WEBVTT NOTE Hayekian Social Orders and Institutions 1 00:00:00.000 --> 00:00:06.000 Today, it's my distinct pleasure to introduce the F.A. Hayek Memorial Lecturer. 2 00:00:06.000 --> 00:00:11.000 William Budos received his B.A. in Economics from Brooklyn College. 3 00:00:11.000 --> 00:00:17.000 He holds an M.A. in Economics from City University of New York and a Ph.D. in Economics from Penn State, 4 00:00:17.000 --> 00:00:23.000 where he worked under Will E. Mason, an unduly neglected monetary theorist. 5 00:00:23.000 --> 00:00:27.000 Bill is currently Professor of Economics at Trinity College, 6 00:00:27.000 --> 00:00:32.040 College, where he has taught since 1981 and holds the George M. Ferris Chair of Corporation 7 00:00:32.040 --> 00:00:33.040 Finance. 8 00:00:33.040 --> 00:00:37.920 He has served as President of the Society for the Development of Austrian Economics 9 00:00:37.920 --> 00:00:42.260 and is currently on the Board of Editors of the Journal of Private Enterprise. 10 00:00:42.260 --> 00:00:48.280 Since 1993, he has been a visiting scholar and my colleague at NYU's Austrian Economics 11 00:00:48.280 --> 00:00:49.360 Program. 12 00:00:49.360 --> 00:00:54.840 He edited Will Mason's Magnum Opus on neoclassical versus classical monetary theories and has 13 00:00:54.840 --> 00:01:00.840 has recently published The Social Science of Hayek's The Sensory Order. 14 00:01:00.840 --> 00:01:04.860 He's published widely in monetary economics, the history of economic thought, and the economics 15 00:01:04.860 --> 00:01:09.720 of science, and is currently working on the political economy of government and science 16 00:01:09.720 --> 00:01:12.840 with co-author Thomas McQuade. 17 00:01:12.840 --> 00:01:18.640 Bill is the leading authority on monetary and social thought of Hayek, and as my good friend 18 00:01:18.640 --> 00:01:24.400 has guided me to much greater appreciation for the breadth and profundity of Hayek's contributions 19 00:01:24.400 --> 00:01:26.960 to Monetary and Business Cycle Theory. 20 00:01:26.960 --> 00:01:31.080 Bill will be addressing us today on Hayekian Social Orders and Institutions. 21 00:01:31.080 --> 00:01:45.740 Thank you very much and special thanks to Joe for the kind remarks and also for inviting 22 00:01:45.740 --> 00:01:46.740 me here. 23 00:01:46.740 --> 00:01:52.280 It's been several years, a long hiatus since I was here last and many things have changed 24 00:01:52.280 --> 00:02:01.640 and it's just wonderful to see the Mises Institute having arrived to this state and I just congratulate 25 00:02:01.640 --> 00:02:05.840 Lew Rockwell, Joe and all the others who have made this possible. 26 00:02:05.840 --> 00:02:13.040 For 30 plus years I've been teaching courses and almost all of my courses are an hour and 27 00:02:13.040 --> 00:02:20.280 15 minutes in length and so I'm kind of pre-programmed, I guess, to speak for about an hour and 15 28 00:02:20.280 --> 00:02:21.280 minutes. 29 00:02:21.280 --> 00:02:29.280 Joe has made it very clear that once my time is up, I will be literally hauled off the stage. 30 00:02:29.280 --> 00:02:38.280 So to ensure at least the higher probability that I'll be able to address some questions from the audience, 31 00:02:38.280 --> 00:02:41.280 I'll probably stick to my text. 32 00:02:41.280 --> 00:02:51.280 and I think if things work out well, there should be several minutes left over at the end for your questions or comments. 33 00:02:51.280 --> 00:03:01.280 So let me just start and again, it's so great to be here, I'm thrilled and I'm going to talk today about some of the, 34 00:03:01.280 --> 00:03:10.280 what in retrospect has been questions that sort of speak to what I've done in my research efforts. 35 00:03:10.280 --> 00:03:27.280 So, these questions, which maybe haven't interested everyone, nonetheless have interested me, and I hope I can extend an invitation for you to think about these things and perhaps embark upon your own efforts in this direction. 36 00:03:27.280 --> 00:03:36.280 Now, one thing we know, I'm going to start reading now, so I hope you don't take that the wrong way, but I think for time's sake I better do that. 37 00:03:36.280 --> 00:03:47.280 We know from Hayek that a vital characteristic of markets is that they transmit local knowledge in a form that is widely available to market participants. 38 00:03:47.280 --> 00:03:50.280 That they solve the problem of the division of knowledge. 39 00:03:50.280 --> 00:03:59.280 But the basic idea that I wish to promote is that this knowledge enhancing characteristic is to be found in certain other social arrangements as well. 40 00:03:59.280 --> 00:04:16.280 and that a fruitful way of looking at social orders in general is to focus on an understanding of their ability to, not only in terms of their knowledge using characteristics, but also in terms of their adaptive capacities. 41 00:04:16.280 --> 00:04:22.280 And so, what I'm going to do is sketch out some ideas that I've been working on 42 00:04:22.280 --> 00:04:27.280 that emphasizes the way in which social orders actually generate knowledge 43 00:04:27.280 --> 00:04:32.280 and how they can be usefully applied to two distinct realms of inquiry 44 00:04:32.280 --> 00:04:37.280 the scientific order and also the monetary order 45 00:04:37.280 --> 00:04:40.280 So, as Hayek pointed out in Economics and Knowledge 46 00:04:40.280 --> 00:04:47.280 The aim of my remarks this morning is to take seriously Hayek's claim. More specifically, I hope to explore the idea that social orders differ with respect to their knowledge using an adaptive capacity. And that such differences are very significant. 47 00:05:10.280 --> 00:05:16.280 and why these kinds of knowledge problems, if you wish to call them that, matter in two fields of inquiry. 48 00:05:16.280 --> 00:05:28.280 First, from the general field of the economics of science, I will examine the scientific order and the effect, specifically, of government funding and regulation on the production of scientific knowledge. 49 00:05:28.280 --> 00:05:29.280 Research. 50 00:05:29.280 --> 00:05:36.080 Second, I will consider whether we can assume that certain economic propositions apply with 51 00:05:36.080 --> 00:05:41.280 equal cogency to laissez-faire and central banking monetary systems. 52 00:05:41.280 --> 00:05:46.280 So there's a two-pronged approach that I'm going to pursue here today, one in the scientific 53 00:05:46.280 --> 00:05:51.720 realm of the economics of science and another that I'll try to address in terms of the different 54 00:05:51.720 --> 00:05:53.920 monetary orders. 55 00:05:53.920 --> 00:05:59.840 In both cases, the object is to understand how the scientific and monetary orders function 56 00:05:59.840 --> 00:06:03.920 under different institutional frameworks in terms of their knowledge using an adaptive 57 00:06:03.920 --> 00:06:04.920 capacities. 58 00:06:04.920 --> 00:06:08.720 Now social orders come in various guises and forms. 59 00:06:08.720 --> 00:06:15.900 I shall refer to them quite simply as structures comprised of individuals interacting according 60 00:06:15.900 --> 00:06:22.980 to specific routines, rules, routines and whatever institutions that may apply to them 61 00:06:22.980 --> 00:06:30.820 as well. Now, for example, we can envision a particular social order, like the catallaxy, 62 00:06:30.820 --> 00:06:36.980 the market order, as referring to, in the abstract, to an open-ended system of voluntary 63 00:06:36.980 --> 00:06:43.320 exchange of property rights in which actors pursue ends under scarcity and whose behaviors 64 00:06:43.320 --> 00:06:48.860 are constrained by rules and conventions governing those exchanges. The aim of each agent, of 65 00:06:48.860 --> 00:07:06.860 The idea, of course, is to engage in action to relieve, as Mises put it, felt uneasiness, and in so doing, within the framework of property rights, the ongoing interactions of agents produce, as a byproduct of that process, an order of having various attributes and outcomes. 