WEBVTT NOTE Authors Forum: Action, Time and Knowledge - The Austrian School of Economics 1 00:00:00.000 --> 00:00:10.000 I would like to thank the committee for inviting me here, especially Professor Salerno. 2 00:00:10.000 --> 00:00:18.000 And my purpose today is to present a summary of my book, this book. 3 00:00:18.000 --> 00:00:24.000 It's a very simple book and I wrote it to my students, 4 00:00:24.000 --> 00:00:30.000 who are permanently poisoned by Keynesian and monetarist textbooks. 5 00:00:31.000 --> 00:00:40.000 His main purpose is to clean their minds and put some Austrian concepts, 6 00:00:40.000 --> 00:00:50.000 which we all in this room we know are important. 7 00:00:50.000 --> 00:01:04.000 From my point of view, in a very simple way, the Austrian School is founded on a concurrent and complementary triad, 8 00:01:04.000 --> 00:01:16.000 formed by the concepts of a, human action, b, dynamic time, and c, the hypothesis about the limitations of human knowledge. 9 00:01:16.000 --> 00:01:26.000 These three concepts form the cornerstone of the monumental Austrian School of Economics, Theoretical Edifice. 10 00:01:26.000 --> 00:01:31.000 And certain elements emanate from the triad. 11 00:01:31.000 --> 00:01:39.000 They are, first, marginal utility, b, subjectivism, and c, spontaneous orders. 12 00:01:39.000 --> 00:01:48.000 From these propagation elements, every proposal of a practical nature may be logically deducted. 13 00:01:48.000 --> 00:01:57.000 I refer to these as propagation elements, for they bring implications for various fields of human knowledge, 14 00:01:57.000 --> 00:02:03.000 such as political philosophy, epistemology and economics proper. 15 00:02:03.000 --> 00:02:12.080 First of all, action. As you know, every economic act, without exception, can be reduced to 16 00:02:12.080 --> 00:02:19.620 choices made in accordance with the seminal concept of human action. And the basic proposition, 17 00:02:19.620 --> 00:02:28.600 the first axiom of praxeology, is that the motivation for any action is dissatisfaction, 18 00:02:28.600 --> 00:02:36.560 This nobody acts unless he feels some dissatisfaction and considers that a particular action will 19 00:02:36.560 --> 00:02:45.040 improve satisfaction, comfort, joy or feeling of accomplishment, thus decreasing discomfort, 20 00:02:45.040 --> 00:02:48.880 frustration or dissatisfaction. 21 00:02:48.880 --> 00:02:53.600 This axiom is fundamental and universal. 22 00:02:53.600 --> 00:02:57.960 Wherever there are people, there are actions. 23 00:02:57.960 --> 00:03:06.320 are that economics which is built on praxeology is by corollary universal. 24 00:03:06.320 --> 00:03:17.000 The second element is the dynamic concept of time or subjective time or even real time 25 00:03:17.000 --> 00:03:23.760 in which time ceases to be a static category described by a single horizontal axis to be 26 00:03:23.760 --> 00:03:28.720 be redefined as the continuous flow of new experience, 27 00:03:28.720 --> 00:03:33.720 which is not in time, as in the static or Newtonian concept, 28 00:03:33.800 --> 00:03:36.700 but becomes time proper. 29 00:03:36.700 --> 00:03:40.920 When we consider dynamic time, we are implicitly accepting 30 00:03:40.920 --> 00:03:44.880 that something new is continuously occurring. 31 00:03:44.880 --> 00:03:49.880 We must also recognize dynamic time's three characteristics, 32 00:03:49.880 --> 00:04:03.880 Dynamic Continuity, Eterogeneity and Causal Efficacy, as explained by Mario Rizzo and Gerold Odrisco in their interesting book, The Economics of Time and Ignorance. 33 00:04:04.880 --> 00:04:13.880 The real-time dynamic is irreversible and leads to a creative evolution process, which implies unpredictable changes. 34 00:04:13.880 --> 00:04:21.760 The concept of real time is essential to the understanding of human action, because acting 35 00:04:21.760 --> 00:04:29.640 individuals continuously accumulate new experiences which generate new knowledge, which in turn 36 00:04:29.640 --> 00:04:34.640 often leads them to change their plans and actions. 37 00:04:34.640 --> 00:04:40.480 The third element is the limitation of knowledge. 38 00:04:40.480 --> 00:04:46.560 It is the epistemological treatment of the undeniable fact that human knowledge always 39 00:04:46.560 --> 00:04:55.440 contains components of uncertainty and unpredictability, which confer on every human action unintended 40 00:04:55.440 --> 00:04:59.800 effects that cannot be a priori calculated. 