WEBVTT NOTE Mises in One Lesson 1 00:00:00.000 --> 00:00:06.000 Thank you very much, Lou. This is a real pleasure. 2 00:00:06.000 --> 00:00:14.000 It's going to be difficult to explain all of Austrian economics and Mises' role in a short period of time. 3 00:00:14.000 --> 00:00:17.000 I'll try to my best. 4 00:00:17.000 --> 00:00:20.000 First place, about Austrian economics. 5 00:00:20.000 --> 00:00:26.000 Contrary to many impressions, it has nothing to do with Austria. 6 00:00:26.000 --> 00:00:31.000 I know nothing about the economics of Austria. It doesn't mean it's not a viable subject, 7 00:00:31.000 --> 00:00:37.000 but I don't know much about it. Also, there are very few Austrians left in Austria. 8 00:00:37.000 --> 00:00:41.000 Yeah, they're all here. 9 00:00:47.000 --> 00:00:54.000 Austrian economics began in the University of Vienna with Carl Menger, 10 00:00:54.000 --> 00:01:01.000 and the early Austrians were indeed located in Austria and then the doctrine permeated outward. 11 00:01:01.000 --> 00:01:18.000 The essence of Austrian economics is that it's based on, in contrast to all other schools, including alleged free market schools of economics. 12 00:01:18.000 --> 00:01:25.280 The Austrian Economics is based on an analysis of individual action, 13 00:01:25.280 --> 00:01:30.240 of individuals doing things, having purposes and goals, and pursuing them. 14 00:01:30.240 --> 00:01:39.000 This immediately sets us apart, because all the other schools of economics deal with aggregates, groups, classes, 15 00:01:39.000 --> 00:01:45.200 holes, one sort or another, without focusing on the individual first and building up from there. 16 00:01:45.200 --> 00:01:55.200 I have to start with, I could easily make this about five hours instead of 45 minutes, so I'm going to try to truncate this. 17 00:01:55.200 --> 00:02:05.200 Austrian economics basically builds on an earlier tradition of French and Italian, especially French continental tradition, 18 00:02:05.200 --> 00:02:15.200 beginning with the Spanish scholastics in the 16th century and then proceeding on to France with Cantillon and Turgo in the 18th century. 19 00:02:15.200 --> 00:02:28.200 This was buried for various reasons. This knowledge was lost to economic thought and superseded by the British classical school, by Smith and Ricardo and their followers. 20 00:02:28.200 --> 00:02:44.200 So this immediately starts a new history of thought, because most economists, I think, still think that economics began sort of out of the forehead of Adam Smith, you know, in 1776, he sort of created it like Athena springing from the brow of Zeus. 21 00:02:44.200 --> 00:02:53.200 Actually economics not only predated Smith by several centuries, but also was much better than Smith. In other words, Smith represents a decline. 22 00:02:53.200 --> 00:03:01.680 At any rate, the British classical school, Smith-Ricardo, etc., John Stuart Mill, focused 23 00:03:01.680 --> 00:03:08.240 on aggregates and groups and classes rather than the individual, number one. 24 00:03:08.240 --> 00:03:13.920 Basically you could sum up the classical school with several key fallacies, and this was dominant 25 00:03:13.920 --> 00:03:19.520 until Menger came around in 1871. 26 00:03:19.520 --> 00:03:24.920 The value, economic value, price is determined by the cost of production, the cost of production 27 00:03:24.920 --> 00:03:30.720 embodied in some fashion in the product, and specifically by the quantity of labor hours 28 00:03:30.720 --> 00:03:34.040 embodied in it. 29 00:03:34.040 --> 00:03:39.120 We can pretty well see, almost automatically, if we look at this thing in a clear-eyed fashion 30 00:03:39.120 --> 00:03:42.280 there's something wrong with it, because I could work, I remember there was a movie, 31 00:03:42.280 --> 00:03:48.600 it was a kind of charming movie, a grade Z movie came out about 20 years ago, I forget 32 00:03:48.600 --> 00:03:53.880 the title, but the essence of it was some great inventor somewhere in the west of England, 33 00:03:53.880 --> 00:03:59.880 living totally isolated, and he kept inventing great things like the radio and television 34 00:03:59.880 --> 00:04:03.300 and all that, except that he had already been invented 20 years before, so he didn't know 35 00:04:03.300 --> 00:04:04.300 about it. 36 00:04:04.300 --> 00:04:10.440 So he was a great inventor, he just invented the wheel and whatever, too late. 37 00:04:10.440 --> 00:04:14.640 But he was working, he must have put in 100,000 labor hours into these inventions, how many 38 00:04:14.640 --> 00:04:15.640 of these sell? 39 00:04:15.640 --> 00:04:16.640 Obviously zero. 40 00:04:16.640 --> 00:04:21.640 So the economic value, they're not obviously dependent on his quantity of labor hours. 41 00:04:21.640 --> 00:04:33.640 At any rate, what the classical school had to do was dismiss as unimportant a whole group of economic goods and not able to explain their value. 42 00:04:33.640 --> 00:04:39.640 Namely, non-reproducible objects, goods that are not being produced anymore, like Rembrandt's. 43 00:04:39.640 --> 00:04:44.320 Rembrandt put in a certain number of labor hours, I suppose, but the price of Rembrandt 44 00:04:44.320 --> 00:04:49.560 keeps fluctuating since then, not in accordance with somebody's input on hopes, otherwise 45 00:04:49.560 --> 00:04:52.640 it would be forgery. 46 00:04:52.640 --> 00:04:54.360 So what determines the value of Rembrandt? 47 00:04:54.360 --> 00:04:59.600 Well, they couldn't figure it out, they just had to leave it aside as unimportant. 48 00:04:59.600 --> 00:05:06.160 And they couldn't deal with consumers either, with consumers that came up against the famous 49 00:05:06.160 --> 00:05:16.160 The value of paradox. Smith was Buffalo by the value of paradox. The peculiar thing was he solved it himself about 20 years before. 50 00:05:16.160 --> 00:05:25.160 It's a very odd kind of situation. Anyway, in The Wealth of Nations, he sets forth the value of paradox. It's a terrible thing. You can't understand it. 51 00:05:25.160 --> 00:05:30.160 On one hand there's diamonds, let's say. On the other hand there's bread or water. You can use either one of the two. 52 00:05:30.160 --> 00:05:37.160 And bread is a staff of life that's philosophically extremely important and very necessary, and yet it's very cheap on the market. 53 00:05:37.160 --> 00:05:44.160 In other words, economic value is zilch. It's very cheap, not zero. Water is the economic value. It used to be zero. 54 00:05:44.160 --> 00:05:51.160 And on the other hand, we have diamonds, which are mere flippery, a luxury item and so forth and so on. 55 00:05:51.160 --> 00:05:57.160 And Adam Smith, being a good Calvinist, said they have zero value, diamonds, and yet they're very expensive. 56 00:05:57.160 --> 00:06:00.520 Very expensive. They have very high economic value. So he couldn't figure that out, the 57 00:06:00.520 --> 00:06:05.160 value of paradox. Here's bread, which was extremely useful, yet has very low economic 58 00:06:05.160 --> 00:06:10.000 value. And diamonds, which are useless or almost useless and have very high economic 59 00:06:10.000 --> 00:06:15.080 value. And he concluded economics can't solve this. There's two, just a split between value 60 00:06:15.080 --> 00:06:19.880 and use and value and exchange. There's no way to solve it. We have to deal with exchange 61 00:06:19.880 --> 00:06:24.040 value and forget about use value. And you see right away, this sets up the conditions 62 00:06:24.040 --> 00:06:29.040 is for the whole bunch of left-wing thought in the late 19th, early 20th century. 63 00:06:29.040 --> 00:06:33.040 It's still going on, I suppose, the separation between value for use and value for, I mean, 64 00:06:33.040 --> 00:06:35.040 production for use and production for profit. 65 00:06:35.040 --> 00:06:41.040 That's what immediately sets that up, but somehow it's a big distinction. 