66 00:07:06.860 --> 00:07:15.500 Now, I want to highlight just two general propositions that any order will satisfy ordinarily, 67 00:07:15.500 --> 00:07:20.020 and my specific context for the moment will be the catallaxy. 68 00:07:20.020 --> 00:07:25.700 Now, first, as a byproduct, an unintended consequence of individuals' actions, monetary 69 00:07:25.700 --> 00:07:31.620 market prices are an emergent characteristic of the exchange process and could only have 70 00:07:31.620 --> 00:07:35.820 arisen by that process and in no other way. 71 00:07:35.820 --> 00:07:40.380 The system of exchange under the conditions specified, the institutional arrangements 72 00:07:40.380 --> 00:07:45.860 that govern the operation of the order itself, transform the actions of individuals into 73 00:07:45.860 --> 00:07:51.220 system level outputs, market prices, that could not have been generated or known in 74 00:07:51.220 --> 00:07:57.160 the absence of the actual process from which they emerge. Such system level outputs are 75 00:07:57.160 --> 00:08:02.980 not aggregated from the attributes of the system's individuals, because during the 76 00:08:02.980 --> 00:08:17.980 The systems outputs represent a transformative process. We can say that prices are a kind of knowledge generated by the system itself. 77 00:08:17.980 --> 00:08:28.980 Now this suggests that institutional arrangements matter for the market process and that the specific outputs the system generates will be institutionally dependent. 78 00:08:28.980 --> 00:08:38.980 For example, the rental market for apartments will generate outputs in the form of prices, quantities and other characteristics of the goods that are exchanged. 79 00:08:38.980 --> 00:08:49.980 But arguably those outputs and those outcomes are going to be different under laissez-faire than they will be under an interventionist sort of system. 80 00:08:49.980 --> 00:08:55.340 The system in both cases is doing the best it can, presumably. 81 00:08:55.340 --> 00:09:00.420 We also know that the system's capacity to produce prices and other outputs to best meet 82 00:09:00.420 --> 00:09:04.780 the wishes of the consumers is different under each regime. 83 00:09:04.780 --> 00:09:08.200 Now a second feature of the market process is that the market should be understood as 84 00:09:08.200 --> 00:09:10.820 open-ended feedback systems. 85 00:09:10.820 --> 00:09:16.400 The emergent constellation of monetary prices constitute relevant knowledge inputs for agents 86 00:09:16.400 --> 00:09:22.720 to revise their plans and actions for engaging in subsequent exchanges. More than that, the 87 00:09:22.720 --> 00:09:29.720 changing pattern of market prices itself induces a self-generating discovery process of entrepreneurial 88 00:09:29.720 --> 00:09:36.720 activity and also the discovery of new preferences by consumers as well. How well the system 89 00:09:37.300 --> 00:09:41.880 is able to satisfy the wishes of the consumer will depend on the feedback properties of 90 00:09:41.880 --> 00:09:47.520 and the system, and those properties cannot be divorced from the framework of institutions 91 00:09:47.520 --> 00:09:49.920 the system is governed by. 92 00:09:49.920 --> 00:09:54.840 For example, returning to the rent control case mentioned above, the market under rent 93 00:09:54.840 --> 00:10:00.000 control is affected by the absence of price feedback signals that correspond to underlying 94 00:10:00.000 --> 00:10:02.000 supply and demand conditions. 95 00:10:02.000 --> 00:10:07.300 The familiar makeshifts and workarounds we see in regulated markets, for example, such 96 00:10:07.300 --> 00:10:12.660 such as the deterioration in the case of rent control, of the quality of housing, the disappearance 97 00:10:12.660 --> 00:10:20.540 of high-end housing or apartments, are all reflections of the regulation that is imposed. 98 00:10:20.540 --> 00:10:31.220 The system has adapted to the prevailing institutional situation, but its adaptive responses are not 99 00:10:31.220 --> 00:10:36.400 the same as those to the prevailing institutional environment that would have been generated 100 00:10:36.400 --> 00:10:42.560 by laissez-faire. Feedback systems like the market both under laissez-faire and intervention 101 00:10:42.560 --> 00:10:48.440 are adaptive systems and their adaptive qualities may be efficacious or not depending upon the 102 00:10:48.440 --> 00:10:53.520 institutional arrangements. Summarizing, my point is that social orders differ with 103 00:10:53.520 --> 00:10:59.920 respect to their knowledge using and adaptive capacities. This perspective provides a way, 104 00:10:59.920 --> 00:11:05.060 one of many ways, but certainly a way to analyze how alternative institutional arrangements 105 00:11:05.060 --> 00:11:10.400 are likely to affect the way social orders function. 106 00:11:10.400 --> 00:11:17.260 Now, let me just move on to the scientific order. 107 00:11:17.260 --> 00:11:21.180 And again, I'm not playing a fair game here in some sense, 108 00:11:21.180 --> 00:11:23.060 because what I'm concentrating on 109 00:11:23.060 --> 00:11:26.780 is a particular kind of framework 110 00:11:26.780 --> 00:11:29.220 in which I'm going to frame my discussion that 111 00:11:29.220 --> 00:11:32.900 is governed largely by government intervention. 112 00:11:32.900 --> 00:11:38.580 And that is a result of many factors, perhaps we can talk about those later. 113 00:11:38.580 --> 00:11:44.580 But that's the context in which I wish to pursue my remarks to demonstrate how these 114 00:11:44.580 --> 00:11:49.500 third party interventions, in this case into the scientific order, really do affect the 115 00:11:49.500 --> 00:11:53.140 scientific order itself. 116 00:11:53.140 --> 00:11:59.080 Now since the time of at least Michael Polanyi work in this area, we have reason to see science 117 00:11:59.080 --> 00:12:05.800 is a particular kind of emergent social order, albeit not a strictly catallactic one, especially 118 00:12:05.800 --> 00:12:10.640 regarding so-called basic research. You can talk about other kinds of research activities 119 00:12:10.640 --> 00:12:16.680 regarding development and so forth, which are more closely aligned to a market context, 120 00:12:16.680 --> 00:12:22.900 but basic research is generally not. That's what I want to talk about here. In general, 121 00:12:22.900 --> 00:12:27.920 science has its own institutions by which individual scientists undertake and communicate 122 00:12:27.920 --> 00:12:34.080 their knowledge findings to others, largely via publication, lectures, conferences, initiating 123 00:12:34.080 --> 00:12:40.200 an essentially adaptive process of interaction among scientists as they debate and marshal 124 00:12:40.200 --> 00:12:45.720 evidence to critique and extend the work of others. What emerges as warranted scientific 125 00:12:45.720 --> 00:12:50.200 truth, okay, now this is again I'm talking about science in the case of like physics 126 00:12:50.200 --> 00:12:56.740 or chemistry, which have strong empirical content to them, but what emerges as warranted 127 00:12:56.740 --> 00:13:01.580 of Scientific Truth in the sense of codifiable and articulated propositions about the real 128 00:13:01.580 --> 00:13:07.380 world reflect a process of interaction within the scientific community having the capacity 129 00:13:07.380 --> 00:13:12.840 to transform the work of an individual scientist into something considerably different and 130 00:13:12.840 --> 00:13:15.160 more possibly momentous. 131 00:13:15.160 --> 00:13:21.900 We do not know ex-ante what scientific insights, for example, will be generated by this process 132 00:13:21.900 --> 00:13:28.300 For the simple reason, scientific knowledge emerges precisely as something new. 133 00:13:28.300 --> 00:13:35.200 That's what we usually mean by scientific knowledge, something we learned, something we didn't know before. 