41 00:04:59.800 --> 00:05:05.680 There are, for the Austrians, limits to the ability of the human mind to fully fatten the 42 00:05:05.680 --> 00:05:09.520 The Complex of Social and Economic Phenomena 43 00:05:09.520 --> 00:05:21.160 Formal systems possess certain operating rules that cannot be predetermined, as the Spanish 44 00:05:21.160 --> 00:05:28.000 philosopher José Ortega Higase states, the eye does not see itself. 45 00:05:28.000 --> 00:05:35.600 As it is not possible to quantify our knowledge, the Austrian School does not analyze the markets 46 00:05:35.600 --> 00:05:44.720 as equilibrium states, but as process of discovery and articulation of knowledge. 47 00:05:44.720 --> 00:05:46.920 About the propagation elements. 48 00:05:46.920 --> 00:05:53.560 The first is the concept of marginal utility, and you all know what that means. 49 00:05:53.560 --> 00:05:57.040 The second is subjectivism. 50 00:05:57.040 --> 00:06:02.600 Subjectivism emphasizes creativity and autonomy of individual choices, and for that reason 51 00:06:02.600 --> 00:06:10.720 shall be subject to methodological individualism, the notion that market outcomes may be explained 52 00:06:10.720 --> 00:06:18.700 in terms of individual acts of choice. For the Austrian scholar, economic theory should 53 00:06:18.700 --> 00:06:26.380 consider primarily the web of factors that explain choices and not be limited to simple 54 00:06:26.380 --> 00:06:34.860 Interactions Among Objective Variables. Subjectivism then presupposes that action always take place 55 00:06:34.860 --> 00:06:43.060 under conditions of immeasurable and genuine uncertainty, and also that it occurs over 56 00:06:43.060 --> 00:06:52.540 dynamic time. The third element is the concept of spontaneous orders, which are intermediate 57 00:06:52.540 --> 00:06:59.620 Classes of Phenomena that are specific to the science of human action or praxeology. 58 00:06:59.620 --> 00:07:06.500 They are institutions that fall between instinct and reason as a result of human action, but 59 00:07:06.500 --> 00:07:11.980 not the execution of human design or planning. 60 00:07:11.980 --> 00:07:20.380 Typical examples of these orders are, as you know, the monetary system markets cultural 61 00:07:20.380 --> 00:07:23.140 Events and Language. 62 00:07:23.140 --> 00:07:28.260 The next step in the book is combining the elements of the Austrian School. 63 00:07:28.260 --> 00:07:34.980 In the epistemological field, the implications should be A, methodological individualism, 64 00:07:34.980 --> 00:07:42.140 B, the difference between models and facts in the social sciences, C, the recognition 65 00:07:42.140 --> 00:07:50.260 that the social sciences have their own characteristics, which differentiate them from the natural 66 00:07:50.260 --> 00:07:58.260 and the rejection of forecasting methods in social sciences and with regard to 67 00:07:58.260 --> 00:08:04.340 political philosophy the implications should be a criticism of the mixed 68 00:08:04.340 --> 00:08:11.420 systems be evolution in the social sciences see democracy and separation of 69 00:08:11.420 --> 00:08:19.820 powers the limitations to power and the rejection of constructivism and in the 70 00:08:19.820 --> 00:08:31.320 and Social Sciences. In the field of economics, based on these core elements and seminal propagators, 71 00:08:31.320 --> 00:08:40.120 the Austrian economists from Menger onwards have erected a remarkable and rich structure 72 00:08:40.120 --> 00:08:48.680 from the scientific point of view. It works perfectly, at least as perfectly as one can 73 00:08:48.680 --> 00:08:57.320 Let me briefly set out each of the six fields of economic theory that I believe are essential 74 00:08:57.320 --> 00:09:00.880 to the understanding of the Austrian thought. 75 00:09:00.880 --> 00:09:03.700 The first is the market process. 76 00:09:03.700 --> 00:09:08.320 The main elements of the Austrian theory of the markets are, first, markets are moved 77 00:09:08.320 --> 00:09:14.240 by the actions of its participants, both on the demand and the supply sides. 78 00:09:14.240 --> 00:09:22.900 Second, human action takes place over dynamic time where each moment is a learning opportunity. 