66 00:06:41.040 --> 00:06:46.040 So, he said, therefore we can't deal with consumers, we can't deal with non-reproducible goods, 67 00:06:46.040 --> 00:06:51.040 we have to deal with reproducible goods, and we can only talk about, since we can't talk about consumers, 68 00:06:51.040 --> 00:06:57.040 In order to measure values, value must come from something inherent in the object, namely, labor hours. 69 00:06:57.040 --> 00:07:03.040 Another reason to use labor hours is that he and Ricardo were trying to measure value all the time. 70 00:07:03.040 --> 00:07:07.040 Because science meant measurement, even in those days, for these people. 71 00:07:07.040 --> 00:07:11.040 And so therefore, how do you measure value and how do you measure changes? 72 00:07:11.040 --> 00:07:16.040 Looking for some hard quantity, and they concluded labor hours was about the best thing they could get to. 73 00:07:16.040 --> 00:07:22.040 One big fallacy, one big dominant fallacy in economic thought when Menger was started to write. 74 00:07:22.040 --> 00:07:30.040 Another big fallacy is that they couldn't deal with individuals at all. They were dealing with classes. 75 00:07:30.040 --> 00:07:36.040 They had a separate thing called distribution, theory of distribution, trying to figure out, this is Ricardo in particular, 76 00:07:36.040 --> 00:07:44.040 who decides how much of the national output goes to wages, how much goes to profits, how much goes to landlords. 77 00:07:44.040 --> 00:07:56.040 The way he set it up was there's a class struggle between these three mighty groups, in other words, the good is produced somewhere, then they fight for who gets the different shares of income. 78 00:07:56.040 --> 00:08:12.040 The laborers get messed up here, the laborers are the dirty end of the stick, because wages are determined by the iron law of wages, the Malthusian iron law, it's down to subsistence level, as we all know, we're sitting here living at subsistence level at the Anaheim Hilton. 79 00:08:12.040 --> 00:08:18.640 Everybody gets the lowest possible wages, that takes care of the workers, and capitalists 80 00:08:18.640 --> 00:08:24.000 and landlords fight it out for the rest of it, with usually landlords winning out because 81 00:08:24.000 --> 00:08:28.640 they get an increasing share of these unproductive group of people, getting an increasing share 82 00:08:28.640 --> 00:08:29.640 of income. 83 00:08:29.640 --> 00:08:35.240 Well, this obviously led, this analysis seems to me led logically straight away to Marx 84 00:08:35.240 --> 00:08:40.040 and Henry George, two different sets of thinkers, but each focusing on different aspects of 85 00:08:40.040 --> 00:08:41.040 it. 86 00:08:41.040 --> 00:08:54.040 Henry George is focusing on the alleged surplus value going to the capitalists against the workers and somehow capitalism conspiring to keep the wages of people down to the subsistence level. 87 00:08:54.040 --> 00:09:02.040 On the other hand, Henry George is focusing on the evil unproductive landlords getting an increasing share of the national product and they should be expropriated. 88 00:09:02.040 --> 00:09:06.040 Now, of course, Smith and Ricardo did not believe they should be expropriated in thinking those terms. 89 00:09:06.040 --> 00:09:09.960 So it seems to me it's pretty logical that if you're interested in justice rather than 90 00:09:09.960 --> 00:09:14.160 only economic analysis, you will wind up as either, if you're a Ricardian, you'll wind 91 00:09:14.160 --> 00:09:18.600 up as either a Marxist or a Georgist. Some people, of course, take both paths, sort of 92 00:09:18.600 --> 00:09:19.600 moxo-Georgists. 93 00:09:19.600 --> 00:09:28.600 Okay, so this is the second big dominant force in British classical economics. The third 94 00:09:28.600 --> 00:09:33.240 one, well, the third thing is asking how could they be so wrong? How could they focus on 95 00:10:03.240 --> 00:10:05.340 and the 96 00:10:05.340 --> 00:10:08.940 classical home of Calvinism. Calvinist doctrine is that 97 00:10:08.940 --> 00:10:12.240 labor is a key thing. 98 00:10:12.240 --> 00:10:16.400 Everybody is doomed to work. Consumer enjoyment, by the way, is evil. 99 00:10:16.400 --> 00:10:19.760 And as Adam Smith said, diamonds are useless. 