134 00:13:35.200 --> 00:13:40.300 It's similar in this respect to a market process in that, in the market process on the other hand, 135 00:13:40.300 --> 00:13:44.700 it's prices that emerge principally as a byproduct of these interactions. 136 00:13:44.700 --> 00:13:51.300 But in science, we have a different kind of knowledge that's generated, scientific knowledge. 137 00:13:51.300 --> 00:14:04.300 Perhaps more importantly for the purpose at hand, however, I want to emphasize that it's the institutional arrangements of any particular order that are likely to prove decisive in affecting the kind of knowledge science actually generates. 138 00:14:04.300 --> 00:14:18.300 Now standard neoclassical economics of science, which has its roots in the work of Nelson Arrow and many others, specifically insulates science from any kind of institutional context. 139 00:14:18.300 --> 00:14:25.980 In doing so, the main thrust of neoclassical work assumes widespread market failure, in quotes, 140 00:14:25.980 --> 00:14:30.460 and science on the grounds that scientific knowledge is non-appropriable, 141 00:14:30.460 --> 00:14:35.100 and hence creates a public goods problem requiring, as the story goes, 142 00:14:35.100 --> 00:14:40.220 government subsidies to achieve so-called optimal output of knowledge. 143 00:14:40.220 --> 00:14:45.260 Someone should tell, I don't know what that means anymore, but that's what they claim. 144 00:14:45.260 --> 00:14:48.260 Nelson claimed that back in 1955. 145 00:14:48.260 --> 00:14:54.260 Now, this is not to say that people have questioned this. 146 00:14:54.260 --> 00:15:03.260 Indeed, there's a large emerging body of work by some very good people, Terrence Keighley, James Bennett up at GMU and others, 147 00:15:03.260 --> 00:15:14.260 who have questioned this whole framework within which neoclassical economics has constructed this view of what science is and the necessity for government intervention. 148 00:15:14.260 --> 00:15:20.660 I might add that Thomas McQuade and I, who Joe thankfully mentioned as my frequent co-author, 149 00:15:20.660 --> 00:15:27.820 and I have examined science in some detail from the point of view of a particular kind 150 00:15:27.820 --> 00:15:33.760 of Hayekian social order, and in particular our concerns have focused on how government 151 00:15:33.760 --> 00:15:37.180 funding affects that order, and that's what I want to turn to now. 152 00:15:37.180 --> 00:15:38.180 How is it? 153 00:15:38.180 --> 00:15:45.140 What ways can we impact the effect of government funding on the actual scientific order itself? 154 00:15:45.140 --> 00:15:58.300 Now, my remarks are going to cover those three things there, the three big D's as I like 155 00:15:58.300 --> 00:16:04.220 to think of it, directional effects, destabilizing effects and distorting effects. 156 00:16:04.220 --> 00:16:10.860 Now the driving force for government funding of science has historically centered on military 157 00:16:10.860 --> 00:16:18.100 and defense considerations and only since the 1950s really on the presumed market failure 158 00:16:18.100 --> 00:16:25.100 in basic research. Still more recently, see how these things morph into something very 159 00:16:25.100 --> 00:16:30.740 different in fact, that argument has been applied to commercial R&D as well, especially 160 00:16:30.740 --> 00:16:33.740 in Europe, and increasingly so in America. 161 00:16:33.740 --> 00:16:43.740 While I believe these justifications are absolutely questionable and ought to be questioned, that discussion must be set aside for the time being. 162 00:16:43.740 --> 00:16:48.740 A lot of work has been done in this. I want to concentrate on something a little bit different. 163 00:16:48.740 --> 00:16:58.740 Instead, I want to briefly consider the ways government funding of science as such affects science in terms of its functioning as an adaptive social order. 164 00:16:58.740 --> 00:17:08.740 Now, it's not necessary to presume, I might add, that scientists are angels on earth and have the highest and best of motives. 165 00:17:08.740 --> 00:17:13.740 Scientists are all kinds of people. They have different kinds of intent. 166 00:17:13.740 --> 00:17:20.740 Some of them approach their work vocationally as something they would do in any case, as long as they have the resources. 167 00:17:20.740 --> 00:17:25.740 But other people are known to cut corners and so forth and so on. 168 00:17:25.740 --> 00:17:33.740 So science is not this pure kind of enterprise necessarily. It's composed of real people. 169 00:17:33.740 --> 00:17:38.740 But the problem here, of course, is that these real people have to have a source of income. 170 00:17:38.740 --> 00:17:44.740 And the source of income is necessary for them not only to generate their own standards of living 171 00:17:44.740 --> 00:17:51.740 and the custom that their wives would like to be accustomed to, but also they need resources for research. 172 00:17:51.740 --> 00:17:58.300 Research. And so where's that going to come from? Well, during, for example, the 19th 173 00:17:58.300 --> 00:18:03.740 century, there was no government funding of research to speak of. There's one important 174 00:18:03.740 --> 00:18:11.060 exception maybe. John Adams saw to it that the Naval Observatory in Washington, D.C. came 175 00:18:11.060 --> 00:18:16.500 under government funding after a long, long debate. But he got that. But other than those 176 00:18:16.500 --> 00:18:21.660 sorts of things, maybe the Lewis and Clark, very little funding by government of science. 177 00:18:21.660 --> 00:18:50.660 Science. Okay. Indeed, during the 19th century in America, as James Bennett points out, the United States became a leader in astronomical research and the building of observatories, all with private money. Okay. There you go. My argument, of course, for another day would be, let's use that kind of model for science today, but that's again another story. Okay. 178 00:18:51.660 --> 00:19:03.660 So let me just highlight, if I might, some of these effects that Thomas McQuade and I have kind of thought about and organized in this fashion. 179 00:19:03.660 --> 00:19:08.660 It's kind of a taxonomy, if you will, of the effects of government funding on science. 180 00:19:08.660 --> 00:19:15.660 These directional effects, whether they're funded by government or private philanthropists or what have you, 181 00:19:15.660 --> 00:19:21.660 have you, are always going to be designed to, not always, but generally will be designed 182 00:19:21.660 --> 00:19:28.900 to satisfy the interests of the donors. And that's only natural. The donors have a vested 183 00:19:28.900 --> 00:19:34.300 interest in seeing to it that certain kinds of questions are asked. Hopefully they also 184 00:19:34.300 --> 00:19:39.340 have some kind of agenda, hoping that certain results will be obtained from that funding. 185 00:19:39.340 --> 00:19:44.980 And that's all fine and dandy. In the world of philanthropy, there's enough separate units 186 00:19:44.980 --> 00:19:55.980 and the use of philanthropists such that you get a wide and interesting diversity of scientists doing their own thing that generates a very vibrant kind of scientific order. 187 00:19:55.980 --> 00:20:00.980 But when we turn to government, what we're talking about here is a big player. 