00:02:24.680 The entrepreneur is never mentioned. 25 00:02:24.680 --> 00:02:29.200 You look through the whole thing, there ain't no such person, there's hardly any mention 26 00:02:29.200 --> 00:02:30.200 of profits or losses. 27 00:02:30.200 --> 00:02:36.120 That all drops out because the orthodox economics or standard economics assumes that the world 28 00:02:36.120 --> 00:02:42.020 is always in what they call equilibrium, that everything is always in a state of rest, contentment 29 00:02:42.020 --> 00:02:45.660 and Perfect Knowledge, where everybody knows everything. 30 00:02:45.660 --> 00:02:49.540 And in a state of perfect knowledge, there are no, of course, no losses. There's no 31 00:02:49.540 --> 00:02:52.580 problem about making forecasts erroneous. 32 00:02:52.580 --> 00:02:57.420 And no profits, where everybody's settled down in sort of an endless round. 33 00:02:57.420 --> 00:03:01.100 And so this peculiar model has risen up over the years in standard 34 00:03:01.100 --> 00:03:04.580 economics and is then not only totally unrealistic, it totally 35 00:03:04.580 --> 00:03:07.820 falsifies what goes on, but is then used to apply 36 00:03:07.820 --> 00:03:11.420 the standards to the market. In other words, well, the market isn't working well because it's not like 37 00:03:11.420 --> 00:03:29.900 The Austrian School focuses on the entrepreneur, facing uncertainty, investing capital, hoping 38 00:03:29.900 --> 00:03:34.700 to get profits and avoid losses. 39 00:03:34.700 --> 00:03:39.940 The first lesson of Mises in this field in Austrian economics and on the entrepreneur 40 00:03:39.940 --> 00:03:44.580 is, the first general lesson, I'll explain in a minute, in ways in which it's not always 41 00:03:44.580 --> 00:03:47.540 totally true, but it's certainly basically true. 42 00:03:47.540 --> 00:03:50.900 The first lesson is that the entrepreneur knows more about his subject than the economist 43 00:03:50.900 --> 00:03:51.900 does. 44 00:03:51.900 --> 00:03:57.060 Key, key situation, the entrepreneur knows more than the economist about his particular 45 00:03:57.060 --> 00:03:59.400 market, his or her particular market. 46 00:03:59.400 --> 00:04:03.860 If you have an entrepreneur in the steel industry or in the clothing industry or in the logging 47 00:04:03.860 --> 00:04:08.860 and the banking industry or whatever, this person, this entrepreneur knows more about what's going on, 48 00:04:08.860 --> 00:04:13.860 about demands and costs and what's happening and how to act in that industry, 49 00:04:13.860 --> 00:04:21.860 knows much more than economists, government officials, assorted experts and bureaucrats and whatever. 50 00:04:21.860 --> 00:04:25.860 And one of the reasons the entrepreneur knows more is the entrepreneur's life is always on the line. 51 00:04:25.860 --> 00:04:31.860 When he does something, he invests capital, he risks losing money and he hopes to gain money. 52 00:04:31.860 --> 00:04:42.860 The economist, and as all of his forecasting and other activities in Washington are jetting back and forth across the country, the economist doesn't risk his own capital. 53 00:04:42.860 --> 00:04:49.860 As a matter of fact, the economist, the situation is, there's so-called talk amongst critics of the market of market failure. 54 00:04:49.860 --> 00:04:57.860 There's a market failure in this and a market failure in that. The only market failure that I know of, and it's now fortunately coming to an end, is a market failure in the market and the forecasting industry. 55 00:04:57.860 --> 00:05:06.860 In other words, economic forecasters have constantly made lousy, rotten forecasts for 20 years and are still getting customers by the bushel barrel. 56 00:05:06.860 --> 00:05:13.860 Well, it's coming to an end now. The last couple of years has been a great depression in the econometric forecasting industry, economic forecasting industry. 57 00:05:13.860 --> 00:05:17.860 And for good reason, they're always wrong. I'll get to that a little bit later. 58 00:05:17.860 --> 00:05:23.860 But the point is that these guys are not risking their reputation. 59 00:05:23.860 --> 00:05:24.860 Reputation 60 00:05:24.860 --> 00:05:28.620 You might think, well, if they make a consistent string of bad forecasts, they're not going 61 00:05:28.620 --> 00:05:29.620 to get many customers. 62 00:05:29.620 --> 00:05:30.620 That's not really true. 63 00:05:30.620 --> 00:05:35.060 In various ways, their reputation doesn't catch up for a long time. 64 00:05:35.060 --> 00:05:39.020 They continue to be eminent forecasters even though their forecasts are always wrong. 65 00:05:39.020 --> 00:05:46.540 One of the tactics they use, by the way, and this is self-conscious, it's not just intuitive, 66 00:05:46.540 --> 00:05:48.060 I know for a fact this is true. 67 00:05:48.060 --> 00:05:54.060 Well, if you notice all the forecasts, the typical forecasting season is around Christmas. 68 00:05:54.060 --> 00:06:01.060 Around the end of the year, all the economists forecast GNP, unemployment, inflation rates, interest rates for the next year. 69 00:06:01.060 --> 00:06:05.060 And they're almost all the same. I mean, there's slight variance, variations. 70 00:06:05.060 --> 00:06:09.060 You know, one guy says it's going to be 3.8% inflation, the other one says 4.2%. 71 00:06:09.060 --> 00:06:11.060 And that's about it. 72 00:06:11.060 --> 00:06:17.060 And the reason why there's such a narrow range is they all call each other up on the phone to make sure that the ranges are narrow. 73 00:06:17.060 --> 00:06:23.060 I know that's true. I know it looked as if it was true, and I now know it is true. 74 00:06:23.060 --> 00:06:27.060 They call each other up. It's a small industry where they all know each other, and they collude. 