100 00:10:19.760 --> 00:10:26.440 And so, the only reason you consume anything is to allow you to keep working 101 00:10:26.440 --> 00:10:29.760 because of God's commandment. To suffer, keep suffering. 102 00:10:29.760 --> 00:10:35.760 So, this sort of Calvinist attitude leads pretty quickly, I think, to a labor theory of value. 103 00:10:35.760 --> 00:10:42.760 At any rate, the third, so that's one, two big fallacious aspects of British classical school. 104 00:10:42.760 --> 00:10:49.760 Labor theory of value or cost theory of value, one, two, classes or aggregate, class struggle over shares of income. 105 00:10:49.760 --> 00:10:54.760 And the third thing is to focus totally on non-existent, unreal, long-run equilibrium. 106 00:10:54.760 --> 00:11:03.400 Now this is done right now by modern microeconomics and macroeconomics for that matter. 107 00:11:03.400 --> 00:11:08.720 Current neoclassical economics focuses solely on reason that Lew Rockwell mentioned before, 108 00:11:08.720 --> 00:11:09.720 they don't talk about entrepreneurs. 109 00:11:09.720 --> 00:11:13.600 They know it's very easy, simple why they don't talk about entrepreneurs. 110 00:11:13.600 --> 00:11:17.200 They don't talk about entrepreneurs because entrepreneurs deal with change and uncertainty. 111 00:11:17.200 --> 00:11:20.840 You make a profit if you can forecast better than the next guy. 112 00:11:20.840 --> 00:11:23.600 You make losses if you can't forecast. 113 00:11:23.600 --> 00:11:53.600 In long run equilibrium, you don't have to forecast anything, nothing ever changes, since nothing ever changes, everybody has perfect knowledge, as they call it, perfect knowledge, everybody's in perfect competition, there's no uncertainty, there's no risk, there's no profits and no losses, and so the entrepreneur then becomes a pain in the neck, it becomes a messing up your neat mathematical system, and this again stems from British classical school, they didn't have the mathematical diagrams or anything, but they had the essence of Ricardo in particular, 114 00:11:53.600 --> 00:12:04.000 Focusing only on long run equilibrium, as a result of the fourth of the three, the fourth thing which goes along with this, is again, 115 00:12:04.000 --> 00:12:12.800 Mercado's contribution of economic thought, co-contribution unquote, is to separate, divide totally, the macro from the micro sphere, 116 00:12:12.800 --> 00:12:19.600 of course we're all familiar with that, those of us who take current economics, is micro the first term or the second whatever, second term, 117 00:12:19.600 --> 00:12:29.600 Macro, you learn about supply and demand or whatever, and then suddenly you leap into macro and nobody talks about supply and demand, they all talk about growth curves and velocity and all that, totally different. 118 00:12:29.600 --> 00:12:34.600 And this whole split starts with Ricardo also. 119 00:12:34.600 --> 00:12:42.600 Okay, and so with Ricardo, the quantity of money only determines the general price level. If you increase the money supply, prices go up. 120 00:12:42.600 --> 00:12:48.600 There's no impact on production, on profits, on interest, on relative prices or anything else. 121 00:12:48.600 --> 00:12:56.600 It's like two hermetically sealed spheres. There's the microsphere where things are going on, so it's fairly understandable, supply and demand, prices and all that. 122 00:12:56.600 --> 00:13:04.600 Then there's the macrosphere, totally cut off in the micro, where you have money and prices bouncing up and down with no relationship between the two. 123 00:13:04.600 --> 00:13:12.720 Okay, it was in that kind of atmosphere, set up, dominant, British Classical School dominance. 124 00:13:12.720 --> 00:13:19.000 By the way, it now turns out, not everybody was a Ricardian from 1819 until 1871. 