WEBVTT NOTE Say's Law and the Austrian Business Cycle Theory 1 00:00:00.000 --> 00:00:06.500 I'm Bill Anderson. I'm here to, you know, I'm doing a space while in the theory of the business cycle. 2 00:00:06.500 --> 00:00:15.900 I'm very, very glad to be able to be in a session with my Jewish mother, Walter Block, and, but, and, you know, hope it all works out. 3 00:00:15.900 --> 00:00:31.900 Before I do this though, to sort of highlight what's going on in the rest of the world on the business cycle, 4 00:00:31.900 --> 00:00:37.900 it seems that our friends at the New York Times, they're very good at giving advice to people, in fact whole governments now. 5 00:00:37.900 --> 00:00:44.900 Now we're talking about a newspaper that basically is on its way to bankruptcy and can't manage its own finances, 6 00:00:44.900 --> 00:00:58.900 but it does still give advice but the reason I did this is because it ties in with what I'm talking about here. 7 00:00:58.900 --> 00:01:08.900 If you think about the current way of thinking and certainly what you hear on the news, 8 00:01:08.900 --> 00:01:16.900 In governments, I think they're always going to be biased towards spending, sort of politicians are. 9 00:01:16.900 --> 00:01:22.900 But what the Times is saying is, look, these guys need to go out and spend more money. 10 00:01:22.900 --> 00:01:26.900 They're not spending enough and they're not going to prop up the economy. 11 00:01:26.900 --> 00:01:31.900 And the whole issue is just spending, if we can just spend, spend, spend enough. 12 00:01:31.900 --> 00:01:36.900 Now this is ironic because Japan struggles through a recession in the 1990s, 13 00:01:36.900 --> 00:01:41.900 in the 1990s, constrained by weak government, and an enormous pile of debt. 14 00:01:41.900 --> 00:01:44.900 And I'm thinking, what the hell do we have in this country? 15 00:01:44.900 --> 00:01:47.900 I think that's what we call an enormous pile of debt, but nonetheless, 16 00:01:47.900 --> 00:01:52.900 that's not a constraint here, but it must be a constraint in Japan. 17 00:01:52.900 --> 00:02:00.900 And so, I look at that, and you wonder what it is that they're smoking, 18 00:02:00.900 --> 00:02:02.900 but then you've already figured it out. 19 00:02:02.900 --> 00:02:30.900 The world would be much better off if they could substantially increase fiscal spending at home to provide financing for poor countries so they can do like us and get themselves some debt and spend more money, as Peter Schiff likes to say, to borrow money from foreign governments and boil it on consumption goods, but they do argue against protectionism, but I'm sure they'll get around changing that too. 20 00:02:30.900 --> 00:02:38.900 And I like this. In a recent speech, Christina Romer, another of President Obama's economic advisors, pointed out some lessons from the Great Depression. 21 00:02:38.900 --> 00:02:47.900 You know, that fiscal stimulus works. It does. I had no idea. In a recent speech, I may see. 22 00:02:47.900 --> 00:02:52.900 And the more countries around the world do it, the better off we all will be. 23 00:02:52.900 --> 00:02:56.900 In Europe and Japan, just listen. And so should Washington. 24 00:02:56.900 --> 00:03:15.900 So at any rate, now why do I bring that up? Because in, I think that Jean-Baptiste Say, which he first wrote what we called Say's Law, not really Say's Law at all, but a law, but he wrote this back in 1803. 25 00:03:15.900 --> 00:03:20.900 So somebody back in 1803 actually had something to say about this whole mess. 26 00:03:20.900 --> 00:03:29.900 Also along that line you'll notice I didn't have anything up there by Paul Krugman. It just kills me. He is off today. 27 00:03:29.900 --> 00:03:40.900 I was counting all week on putting some outrageous statement by Paul Krugman up there and now the guy disappoints me and he's not there. 28 00:03:40.900 --> 00:03:45.900 I'm sure my Jewish mother would have something to say about that too. 29 00:03:45.900 --> 00:04:01.900 But anyway, what we've got is in Book 1, Chapter 15, and what Satan does is he starts out describing what would be slow business conditions, you know, what we might call recession. 