75 00:06:27.060 --> 00:06:34.060 So they make sure, in other words, if they're all off the beam, as often they are, well, gee, all the top distinguished forecasters made the same error I did. 76 00:06:34.060 --> 00:06:38.060 I can't be blamed. It's not my fault. 77 00:06:38.060 --> 00:06:44.060 So all the other big shots, the econometric chasers, the forecasting bureau, whatever, they all said the same thing. 78 00:06:44.060 --> 00:06:53.460 So it's worked for a long time, and as I say, in the last couple of years, reality has finally caught up with it. 79 00:06:53.460 --> 00:07:01.060 But there have been many studies for the last 30 years or so, literally, of forecasting, economic forecasts and how successful they've been. 80 00:07:01.060 --> 00:07:06.060 About every year, the Wall Street Journal sort of updates it, and it's always terrible, it's always awful. 81 00:07:06.060 --> 00:07:11.560 I mean, worse than if you just took a ruler, what's called an extrapolating trend. 82 00:07:11.560 --> 00:07:16.560 If they take a ruler, if things have been going up by four or five percent in the last six months, 83 00:07:16.560 --> 00:07:20.560 you assume they'll go up by another four or five percent in the next six months. That's taking a ruler. 84 00:07:20.560 --> 00:07:26.560 If they took a ruler, they'd do a little bit better than they actually have. 85 00:07:26.560 --> 00:07:29.560 By the way, the forecasters keep saying, well, gee, we're very good. 86 00:07:29.560 --> 00:07:33.560 We keep rectifying our high-speed computer models. 87 00:07:33.560 --> 00:07:37.560 We're doing a very good job in forecasting, except we can't forecast changes in trend. 88 00:07:37.560 --> 00:07:43.560 If you go okay when the trend is the same, but once in a while the trend changes, we don't know what, we can't understand that yet. 89 00:07:43.560 --> 00:07:46.560 Of course, any moron can take a ruler. You don't need high-speed computer models. 90 00:07:46.560 --> 00:07:51.560 You take a ruler, you put it in the middle of the curve, and you fork it, and you extrapolate. 91 00:07:51.560 --> 00:07:55.560 You don't need to spend two million dollars a year on these forecasts. 92 00:07:55.560 --> 00:08:03.560 At any rate, that's the, the, the entrepreneur knows more than economists. 93 00:08:03.560 --> 00:08:10.560 And generally, and one of the things that happens, one of the reasons why the entrepreneur knows more than the economist is the lousy entrepreneur has got to leave the market. 94 00:08:10.560 --> 00:08:14.560 In other words, it's sort of a survival of the fittest mechanism. 95 00:08:14.560 --> 00:08:17.560 If you're a lousy forecaster, you don't last too long as an entrepreneur. 96 00:08:17.560 --> 00:08:21.560 You go back on the ranks, join me in the ranks of the proletariat, of wage earners. 97 00:08:21.560 --> 00:08:28.560 If you do well, however, if you're a good forecaster, then you make more money, you plow it back in, and your assets keep increasing. 98 00:08:28.560 --> 00:08:48.560 So it's sort of a built-in mechanism in the market, as there is in most other areas of the market, just to ensure that better forecasters make more money, lousy forecasters drop out, lose money and drop out, and this means that they will be generally fairly accurate, although not completely so. And I say much more so than economists. 99 00:08:48.560 --> 00:08:56.960 Okay, so if, if, if forecasters, if, if entrepreneurs know more than economists, what does, what does Austrian economics have to contribute? 100 00:08:56.960 --> 00:09:03.760 Well, one thing is this knowledge itself. I mean, sort of like, show entrepreneurs they're really, they're really better than they think they are. 101 00:09:03.760 --> 00:09:10.060 Second of all, as an analog, as an analog of this, this is one of the basic reasons why all government intervention is counterproductive. 102 00:09:10.060 --> 00:09:17.860 First of all, it fails, and second of all, it's counterproductive, because government intervention is usually, of course, promulgated by experts, economists and whatever, 103 00:09:17.860 --> 00:09:37.860 So that's point number two of what economists have to contribute to this, what Austrian economics has to contribute to this, to show that their colleagues in the economics profession mess things up and are kind of productive. 104 00:09:37.860 --> 00:09:47.260 There's another point, Mises used to mention this in a seminar at one point, around I think 105 00:09:47.260 --> 00:09:50.660 during the Truman administration, I think this is Truman administration, I haven't checked 106 00:09:50.660 --> 00:09:57.220 it, in 1950, early 50s, late 40s, for some reason the economists concluded that the steel 107 00:09:57.220 --> 00:10:02.060 industry wasn't producing enough, there was an under-production of steel, a big hysteria 108 00:10:02.060 --> 00:10:09.180 on Us and All the Establishment, Organs of Opinion, and Truman and his experts who kept 109 00:10:09.180 --> 00:10:11.900 denouncing the steel industry for not producing enough steel, why aren't you out there producing 110 00:10:11.900 --> 00:10:16.940 more steel, and you're monstrous for doing that, you're unpatriotic for not producing 111 00:10:16.940 --> 00:10:17.940 more steel. 112 00:10:17.940 --> 00:10:25.460 Now this is, Mises pointed out in his seminar, this is very much like a traditional story 113 00:10:25.460 --> 00:10:30.260 of a minister in a Sunday sermon denouncing the congregation for not enough people showing 114 00:11:00.260 --> 00:11:05.260 Why take it out on the steel industry? They were doing a great job compared to the other industries. 115 00:11:05.260 --> 00:11:08.260 Yet somehow, of course, Truman didn't do that. 116 00:11:08.260 --> 00:11:12.260 In other words, as Mises pointed out, there's no caste system in the United States. 117 00:11:12.260 --> 00:11:17.260 There's no law that only U.S. Steel, Bethlehem, whatever, can produce steel. 