79 00:09:22.900 --> 00:09:31.640 Third, market transactions are carried out under conditions of limitation and dispersion of knowledge. 80 00:09:31.640 --> 00:09:38.900 And fourth, markets are spontaneous orders subject, therefore, to permanent changes. 81 00:09:38.900 --> 00:09:45.580 And fifth, human action is essentially subjective. 82 00:09:45.580 --> 00:09:54.540 How can it be expected, therefore, that real world markets be in equilibrium at a given point of time? 83 00:09:54.540 --> 00:09:58.300 This is one of the central tenets of the Austrian theory. 84 00:09:58.300 --> 00:10:07.140 Markets are reflections of trials and errors in a permanent process for finding new opportunities. 85 00:10:07.140 --> 00:10:14.260 and whose dynamism does not provide room for balance or equilibrium. 86 00:10:14.260 --> 00:10:21.300 The second element in economics is the role of the entrepreneur and its function in the 87 00:10:21.300 --> 00:10:23.260 markets. 88 00:10:23.260 --> 00:10:28.100 Entrepreneurship is the subjective individual ability to perceive the possibilities of gains 89 00:10:28.100 --> 00:10:29.100 on the markets. 90 00:10:29.100 --> 00:10:33.100 Therefore, it is nothing more than a category of action. 91 00:10:33.100 --> 00:10:47.100 Thus, human action can be considered a business phenomenon, specifically one based on the capabilities of perception, coordination and creativity of the acting individual. 92 00:10:47.100 --> 00:11:00.100 In addition, to economists of the Austrian tradition, each action embeds a pure and creative entrepreneurial component that does not require any cost. 93 00:11:00.100 --> 00:11:10.100 This pure entrepreneurial component provides for the convergence of the concepts of action and entrepreneurship. 94 00:11:10.100 --> 00:11:18.100 The third element is the debate about the impossibility of economic calculation in socialist economies. 95 00:11:18.100 --> 00:11:28.100 Even in the 20s, Mises saw clearly that in a socialist economic system, calculation is impossible. 96 00:11:28.100 --> 00:11:54.100 His argument was very simple, economic calculation requires planners to know the prices, and these, in turn, to be considered prices as such, and not pseudo-prices, presuppose both the existence of the market process, in which actions of bidders and sellers flow normally, and private property, a prerequisite of markets. 97 00:11:54.100 --> 00:12:09.100 Socialism, however, does not admit private property, so it makes no sense to speak about markets in a socialist system if there are no functioning markets and therefore no prices. 98 00:12:09.100 --> 00:12:18.100 Accordingly, if there are no prices, economic calculation is impossible. You know these arguments. 99 00:12:18.100 --> 00:12:22.100 The fourth element is the monetary theory. 100 00:12:22.100 --> 00:12:32.100 I was, first I was a monetarist. I have a PhD and my PhD dissertation was about freedom and arguments. 101 00:12:32.100 --> 00:12:38.100 I came from the dark side of the street. 102 00:12:38.100 --> 00:12:44.100 And why saved by the lecture of Human Action? 103 00:12:44.100 --> 00:12:49.100 There are five main points about the Austrian School Monetary Theory. 104 00:12:49.100 --> 00:13:01.100 Firstly, money, that is the monetary system, is a spontaneous order, a phenomenon that is constantly changing as the result of human action, thought not of planning. 105 00:13:01.100 --> 00:13:13.100 Secondly, variations in the stock of money have an unequal effect on relative prices, capital structure and patterns of production in the economy. 106 00:13:13.100 --> 00:13:20.100 and the economy, and in addition, they changed the employment levels of the factors of production. 107 00:13:20.100 --> 00:13:28.100 Thirdly, money, like any other good, has its value established by the principle of marginal utility, 108 00:13:28.100 --> 00:13:38.100 as Mises showed a century ago by solving the problem of Austrian circularity, which is his famous regression theorem. 109 00:13:38.100 --> 00:13:49.100 The fourth point is that business cycles are phenomena which, without manifesting themselves in the so-called real sector, have only monetary causes. 110 00:13:49.100 --> 00:14:03.100 And lastly, Austrian scholars do not define inflation as continuous and widespread increase in prices, because that is actually a mere symptom of inflation. 