30 00:04:01.900 --> 00:04:07.900 In 1803, obviously, you don't have the business cycle like we have now, but you have slow time. 31 00:04:07.900 --> 00:04:17.900 It's common to hear adventurers in different channels of industry assert that their difficulty lies not in the production, but in the disposal of commodities. 32 00:04:17.900 --> 00:04:27.900 Two centuries later, Paul Krugman is saying that the difficulty lies not in the production, but in the disposal of commodities. 33 00:04:27.900 --> 00:04:33.900 That products always would be abundant if there were but a ready demand or a market for them. 34 00:04:33.900 --> 00:04:42.060 When demand for commodities is slow, difficult, and productive of little advantage, they pronounce 35 00:04:42.060 --> 00:04:44.460 money to be scarce. 36 00:04:44.460 --> 00:04:50.540 The ground object of their desire is consumption, risk enough to quicken sales and to keep up 37 00:04:50.540 --> 00:04:51.540 prices. 38 00:04:51.540 --> 00:05:02.220 Oh my gosh, I mean, this is the New York Times editorial page, and Mises in 1996 writes, 39 00:05:02.220 --> 00:05:06.220 When ever business was bad, the average merchant had two explanations at hand. 40 00:05:06.220 --> 00:05:10.220 Evil was caused by scarcity of money and by general overproduction. 41 00:05:10.220 --> 00:05:15.220 Adam Smith exposed the first of these sayings and invoked a reputation of the second. 42 00:05:15.220 --> 00:05:21.220 And so what we've got really with what we call sayings laws, why does it relate to the business cycle, 43 00:05:21.220 --> 00:05:33.740 is because the arguments that Say was making are very, very much apropos to what we're doing. 44 00:05:33.740 --> 00:05:42.100 Okay, and I want to go to a quote by Thomas Soule and then come back to the rest of the material 45 00:05:42.100 --> 00:05:46.580 and explain how Say's law actually does relate to the Austrian business cycle. 46 00:05:46.580 --> 00:05:55.420 Say's law is not sufficient, or what he lays out in chapter 15 is not sufficient to explain the Austrian business cycle, but it is necessary. 47 00:05:55.420 --> 00:05:59.860 So it's a necessary but not sufficient passage. 48 00:05:59.860 --> 00:06:06.300 And so writes, before, long before Engels and Marx came upon the scene, economists had divided into two main groups. 49 00:06:06.300 --> 00:06:14.900 Those who explained depression by inadequate demand, this is the general bluff theory, led by Sismondi and Malthus, 50 00:06:14.900 --> 00:06:23.600 And those who insisted that the pressures were caused by internal disproportionalities in the composition of overall and aggregate output. 51 00:06:23.600 --> 00:06:34.800 I hate that term, but too much of A and too little of B, rather than by being, it's total being excessive relative to aggregate demand. 52 00:06:34.800 --> 00:06:41.040 okay and so then I take a passage from chapter 15 okay page I've got the book 53 00:06:41.040 --> 00:06:48.120 let me see it from eight his edition from 1826 this is where it comes out but 54 00:06:48.120 --> 00:06:51.600 it made me ask how does it happen that there are times when so great a lot of 55 00:06:51.600 --> 00:06:56.480 commodities in the markets and so much difficulty in finding that for them why 56 00:06:56.480 --> 00:07:02.800 cannot one of the super budget commodities be exchanged for another I 57 00:07:02.800 --> 00:07:10.500 I answer that the glut of a particular commodity arises from its having outrun the total demand for it in one of two ways. 58 00:07:10.500 --> 00:07:17.300 Either because it is produced in excessive abundance or because production of other commodities has fallen short. 59 00:07:17.300 --> 00:07:23.200 It is because the production of some commodities has declined and other commodities are superabundant. 60 00:07:23.200 --> 00:07:28.100 Now, another way to do that is what Peter Schiff has been saying. 