118 00:11:17.260 --> 00:11:23.260 Anybody can produce steel if they want to. They get into the steel industry if they think it's the most efficient and most profitable thing to do. 119 00:11:23.260 --> 00:11:28.260 And of course, the next point, as a resource allocating point, 120 00:11:28.260 --> 00:11:34.260 If you think there's supposed to be more steel produced, if that's the official doctrine of the establishment, what less should be produced? 121 00:11:34.260 --> 00:11:44.260 It's easy to say more steel should be produced. If you say that, should it be less aluminum, or less peanuts, or less copper, or less clothing, or what? 122 00:11:44.260 --> 00:11:53.260 Because you have to take out the resources from somewhere to produce more in steel, and of course, that's never, nobody ever says what should be produced less of. That's never pointed out. 123 00:11:53.260 --> 00:12:00.260 Because there's no criterion. The only criterion is for economic, whether something is economic or not, is if it's profitable or not. 124 00:12:00.260 --> 00:12:04.260 And so it's not more, no more steel was being produced because it wasn't profitable to do so. 125 00:12:04.260 --> 00:12:09.260 And so once you're, once you leave the profit-loss criterion, you're at sea without a rudder. 126 00:12:09.260 --> 00:12:14.260 It's just, everything is totally arbitrary. Any, any jerk can say, well, I think it should be 20% more steel produced. 127 00:12:14.260 --> 00:12:18.260 All right, but 20% less of what? Blank out. 128 00:12:18.260 --> 00:12:26.260 because there are no standards left, there are no criteria for production if you leave 129 00:12:26.260 --> 00:12:34.420 the market, okay, and what next can we say about investors, don't forget every investor 130 00:12:34.420 --> 00:12:37.860 is an entrepreneur of course, if you invest your capital you're being an entrepreneur, 131 00:12:37.860 --> 00:12:42.620 you're risking losses and you're hoping to gain profits, can the economist say anything 132 00:12:42.620 --> 00:12:55.620 Well, in addition to the points I made up till this point, there is one cautionary note that an economist could point out. 133 00:12:55.620 --> 00:13:06.620 For example, if you think, if you come to the conclusion there is going to be a growing industry coming up, a new, great new industry, like computers were, still are, but computers were particularly a few years ago, or like plastics were in the 1950s. 134 00:13:06.620 --> 00:13:16.620 If you see a great new industry arising, don't necessarily think there's a lot of profits to be made in it because it depends whether the market has discounted, how much the market has discounted this expectation. 135 00:13:16.620 --> 00:13:23.620 In other words, how many other people, how many other investors have also anticipated it and have bid up the price of the share of stock. 136 00:13:23.620 --> 00:13:32.620 So the fact that a company or industry is going to be growing is not necessarily a key because you have to think of how your other colleagues, other investor colleagues, 137 00:13:32.620 --> 00:13:39.620 How much they have also discounted this expectation, and how much therefore they bid up the price of the stocks is no longer profitable. 138 00:13:39.620 --> 00:13:42.620 So that's one point an economist can make, a cautionary note. 139 00:13:42.620 --> 00:13:52.620 Try to look around and try to estimate how much other investors have discounted this possibility of future profits. 140 00:13:52.620 --> 00:14:09.120 Okay, the other, as a general point, a general point that Austrian economics, Austrian economics can contribute are general principles, particularly macro principles, so to speak. 141 00:14:09.120 --> 00:14:21.120 In other words, when I've said about entrepreneurship, when I've said about counterproductive government intervention and discounting the future, it's just that only can be said about individual industries or individual stocks. 142 00:14:21.120 --> 00:14:35.120 However, there are general principles of money and business cycles which touch everything, which touch all industries in different ways, and it's difficult for investors or entrepreneurs to have a general knowledge of the whole economy as Austrian economics does. 143 00:14:35.120 --> 00:14:44.120 So even though entrepreneurs may know more about the steel drum industry or the clothing industry than economists do, they know less about money and banking or business cycles. 144 00:14:44.120 --> 00:14:51.560 Taxes. It's one thing sound economics can contribute. To sum up the Austrian view of 145 00:14:51.560 --> 00:14:57.000 this, the Misesian view of this is an increase in the money supply will cause an increase 146 00:14:57.000 --> 00:15:01.880 in prices, will cause a, if it's done through business lending, expansion of business lending, 147 00:15:01.880 --> 00:15:10.760 which it usually is, it will cause over investment in capital goods industries and under investment 148 00:15:10.760 --> 00:15:14.460 consumer goods, and therefore a whole bunch of, 149 00:15:14.460 --> 00:15:21.400 materials, construction projects, things like that, 150 00:15:21.400 --> 00:15:23.680 which is not really enough 151 00:15:23.680 --> 00:15:26.660 voluntary savings to complete, finish. 152 00:15:26.660 --> 00:15:30.700 And so this is again an act of government intervention, 153 00:15:30.700 --> 00:15:33.380 but it's an act of government intervention that's not quite as clear as other things. 154 00:15:33.380 --> 00:15:36.420 If the government heavily taxes the liquor industry, 155 00:15:36.420 --> 00:15:39.520 you know darn well that profits in liquor are going to be 156 00:15:39.520 --> 00:15:51.520 but this sort of bank credit expansion, inflationary bank credit expansion is much more subtle and not obvious to anyone, entrepreneurs or anybody else. 157 00:15:51.520 --> 00:16:03.520 So this, once we're in business cycles we know that every, and again this is the only school of economics that believes this, 158 00:16:03.520 --> 00:16:07.520 Any inflationary expansion, any inflationary credit expansion must lead to a recession. 