Thank you, Mr. Chairman. I hope you will excuse my sitting down. I hope you can hear me, even
if you can't. I will let you see the sort of bit of hair sticking up or something. Right.
Now, I said I'd be talking about an auxiliary for historians, the contribution of the older
Auxiliary is something which is auxiliary to a primary activity.
The primary activity for which the older Austrians, that is to say Menger, Mises and Hayek, were
developing their work, that primary activity was history, the study of history.
The study of history, because that is the actions of human beings, the actual actions
Concrete actions of human beings in a particular historical context, the actions which actually
create that context.
And in developing this, as we'll see, the older Austrians in fact came at the end of
a long line of previous people who also worked in the same field, starting with Sir Edward
I thought I might do is illustrate the points practically, because after all we are looking
at the real world, historical world.
I thought therefore that I might begin by simply looking at a couple of examples, a couple
of fairly simple, relatively simple historical facts, and then working through to see exactly
what lies under the surface to show how that auxiliary works with the material to be studied
to bring out particular points which otherwise would simply not be accessible.
Okay, I'm starting out there with a family in California, two adults, two children and
one invisible cat who of course actually owns the family.
And that's their weekly shopping.
Okay, what's immediately visible, of course, is that there's very large quantities of the stuff.
They're all industrial consumer goods, manufactured consumer goods.
There's a large range, large variety and superior quality.
Okay, we now go to the other extreme.
We now have a family in Mali in West Africa. If you want to find Mali on the map, you first
find the Sahara Desert, and then you move south until you hit Timbuktu, because Timbuktu
is in fact in Mali and the surrounding area is Mali.
Now, if we have a look at the, you know, what's again, what's immediately visible, if you
just have a look, first of all, there seems to be rather a lot of them.
In fact, there's four adults, two young adults and about nine children.
The second thing, of course, is that there's very much less, weekly shopping or whatever
it is, is very much less than for the Californian family.
Also you'll notice that much of it consists of basically raw materials.
As you'll see it consists of things like millet, rice, dried onions, a few tomatoes, etc.
Okay, so what I'll now do is put up a list which shows us, a comparative list which allows
us to see the difference between the two, okay, as I said the cat refused to be in the
photograph, but the humans were there, okay, now if you go through that list it's something
which is familiar to all of us, we're all living in a developed country in the late
In the 20th century, when I showed this list to my husband in Australia, he said, well,
what we buy isn't all that different from what those Californians buy.
Now, we have a look now with the family in Mali.
We've got there 30 kilos of corn, 20 kilos of rice, 20 kilos of millet, oil, onions,
etc.
In other words, to repeat raw materials which have to be worked up further.
I thought I might add there simply an account of what they actually eat, the breakfast which
consists of millet porridge with tamarind juice, or alternatively rice porridge with
sour milk, lunch which consists of that stew of tomatoes, onions, salt, and if they have
money they actually buy some dried fish, and supper, again millet and corn or brittle cakes,
okra soup, etc.
Okay, now what I'll do is start asking the next question.
What are the production processes that go into the production of what the family in Mali consume?
And we have a look there.
Okay, I'll have a look at the milk porridge with tamarind juice.
I don't know if any of us have actually eaten millet, or products made with millet, but
believe you me, it is not easy to eat, it's very heavy, it's not tasty, but it does fill
Okay, now the final good, as I said, millet forage with tamarind juice, so what are the
production processes, the capital structure which produces this?
Well, you've got your cooking vessels, you've got your pounded millet, and we'll come to
We've got a low, urban platform on the floor which has a U-shaped hole in it and that's
where you have your fire and you've got twigs and sticks and so on which you send the kids
out to collect and you've got well water and a hand fan of reeds because you have to
keep fanning the thing to keep it going if it's going to boil your porridge for you.
The pounded millet, hand pounded several times daily, you've got a staff, a wooden
staff about that big and you've got a mortar, a wooden mortar about that high and you put
in your handfuls of millet and you take your staff and you go thud, thud, thud until the
wretched thing gets pounded and then you do that several times daily, so as soon as you've
You've had breakfast, you start pounding the milk for lunch, and so it goes.
And I hope the ladies here are beginning to feel contented with their life.
And there again, it's a household which has to do it, no one else is going to do it.
Your soaked tamarind.