188 00:20:00.980 --> 00:20:11.980 We're talking about an institution, the government, which not only has the capacity to tax people 189 00:20:11.980 --> 00:20:33.980 and use those tax funds to support funding, which is bad enough, of course, but to add injury to insult, the government also obviously has its own set of agenda items, its own ideology and its own kinds of constraints as governed by the political process and cow-tailing to it, okay? 190 00:20:33.980 --> 00:21:03.480 So what we observe in these government funding, and this has been documented by all kinds of researches, Savage and others have written extensively on this, it's well worth your looking into, that government not only is not this isolated, disinterested funder of science, but rather tries to mold the direction of science to suit its aims. 191 00:21:03.980 --> 00:21:22.980 And we see this all the time. For example, under George W. Bush, George Bush II, he allocated for NASA all kinds of funding that was designed to ensure space exploration, you know, sending probes out to Mars and all of that. 192 00:21:22.980 --> 00:21:40.980 Obama comes into office and he immediately kills that NASA program and all the money that went with it and redirects those funds to NASA with the specific charge of sending satellites up so they can study earth climatology. 193 00:21:40.980 --> 00:21:49.980 So all the governments do this, they have their own agendas and they all funnel money in the way that they think is best. 194 00:21:49.980 --> 00:22:00.980 I could go on and on about this stuff. I mean, you can just imagine the kinds of sausage machine that we're talking about here with government funding. 195 00:22:00.980 --> 00:22:12.980 But I think you get the point that government has a real interest and executes and implements its interests to achieve certain effects directionally on the course of science. 196 00:22:12.980 --> 00:22:18.980 Now, this does not mean that the science that's being performed is necessarily second rate. 197 00:22:18.980 --> 00:22:32.980 You know, if you're going to fund, say, breast cancer research at Sloan Kettering Hospital in New York, the presumption would be that those scientists are fully competent to generate sensible science. 198 00:22:32.980 --> 00:22:41.980 It's not that the science gets corrupted per se, it's what the funding is used for that is the issue here. 199 00:22:41.980 --> 00:22:45.980 So I don't want to be clear about that. 200 00:22:45.980 --> 00:23:02.980 Let me move on to destabilizing effects, and here too, government funding is subject of course to the fleeting movements of political ideology and the process, the political process itself. 201 00:23:02.980 --> 00:23:11.980 So you have one, as I explained with George W. Bush versus Obama's space exploration initiatives, 202 00:23:11.980 --> 00:23:17.980 The one president comes in, one set of policy makers come in and they have a particular thing they want to do. 203 00:23:17.980 --> 00:23:21.980 The next bunch come in and they want to reverse that, do something different. 204 00:23:21.980 --> 00:23:28.980 The problem here is that in many cases the funding amounts are so large 205 00:23:28.980 --> 00:23:37.980 that we're talking about massive, in effect massive reallocations of resources from one kind of use to another. 206 00:23:37.980 --> 00:23:55.980 That is to say, the scientific community is responding in part to the ideology and the agenda items that the administration and its acolytes are putting forth. 207 00:23:55.980 --> 00:24:01.980 And they will do that science. Scientists need the money, they're happy to do that. 208 00:24:01.980 --> 00:24:19.980 The next bunch comes in, and by gosh, the funding priorities change, and those scientists have to switch or move, but in the process, a lot of graduate students have been educated according to the prior set of agenda items. 209 00:24:19.980 --> 00:24:24.980 They're not trained to do something maybe new right away, this capital investment and so forth. 210 00:24:24.980 --> 00:24:54.980 and so forth. So what we have here is this kind of, and it's demonstrable. You can actually track this stuff. You can see the tides of change wafting through the scientific community as the funding priorities change. These are destabilizing. It's analogous, not the same thing obviously, but it's similar to the effects 211 00:24:54.980 --> 00:25:02.580 We talk about an Austrian business cycle theory. It's a different kind of reallocation. It 212 00:25:02.580 --> 00:25:07.420 concerns different kinds of questions, but it's essentially the same process. And there's 213 00:25:07.420 --> 00:25:13.820 examples up the kazoo that demonstrate that these things can be very significant. Back 214 00:25:13.820 --> 00:25:19.380 in the 80s, Japan, for example, was trying to generate what was called then fifth generation 215 00:25:19.380 --> 00:25:24.540 Supercomputers, these supercomputers. Japan invested hundreds and hundreds of millions 216 00:25:24.540 --> 00:25:33.180 of dollars into the research for this. And of course, UK, Germany, France, America and 217 00:25:33.180 --> 00:25:37.380 other countries said, we can't let the Japanese get ahead of us on this particular thing. 218 00:25:37.380 --> 00:25:44.180 So they followed suit. And after billions and billions of dollars around the world spent 219 00:25:44.180 --> 00:25:51.180 on this research, what came of it? Nothing. Very little. Nothing momentous. That's what 220 00:25:51.760 --> 00:25:57.460 I mean by destabilizing. It can be severe, it can be minor, but it's something that we 221 00:25:57.460 --> 00:26:01.300 have to keep track of because it does affect how well the scientific order is going to 222 00:26:01.300 --> 00:26:08.300 function. Now, distorting effects. This is a little bit more slippery. This kind is the 223 00:26:08.300 --> 00:26:20.300 This kind is the third effect, but a potentially much more serious and injurious effect that can affect the scientific order. 224 00:26:20.300 --> 00:26:33.300 This occurs, I think how I define it anyway, if the evolved institutions of science that confer legitimacy on the work of scientists are replaced, negated, or bypassed. 225 00:26:33.300 --> 00:27:03.300 Bypassed. Now certainly this can apply to private sciences if scientists cheat and don't get caught so that they bypass the procedures that scientists all accept for the kind of research they're doing. That can work there. But where we find this really much more seriously at stake is of course when government gets into the act. Now I'll just remind, probably some of you 226 00:27:03.300 --> 00:27:10.300 I remember the Lysenko episode in Soviet Russia during the 1930s. 227 00:27:10.300 --> 00:27:19.300 This is a classic illustration of how government can actually distort and destroy science. 228 00:27:19.300 --> 00:27:31.300 Lysenko was his political hack. He was a political hack who was trained in agrarian techniques, uneducated. 229 00:27:31.300 --> 00:27:35.300 and he got the ear of some party apparatchnik 230 00:27:35.300 --> 00:27:39.300 and was laying out this idea about how 231 00:27:39.300 --> 00:27:43.300 you can graft, the essential idea was you can 232 00:27:43.300 --> 00:27:47.300 graft plants on and they will acquire the characteristics of the 233 00:27:47.300 --> 00:27:51.300 other, the thing that you're grafting onto. Well, 234 00:27:51.300 --> 00:27:55.300 that's not good genetics and it's certainly not consistent with 235 00:27:55.300 --> 00:27:59.300 Mendelian genetics and up at that time 236 00:27:59.300 --> 00:28:13.300 Soviet biology, Soviet genetics was world class. It was absolutely world class. They were educated in the West. They had very good scholars and everything, internationally recognized. No problem. 237 00:28:13.300 --> 00:28:26.300 Lysenko gets into the act and they warmed with the strong arm tactics of the party, forced his theories on Soviet agriculture. 238 00:28:26.300 --> 00:28:35.800 It wasn't just the way they reorganized production, but more importantly, in some ways, it was what they did to the scientific community. 239 00:28:35.800 --> 00:28:43.800 Now, if you didn't buy into Lysenkoism, you were shipped off to a gulag, or you were disposed of in other ways. 240 00:28:43.800 --> 00:28:54.800 Publish or perish had a new meaning here, actually, and in fact, that was a serious issue. 