159 00:16:07.520 --> 00:16:11.520 A recession becomes a necessary, inevitable and good. 160 00:16:11.520 --> 00:16:15.520 In other words, once you've got the boom, you have to have the recession to liquidate the malinvestments 161 00:16:15.520 --> 00:16:21.520 and go back to sound production which satisfies the desires of consumers in the most efficient manner. 162 00:16:21.520 --> 00:16:25.520 So a recession becomes not only inevitable, it becomes good, quote-unquote, 163 00:16:25.520 --> 00:16:30.520 vis-a-vis the fact you have to wipe out malinvestments, unsound investments. 164 00:16:30.520 --> 00:16:31.520 Expansions. 165 00:16:31.520 --> 00:16:36.880 So that means that when a recession comes, which always comes after a credit expansion 166 00:16:36.880 --> 00:16:41.720 either stops or slows down significantly for whatever reason, sometimes people get scared 167 00:16:41.720 --> 00:16:47.400 about inflation, other times the banks start collapsing, whatever the reason is, once the 168 00:16:47.400 --> 00:16:52.080 credit expansion stops or significantly slows down, recession then becomes inevitable and 169 00:16:52.080 --> 00:16:53.080 immediate. 170 00:16:53.080 --> 00:16:58.520 At that point, the Austrian economists say, good, let it happen as quickly as possible. 171 00:16:58.520 --> 00:17:01.520 In other words, let the recession process as an adjustment process. 172 00:17:01.520 --> 00:17:03.520 It's the same thing as the adjustment process. 173 00:17:03.520 --> 00:17:05.520 It's a painful but necessary adjustment. 174 00:17:05.520 --> 00:17:09.520 And the more you leave it alone, the more the adjustment, the faster the adjustment will be, 175 00:17:09.520 --> 00:17:13.520 and the sooner recovery process will come to pass. 176 00:17:13.520 --> 00:17:17.520 Any attempt by the government to interfere with the recession adjustment, 177 00:17:17.520 --> 00:17:22.520 any attempt to bail out bankrupt businesses, prop up wage rates, prop up prices, whatever, 178 00:17:22.520 --> 00:17:27.520 or inflate credit more, or public works expansion, that sort of thing. 179 00:17:27.520 --> 00:17:32.400 Any attempt of that sort, all it does is prolong the recession, makes it worse, makes the consequences 180 00:17:32.400 --> 00:17:36.000 worse, makes unemployment worse, and all the rest of it, and it creates another depression 181 00:17:36.000 --> 00:17:38.680 or recession a few years later. 182 00:17:38.680 --> 00:17:41.560 So this is, again, the Austrian School is the only school that points this out, but 183 00:17:41.560 --> 00:17:46.120 it's the only school that believes that recessions are the inevitable consequence of boom periods, 184 00:17:46.120 --> 00:17:47.760 of inflationary booms. 185 00:17:47.760 --> 00:17:51.080 Everybody else is trying to adjust it somehow, they're trying to iron everything out, one 186 00:17:51.080 --> 00:17:52.080 way or the other. 187 00:17:52.080 --> 00:17:56.240 The government should step in and iron out recessions and inflations. 188 00:17:56.240 --> 00:18:01.080 Even those, even those economists who were skeptical about government intervention, they 189 00:18:01.080 --> 00:18:06.080 still think that free market left to itself will cause recessions and oppressions. 190 00:18:06.080 --> 00:18:14.080 Okay, on the, on this macro forecasting point, my colleague Roger Garrison, a very good Misesian 191 00:18:14.080 --> 00:18:21.560 economist, likes to think of either as a special tactic or as a, or whatever, or as an aesthetic 192 00:18:21.560 --> 00:18:22.560 join itself. 193 00:18:22.560 --> 00:18:26.560 He likes to think of the Austrian School since we were always attacked as being extremists. 194 00:18:26.560 --> 00:18:29.560 He likes to think of us as middle of the rotors in between other extremes. 195 00:18:29.560 --> 00:18:34.560 And there are ways you can look at it that way. I think it's useful in many ways to do that. 196 00:18:34.560 --> 00:18:43.560 For example, one group on a macro forecasting question, one group believes, or various groups believe, 197 00:18:43.560 --> 00:18:48.560 what we call mechanistic precise forecasting, Mark has already alluded to this, 198 00:18:48.560 --> 00:18:52.440 Somehow, by various charts or equations or cycles or whatever it is, you can predict 199 00:18:52.440 --> 00:18:57.080 exactly what's going to happen, you know, in November 1992, the proper prices will fall 200 00:18:57.080 --> 00:18:59.280 by 3.2 percent, that sort of thing. 201 00:18:59.280 --> 00:19:05.360 I've heard, I've been to seminars, I've sat there and watched people say this. 202 00:19:05.360 --> 00:19:10.160 And this sort of thing, Austrian has done, it's total nonsense. 203 00:19:10.160 --> 00:19:15.360 In the first place, we have, every individual has free will, every individual has values 204 00:19:15.360 --> 00:19:20.900 and Preferences, and what they learn, as Mark said, the learning experience, they learn 205 00:19:20.900 --> 00:19:24.660 in different ways, at different rates of time, in different contexts, and how they learn 206 00:19:24.660 --> 00:19:29.760 and how they conclude, how they think about what's going on, what's going to happen deeply 207 00:19:29.760 --> 00:19:31.720 influences the actual facts of the market. 208 00:19:31.720 --> 00:19:36.240 There's no way to make these quantitative predictions, precise predictions. 