Now, a tambourine is a fruit which is sort of flat and sort of U-shaped almost, and you
have a large tree which is rather spready, and you get the fruit by throwing stones at
the tree, or alternatively you climb it or you get a pole and try and shake the fruit
down.
And that again someone has to do, again you send the kids out to do it.
Well water, which you use, you have to go out and get it, and again you carry that home
on your head and you store it, and in other parts of the underdeveloped world where there's
more water than in Mali, if you have, if you're an upper income person in the village, you
actually have the well inside the house, so that all you have to do is drop the bucket
out the kitchen window and you get your water, you don't have to go all the way down to the
bottom of the street to the well to get the water.
Okay, you then have to thresh the millet, which you pound every day, and the threshed
millet is stored in sacks in the house.
If you remember the photograph, everything was in sacks, and that's because you buy
the thing at harvest and store it in the house and keep it until the next harvest.
Okay, the threshed millet has to be picked over and winnowed, and I've done this sort
of thing, and believe me, it is labor intensive.
You have winnowing baskets, which are made of flat reeds, you winnow the thing by shaking
it up and down, again you have household labour, you've got harvested millet, you've got a
threshing floor, you've got donkeys to tread the crop.
I forgot to say that many households in Mali also have a working donkey, this particular
one doesn't, but other families do.
Okay, now, that household is autarkic. It produces its own millet.
You have a small piece of land for each wife, and the land is obtained from the lineage head.
Hubby belongs to a particular lineage. The head of that lineage gives him a bit of land for his wife, each wife, as he gets one,
and then she grows the food for the household.
Okay, so you've got seeds and you have pointed sticks in which you dig and put in the seeds and then you have hose and throughout the season you've got to put in your own labour, the household labour, sickles for harvesting and you've got baskets and sacks and of course your donkey to transport the millet.
Now, you only go outside the household now when you start getting your utensils, pottery
utensils, pounding staffs, baskets, fans, etc. You've got a craftsman with hand tools
and you've got the things that come in, the wood and the clay and the reeds and so forth.
The pottery is sometimes fired out in the open. You have branches which you put on top
You chop up the pottery, you fire the branches and then you get some sort of pottery.
Alternatively, you've got a furnace, which is much more expensive, and then you put in coal or charcoal or whatever.
And again, it's the craftsman's household who puts in the labour.
Again, donkeys and sacks and so forth.
Now, again, you've got a woodcutter then and a donkey with a rope for transporting the wood.
The clay has to be dug out, it's transported in baskets again on the poor donkey's back.
And finally you've got a blacksmith who makes all these tools,
and he has hanged tools and a shed and a furnace and iron bars and bellows.
He does have an apprentice, and of course again the donkey for transport.
Okay, now I'll put that picture back up again,
And now we see something which we didn't see before.
What we're looking at here is a production unit.
It is not the same as that Californian family.
The Californian family just consumes, if you want.
This is a production unit.
That's why you have all these people there.
They're all helping in the production process, and I should add that the two ladies in the
In the picture, on either side of the gentleman, confided to the photographer that they hoped
Hubby would get a third wife.
The reason for this was they wanted some additional labor to help in the household production.
Okay, so when you've got autarkic production, you enlarge the household, that's the only
way you're going to get the additional output.
All right, now some further observations if we have a look at that capital structure if
you want, the one which produces your millet porridge every morning for breakfast.
The first point to note is that it's a relatively short production process.
You're thinking in terms of one harvest to the next, one season to the next.
It doesn't take very long to establish that production structure,
and it doesn't take very long to turn out whatever you're producing.
What you're producing in the end, the final goods that you get out,
Small in quantity, poor in quality, uncertain.
Because you don't know what the weather is going to be like and you're completely dependent on the weather.
And very limited in range.
Okay, again if we have a look at that production structure there, we notice that we have extremely limited division of labour.
Extremely limited division of labour, a small group involved, a small number of people.
And we have therefore limited, small groups, limited amount of interdependence.
The bulk of the labor goes into the autarkic segment of the production process.
Now, a broader point, which emerges when you have a look at the historical record,
this is the way things have always been.
This is the norm for humanity, the normal way that things are for all human beings,
the way it's been since time began, the way it is for the bulk of the population of this planet,
the short production processes, considerable autarky and all that goes with it.
The other point which also comes out is that what you have is a status-based legal system.