241 00:28:54.800 --> 00:29:23.800 But, of course, it was all accepted during the 1930s. Interestingly, the ability of Soviet agriculture to recover from this fake fraudulent kind of science and the simultaneous disappearance of good science, at least in the genetics area, of course doomed much of the agricultural seven, five-year plans in Russia to ongoing under-production, starvation, and you know the story there. 242 00:29:23.800 --> 00:29:47.800 Now, interestingly, Soviet genetics disappeared off the face of the earth and it didn't reappear until much later, after Khrushchev, or it may have been Brezhnev, finally acknowledged that they had made a little mistake with Lysenkoism, and only then was Soviet biology rehabilitated to some extent. 243 00:29:47.800 --> 00:29:55.200 So this went on for many, many decades. It destroyed the science in the Soviet Union. 244 00:29:55.200 --> 00:30:07.740 A more subtle story here would be, surrounds the work of this biologist, physician, won 245 00:30:07.740 --> 00:30:13.320 a Nobel Prize in medicine, Baltimore, who was, at the time that I'm going to address, 246 00:30:13.320 --> 00:30:24.320 He was president of the Rockefeller Institute, Rockefeller University, sorry, in New York, and he was a world-class biologist by far. 247 00:30:24.320 --> 00:30:40.320 Well, he and some colleagues published a paper in 1986 in Cell Magazine, and some irate and abused graduate student, a postdoc student who was in the lab working, took offense at some things. 248 00:30:40.320 --> 00:30:52.620 and she lodged a suit against Baltimore and the authors of the article claiming that fraud and misconduct, scientific misconduct had occurred. 249 00:30:52.620 --> 00:31:02.920 Well, it turns out that after several inquiries at MIT and Tufts University, these charges were utterly dismissed. 250 00:31:02.920 --> 00:31:12.400 But, two enterprising people in the government that were working with Representative Dingell 251 00:31:12.400 --> 00:31:18.920 at the time caught on to this story and they started pursuing it and they adopted it as 252 00:31:18.920 --> 00:31:23.840 their crusade to ferret out all cheating fraudulent scientists. 253 00:31:23.840 --> 00:31:29.860 Well, they didn't come up with very much, but Representative Dingell saw an opportunity 254 00:31:29.860 --> 00:31:36.820 Committee here. And he organized hearings to bring Baltimore and his colleagues before 255 00:31:36.820 --> 00:31:42.180 Congress. And in the course of doing that, his aim was to rehabilitate his little subcommittee 256 00:31:42.180 --> 00:31:49.180 on oversight that was languishing and essentially moribund, had been quite moribund for quite 257 00:31:49.180 --> 00:31:56.460 some time. So this was a high-profile person that they hauled into Congress. The Baltimore 258 00:31:56.460 --> 00:32:11.460 Baltimore was subjected, Dingell subjected Baltimore to the full force of adversarial 259 00:32:11.460 --> 00:32:17.420 government assets, the National Institutes of Health Fraud Unit, the Office of Scientific 260 00:32:17.420 --> 00:32:23.700 Integrity from the Health and Human Services Department, U.S. Treasury Document Examiners, 261 00:32:23.700 --> 00:32:29.460 U.S. Secret Service Forensic Specialists and Subcommittee Investigators and Lawyers. 262 00:32:29.460 --> 00:32:38.060 Baltimore's work, which had been cleared of any wrongdoing by scientists, as I mentioned, 263 00:32:38.060 --> 00:32:45.660 at the university level, came under this vicious attack and Dingell used these hearings as 264 00:32:45.660 --> 00:32:52.460 a way of publicly humiliating Baltimore and claiming that just because Baltimore may have 265 00:32:52.460 --> 00:32:56.940 I have made some errors in some calculations in the paper, which he admitted to at the 266 00:32:56.940 --> 00:33:06.200 get-go from years earlier, that errors was a sufficient reason to assume misconduct. 267 00:33:06.200 --> 00:33:12.260 So any scientist who makes an error, according to Dingell, is guilty of fraud. 268 00:33:12.260 --> 00:33:17.780 So you can just imagine what that would do to science if it were actually implemented 269 00:33:17.780 --> 00:33:19.340 on a widespread basis. 270 00:33:19.340 --> 00:33:25.540 The point here is that Baltimore's reputation was savaged by these congressional hearings 271 00:33:25.540 --> 00:33:30.060 and it was a reputational hit that he could not reclaim. 272 00:33:30.060 --> 00:33:35.740 He was fired, he was asked to leave Rockefeller University for the notoriety he had brought. 273 00:33:35.740 --> 00:33:43.440 He ended up finally, I think, at Caltech as a professor, maybe a dean, I forget now. 274 00:33:43.440 --> 00:33:47.320 But his reputation was sullied beyond redemption. 275 00:33:47.320 --> 00:33:52.560 Even though, in the aftermath of the Dingell hearings and several years later, all of the 276 00:33:52.560 --> 00:34:01.160 accusations were reinvestigated again by other university boards and they were all found. 277 00:34:01.160 --> 00:34:04.900 Scientific error had been made, but there was no evidence of misconduct. 278 00:34:04.900 --> 00:34:11.240 This is the way that government, through its regulatory oversight function, when it funds 279 00:34:11.240 --> 00:34:15.560 science can actually affect what counts for science. 280 00:34:15.560 --> 00:34:20.320 That's the point of my remarks here, that when you have, when you combine the funding 281 00:34:20.320 --> 00:34:25.320 operation with a regulatory, and in this case, you might say, congressionally approved or 282 00:34:25.320 --> 00:34:32.240 constitutional legitimated function in the regulation area, you have a very powerful 283 00:34:32.240 --> 00:34:36.440 way of influencing what scientists can do and how you want to treat them. 284 00:34:36.440 --> 00:34:39.760 There are other examples of this, I've just picked out the one that you may have heard 285 00:34:39.760 --> 00:34:50.840 about, but there are many, many similar examples of such things going on. 286 00:34:50.840 --> 00:35:00.120 In light of these things, I hope it suggests to you that the kinds of frameworks within 287 00:35:00.120 --> 00:35:07.760 which scientists operate are going to be measurably affected by those arrangements. 288 00:35:07.760 --> 00:35:13.640 And if you have a laissez-faire approach to science, absent the kind of regulatory oversight, 289 00:35:13.640 --> 00:35:19.400 for example, that Dingell was able to bring to bear in Baltimore, then science will be 290 00:35:19.400 --> 00:35:27.360 conducted in a different way and on different criteria and different self-generating, self-enforcing 291 00:35:27.360 --> 00:35:29.360 mechanisms. 292 00:35:29.360 --> 00:35:34.060 When you add funding with a regulatory function, you get a different animal altogether. 293 00:35:34.060 --> 00:35:40.260 And I mention this because this is where we're moving, folks. 294 00:35:40.260 --> 00:35:42.380 Obama has been very clear about this. 295 00:35:42.380 --> 00:35:51.200 He's setting up a new research center, for example, that will be with sufficient funds. 296 00:35:51.200 --> 00:35:53.980 Who said there was a deficit anyway? 297 00:35:53.980 --> 00:36:02.060 But with a lot of money that is going to concentrate the approval process for bringing drugs to 298 00:36:02.060 --> 00:36:03.060 market. 299 00:36:03.060 --> 00:36:08.060 Of course, it doesn't occur to them that the problem there is the FDA, not the scientific community. 300 00:36:08.060 --> 00:36:19.060 But that being said, Obama has made it very clear that he is going to be very active in getting the right science put forth to satisfy his agenda. 301 00:36:19.060 --> 00:36:25.060 And how that's going to go on is, I think, a story that we won't really fully know for quite a while. 