209 00:19:36.240 --> 00:19:41.200 I've heard somebody say, I know one investment analyst, this was a few years ago, I remember 210 00:19:41.200 --> 00:19:47.600 I've never heard him say this, and there will be nuclear war in August 2012. He's learned 211 00:19:47.600 --> 00:19:50.800 this from a cycle of researches. Well, I mean, of course, it's very difficult to test this. 212 00:19:50.800 --> 00:19:55.080 First of all, those of us, many of us are not going to be around in August 2012, so 213 00:19:55.080 --> 00:19:59.160 we're not going to know. And those of us who are around probably have forgotten this crazy 214 00:19:59.160 --> 00:20:04.840 forecast. So it's difficult to pin somebody down, this sort of, this sort of the accuracy 215 00:20:04.840 --> 00:20:10.480 of the forecast. Well, the various wings of this, of this extreme, extremism in the sense 216 00:20:10.480 --> 00:20:13.840 of Mechanistic Precise Forecasting. 217 00:20:13.840 --> 00:20:18.640 One wing is the, I've already mentioned the econometricians, the GMP forecasters, and 218 00:20:18.640 --> 00:20:23.520 already pointed out, they're becoming a cropper, as they say, big depression in econometric 219 00:20:23.520 --> 00:20:24.520 forecasting. 220 00:20:24.520 --> 00:20:28.240 Another wing are the monetarists, the Feminites, who are Chicago school people, who believe 221 00:20:28.240 --> 00:20:35.080 that by, you could chart the money supply by precise correlations, leads and lags, and 222 00:20:35.080 --> 00:20:38.960 that sort of thing, you can predict when the recession is going to come and how deep it's 223 00:20:38.960 --> 00:20:45.040 Well, they started making a whole bunch of prediction. Interestingly enough, the Chicago 224 00:20:45.040 --> 00:20:49.360 School believes that science is prediction. Science doesn't explain anything, it's not 225 00:20:49.360 --> 00:20:53.960 coherent, all it does is predict. And they stake their whole life on prediction. Well, 226 00:20:53.960 --> 00:20:58.480 he who lives by prediction, dies by prediction. So they've made a series of terrible predictions 227 00:20:58.480 --> 00:21:04.600 the last six years, all of which have been blatantly incorrect, as a result of crediting 228 00:21:04.600 --> 00:21:16.600 in the Reganomics field. Reganomics is a deeply contested field about four or five conflicting groups of economists, all of whom hate each other's guts, of course, and then you're either in or out every six months. 229 00:21:16.600 --> 00:21:28.600 And the monetarists were in the money field in 1981. By 1982, they started making terrible predictions. Then, of course, they were out. They're slightly back in again because everybody else has been out. 230 00:21:28.600 --> 00:21:35.600 But basically, they've been out for a long time to such an extent that they're even checking their own assumptions. 231 00:21:35.600 --> 00:21:40.600 Many monitors now say they don't know what's going on. They can't understand the money field anymore. 232 00:21:40.600 --> 00:21:46.600 And again, the problem is that they're trying to make these predictions on the basis of these last correlations 233 00:21:46.600 --> 00:21:53.600 and leaving out the subjective factor, leaving out the psychological factor of individualism, how they expect, what they expect to happen. 234 00:21:53.600 --> 00:22:01.600 The so-called demand for money. If people expect the prices will go up rapidly in the next few months, they're going to spend money faster. 235 00:22:01.600 --> 00:22:06.600 The demand for money is going to fall. They're going to speed up their purchases. This is going to affect inflation. 236 00:22:06.600 --> 00:22:12.600 If they expect prices to fall, they will slow down their money purchases. They will hold on to the money and spend the money later. 237 00:22:12.600 --> 00:22:21.600 And you can't feed that into some kind of computer. That's a question of figuring out what's going on with the public psyche. 238 00:22:21.600 --> 00:22:30.600 The, there's an opposing, supposedly opposing group before I get to the Austrian middle-of-the-road position here, I already mentioned the cycle theorists, 239 00:22:30.600 --> 00:22:35.600 there's another weird group which is now dominant, which is now the orthodoxy in the finance field. 240 00:22:35.600 --> 00:22:41.600 Professors of finance are now in the so-called rational expectations or efficient market movement. 241 00:22:41.600 --> 00:22:48.600 Now this group believes that all, sort of the other position, in other words, they believe that the markets are, 242 00:22:48.600 --> 00:22:54.080 The market, with a capital M, sort of like an organic collective soul, the market knows 243 00:22:54.080 --> 00:23:01.000 that it is omniscient, not just as an efficient mechanism for transmitting signals and for 244 00:23:01.000 --> 00:23:02.560 predicting things, but knows everything. 245 00:23:02.560 --> 00:23:06.240 The market knows the future perfectly, and therefore everything is, remember I mentioned 246 00:23:06.240 --> 00:23:07.240 about discounting before. 247 00:23:07.240 --> 00:23:11.040 You have to watch out that other people might have discounted the new computer industry 248 00:23:11.040 --> 00:23:12.040 or whatever. 249 00:23:12.040 --> 00:23:14.200 Well, these guys believe that everything is always discounted. 250 00:23:14.200 --> 00:23:18.560 By definition, everything is perfectly discounted, therefore nobody can ever make any profits 251 00:23:18.560 --> 00:23:23.520 in the stock market or any other market. They can't make any losses either. Everything is perfect. 252 00:23:23.520 --> 00:23:30.200 So if you yourself making profits and losses, how do you explain that? That's just random events, they claim. It's all random. It's all luck. 253 00:23:30.200 --> 00:23:37.180 In other words, the market of the capital M is perfect, but individuals don't count. Individuals are not part of the market. They're somehow outside of it. 254 00:23:37.180 --> 00:23:43.440 And they're just playing around because they don't affect anything. They're simply, they're making either good luck or bad luck. 255 00:23:43.440 --> 00:23:53.440 So oddly enough, even though these people tend to be free market economists, they're outgrowths of the Chicago School, mathematical versions of the Chicago School, they wind up as the Keynesians wind up. 256 00:23:53.440 --> 00:24:03.440 In other words, the Keynesians believe that the stock market and financial markets are like a gambling casino, have no impact on the economic system, they just win or lose, it's like playing a roulette. 