Chief major production asset is the land and you get the land or get access to the land
because of your status as a member of a particular lineage and then you are allocated the land
by the head of that lineage.
There is, where does the status legal system stop and that stops when you start exchanging
goods.
You've got to pay the craftsman and therefore the exchange there, it's a different set
of rules, a different kind of rule.
That is your independent commercial rule, it's a commercial exchange whereas of course
within the household it's autarkic exchange and you have very much, well it's central
planning basically.
Okay, so you have therefore largely what you might call status-based legal rules and a
certain number of ends-independent, instrumental legal rules for the limited amount of exchange
Okay, now you remember that Californian family was not complete with cat and so on.
We'll now use the example of one single item, which is there, which we all remember in the
And that is the bread.
Your investments now, first order investments, you've got foodstuffs in the pantry, or the larder, or kitchen cupboards, or whatever.
Bread and other foodstuffs, they are ready to go.
You get that from the supermarket.
Supermarket building, fixtures and fittings, trolleys, et cetera, labor, power and transport,
kinds of labor that you'd need for producing whatever you produce in that stage of production.
Okay, you then go on to get to the bakeries, which take in flour of various kinds.
You've got yeast and salt and other ingredients, et cetera, et cetera.
You can fill in those blanks, or if you want, you can continue reading that.
You've got a flour mill, again, with wheat or grains and so on,
machinery, sacks and labour, power transport, etc., distributors for the bakery equipment,
warehouses for the grain, factories producing the flour mill machinery,
factories producing stuff for the bakeries, and how far have you got?
And it isn't until we finish going through there that we actually get to the farms.
The farms, again, have seeds and fertilizers and pesticides and so forth, agricultural machinery, factories there producing agricultural machinery, producing fertilizers and pesticides, separate farms which produce the seeds,
steel mills, mines and the factories who produce the mining machinery and so on and so forth.
Okay, now as we go along through there, a couple of comments again.
First comment, of course, is that in addition to everything else we've got legal and insurance services at every stage.
We've got certain loops in the flow. It's not a linear flow.
We've got steel which goes into fifth, sixth, seventh and tenth stages of production or whatever.
The other point is that this is the way in which people use the goods. That's what the classification tells us.
The other point, of course, is that what we have there is only the barest sketch,
the barest sketch of the kind of capital structure which you've got in developed countries in the late 20th century.
And even as we look at this very crude representation,
And we find that clearly that capital structure is going to produce millions upon millions
of final products.
In trying to find out how much the supermarket, the Woolworth supermarket carried, I went
in there and trustingly asked them, can you tell me the total number of items that you
have on your shelves?
They were scandalized.
and he accused me of being a spy for a rival grocery chain.
I said it's a commercial secret, we can't tell you.
But again, from our daily experience in the shopping in a developed area,
we know we're talking about millions of items being turned out by this given capital structure
and bread as being one item but once you start going through it what you find is that you've got a capital structure which in fact produces all these millions of items and again what you've got therefore is the stage of final production, whatever the range of goods are that come out in that stage and then whatever other investments that you've got in stages further removed.
Okay, now let me make a few observations there on the capital structure that we've got here.
Is there any way we can put both of those up?
I'm going to try and put up both together if we can.
Okay, first point I'd like to make is that at all stages of production you've got both
fixed and circulating capital, so that we're not talking about fixed capital by itself
or circulating capital by itself, you need both.
And in every stage of production you've got both fixed and circulating capital, or what
is known as that.
You've also got, in all stages, everywhere, you've got a range of capital combinations.
This is one of the things which Menger noticed very early on. Capital combinations, and they
have to be available in the right capital combination if they're going to have further
production.
Okay, the other point to note is the time taken. From the time you start producing your
Mining Machinery to the time when you finally turn out your millions upon millions of final
consumer goods at the other end.
Again, a point I want to emphasize, we are not simply saying inputs at one end plus t
for time plus outputs at the other end.
You have to have all of these things specifically if you're going to produce the final goods
and services that you're producing.
Okay, another point, this capital structure did not drop from the sky overnight.
It took time to develop.
In fact, if we say, take the example, say, of England, or even of America, England, it
started, this sort of thing started, to build it up to that level, you had to start, you
And we did start back in the 11th century or earlier, 12th century and so on.
