WEBVTT NOTE 'America’s Great Depression' 50th Anniversary 1 00:00:00.000 --> 00:00:05.400 Well, the title of my talk is Combating the Critics and Advancing the Theory. 2 00:00:05.400 --> 00:00:12.000 I actually have several hard copies of it that I'm going to leave up here for people to pick up. 3 00:00:12.000 --> 00:00:16.000 Just a handful of copies, but if you're interested, pick them up after the session. 4 00:00:16.000 --> 00:00:23.500 I'll also have it posted to the Mises site probably by the end of the day. 5 00:00:23.500 --> 00:00:32.420 Sure enough, I first read America's Great Depression when it was only six years old, 6 00:00:32.420 --> 00:00:34.800 and still in its first edition. 7 00:00:34.800 --> 00:00:42.920 We learned that from Bill Bustos already, and he pointed out that it was four years 8 00:00:42.920 --> 00:00:45.160 earlier that he bought the book. 9 00:00:45.160 --> 00:00:49.740 We don't know when he read it. 10 00:00:49.740 --> 00:00:57.620 But I've had numerous occasions to refer to Murray's book and read it in its entirety 11 00:00:57.620 --> 00:01:05.060 again in 2000 in preparations to review the fifth edition of the book, and still again 12 00:01:05.060 --> 00:01:09.260 I read much of it in preparation for this session. 13 00:01:09.260 --> 00:01:16.600 Now we all know that the primary contribution that Rothbard made was his insightful application 14 00:01:16.600 --> 00:01:20.680 of the Austrian Theory to America's Great Depression. 15 00:01:20.680 --> 00:01:26.480 But several of us, including myself, have chosen to focus on the theory chapters. 16 00:01:26.480 --> 00:01:34.920 And I'm focusing specifically on chapter one, which he calls a positive theory. 17 00:01:34.920 --> 00:01:42.480 And you could describe that theory as simply drawing from Mises and responding to critics. 18 00:01:42.480 --> 00:01:48.920 And as I've read this book different times, it's occurred to me of the strategic value 19 00:01:48.920 --> 00:01:57.920 of responding to critics, especially when it's Rothbard doing the responding. He has 20 00:01:57.920 --> 00:02:06.040 a knack for it and is just in his element when it comes to setting a critic straight. 21 00:02:06.040 --> 00:02:15.320 The approach is gleefully, let's say, sort of as a Rothbardian adjective. 22 00:02:15.320 --> 00:02:19.600 Responding to critics has a lot of payoffs. 23 00:02:19.600 --> 00:02:25.640 It gives you a better understanding of the theory that you're defending, helps you state 24 00:02:25.640 --> 00:02:32.160 it more clearly, causes you to see new directions in which the theory can be developed. 25 00:02:32.160 --> 00:02:33.160 Development. 26 00:02:33.160 --> 00:02:38.880 Well, sure, it does all those things, but who could object, who could deny that responding 27 00:02:38.880 --> 00:02:43.040 to critics is a worthwhile undertaking? 28 00:02:43.040 --> 00:02:48.640 And you don't have to look any further than one of our own Austrians, Louis Spadaro, who 29 00:02:48.640 --> 00:02:58.160 comes into play here as the chair of a conference in 1976, just two years after the South Royalton 30 00:02:58.160 --> 00:03:04.160 Conference, and he was chair of that session. It was a wonderful session. It was held at 31 00:03:04.160 --> 00:03:11.840 Windsor Castle, which is recommended as a place to have a conference. And Rothbard was 32 00:03:11.840 --> 00:03:24.480 there, as was Hayek and Kirzner and Lachmann, and then quite a few upstart Austrians, youngsters, 33 00:03:24.480 --> 00:03:30.640 I like to be able to refer to myself as a youngster every once in a while, and there 34 00:03:30.640 --> 00:03:38.080 I was in 1976 at Windsor Castle, soaking up some Austrian theory. 35 00:03:38.080 --> 00:03:47.120 Well, Spadaro, chair of the session, he did his PhD under Mises and undeniably an Austrian, 36 00:03:47.120 --> 00:03:55.480 But he spent about a quarter of his paper lamenting people responding to critics. 37 00:03:55.480 --> 00:04:12.960 I'm going to cut this short and I'm going to read one of his claims. 38 00:04:12.960 --> 00:04:20.160 He actually had a number of suggestions on how we might advance the theory, but when 39 00:04:20.160 --> 00:04:28.040 it came to responding, let me just paraphrase, that he says it's a shame that we spend so 40 00:04:28.040 --> 00:04:34.860 much time responding to critics, and we should use time more productively by developing our 41 00:04:34.860 --> 00:04:36.560 own theory. 