302 00:36:25.060 --> 00:36:28.060 But I imagine it's going to be a nasty story. 303 00:36:28.060 --> 00:36:37.060 Okay, so let me now turn to perhaps a more contentious item, monetary orders. 304 00:36:37.060 --> 00:36:48.060 I think monetary orders can also be modeled, obviously, as social orders, in which the transactions here pertain to banks, the customers and the constraints imposed on them. 305 00:36:48.060 --> 00:36:53.060 Here the transactions involve the issuing of loans and the redemption of notes and the 306 00:36:53.060 --> 00:37:00.640 knowledge generated is visible at the level of reserves, individual banks and the market 307 00:37:00.640 --> 00:37:05.300 premium required for those transactions to go through. 308 00:37:05.300 --> 00:37:11.460 By drawing contrast between different monetary orders, we can carry out a form of comparative 309 00:37:11.460 --> 00:37:16.420 institutional analysis, I hope, to highlight their respective knowledge using and adaptive 310 00:37:16.420 --> 00:37:17.420 qualities. 311 00:37:17.420 --> 00:37:24.420 So I'm going to talk about two different monetary orders, a central banking one and a free banking one, okay? 312 00:37:24.420 --> 00:37:29.420 Free banking along the lines of Selgin, White and Horowitz, if you don't mind. 313 00:37:29.420 --> 00:37:31.420 But let me just continue here. 314 00:37:31.420 --> 00:37:37.420 Now turning first to central banking, obviously the appropriate framework here is an interventionist system 315 00:37:37.420 --> 00:37:41.420 dominated by an institution that conducts centralized monetary planning 316 00:37:41.420 --> 00:37:46.420 and which is effectively exempt from the consequences of its own actions. 317 00:37:46.420 --> 00:37:54.420 Since its inception in 1913, the Federal Reserve has been complicit in causing all kinds of economic problems. 318 00:37:54.420 --> 00:37:59.420 That's amply documented. I'm sure all of you are aware of that. 319 00:37:59.420 --> 00:38:05.420 And the recent financial crisis, of course, highlights the failure of central banking, 320 00:38:05.420 --> 00:38:12.420 as well as the failure of the attendant government policies that were deployed there. 321 00:38:12.420 --> 00:38:29.420 It is also ushered in, however, something called quantitative easing, and quantitative easing is a non-traditional way of affecting reserves of the banking system, especially in an environment where the interest rate which the Fed controls, the Fed funds rate, is very close to zero. 322 00:38:29.420 --> 00:38:54.420 So, these are new tools that have been deployed by the Fed, and in connection with not only that, QE1, when they bought all those mortgage-backed securities, and now QE2, when they're buying 600 billion of treasuries over the next several months, starting in past November. 323 00:38:54.420 --> 00:39:18.420 They have entered into a new realm here and not only has the Bernanke seen to it that the balance sheet of the Fed has increased by 2.8 times since 2008, roughly, but also the Fed has now become a fiscal policymaker in many respects as well. 324 00:39:18.420 --> 00:39:31.420 So the blending of monetary and fiscal policy has been achieved by Bernanke and little Timmy Geithner, so we're in a new era, essentially. 325 00:39:31.420 --> 00:39:45.420 Now, I want to mention that as developed by monetary equilibrium theorists, it's important to differentiate between benign deflation, which is what Bernanke's agenda is pretty much about, and harmful deflation. 326 00:39:45.420 --> 00:39:57.420 The basic argument is that falling prices are benign when output is increasing, but harmful if the deflation is caused by an excess demand for money. 327 00:39:57.420 --> 00:40:09.420 And here I wish to suggest that monetary equilibrium argument that calls for an increase in the money stock in response to a perceived excess demand for money has questionable relevance for central banking. 328 00:40:09.420 --> 00:40:39.420 and Central Banking. That is to say, my argument is that, and I'm not presuming anybody here is a free banker, I happen to buy into that, probably more than some of you, but the problem is, and here's the, I think I'm just going to lay it out and say it, that I think the problem here is that the monetary equilibrium theorists, who also usually are free bankers, have argued, to some extent, some more than others, that the Fed's activities 329 00:40:39.420 --> 00:40:46.820 During the early phase of the financial crisis reflected, should have been designed to reflect 330 00:40:46.820 --> 00:40:53.940 the existing excess demand for money. That is to say, to ward off deflation and its costs, 331 00:40:53.940 --> 00:40:59.860 I know Steve Horowitz has publicly mentioned that the Fed should have increased the money 332 00:40:59.860 --> 00:41:05.020 supply back then, not necessarily in the way they did through mortgage-backed security 333 00:41:05.020 --> 00:41:09.340 purchases, but the money supply should have been increased to solve that particular problem. 334 00:41:09.340 --> 00:41:21.140 System. I will argue that that attempt to generate increase in the money supply can work 335 00:41:21.140 --> 00:41:28.140 quite well under a free banking system. But when you apply that insight to a central bank 336 00:41:28.140 --> 00:41:35.380 regime, you're really changing the game altogether. And that result that you take from your free 337 00:41:35.380 --> 00:41:41.180 Free banking model, and I'll try to apply it to your central banking model, is flawed. 338 00:41:41.180 --> 00:41:49.300 So it's a misapplication of a approach that works in one institutional setting, free banking, 339 00:41:49.300 --> 00:41:55.780 and is used to apply or give policy advice to a central bank in a different altogether, 340 00:41:55.780 --> 00:41:57.820 obviously, institutional setting. 341 00:41:57.820 --> 00:41:59.820 So that's the problem. 342 00:41:59.820 --> 00:42:04.900 Now, in a free banking system, if there's an excess demand for money, you know, banks 343 00:42:04.900 --> 00:42:10.700 Bankers will respond and they will issue more notes because people obviously want to hold 344 00:42:10.700 --> 00:42:16.580 more notes or hold the period of time during which they're holding notes and hence banks 345 00:42:16.580 --> 00:42:24.140 can increase their liabilities by increasing those notes. 346 00:42:24.140 --> 00:42:30.820 Now there's nothing particularly dangerous about that, there are, I can't go into it 347 00:42:30.820 --> 00:42:38.620 here, obviously, I haven't got much time left indeed, but the argument is that banks can 348 00:42:38.620 --> 00:42:46.100 respond in some sort of way to these sorts of problems. No one has to oversee it, it 349 00:42:46.100 --> 00:42:52.940 happens quite automatically in quotes, and it makes sense within the context of the free 350 00:42:52.940 --> 00:42:58.460 banking model. I'm not saying here, and I know not everybody in this room is a free 351 00:42:58.460 --> 00:43:06.100 Free Banker. My argument is not to defend free banking here. That's not my point today 352 00:43:06.100 --> 00:43:12.660 at all. Rather, I'm simply trying to argue that when you take a proposition that does 353 00:43:12.660 --> 00:43:18.180 make sense within that context and apply it to a contemporary policy setting, that's where 354 00:43:18.180 --> 00:43:22.780 the mistake is being made. That's a big mistake in my judgment. 355 00:43:22.780 --> 00:43:34.700 Now, I want to just try to demonstrate and use some really cheesy graphs here to show 356 00:43:34.700 --> 00:43:40.380 that if you were to try to apply some of these principles that we can glean from free banking 357 00:43:40.380 --> 00:43:50.600 models to the Fed's actual situation, that you don't end up with a clear-cut policy 358 00:43:50.600 --> 00:43:57.600 I have adulterated that photograph. It came out of the New Yorker, and it was black and white. This is exactly what I'm looking for, because I can make it darker and more sinister, like darker, darker, darker. 