So this capital structure took time to develop.
And another point, this is exceptional.
Developed countries are exceptional.
I said, for most of mankind, sorry, politically incorrect, for most of humanity, for most
of humanity, it is your shorter capital structure, which is what we are familiar with, what we
live with.
And even in underdeveloped areas, even with higher income groups, you're still dependent
very much on what is essentially the short capital structure. You're buying this year's
harvest of grain, you're storing it, and you're using it, you're actually eating last year's
harvest because grain is supposed to improve with keeping. And a lot of the final stages
of production, in other words, are still within the household. Every time the harvest comes
in you hire women to come along and help you to winnow and pick over the grain, oil it down,
In India, it is still true that you don't buy flour ready-made when you are ready to
have some sort of grain food in the house.
The grain is then taken down to the flour mill to be turned into flour and then brought
Okay, and of course the bulk of your foodstuffs consist still of grain, not of the other foodstuffs which require much longer production processes before they're turned out.
Okay, now, you notice that in all of this longer production process, the capital structure
in the developed countries, late 20th century, we do not have any sort of status system.
Everything there, the title is a through exchange, in other words, an ends independent and instrumental
Legal Order.
And another thing to notice, the developed countries are the common law countries, the
English common law countries.
Western Europe has Roman law.
Roman law is like English common law, a grown law, and not legislation, it is not status
either.
It ends independent, it is instrumental.
The more developed parts of the underdeveloped world are the ones in which English common
law has become more widely absorbed and used, or Roman law has become more widely absorbed
and used, the Anglophone areas of the underdeveloped world, or the Francophone areas.
Japan, the other developed area, has had similarly grown law, the Japanese Merchant's Law, which
has been going since at least the 16th century, if not earlier.
And again, in the Japanese case, the samurai, the ruling classes, were simply concerned
with themselves.
They couldn't be bothered with such people beneath their notice, like the merchants or
farmers or whatever, and therefore the Japanese economic order developed over centuries, again,
with grown law rather than any sort of imposed legislation or status.
also was exchange-based law, you might say.
Okay, next point, we've been talking about the capital structure here, it's a social
formation.
Again, what we're looking at, the investments in each firm are, as it were, small bits in
the capital structure.
They don't stand independently, they cannot, they're all part of the capital structure.
Okay, now the question therefore which emerges from looking at things in terms of the capital
structure is, with any investment, what is the final good or service to which it contributes,
which it helps to produce?
Where does it stand in relation to that final good or service?
In other words, every investment is really only part of the whole network of investments.
We are looking here at a social formation which involves millions upon millions upon
millions of people.
The other point is that, except for the US, which is always odd man out, in the other
In other developed countries you find that as early as 15th century what you had were
production processes which were already crossing political boundaries.
And so if we are looking at a capital structure like this, we're looking at something which
is already international.
That's why Mises said, of course, that the market economy's field is the world.
Okay, I'll put up now a little diagram. That's the stage furthest removed, then you have the other stages, the standard Hayekian triangle or what you want to call it.
Okay, now that of course is not really an arm block. What you've got is an intricate, very intricate network of investments.
And again, it's so complex that, as Hayek said, you can state the principle on which it's formed,
but you can't really describe each and every investment that goes into it.
So you have to think of it as a sort of highly intricate sort of network like that.
Okay, now you've got your regular production processes then, which turn out your final goods and services,
but you've also got political boundaries.
And what happens is that your political boundaries in relation to the production processes
are completely random so when you look at your export and import statistics what
you're really picking up of course are simply the flows from one stage to the
next or within a stage or whatever okay now for the US for most of your history
your exports and imports your foreign trade has been about 10% or less total
For all other developed countries, foreign trade, exports and imports combined, has always equaled 40-50% of total output.
And in countries like France, which don't like foreign trade very much, it's still 35% and of course it goes up higher.
Now that is simply another way of saying that the production processes that you've got here don't simply end there because you've got a political boundary, they continue on.
And what you've really got therefore is really, by the time you get to the late 19th century, it's been growing for centuries,
by the time you get to the late 19th century you really have an international economic order, worldwide economic order,
in which what you've got is, say, the Australia sector, the British sector, the German sector, and so on.
So, if you start studying economic history of any one country, you soon find that by the time you get to the 16th, 17th centuries or later,
you're really very conscious, find that you are looking at only one part of a very much bigger, very much bigger picture.