61 00:07:28.100 --> 00:07:34.380 You know, I know nobody in this room has ever heard of Peter Schiff, but he's a guy who appears on YouTube once in a while. 62 00:07:34.380 --> 00:07:38.700 And what he says is, the fundamentals are out of balance. 63 00:07:38.700 --> 00:07:42.300 Now, we've all heard him say that, the fundamentals are out of balance. 64 00:07:42.300 --> 00:07:47.260 Well, basically, this guy's not Peter Schiff, he doesn't know about YouTube, he's dead. 65 00:07:47.260 --> 00:07:51.740 But, he's saying the fundamentals are out of balance. 66 00:07:51.740 --> 00:07:57.820 And what we're really dealing with in the Austrian business cycle is that 67 00:07:57.820 --> 00:08:04.020 Whether or not we talk about monetary inflation, which by the way I really like that previous 68 00:08:04.020 --> 00:08:12.260 paper because that really does bring some interesting issues because Rothbard said simply 69 00:08:12.260 --> 00:08:17.700 the presence of fractional reserve banking in and of itself will cause that and what 70 00:08:17.700 --> 00:08:24.380 you're saying is that that's necessary but not sufficient and so you add the credit expansion 71 00:08:24.380 --> 00:08:32.380 in there, and if Rothbard were disagreeing with you, I wouldn't be able to argue with him, because he's also dead. 72 00:08:32.380 --> 00:08:43.380 But like Say, at least they left something, unlike Keynes, who left something too, but it was not very good. 73 00:08:43.380 --> 00:08:55.880 But, if we go to, Say's Logging, this is from an explanation from Tom Sowell's Classical Economics Reconsidered, 74 00:08:55.880 --> 00:09:07.880 the total factor payments received for producing are necessary and sufficient to produce that volume of output, as opposed to the leakage theory, okay? 75 00:09:07.880 --> 00:09:10.880 There is no loss of purchasing power in the economy, okay? 76 00:09:10.880 --> 00:09:19.280 No Keynesian Leakages. People save only to the extent of their desire to invest and to not hold money beyond the transactions needed during the current period. 77 00:09:19.280 --> 00:09:22.980 Of course, I'd like to point out that why do we save money so we can consume in the future? 78 00:09:22.980 --> 00:09:27.480 I mean, even savings will be consumed, but you know, there's a purpose there. 79 00:09:27.480 --> 00:09:32.780 You know, in the Keynesian business, you just, you know, it's not only do animal spirits guide the investors, 80 00:09:32.780 --> 00:09:40.780 but animal spirits guide the rest of us to stuff money on our mattress, which is always what savings is in terms of view, and the proven view, of course. 81 00:09:40.780 --> 00:09:46.780 Investment is only an internal transfer, not in that reduction of aggregate demand. 82 00:09:46.780 --> 00:09:58.780 In real terms, supply equals demand is empty, since each individual produced only because of them, to the extent of demand for other goods. 83 00:09:58.780 --> 00:10:04.780 In other words, the source of your demand, folks, is your supply. It's what you produce. 84 00:10:04.780 --> 00:10:10.340 and whereas what they're talking about with a New York Times editorial, 85 00:10:10.340 --> 00:10:18.540 let's create some demand, okay, we can do this, yes sir, we will now, okay, throw the money out there, we now have demand, 86 00:10:18.540 --> 00:10:24.020 we're going to sell all those commodities, they're not going to sit in warehouses by George, they're going into your homes. 87 00:10:24.020 --> 00:10:31.580 And a higher rate of savings will cause a higher rate of subsequent growth in aggregate output, oh my gosh, 88 00:10:31.580 --> 00:10:41.180 It's an Austrian view, but it was a standard view held by economists pretty much until Mr. Keynes came on the scene. 89 00:10:41.180 --> 00:10:49.680 A few other people were called cranks, and then like Silvio Gizelle, who wanted to issue a currency that timed out, 90 00:10:49.680 --> 00:11:00.880 and so Keynes called him a prophet, this equilibrium in the economy can exist only because the internal proportions of output 91 00:11:00.880 --> 00:11:07.280 differ from the consumer's preferred mix because output is excessive, not excessive, in the aggregate. 