42 00:04:36.560 --> 00:04:41.520 And so what we see is that he saw those as just strictly alternative ways of using your 43 00:04:41.520 --> 00:04:42.520 time. 44 00:04:42.520 --> 00:04:49.120 It's not, of course, it has a payoff in developing the theory as well. 45 00:04:49.120 --> 00:04:57.200 Now what I've chosen to do today is not to rehash some of the responses to critics that 46 00:04:57.200 --> 00:04:58.200 Rothbard portrayed. 47 00:04:58.200 --> 00:05:03.680 In fact, we've had some of that from Bill Butos and from John Cochran. 48 00:05:03.680 --> 00:05:17.080 But I want to respond in a Rothbardian style to critics that we've dealt with since 1963. 49 00:05:17.080 --> 00:05:24.200 And I have in mind here something called Cambridge Capital Theory, which calls into question 50 00:05:24.200 --> 00:05:28.000 the whole root of the Austrian theory. 51 00:05:28.000 --> 00:05:32.560 It's capital theory and therefore it's a business cycle theory. 52 00:05:32.560 --> 00:05:38.020 It's a kind of criticism that just lives a number of lives. 53 00:05:38.020 --> 00:05:41.200 It keeps coming back no matter what the criticism. 54 00:05:41.200 --> 00:05:47.880 It hadn't caught the wind in 1963, and so Rothbard would not have been inclined to deal 55 00:05:47.880 --> 00:05:57.680 with it, although it had its roots back in the 1920s. 56 00:05:57.680 --> 00:06:11.920 Now, I can tell just by looking at this audience that you're not already primed in Cambridge 57 00:06:11.920 --> 00:06:21.600 Capital Theory, so I'm going to have to tell you a little bit about what it is. 58 00:06:21.600 --> 00:06:29.080 And it strikes at the roots of the Austrian idea of roundabout production, of the production 59 00:06:29.080 --> 00:06:32.200 time in economics. 60 00:06:32.200 --> 00:06:39.240 And so I might start with just mentioning those contributions by a number of Austrians. 61 00:06:39.240 --> 00:06:45.220 Menger talked about orders of goods, Boehm-Bawerk talked about maturity classes, Hayek talked 62 00:06:45.220 --> 00:06:48.260 about a structure of production and drew a triangle. 63 00:06:48.260 --> 00:06:57.540 All of these were just efforts to put time into our theorizing, put time into the notion 64 00:06:57.540 --> 00:06:58.860 of roundaboutness. 65 00:06:58.860 --> 00:07:05.220 Boehm-Bawerk, unfortunately, attempted to quantify the roundaboutness, and it turns 66 00:07:05.220 --> 00:07:09.380 out that just won't work. 67 00:07:09.380 --> 00:07:13.580 There's no metric by which you can measure roundaboutness. 68 00:07:13.580 --> 00:07:23.300 One of the reasons is that capital has no natural unit of its own, unlike labor, which 69 00:07:23.300 --> 00:07:29.740 we talk about in terms of worker hours or land, acre years, each of those things, those 70 00:07:29.740 --> 00:07:38.140 are heterogeneous labor and land, but at least we have a unit that we can measure it in. 71 00:07:38.140 --> 00:07:43.900 With capital, there is no such unit, and that makes it impossible to quantify. 72 00:07:43.900 --> 00:07:51.900 Now, ironically enough, Cambridge Capital theorists create a unit in order to criticize 73 00:07:51.900 --> 00:07:54.660 Boehm-Bawerk and the Austrians. 74 00:07:54.660 --> 00:07:59.900 And this is true actually of neoclassical theory too, but I became attuned to this early 75 00:07:59.900 --> 00:08:07.980 on where the kinds of capital measure that people had in mind were what I call universal 76 00:08:07.980 --> 00:08:20.180 Universal Non-Units, they write about hunks of capital, or chunks of it, or doses, which 77 00:08:20.180 --> 00:08:25.900 are red flags that say that there's no more appropriate unit than that, they're universal 78 00:08:25.900 --> 00:08:27.940 non-units. 79 00:08:27.940 --> 00:08:37.140 Sometimes they just use the term unit of capital, not recognizing that unit is not a unit. 80 00:08:37.140 --> 00:08:47.360 And only by doing that can they make their case about the fallacy of, the so-called fallacy 81 00:08:47.360 --> 00:08:51.080 in Boehm-Bawerkian Capital Theory. 82 00:08:51.080 --> 00:08:59.600 Now the theory itself comes in the form of a re-switching model, capital re-switching. 83 00:08:59.600 --> 00:09:05.240 See if I can get through this in three minutes or whatever we've got here. 84 00:09:05.240 --> 00:09:12.520 They imagine that the whole economy is characterized by a sequence of input. They call it capital. 