257 00:24:03.440 --> 00:24:11.440 There's no influence on asset markets, there's no economic function in the economy, just a pain in the neck. 258 00:24:11.440 --> 00:24:15.280 Well, these guys come out with the same conclusion. It's an oral gambling casino because, after all, 259 00:24:15.280 --> 00:24:19.400 individuals' profits and losses mean nothing. So, notice the Austrian School 260 00:24:19.400 --> 00:24:21.920 believes that individuals, that markets are 261 00:24:21.920 --> 00:24:25.360 efficient but not perfect, they're not omniscient. 262 00:24:25.360 --> 00:24:28.840 And one of the reasons why they're efficient is because better forecasters went out 263 00:24:28.840 --> 00:24:31.760 over those lousy forecasters and get more assets. 264 00:24:31.760 --> 00:24:34.960 And so, the financial markets have become extremely important 265 00:24:34.960 --> 00:24:39.200 as methods of channeling assets, ownership of assets of the most efficient, 266 00:24:39.200 --> 00:24:43.560 most knowledgeable owners, stock owners, bond owners or whatever. 267 00:24:43.560 --> 00:24:47.200 So it's only the Austrian School that really believes that financial markets are important, 268 00:24:47.200 --> 00:24:49.080 perform an important economic function. 269 00:24:49.080 --> 00:24:52.240 All these other guys kind of, no, no, it's all sort of, it's all a gambling casino one 270 00:24:52.240 --> 00:24:55.960 sort or another, and therefore they really have no justification for private property 271 00:24:55.960 --> 00:25:00.960 and assets, and capital assets. 272 00:25:00.960 --> 00:25:12.960 Okay, let's take, to get to the positive Austrian point, now having demolished the other, the 273 00:25:12.960 --> 00:25:16.060 two extremes, so to speak, which turn out to be very similar. The extremes turn out 274 00:25:16.060 --> 00:25:20.880 to meet here because the people who claim that you can forecast perfectly tend to meet 275 00:25:20.880 --> 00:25:25.040 with those who can't forecast at all. Because both sides see no role for the entrepreneur, 276 00:25:25.040 --> 00:25:33.640 No role for any kind of, no real economic function for financial markets, for asset markets. 277 00:25:33.640 --> 00:25:38.920 Let's take a typical Austrian statement how this, how it's related to forecasting or the 278 00:25:38.920 --> 00:25:44.720 investor or whatever. We know with an absolute truth from Austrian economics, we know that 279 00:25:44.720 --> 00:25:48.840 if the money supply increases and if the demand for money remains the same, prices will go 280 00:25:48.840 --> 00:25:55.840 Now, this is an absolute truth. Well, all right, but we can't, so how much can we forecast? 281 00:25:58.200 --> 00:26:01.680 We know this is a general principle. What we don't know, however, is one, whether money 282 00:26:01.680 --> 00:26:06.400 will increase or not in the next six months. Whether money increases or not depends on 283 00:26:06.400 --> 00:26:12.400 the central bank, on the Federal Reserve, on their, who they are and what their political 284 00:26:12.400 --> 00:26:16.120 connections are, what their ideology is, what they read on the paper the next day, what 285 00:26:16.120 --> 00:26:20.320 Financial elites impinge upon them. All these things are not something you can learn from 286 00:26:20.320 --> 00:26:24.820 equations or a computer. It's something you have to sort of have a feel for, a historical 287 00:26:24.820 --> 00:26:31.160 feel of the current situation. And it's very interesting because there's all sorts of bi-plays 288 00:26:31.160 --> 00:26:35.400 here I'm trying to forecast. For example, I would predict, sticking my neck out, that 289 00:26:35.400 --> 00:26:42.400 if a Dukakis victory becomes, I would say, generally expected, I'd say, there'd probably 290 00:26:42.400 --> 00:26:49.400 There will probably be a big increase in inflation or interest rates because people will think the democratic administration will be a wild spending administration as compared to the republic. 291 00:26:49.400 --> 00:27:00.400 It's probably not true. It's probably almost no difference. But people's perceptions are the democrats are free spenders and therefore if the general public expects a democratic victory, 292 00:27:00.400 --> 00:27:07.400 there will probably be immediate acceleration of inflation and interest rates in order to discount the expected future. 293 00:27:07.400 --> 00:27:11.800 So all these things, I mean, you can't feed that on any computer. There's no equations that will sum this up. 294 00:27:11.800 --> 00:27:18.600 You have to have sort of a feel for the situation and follow the public feel for the situation, follow what the public is expecting. 295 00:27:18.600 --> 00:27:25.400 Okay, and then the question is, once you try to forecast what's going to happen in the supply of money, what about the demand for money? 296 00:27:25.400 --> 00:27:31.800 Well, that depends, as I already mentioned, on what people's expectations are of the future. 297 00:27:31.800 --> 00:27:40.440 One of the reasons why the so-called Reagan miracle occurred for about five years, 1982-86 or something like that, 298 00:27:40.440 --> 00:27:46.480 money supply went up, increased a great deal, prices only increased a little bit. 299 00:27:46.480 --> 00:27:51.480 They kept increasing. Inflation has always been here. It just was less than before. 300 00:27:51.480 --> 00:27:55.280 So why is that? Well, there are various reasons you can talk about. 