92 00:11:07.280 --> 00:11:12.080 This is very important. We are being told, ladies and gentlemen, that this current downturn is a 93 00:11:12.880 --> 00:11:18.240 problem in aggregate demand. We're just not spending enough. Now, you got to spend more, you know. 94 00:11:18.240 --> 00:11:23.280 So, you know, get that. I want you to max out that credit card and then go get another one. 95 00:11:23.280 --> 00:11:36.280 But in Benjamin Anderson, one of the 1949 prevailing view among economists has long been that purchasing power grows out of production. 96 00:11:36.280 --> 00:11:40.280 The great producing countries are the great consuming countries. 97 00:11:40.280 --> 00:11:49.280 The 20th century world consumes vastly more than the 18th century because it produces vastly more, not just prints more money, Mr. Kruger. 98 00:11:49.280 --> 00:12:01.280 Supply and demand in the aggregate are not merely equal, but they are identical since every commodity may be looked upon either as a supply of its own kind or as demand for other things. 99 00:12:01.280 --> 00:12:07.280 But this doctrine is subject to the great qualification that the proportions must be right. 100 00:12:07.280 --> 00:12:14.280 And again, the Austrian business cycle is in the proportional camp. 101 00:12:14.280 --> 00:12:17.280 The proportions are wrong. What do we mean by malinvestment? 102 00:12:17.280 --> 00:12:29.280 What we're saying is that the malinvestments, especially with the injection of credit, and also more money goes into capital goods, 103 00:12:29.280 --> 00:12:39.280 but people's spending do not match the intertemporal structure that is created. 104 00:12:39.280 --> 00:12:47.280 You get a structure of production that is out of balance with the preferences of consumers. 105 00:12:47.280 --> 00:12:51.840 And so what happens is they begin to spend their money, they direct, they're trying to 106 00:12:51.840 --> 00:12:55.980 direct the balances, you know, the economy back into balance. 107 00:12:55.980 --> 00:12:59.800 And what we've got right now is the government that says, we can't allow that. 108 00:12:59.800 --> 00:13:05.740 I mean, if you want to know what the Obama stimulus program is, it basically is a declaration 109 00:13:05.740 --> 00:13:11.220 and that we cannot go back to those old proportions because that's just morally unacceptable and 110 00:13:11.220 --> 00:13:17.820 politically unacceptable too, and then let's go to Michael Harrington. Yes, remember Michael 111 00:13:17.820 --> 00:13:26.660 Harrington? He's also dead and that's probably a good thing because he can't write anymore. 112 00:13:26.660 --> 00:13:33.020 I remember in 1981, he wrote this in the National Education Association's magazine, Education 113 00:13:33.020 --> 00:13:54.020 Today. During the 30s there was a glut of consumer goods because workers lacked the purchasing power to buy back what they produced. That's why the government began to play a role in the economy on behalf of middle and low income people during the period of Franklin Roosevelt's New Deal. 114 00:13:54.020 --> 00:14:03.420 Okay, in other words, what they're saying is that production and consumption are separate. 115 00:14:03.420 --> 00:14:09.020 They're unrelated things. You produce and maybe this stuff will kind of get sold. 116 00:14:09.020 --> 00:14:15.020 If the consumers have enough money, but however, because of the internal contradictions of capitalism, 117 00:14:15.020 --> 00:14:21.020 why then there's leakages from the system, they don't spend enough and then we get this aggregate flood. 118 00:14:21.020 --> 00:14:51.020 I mean that's okay, that's the entire theory in a nutshell and so but what happens as Rothbard points out that once the money, the new money comes into the system through an injection of credit what occurs is that it ultimately ends up in the hands of people as income and then they rush to establish the old proportions, in other words not the proportions as being laid out in the structure that's given by the interest rates 119 00:14:51.020 --> 00:14:55.960 by the Credit Structure that, in other words, that says one set of signals, but the buyers 120 00:14:55.960 --> 00:15:01.220 are going out to buy goods and they're setting another set of signals, and demand shifts 121 00:15:01.220 --> 00:15:05.220 back from the higher to the lower orders. 