125 00:13:19.000 --> 00:13:23.640 The British themselves began to peck away at Ricardianism shortly after he died. 126 00:13:23.640 --> 00:13:31.240 By 1830, there were no Ricardians left, but what happened was that John Stuart Mill resurrected 127 00:13:31.240 --> 00:13:52.120 He restored Ricardianism to its predominant pedestal, and he did it because he was brainwashed 128 00:13:52.120 --> 00:13:55.800 by his father who was a top Ricardian and so forth, so I'm not going to get into that 129 00:13:55.800 --> 00:14:01.480 kind of worms at this point. At any rate, it's in that atmosphere that Carl Menger, the founder of 130 00:14:01.480 --> 00:14:07.640 Austrian Economics, writes his great, path-breaking, magnificent book, Principles of Economics, in 1871. 131 00:14:09.240 --> 00:14:13.640 What he does, he builds on the earlier continental tradition, but essentially he develops this whole 132 00:14:15.000 --> 00:14:20.920 path-breaking system. Okay, well, what is it? Well, to sum it up, the Austrian system is created by 133 00:14:20.920 --> 00:14:26.920 by Menger and a student von Boehm-Bawerk at the University of Vienna. 134 00:14:26.920 --> 00:14:33.420 Essentially, it's based on methodological individualism, in other words, focusing on the individual first, the individual's actions. 135 00:14:33.420 --> 00:14:39.520 The individual, the idea is the individual has a purpose, has goals that he or she wants to pursue. 136 00:14:39.520 --> 00:14:43.620 In order to pursue these goals, you have to use resources or means to pursue them. 137 00:14:43.620 --> 00:14:46.220 And it takes time to do all this, etc., etc. 138 00:14:46.220 --> 00:14:49.380 The concept of the Manga is that you start with crew-selling and work on up to different 139 00:14:49.380 --> 00:14:56.140 individuals and exchanges, building up the whole economic analysis from the individual. 140 00:14:56.140 --> 00:14:58.720 And it hadn't really been done before, it had been done partially, but it had never been 141 00:14:58.720 --> 00:15:01.540 done systematically as Menger did it. 142 00:15:01.540 --> 00:15:06.220 And as Boehm-Bawerk did, developing it even further, especially in Capital Theory and 143 00:15:06.220 --> 00:15:08.000 Entrepreneurial Theory. 144 00:15:08.000 --> 00:15:13.060 So looking at it that way, you realize that the purpose of production is consumption. 145 00:15:13.060 --> 00:15:17.600 The reason why the inventor worked the 200,000 labor hours is because he hopes that somebody 146 00:15:17.600 --> 00:15:23.300 will buy it, and so value is conferred by the consumers, by the demand of consumers, 147 00:15:23.300 --> 00:15:28.580 and goes backward from the subjective valuations of consumers down through to the factors of 148 00:15:28.580 --> 00:15:31.980 production that people receive income. 149 00:15:31.980 --> 00:15:35.420 So you have, in other words, a demand theory or a consumer demand theory of value, the 150 00:15:35.420 --> 00:15:39.220 subjective value theory, instead of a cost of production doctrine. 151 00:15:39.220 --> 00:15:43.060 And now, of course, we immediately explain why Rembrandts are now, it might be two million 152 00:15:43.060 --> 00:15:46.420 dollars now, one million dollars ten years ago, because consumers are paying more for 153 00:15:46.420 --> 00:15:47.420 it. 154 00:15:47.420 --> 00:15:49.220 They're willing to pay more for it now than they were before. 155 00:15:49.220 --> 00:15:54.220 Their valuations are higher, either because of general inflation, they have more money, 156 00:15:54.220 --> 00:16:00.660 or because Rembrandts are now preferred more to other art than they were ten years ago. 157 00:16:00.660 --> 00:16:07.480 So secondly, looking and focusing on individual action, we can see that individuals make their 158 00:16:07.480 --> 00:16:37.480 Evaluations and Marginal Units. This is the so-called marginal revolution. In other words, they don't take the bread-diamond paradox, which Menger and the other marginalists solved, namely, nobody is confronted in real life, so you're looking at real life action. Nobody is confronted with the choice of all the bread on the world versus all the diamonds in the world. In other words, if the angel Gabriel came down to us tonight and said, you know, captured nationwide television, worldwide television, and said, people of earth, listen, you're not confronted with a choice 159 00:17:37.480 --> 00:17:48.960 Another thing that Austrianism focused on is that economics is not really a quantitative 160 00:17:48.960 --> 00:17:49.960 subject. 