301 00:27:55.280 --> 00:28:00.880 One reason certainly, one factor there, was the public expected that the inflation would be over, 302 00:28:00.880 --> 00:28:05.200 The Reagan miracle would be a miracle, some magic was being performed here, maybe through 303 00:28:05.200 --> 00:28:10.800 astrology or other forces, and that therefore inflation will decline. 304 00:28:10.800 --> 00:28:14.640 People with expectation of inflation declining meant that inflation actually did decline. 305 00:28:14.640 --> 00:28:18.480 It's not the, it doesn't determine everything, it's a powerful contributing factor. 306 00:28:18.480 --> 00:28:25.520 The money supply interacts with the demand for money, with the expectation of the future. 307 00:28:25.520 --> 00:28:28.320 And then for several years, other factors entered into it. 308 00:28:28.320 --> 00:28:34.320 First of all, there's a recovery from big depression, 1981-82, a depression the biggest since the 1930s. 309 00:28:34.320 --> 00:28:37.320 It's now called a recession, by the way, just to point out. 310 00:28:37.320 --> 00:28:39.320 There's a certain linguistic point here. 311 00:28:39.320 --> 00:28:43.320 The science of public relations has been invented over the last few decades, 312 00:28:43.320 --> 00:28:49.320 and they decided you don't call anything depression anymore because it's too depressing. 313 00:28:49.320 --> 00:28:53.320 So they call it recession, but it's really the same thing. 314 00:28:53.320 --> 00:28:58.920 Before that, by the way, before depression, financial crises were called panics. 315 00:28:58.920 --> 00:29:02.220 They decided it was too panicky to call it panic, and they called it depression. 316 00:29:02.220 --> 00:29:05.120 And then they modified that. 317 00:29:05.120 --> 00:29:08.220 For a while in the 50s and 60s, they tried to get rid of the word recession also. 318 00:29:08.220 --> 00:29:11.920 They tried to call it a sideways movement, something like that. 319 00:29:11.920 --> 00:29:15.320 But they couldn't get away with that, so that euphemism is too great. 320 00:29:15.320 --> 00:29:19.120 They founded on that one. Reality hit a little bit. 321 00:29:19.120 --> 00:29:34.520 At any rate, the biggest depression since the 1930s, and therefore, of course, demand for borrowing dropped and all that sort of thing, and naturally, prices, inflation rate fell, but inflation rate did not, was not succeeded by deflation. 322 00:29:34.520 --> 00:29:47.020 In other words, in the old days, that means in the old days before the Federal Reserve took total control over the economic system and the monetary system, in the old days when there was a recession or depression, prices fell. 323 00:29:47.020 --> 00:29:53.020 I mean real price. I mean the cost of living. I don't mean ZIG prices. I mean the cost of living index or whatever you want to call it. 324 00:29:53.020 --> 00:30:00.020 Consumer prices fell sharply during recessions. It was great because it meant the public, even though many of the public are unemployed, 325 00:30:00.020 --> 00:30:07.020 all of the public enjoyed a lower cost of living. Cheaper food, cheaper clothing, cheaper housing and all the rest of it. 326 00:30:07.020 --> 00:30:15.020 Now after 50 years of Keynesian, neo-Keynesian, monetarist, whatever manipulation, 327 00:30:15.020 --> 00:30:25.020 We're now in a situation where the prices are not allowed to fall anymore because the Fed is always pumping more money into the system because there's no gold standard, there's no check, there's no limit on Fed inflation. 328 00:30:25.020 --> 00:30:30.020 So the Fed is always pouring money into the system. So now they arrange, the recessions are still there. They haven't cured recessions. 329 00:30:30.020 --> 00:30:40.020 It simply means that now when there's a recession, instead of the cost of living falling, there's a sugar coating on the pillow of the depression, and now the cost of living goes up even more, in a sense. 330 00:30:40.020 --> 00:30:50.020 So in many cases you have an inflationary recession in other words. So now a person can be both unemployed, bankrupt and suffer from a higher cost of living than they did before. 331 00:30:50.020 --> 00:30:57.020 That's the advantage, that's the consequences of 50 years of non-Austrian economic manipulation of the system. 332 00:30:57.020 --> 00:31:05.020 So we've got to figure out then, when you apply the general principle, you know what's going, figure out what's going on in the economic system. 333 00:31:05.020 --> 00:31:08.380 and the economic system. You apply the general principle, increase the money supply causes 334 00:31:08.380 --> 00:31:12.540 and price inflation, but you have to apply it with knowing all the other factors. In 335 00:31:12.540 --> 00:31:16.540 other words, knowing or trying to, if you're trying to forecast it, trying to figure out, 336 00:31:16.540 --> 00:31:20.700 figuring out what the Fed is going to do. It's very difficult to figure out. There's 337 00:31:20.700 --> 00:31:25.380 always, by interplay, the Fed, of course, is a secret organization and its deliberations 338 00:31:25.380 --> 00:31:30.820 are secret. There's no, there's no popular pressure on the Fed. It's designed that way. 339 00:31:30.820 --> 00:31:34.300 And then trying to figure out how the public is going to react to it. For example, it took 340 00:31:34.300 --> 00:31:38.460 It took the German public and hyperinflation in the early 20s, it took the German public 341 00:31:38.460 --> 00:31:42.060 about five years to wake up to the fact that inflation is going to be permanent. 342 00:31:42.060 --> 00:31:46.620 They're not going to go back to the pre-war, good old days, the pre-war, pre-World War 343 00:31:46.620 --> 00:31:47.620 I system. 