111 00:14:03.100 --> 00:14:16.100 They define it as a permanent decline in the purchasing power of money caused ultimately by the issuing of currency with a consequent decrease in its marginal utility. 112 00:14:16.100 --> 00:14:28.100 The first element is the Capital Theory, which no doubt is an element that differentiates the Austrian School of Thought from all others, 113 00:14:28.100 --> 00:14:34.100 simply because they do not have anything resembling a theory of capital. 114 00:14:34.100 --> 00:14:42.100 Its central tenet is the concept of capital structure or the structure of production, 115 00:14:42.100 --> 00:14:48.100 which describes a good that passes through various stages in the production process. 116 00:14:48.100 --> 00:14:53.100 These various stages correspond to the capital structure of the economy. 117 00:14:53.100 --> 00:15:00.820 Therefore, capital is not homogeneous and constant, as the macroeconomic models consider. 118 00:15:00.820 --> 00:15:07.940 It is essentially heterogeneous and varies with other factors of production over time. 119 00:15:07.940 --> 00:15:13.100 The heterogeneity of capital goods and the fact that economies have capital structures 120 00:15:13.100 --> 00:15:19.460 have led, among other hypotheses, such as the methodological individualism, also in economists 121 00:15:19.460 --> 00:15:25.900 to Reject Macroeconomic Analysis, the last element is the Austrian Business 122 00:15:25.900 --> 00:15:32.660 Cycle Theory, ABCT, which is simultaneously a theory of money, of capital and of 123 00:15:32.660 --> 00:15:37.880 business cycles. It shows how the issue of money and credit in excess of the 124 00:15:37.880 --> 00:15:44.860 corresponding amount of savings has the effect of reducing interest rates, 125 00:15:44.860 --> 00:15:49.780 which initially fooled agents into believing that this reduction is the 126 00:15:49.780 --> 00:15:58.300 result of higher savings. Thus inflation, i.e. that additional money introduced into 127 00:15:58.300 --> 00:16:02.980 the economy without corresponding savings, will eventually cause the 128 00:16:02.980 --> 00:16:09.220 unemployment of factors of production. As Hayek said, there is no choice between 129 00:16:09.220 --> 00:16:17.720 Between eating too much, issuing unbacked currency and having indigestion, recession. 130 00:16:17.720 --> 00:16:22.160 Those are inseparable, the first leading to the second. 131 00:16:22.160 --> 00:16:28.180 The Keynesian analysis, which came to be known as the Phillips Curve, which postulated the 132 00:16:28.180 --> 00:16:34.820 existence of a trade-off between inflation and unemployment, so that if the government 133 00:16:34.820 --> 00:16:50.820 If it wanted to fight inflation, it would have to accept a higher unemployment rate or alternatively, if it wanted to reduce unemployment, it would be forced to accept a higher inflation rate, is therefore wrong. 134 00:16:50.820 --> 00:17:00.820 For Keynes, depression is a problem of excess savings over investment, and for the monetarists, it is a shortage of currency. 135 00:17:00.820 --> 00:17:08.820 and for us, the Austrians, an excess of bad investments over real savings, causes, depressions. 136 00:17:10.820 --> 00:17:19.820 Concluding remarks, when we look at the six elements of the Austrian economic theory, 137 00:17:19.820 --> 00:17:25.820 we realize how much the mainstream economics got wrong. 138 00:17:25.820 --> 00:17:35.820 Definitely, the economic theory that has been taught in universities in all the world for decades is also incorrect. 139 00:17:35.820 --> 00:17:39.820 I hope the world learns the truth. 140 00:17:39.820 --> 00:17:48.820 Armed with the apparatus of the core triad and the propagation elements in this book, 141 00:17:48.820 --> 00:18:03.820 I attempt to describe, in an introductory level, the implications of the tried and propagation elements to the fields of political philosophy, epistemology and the economy. 142 00:18:03.820 --> 00:18:22.820 And, as I said, I know I came from the dark side of economics and now I can affirm action, time and knowledge. 143 00:18:22.820 --> 00:18:29.820 This is the fascinating universe of the Austrian School of Economics. Thank you. 144 00:18:33.820 --> 00:18:35.820 Thank you very much.