85 00:09:12.520 --> 00:09:18.080 But in these examples, capital takes the form of dated labor. Well, once again, they've 86 00:09:18.080 --> 00:09:25.800 gone to a unit, namely labor, to measure capital. Ludwig Lachmann referred to this kind of theorizing 87 00:09:25.800 --> 00:09:34.800 as capital theory without capital. And so, just on that basis, we could dismiss the criticism. 88 00:09:34.800 --> 00:09:41.080 So they imagine that we have these two different techniques, each of which could describe the 89 00:09:41.080 --> 00:09:49.800 entire economy, and they amount to dated labor being applied at different sequences to yield 90 00:09:49.800 --> 00:09:51.600 an output. 91 00:09:51.600 --> 00:09:56.640 And then they show using present value calculations, I don't know how you do present value of dated 92 00:09:56.640 --> 00:10:02.040 labor, you have to measure it in wage units like Keynes would, okay? 93 00:10:02.040 --> 00:10:07.920 But they demonstrate that if an economy is using technique A, they call it, it has one 94 00:10:07.920 --> 00:10:14.840 particular sequence, and could use technique B, which is another particular sequence, they 95 00:10:14.840 --> 00:10:21.080 might find that over a period of time when interest rates are descending, and their descending 96 00:10:21.080 --> 00:10:27.920 sort of waif-like, in other words, it's exogenous and they're floating down, say, from 9% down 97 00:10:27.920 --> 00:10:29.920 The Theory of Money and Credit 98 00:10:57.920 --> 00:11:05.360 is, and the other one is in violation of that relationship, and therefore so much for Austrian 99 00:11:05.360 --> 00:11:09.720 capital theory, so much for the business cycle theory, and we're all through with it, okay? 100 00:11:09.720 --> 00:11:21.260 I'm not quite through with it yet, but I say I got one minute. That's fine. Now, it turns 101 00:11:21.260 --> 00:11:27.100 out that they're theorizing, as they admit, and I've emphasized this in my articles and 102 00:11:27.100 --> 00:11:32.700 Leland Yeager has emphasized it in some of his, that what they're really talking about, 103 00:11:32.700 --> 00:11:38.400 especially to justify this waif-like descent of the interest rate, they're really not talking 104 00:11:38.400 --> 00:11:44.660 about a process through time, they're talking about maybe three separate islands where technique 105 00:11:44.660 --> 00:11:50.540 A is used here and technique B there and technique C over there, and of course if that's what 106 00:11:50.540 --> 00:11:55.360 they're talking about, then it has nothing whatever to do with the Austrian theory because 107 00:11:55.360 --> 00:12:06.560 as Austrian theory is about changing the structure over time in a given economy. However, ever 108 00:12:06.560 --> 00:12:15.700 since Sam Wilson wrote his summing up article claiming that re-switching gives a headache 109 00:12:15.700 --> 00:12:23.200 to the Austrians, then economists of all persuasions have been beating the Austrians over the head 110 00:12:23.200 --> 00:12:31.800 with Technique A and Technique B. And it's time to stop, okay? Because the theory doesn't 111 00:12:31.800 --> 00:12:41.500 work. It is a static theory. It's based on an exogenous interest rate. It uses a phony 112 00:12:41.500 --> 00:12:49.560 measure of capital and then inadmissibly takes present values of that phony measure. So it 113 00:12:49.560 --> 00:12:55.200 What needs to be rejected wholesale, as I'm sure Rothbard would agree, and I'll make one 114 00:12:55.200 --> 00:13:05.240 more point, and that is that even if, even if it could be restructured so as to cause 115 00:13:05.240 --> 00:13:12.280 things to happen over time and cause the economy to shift from technique A into technique B 116 00:13:12.280 --> 00:13:19.760 And then back to A, it would be no more damaging to Austrian capital theory and Austrian business 117 00:13:19.760 --> 00:13:25.280 cycle theory is than the Giffen good, if you know what that is, is to the law of demand. 118 00:13:25.280 --> 00:13:31.960 It's a quirky exception to the law of demand that has no force behind it at all, either 119 00:13:31.960 --> 00:13:35.120 empirically or otherwise. 120 00:13:35.120 --> 00:13:42.520 No one has ever pointed to an instance of re-switching that's going on out there. 121 00:13:42.520 --> 00:13:46.640 And so I think we can dismiss it once and for all, Rothbardian style.