161 00:17:49.960 --> 00:17:54.800 It's not really a subject where you can make correlations and quantitative measurements 162 00:17:54.800 --> 00:18:00.240 and that sort of stuff because value is subjective and can't be measured. 163 00:18:00.240 --> 00:18:04.880 How much do I prefer, for example, Wonder Bread to Tasty Bread? 164 00:18:04.880 --> 00:18:05.880 How much? 165 00:18:05.880 --> 00:18:06.880 Who knows? 166 00:18:06.880 --> 00:18:12.700 be pointless for me to say I prefer 3.8 times as much as a loaf of tasty bread and everybody's 167 00:18:12.700 --> 00:18:13.700 got different... 168 00:18:13.700 --> 00:18:17.320 You certainly can't add up people's subjective preferences. 169 00:18:17.320 --> 00:18:18.320 Preferences are ordinal. 170 00:18:18.320 --> 00:18:19.320 They're rankings. 171 00:18:19.320 --> 00:18:20.320 They're rankings sort of thing. 172 00:18:20.320 --> 00:18:26.480 I prefer a little bit of tasty bread, et cetera. 173 00:18:26.480 --> 00:18:30.360 So by looking at this, we see that with Austrian, we look at any Austrian book, you can almost 174 00:18:30.360 --> 00:18:32.880 tell an Austrian book by looking at it, thumbing through it. 175 00:18:32.880 --> 00:18:36.160 There's no math in there, almost none. 176 00:18:36.160 --> 00:18:39.480 And one of the reasons is because it's not really a mathematical subject, it's really 177 00:18:39.480 --> 00:18:41.880 a philosophic subject. 178 00:18:41.880 --> 00:18:48.800 Okay, and the distribution front, I saw the British classical school talk in terms of 179 00:18:48.800 --> 00:18:52.360 a class struggle between different classes of income receivers. 180 00:18:52.360 --> 00:18:58.480 Again, the Austrians focus on each individual, individual factor owner, the individual laborer, 181 00:18:58.480 --> 00:19:00.060 individual capitalist, etc. 182 00:19:00.060 --> 00:19:04.600 By doing that, they were able to explain individual factor prices, which the classes has never 183 00:19:04.600 --> 00:19:13.160 The Free Market, through competitive action, entrepreneurial action, tends to impute to 184 00:19:13.160 --> 00:19:20.360 each individual factor how much is the productive share of a product, a so-called marginal product 185 00:19:20.360 --> 00:19:21.960 or marginal value product. 186 00:19:21.960 --> 00:19:27.840 Each factor tends on the market to earn its marginal value product, its contribution to 187 00:19:27.840 --> 00:19:30.440 the actual goods being produced. 188 00:19:30.440 --> 00:19:34.040 So there's no longer any split between production on the one hand, distribution on the other. 189 00:19:34.040 --> 00:19:38.540 John Stuart Mill said, the theory of production is all worked out, it's totally separate from the theory of distribution. 190 00:19:38.540 --> 00:19:48.040 This of course leads very quickly to a socialist position, because you can say, well, we're in favor of production, we'll allow people to produce, no one will grab this full income and divide it. 191 00:19:48.040 --> 00:19:54.040 Equal shares, or more to people six feet tall, whatever theory of distribution you've got. 192 00:19:54.040 --> 00:20:00.040 With Austrian economics, you realize there's no separate process called distribution, distribution comes right out of production. 193 00:20:00.040 --> 00:20:06.040 People earn what they contribute to the production. It's very simple, then. 194 00:20:06.040 --> 00:20:14.040 And also, Boehm-Bawerk pointed it out for the first time, and Frank Fetter, the American Austrian, developed it, clarified it. 195 00:20:14.040 --> 00:20:21.040 The interest, long-run profit, is determined or comes from time preference. 