359 00:44:20.600 --> 00:44:49.600 This is just a took out of the St. Louis Fed and you can see here in the recession, the financial crisis in 07, 08, how M2 velocity fell quite substantially and MZM velocity, which is a somewhat broader measure of the money stock. 360 00:44:49.600 --> 00:44:55.320 of the Money Stock, also fell, okay, so you can see that the pattern. Now the problem 361 00:44:55.320 --> 00:45:00.320 here is, if you're, and this is the argument that the free bankers have made, that if you 362 00:45:00.320 --> 00:45:04.480 look at this particular point in time here, right around here, where things are starting 363 00:45:04.480 --> 00:45:12.360 to get pretty nasty, can you legitimately say, gee, we can anticipate velocity falling 364 00:45:12.360 --> 00:45:18.400 through the floor and taking action at that point in time in order to forestall that maybe? 365 00:45:18.400 --> 00:45:25.040 I don't think you can, but let's say that's what you argue, and so the question is no, 366 00:45:25.040 --> 00:45:29.180 you haven't got that in, you have no basis for making that judgment in that particular 367 00:45:29.180 --> 00:45:35.220 point in time, you don't know what's going to happen to velocity, and indeed, if you 368 00:45:35.220 --> 00:45:44.860 look at it, even through the beginning of all eight, the variance in M2 velocity is 369 00:45:44.860 --> 00:45:49.400 It's not out of step with what it had been doing previously to that. 370 00:45:49.400 --> 00:45:54.300 So there's not a good case here that if you were on the board of governors of the Fed, 371 00:45:54.300 --> 00:45:59.260 you could say, ah, I know for a fact, philosophy is going to go through the floor and we better 372 00:45:59.260 --> 00:46:00.980 do something now about it. 373 00:46:00.980 --> 00:46:01.980 Okay? 374 00:46:01.980 --> 00:46:04.620 I don't think you can draw that conclusion. 375 00:46:04.620 --> 00:46:06.440 Why can't you draw that conclusion? 376 00:46:06.440 --> 00:46:08.400 Because the Fed is a centralized bank. 377 00:46:08.400 --> 00:46:11.040 They're getting all their information from all over. 378 00:46:11.040 --> 00:46:12.120 They have to deliberate. 379 00:46:12.120 --> 00:46:13.260 They have to do this. 380 00:46:13.260 --> 00:46:19.340 They can't act spontaneously in the same sense that a free bank or a laissez-faire banking 381 00:46:19.340 --> 00:46:26.700 system can adjust on the spot to something like this, where a bank is maybe experiencing 382 00:46:26.700 --> 00:46:31.060 an increase in its demand for its currency. 383 00:46:31.060 --> 00:46:37.860 It's precisely because these laissez-faire banking systems are decentralized that allows 384 00:46:37.860 --> 00:46:42.820 them to respond in a timely and fast and appropriate way. 385 00:46:42.820 --> 00:46:56.820 Now whether you context that in the case of a free banking model or any other kind of laissez-faire system for banking, that's pretty much what we're talking about, at least I'm talking about here. 386 00:46:56.820 --> 00:47:01.820 And that is something that's not available to a central bank. 387 00:47:01.820 --> 00:47:22.820 Also, I put together here again the pattern of M2 velocity. I've collapsed the time period, as you can see, a little bit, and measured out the monetary base, the red dotted line. 388 00:47:22.820 --> 00:47:32.820 And you can see here that even though the monetary base starts taking an enormous uptick really in the middle of 2008, 389 00:47:32.820 --> 00:47:41.820 this is when the Fed started buying mortgage-backed securities, doubling its balance sheet very, very quickly. 390 00:47:41.820 --> 00:47:51.820 And you can see that despite that, despite that response, the Fed was impotent to stop the fall in velocity. 391 00:47:51.820 --> 00:48:06.820 Now, why was velocity falling? I mean, there's a lot of reasons there. A lot of them pertained to the policies themselves that were being pursued by the Fed, I think, and also a lot of it was due probably to the other policies that the government was punching out at this point. 392 00:48:06.820 --> 00:48:20.820 You know, TARP, TAF, the housing subsidization and all of that sort of stuff. That all played a role here in neutralizing any effect the increase in the monetary base might have had. 393 00:48:20.820 --> 00:48:25.820 And you can see here that it had no effect essentially on velocity. 394 00:48:25.820 --> 00:48:32.820 So the Fed, even if it had been omnipotent, even if it had been omnipotent, 395 00:48:32.820 --> 00:48:40.820 could probably never have adjusted in a fashion that would have approximated any other kind of laissez-faire banking system 396 00:48:40.820 --> 00:48:47.820 in terms of the quickness, the timeliness and the appropriateness of the responses that a decentralized system can buy for you 397 00:48:47.820 --> 00:49:15.820 The problem with central banking is that it is a hopelessly ill-adapted institution for a modern monetary system. It just can't work. It cannot work. It's not that they can even be right by accident. They can never be right. 398 00:49:15.820 --> 00:49:25.820 And the reason they can never be right because there is no way that a centralized banking system can mimic how a different institutional arrangement is going to function. 399 00:49:25.820 --> 00:49:30.820 In this particular example, a free banking system. 400 00:49:30.820 --> 00:49:45.820 So, my concluding point is, and these are some of the things that I talk about in the paper, how the systems respond. I've just summarized those very quickly. 401 00:49:45.820 --> 00:49:56.820 Here's Bernanke again, but he's part of the problem. He's part of the problem. If we put somebody else in there, it would not solve the problem, though, would it? 402 00:49:56.820 --> 00:50:04.820 That's the real problem, and that's the Federal Reserve building in D.C. 403 00:50:04.820 --> 00:50:07.820 I've altered that picture too. 404 00:50:07.820 --> 00:50:14.820 I looked everywhere for sinister-looking Federal Reserve building pictures, 405 00:50:14.820 --> 00:50:22.820 and this one was taken probably during a storm, and I just kind of manipulated it a little bit, 406 00:50:22.820 --> 00:50:25.820 but it suits my purposes, and I thought you'd get a kick out of that one. 407 00:50:25.820 --> 00:50:32.820 Well, anyway, I'll stop there, and thank you very much. I'll take some questions. 408 00:50:38.540 --> 00:50:42.420 The gentleman in the white shirt there. 409 00:50:42.420 --> 00:50:48.060 You said that government funding of science doesn't necessarily diminish the quality of the scientific research performed. 410 00:50:48.060 --> 00:50:52.020 Can we still make the case that it certainly slows it down and it's not efficient? 411 00:50:52.020 --> 00:51:21.020 Yeah, I think there's two ways of maybe answering that. If you look at the kind of science that's funded within agencies of the government, I think you're going to find exactly what you've indicated in the actual doing the science. 412 00:51:21.020 --> 00:51:28.900 Science. But a lot of the government funding of science is doled out to universities and 413 00:51:28.900 --> 00:51:39.140 it's doled out by things like the various agencies that are designed to allocate the 414 00:51:39.140 --> 00:51:46.440 funds to institutions outside of the government. So in those cases, the scientists are just 415 00:51:46.440 --> 00:51:51.680 Researcher, everyday scientist working in their labs at a university and they are constrained 416 00:51:51.680 --> 00:51:57.860 by the funding they have and their research assistants and so forth. So you might want 417 00:51:57.860 --> 00:52:05.040 to make an argument that sometimes what gets funded by government wouldn't have been funded 418 00:52:05.040 --> 00:52:14.040 at all by private donors or philanthropists or in-house university funds. And we all know 419 00:52:14.040 --> 00:52:24.040 And all those absolutely laughable stories about, you know, the funding hog farms for 420 00:52:24.040 --> 00:52:26.640 seeing how much CO2 they produce, right? 