122 00:15:05.220 --> 00:15:10.780 And that goes all the way back to Menger in his 1871 book, Principles of Economics. 123 00:15:10.780 --> 00:15:18.660 And so, the favorite explanation of the crisis stems from underconsumption, okay? 124 00:15:18.660 --> 00:15:19.660 That's what we have. 125 00:15:19.660 --> 00:15:24.100 The New York Times editorial is about, darn it, it's not just the individual consumers 126 00:15:24.100 --> 00:15:27.220 who are under-consuming, it's those governments. 127 00:15:27.220 --> 00:15:29.500 You know, you're not spending enough, buddy. 128 00:15:29.500 --> 00:15:34.820 You know, print some more stuff, get out there and spend, and then the economy will be fine. 129 00:15:34.820 --> 00:15:39.620 And here's an interesting point, too, and in reading Krugman, yes, I actually read his 130 00:15:39.620 --> 00:15:45.460 stuff, what they're saying is that this spending is just filling a hole. 131 00:15:45.460 --> 00:15:46.460 It's temporary. 132 00:15:46.460 --> 00:15:50.160 We're getting this money out until the economy recovers. 133 00:15:50.160 --> 00:15:54.860 So in other words, it recovers, it's sort of this mysterious thing that recovers on its own. 134 00:15:54.860 --> 00:16:04.060 And so, the, and so actually what Rothbard points out is that the boom is actually a period of wasteful misinvestment. 135 00:16:04.060 --> 00:16:07.560 It's a time when errors are made due to credit tampering with the free market. 136 00:16:07.560 --> 00:16:11.760 And that's what we've got now because we've, you know, we've had this expansion of credit. 137 00:16:11.760 --> 00:16:14.060 We've, we've had the boom. 138 00:16:14.060 --> 00:16:20.060 Ladies and gentlemen, we had our boom. I hope you enjoyed it. It's time to pay for it. 139 00:16:20.060 --> 00:16:27.060 And so now we're in that situation, in fact, when this thing is starting to, you know, 140 00:16:27.060 --> 00:16:34.060 it's coming back to claim its own. And the government is desperately trying to keep these old orders, 141 00:16:34.060 --> 00:16:41.060 you know, reflate them, keep the old orders going, when in fact the spending is still going to do it. 142 00:16:41.060 --> 00:16:56.060 You know, I hadn't thought about it tonight. Give me one example. If you've been in New Orleans, or the city formerly known as New Orleans, but although Walter is helping to restore it to its great glory, you've got levee systems there. 143 00:16:56.060 --> 00:17:06.060 And it pulls that Mississippi River right along there. And they've got to have that Mississippi River in New Orleans, because it is a port city. They actually do some work there. 144 00:17:06.060 --> 00:17:16.900 And whereas, if you go back and you see where the Mississippi River used to go, if you go a little farther up into it, what they call Louisiana, 145 00:17:16.900 --> 00:17:27.780 and what you have to understand, the Mississippi River wants to go elsewhere, and one of these days, it's just going to go, and you know, New Orleans, and then, what? 146 00:17:27.780 --> 00:17:29.780 Not if the Federal Government can help. 147 00:17:29.780 --> 00:17:30.780 Precisely, I see. 148 00:17:30.780 --> 00:17:33.780 And millions and millions will be a foreign country. 149 00:17:33.780 --> 00:17:35.780 Defy gravity. 150 00:17:35.780 --> 00:17:37.780 Yeah, exactly. Defy gravity. 151 00:17:37.780 --> 00:17:40.780 And it's basically that same sort of thing. 152 00:17:40.780 --> 00:17:42.780 But it won't matter in New Orleans. 153 00:17:42.780 --> 00:17:44.780 They'll get their booze by truck. 154 00:17:44.780 --> 00:17:46.780 And they'll just, you know... 155 00:17:46.780 --> 00:17:48.780 Alright, thank you very much.