Okay. Now, as I said, that capital structure which I put, which I very crudely put up, did not develop recently.
What you had was a switch, a change from a status-based economic activity, status-based legal system,
as you found in rural Mali, gradually changing over time in the course of centuries to become what we see today.
Now, the story is different in different countries, being British, I only know English, of course, complete monoblock.
And I can tell you that so far as England is concerned, the switch, the changeover started, you might say, around about the 15th century.
And what you notice if you compare the economic and the legal changes is that the substantial legal changes occur in the same period in which you've got your substantial economic changes.
The major period of transformation of the English common law, and this is done by legal historians who haven't a clue as to what is happening in the economy or with economic activity,
major changes were in the period 1450 to 1550 and you had a complete
transformation and that is the legal order which still continues, you've got
changes that still continues today in the common law countries. The autarkic
restricted range of exchange, restricted range of goods being produced stage if
In England, at any rate, was certainly during the Anglo-Saxon period and earlier periods, and after William the Conqueror came around, he then got a change for various reasons, and you can see, in particular areas of England, interestingly, those areas of England where you have what is known as a weak lordship, the Lord didn't particularly know what was going on in his estates, those are the areas where you
So you start getting quite definite indicators of economic growth, of extension of the capital structure,
and then the whole thing sort of merging eventually after the Black Death and then developing thereafter.
Okay, again another point I want to emphasize. This is also in a very real sense an historical process.
You started with the specific kinds of rules that you had in 11th, 12th century England
and then you started gradually changing those until you reached the kind of legal system,
broader legal system, the ends, independent, instrumental rules that you've got today.
If Mali were the country that were doing it, then Mali's rules would have changed.
It would have been a specifically Malian sort of process.
Okay, some further observations.
The difference between what we've seen for Mali and what we've seen for the developed areas
It cannot be summed up by the term industrialization.
What Mali lacks is not just a few factories.
If you plonk down a few factories, it isn't going to help matters.
You have to start with what you've got there in Mali,
and then gradually transform it until it becomes developed, if you want.
Okay, now I'll put up that picture again,
Because there are a few indicators there of, I can find my copy of the picture, okay, now, yes, now there are a few indicators of wider exchange, where do we see, see those, I don't know if it's very clear, but the young man there actually has a watch, he's wearing a watch from Taiwan or Japan or, you know, a very cheap watch,
He's also wearing a shirt and trousers, factory made shirt and trousers, not the hand made, hand woven clothing that the rest of the family are wearing.
And if you can just see, the young lady is obviously wearing a pair of manufactured slippers.
Okay, now that means that they are in contact with a wider international economic order.
And they've got their things more cheaply than they would have got otherwise.
What Mali exports are livestock, ground nuts or what you would call peanuts, and cotton, obviously all very poor quality.
It is surrounded by countries like Nigeria, Ghana and so on which produce cocoa, which is obviously an internationally traded good.
And so therefore what you've got is part of this great multilateral exchange through Ghana, Nigeria, the cocoa production.
You've got Mali also, the people in Mali also participating in and obtaining these international goods, if you want,
and therefore obviously somewhat better off than if they didn't have this sort of contact.
Okay, now, historically speaking, the greatest development of the international economy or the international economic order is in the 19th century.
It's one of the most remarkable centuries that the world has seen.
There were no major wars between 1815 and 1914.
In fact, when 1914, the war broke out, the Royal Navy didn't know what to do, so they
commissioned a report on how the Battle of Trafalgar had been fought, back in the 12th
of whenever it was.
It, as I said, it's also the period in which you had greatest peaceful movement of people,
43-odd million people, moving for no reason at all except to improve their conditions,
from the areas in which you had large numbers of people, but perhaps not quite as much capital,
to places of course like the US, Canada, Argentina, Australia, New Zealand, South Africa and so on.
Okay, that is also the period. Now the other point to note is that of course you also have population growth along with the extension of the capital structure.
The population in 16th century England was around 5 million people.
By the time you get to the late 19th century, it is in the region of 50 million people, or somewhat less,
45 million people or so, enormously more prosperous obviously, in living in proper brick houses, etc.
and with much larger output.