421 00:52:26.640 --> 00:52:31.820 Stuff like that you get with government funding too, because it's a political process, and 422 00:52:31.820 --> 00:52:38.600 it's not meant necessarily to answer the kinds of questions that scientists would, if they 423 00:52:38.600 --> 00:52:41.840 had their druthers, be particularly interested in probably. 424 00:52:41.840 --> 00:52:47.700 So you get some of that, but on the other hand, the parity I've described between government 425 00:52:47.700 --> 00:52:54.800 and privately undertaken science is of course contingent on the monitoring of those funds 426 00:52:54.800 --> 00:53:00.160 and ensuring that in fact scientists deliver on what their proposals say they're going 427 00:53:00.160 --> 00:53:01.160 to deliver on. 428 00:53:01.160 --> 00:53:07.060 And of course, one of the dirty little secrets of this whole funding process, and it operates 429 00:53:07.060 --> 00:53:14.080 to perfection with government funding is that scientists, it's well known, but it's hard 430 00:53:14.080 --> 00:53:19.220 to find this data. It's well known among the scientific community that when scientists 431 00:53:19.220 --> 00:53:24.600 put in a proposal, they're putting in a proposal to a funding agency of the government of research 432 00:53:24.600 --> 00:53:30.740 they've already completed. And the funding is then used for the next research project. 433 00:53:30.740 --> 00:53:37.420 So there's a lot of deception and gaming going on in the system, so there's that too. 434 00:53:37.420 --> 00:53:40.420 I saw that gentleman in the blue suit there. 435 00:53:40.420 --> 00:53:44.420 This is my view, I don't want to hear yours. 436 00:53:44.420 --> 00:53:54.420 I think that the whole issue of government funding is based on a policy that there is 437 00:53:54.420 --> 00:53:57.420 a distinction between basic and applied research. 438 00:53:57.420 --> 00:54:03.420 I think the best way to kill that is to say, if you really wanted to make a case against government funding, 439 00:54:03.420 --> 00:54:07.420 not just the research of public education, would be to kill that fallacy, 440 00:54:07.420 --> 00:54:11.420 to show that there is no distinction between basic and by research. 441 00:54:11.420 --> 00:54:17.420 Because if you cannot show that, there will always be a ground rule to make a case for government funding. 442 00:54:27.420 --> 00:54:42.420 If somebody proves that there is a distinction between basic and applied research, they will always have the ground to justify facts and rules to define basic research. 443 00:54:57.420 --> 00:55:07.420 The linear model in science, and the linear model is basic research leads to, applied research leads to research and development. 444 00:55:07.420 --> 00:55:18.420 And that is from the work of Vannevar Bush, who produced this book called The Endless Frontier back in 1946, 445 00:55:18.420 --> 00:55:23.420 and which led to this enormous expansion in government funding of science. That was his model. 446 00:55:23.420 --> 00:55:28.020 It's all wrong. It was wrong then and it's wrong now. 447 00:55:28.020 --> 00:55:33.120 What you find, and it's a lot of literature that's come out recently that demonstrates this, 448 00:55:33.120 --> 00:55:39.720 that a lot of the theoretical insights that we gain in science 449 00:55:39.720 --> 00:55:44.420 actually come out of the attempt to apply other research. 450 00:55:44.420 --> 00:55:48.320 So there's all this mutual causation going on 451 00:55:48.320 --> 00:55:52.820 where you could argue, as you have and I agree with you, that it's research and development 452 00:55:52.820 --> 00:55:59.740 which generates a lot of the basic science, and it can go both ways, and it does, there's 453 00:55:59.740 --> 00:56:02.740 no doubt about that. Yes, Guido. 454 00:56:02.740 --> 00:56:11.740 Your talk, you addressed the relationship between spontaneous orders on the one hand and the distinction between benign and bad and deflation on the other hand. 455 00:56:11.740 --> 00:56:24.740 I couldn't get much... I mean, a practical question. If you could push the button in September 2008, would you have abolished the Federal Reserve? 456 00:56:24.740 --> 00:56:39.740 Yes. The question was, if I were king or something, right, and we're talking in the events of 2008, would I have pressed the button to abolish the Fed? Yeah. 457 00:56:42.740 --> 00:56:51.740 Well, in this case you're talking about a legislated decrease in the money supply, I think, right? In Brazil where they did that. 458 00:56:51.740 --> 00:56:59.740 Well, I think when you're in a recession, you don't have to contract the money supply, which might happen, I don't know. 459 00:56:59.740 --> 00:57:04.740 So I wouldn't recommend that. What you do is stop the inflation. 460 00:57:09.740 --> 00:57:15.740 Well, I would qualify remarks. If we could just get rid of the Fed and keep the money supply where it had been, I think we would have been fine. 461 00:57:21.740 --> 00:57:50.740 You look at business cycles and the credit cycles. 462 00:57:50.740 --> 00:57:58.740 There's always the hand of interventionists that is at play in these things. 463 00:57:58.740 --> 00:58:04.740 I think the larger question, and I think probably a better answer to Guido's question would have been, 464 00:58:04.740 --> 00:58:09.740 what we need is a system where we can have sound money. 465 00:58:09.740 --> 00:58:15.740 And until we get there, I don't see any particular resolution of a lot of these problems. 466 00:58:15.740 --> 00:58:19.740 I think we're going to go through these cycles again and again and again. 467 00:58:19.740 --> 00:58:26.540 Yeah, I mean, yeah, something like that. So, you know, but I think I do, I would 468 00:58:26.540 --> 00:58:30.580 argue that as you move toward more centralized banking, these problems get 469 00:58:30.580 --> 00:58:36.500 worse. That's what I would argue. Last question, I'm told. Who wants to be the 470 00:58:36.500 --> 00:58:40.980 highest bidder? Okay, way back there. 471 00:58:40.980 --> 00:59:10.980 I think you did an excellent job outlining some of the mis-incentives from government funding for science, but to be able to evoke it and push it in some direction, there are some mis-incentives that come from the market structure, too, when we're speaking strictly about science and trying to have emergent knowledge, trying to have emergent knowledge, if the goal of science is emergent knowledge and not necessarily practicable, priceable knowledge. One thing I'm thinking of when you point out that hog farms are sort of obvious 472 00:59:10.980 --> 00:59:40.980 The other question I have is, you didn't address, and I was hoping you might be able to address, intellectual property capture by private corporations where, for example, patentable information lasts for 19, now 30 years, renewables, so, Pfizer, for example, gets derivative research from the University of Texas on, you know, how to do that, how to do that, how to do that, how to do that, how to do that, how to do that, how to do that, how to do that, how to do that, how to do that, how to do that, how to do that, how to do that, 473 00:59:40.980 --> 00:59:44.980 by Agra and then captures that market information for all 30 years. 474 01:00:40.980 --> 01:00:50.500 would generate better computers, better things that people want, as opposed to smart bombs, 475 01:00:50.500 --> 01:00:57.340 you know, nerve gas or whatever. So it's a complicated kind of question. Maybe we can 476 01:00:57.340 --> 01:01:00.340 talk about it later. Thank you very much all. I appreciate it.