344 00:31:47.620 --> 00:31:52.220 It took the America about 20 years to wake up to the permanent inflation from about 1960 345 00:31:52.220 --> 00:31:56.380 to 1970s, 1950s, 1970s. 346 00:31:56.380 --> 00:31:59.020 Usually the inflation era starts during a war. 347 00:31:59.020 --> 00:32:02.100 I should backtrack a little bit on that. 348 00:32:02.100 --> 00:32:15.100 War time, of course, is a situation where government needs a lot of money fast. Government always wants more money since the early ages of government, primitive government on, ancient Persia, whatever, they want more money. 349 00:32:15.100 --> 00:32:21.100 But in war time they need money very, very rapidly. So how do you get more money? Well, one of the easy ways to do it is to print it. 350 00:32:21.100 --> 00:32:26.100 And so big increases in public debt and in printing money, creating new money during war time. 351 00:32:26.100 --> 00:32:31.100 Well, during wartime, this happened in the U.S. in World War II and it happened in Germany in World War I, 352 00:32:31.100 --> 00:32:36.100 the public, of course, doesn't understand money and banking at all, zilch. 353 00:32:36.100 --> 00:32:39.100 And for good reason, it's a very mystical sort of thing now. 354 00:32:39.100 --> 00:32:44.100 It's all obfuscated, deliberately obfuscated by the establishment. 355 00:32:44.100 --> 00:32:47.100 The public doesn't understand it, but they do see when prices are going up. 356 00:32:47.100 --> 00:32:49.100 They see when they're out of a job or not. 357 00:32:49.100 --> 00:32:51.100 That's much more evident. 358 00:32:51.100 --> 00:32:58.600 And so, the public sees it as a shortage of goods. They see that the prices are going up during the war. 359 00:32:58.600 --> 00:33:01.100 What do they blame it on? They blame it, of course, on the war. 360 00:33:01.100 --> 00:33:05.100 Of course, the government is right there pointing out that the war is the problem. 361 00:33:05.100 --> 00:33:10.100 There's a shortage of goods. You know, lucky strike green is going to war, if you're old enough to remember that great slogan. 362 00:33:10.100 --> 00:33:16.100 So lucky strike cigarettes are not here because they're off to the war fighting front. 363 00:33:16.100 --> 00:33:23.900 So all material, all material, whatever, if there's any shortage or any increase in prices, you blame it on the war effort, okay? 364 00:33:23.900 --> 00:33:33.000 So the public believes then that after the war is over, prices will go back to the good old days before the war, 1940 or 1914, whichever you want to make it. 365 00:33:33.000 --> 00:33:37.600 And they save that money, there's a big increase in saving, hoarding the money or holding on to the money, 366 00:33:37.600 --> 00:33:41.700 because waiting to make the purchases when the good old days come and prices will be much cheaper. 367 00:33:41.700 --> 00:33:46.700 There will be washing machines and automobiles and houses and that sort of stuff at cheap prices. 368 00:33:46.700 --> 00:33:52.700 As a result, the prices during the war go up much less than the money supplies, a big gap. 369 00:33:52.700 --> 00:33:57.700 When the war is over, of course, the government keeps printing more money, because now they found a great bit is in their teeth, 370 00:33:57.700 --> 00:34:02.700 especially after World War II. Fed now has absolute power, there's no more gold standard. 371 00:34:02.700 --> 00:34:04.700 They're just printing money like mad and they love it. 372 00:34:04.700 --> 00:34:10.700 And the public begins to realize that even though the war is over and there's new goods are coming on the market, 373 00:34:10.700 --> 00:34:14.480 are coming on the market, there's washing machines and cars and houses again, somehow 374 00:34:14.480 --> 00:34:19.100 prices are going up instead of down. There's no return of the good old days of the eight 375 00:34:19.100 --> 00:34:23.580 course lunch for fifty cents. But it takes a while for the public to realize it. It's 376 00:34:23.580 --> 00:34:27.460 a learning process, as Mark says. It takes time. There's no way to predict how long it's 377 00:34:27.460 --> 00:34:32.700 going to take. But somehow it happens. By the 1970s, the public began to realize, one, 378 00:34:32.700 --> 00:34:36.180 not only that there ain't going to be no good old days of a twenty-five cent lunch or fifty 379 00:35:06.180 --> 00:35:10.180 That sort of thing. And again, it depends on the memory of the public. 380 00:35:10.180 --> 00:35:14.180 The public has a short memory, and sometimes the memory is longer. 381 00:35:14.180 --> 00:35:19.180 I think one of the big reasons why the real interest rate remained high during the Reagan administration, 382 00:35:19.180 --> 00:35:23.180 even though the inflation rate fell, the real interest rate remained high. 383 00:35:23.180 --> 00:35:27.180 I'm convinced the reason is that the public still had this lingering thought, 384 00:35:27.180 --> 00:35:31.180 hey, maybe inflation will return again in a big way, 385 00:35:31.180 --> 00:35:36.180 and therefore we better keep the interest rate, keep the inflation premium and the interest rate. 386 00:35:36.180 --> 00:35:41.180 So all these things are an interpretation or analysis of what's going on in the public's mind. 387 00:35:41.180 --> 00:35:49.180 It's very important to do that, but it's not a mathematical equation type of operation. 388 00:35:49.180 --> 00:35:56.180 So this I think gives an example of the sort of positive analysis of sort of stuff that Austrians do 389 00:35:56.180 --> 00:36:04.940 to more mechanistic schools of thought, which believe that people do not have values and 390 00:36:04.940 --> 00:36:09.060 preferences that act on them, but somehow everything is part of a giant computer or 391 00:36:09.060 --> 00:36:13.940 mechanism which sort of is ground out by some kind of mathematical laws. 392 00:36:13.940 --> 00:36:21.140 And I hope this has been a lightning way of covering the field of Austrian economics, 393 00:36:21.140 --> 00:36:22.340 which is a large one. 394 00:36:22.340 --> 00:36:29.340 I hope you investigate and explore other fields of it. Thank you.