Okay, I will stop there abruptly, what I will do now, I have one last handout to put up,
and that is of course to tell you that how do we get this picture, what do we do here,
what we've been doing here is of course looking at historical materials, and we've been using
In addition to the capital structure, similar social formations are of course the English common law, Roman law, private law, language as a whole, society itself, habits, customs, ways of doing things and so on.
They all belong in the same category.
As a whole, society itself, habits, customs, ways of doing things, and so on, they all belong in the same category.
And what I've got there are, as it were, the line which culminates, of course, in the three that I mentioned, Menger, Mises and Hayek.
The first social formation, the kind which we've been looking at, ends independent, growth over time, historical, rules-based, etc. with the English common law, and Sir Edward Cook is of course the name there.
So Matthew Hale, also famous for his debate with Hobbes, Hobbes being the legal positivist,
Matthew Hale trying to explain how the common law developed, Matthew Hale was a legal historian as well.
Hale also mentioned that law was like language, but he had no further investigation after that.
Mandeville, Customs, Habits and Economic Activity, analyzed the production of a piece of scarlet, scarlet being a kind of cloth,
and what he showed there was not only the division of labour but also the extent to which by this time, late 17th century,
you're already getting in say dye stuffs from Russia, from Brazil and all over the place,
and he anticipated Menger by pointing out that the fixed investments,
the investments in the dying bats, the weavers' production goods and so on was also part of the total story.
Okay, he saw that the division of labour is the foundation of society
And that piece of analysis was then picked up by Mises later on.
Hume wrote a history of England and a legal analyst as well as economic activity.
Adam Smith, as we know, the father of our science, such as it is, and if you read the
In the wealth of nations, what you find is extensive historical comparisons. China, France, etc.
Edmund Burke. Edmund Burke wrote An Unfinished History of England and An Unfinished History of the Common Law.
Again, a legal thinker. Important because it is through Edmund Burke that the analysis of the common law reached Menger.
Menger points out that Edmund Burke's historical analysis is at opposite poles from that of
younger German historical school.
They're both historically, he says, but in totally opposite senses.
Adam Ferguson, language again, the first to notice the development of the international
Historical-Economic Order, Historical-Sociologist, William Jones, founder of historical linguistics,
Humboldt, a linguist, Humboldt, a linguist, Humboldt, a linguist,
and again important because again through him reached Menger, and Dougal Stewart, again law, mathematician, a philosopher and an economist and therefore totally impractical and finally of course our great founder Carl Menger and you'll notice that he analyzes the common law and he adds another economic formation which I've not
are not mentioned yet, and that is what Hayek later called the catalaxy.
If you look at his appendix on national economy, you'll see he discovers that we have here
and a formation which is much larger than your individual firm.
It is analogous to what I've just drawn here, the capital structure, with each firm being only an element in something much bigger.
Okay, Mises. Again, the point about Mises here is that he analyzed the development of society.
It's very interesting how he does it. He says that society is not an invention,
it is not a large thing in itself, it is not the result of a social instinct,
because that is not an explanation, it is not God-given and therefore mysterious,
it is the result of the division of labor.
Division of labor, reason and language, he says, are the three things
which distinguish humanity from other beings.
And those three, of course, he takes from Adam Ferguson and Adam Smith.
Okay, and finally Hayek, culmination you might say, who gives us the name, the catallaxy, capital structure we have through, from Menger through Mises and Hayek, all three contributed to, obviously, to what I've been saying here, and again also analyze the common law.
Right, so that what we have here are a range of social formations which all belong in the same category and which all have to be analyzed as actions of individual people.
Now, I'll gallop through, Mr Chairman, another minute or so.
I won't go into the economics or whatever.
I'll simply say how linguists analyze language.
It's something which people already do.
They've been doing it ever since they came out of the stage of being just ordinary primates.
A complex set of rules on which people act, which they don't even know that they're acting on, developed historically over time.
And so that is what the linguists are analyzing scientifically, systematically.
The same sort of thing for all these other formations that I've mentioned, capital structure, common law, other economic phenomena.
And finally a point which I think I want to stress, and that is that both Mises and Hayek
always talked about the pricing system as a whole, they did not talk about isolated
prices of isolated markets, and Hayek in particular points out that it is only the economist imagination
which breaks up the economic system into individual markets, in fact the whole thing is one interrelated
social formation.
Okay, well I think I'll stop there. Thank you very much.