196 00:20:21.040 --> 00:20:29.040 This is something, by the way, the poor anti-usury people could never figure out, the Catholic Church theologians, who tended to be in favor of the free market. 197 00:20:59.040 --> 00:21:29.040 Capital takes time. Production takes time. Capital is a time structure. Some goods are very close to consumers, like, you know, producing wonder bread. The retailer, of course, is very close to the consumer. On the other hand, the machinery that goes over, the iron ore that goes into making the machinery that produces wonder bread is way up the structure. It takes a lot of time to get 198 00:21:29.040 --> 00:21:35.800 and so the earlier stage of production, so to speak, or a higher order of production. 199 00:21:35.800 --> 00:21:40.840 So we have then production taking time, we have capital, not as a homogeneous lump which 200 00:21:40.840 --> 00:21:45.320 modern economics still tends to say, just add more capital and this is if it's somehow 201 00:21:45.320 --> 00:21:51.360 a blob out there. Capital is a lattice work, it's a network, a structure which all has 202 00:21:51.360 --> 00:21:56.080 to fit in together and by the way only the free market can fit it in, only entrepreneurs, 203 00:21:56.080 --> 00:22:00.960 Profit and Loss Test, Profit and Loss Incentive and Free Price System can do the fitting. 204 00:22:00.960 --> 00:22:05.000 One of the problems with socialism, for example, is they can make some stuff but they can't 205 00:22:05.000 --> 00:22:06.000 fit it together. 206 00:22:06.000 --> 00:22:10.640 Often in Russia, you have a situation where the bristles, the toothbrush shortage, all 207 00:22:10.640 --> 00:22:12.600 of a sudden the toothbrush, why is there a toothbrush shortage? 208 00:22:12.600 --> 00:22:16.800 Well, the bristles are in omsk and the handles are in tumsk and they just didn't, they never 209 00:22:16.800 --> 00:22:18.800 fit the bristles together by the handle. 210 00:22:18.800 --> 00:22:21.040 In the free market, you never have this problem. 211 00:22:21.040 --> 00:22:26.000 Everything fits because there's a constant feedback mechanism, so to speak, a profit 212 00:22:56.000 --> 00:23:01.120 which equilibrium economics doesn't talk about and so therefore the entrepreneur 213 00:23:01.120 --> 00:23:04.240 becomes a key figure in the whole process the profit and loss system the 214 00:23:04.240 --> 00:23:09.440 incentive to make profits and to avoid losses and so the capitalist entrepreneur 215 00:23:09.440 --> 00:23:14.040 in Austrian theory earns a two-part return one as an entrepreneur by 216 00:23:14.040 --> 00:23:18.320 forecasting better than the next guy and be able to forecast the future forecast 217 00:23:18.320 --> 00:23:22.200 what demand will be for his product what cost will be and also two as a 218 00:23:22.200 --> 00:23:27.480 Capitalists saving up money and paying workers right now in advance of their production and 219 00:23:27.480 --> 00:23:33.320 sale for which the workers, in a sense, pay him a discount. They pay him the interest return and 220 00:23:33.320 --> 00:23:38.120 they're happy to do it because they don't have to wait five years for payroll. So these are the two 221 00:23:38.120 --> 00:23:43.320 basic functions of a capitalist entrepreneur, entrepreneurship and capital saving investment. 222 00:23:44.440 --> 00:23:49.720 Okay, in this atmosphere, in this kind of briefly sketch out Austrian economics before von Mises, 223 00:23:49.720 --> 00:23:58.960 Ludwig von Mises, Menger, Boehm-Bawerk, Fetter, Ludwig von Mises comes and born in 1881, a 224 00:23:58.960 --> 00:24:02.960 brilliant young student of Boehm-Bawerk's famous seminar at the University of Vienna. 225 00:24:02.960 --> 00:24:08.120 And essentially what he saw was that the Austrians had already fixed up these classical errors, 226 00:24:08.120 --> 00:24:12.560 the four big British classical errors, value distribution and equilibrium. 227 00:24:12.560 --> 00:24:17.280 But the one thing they hadn't done yet, one of the main thing they hadn't done yet, was 228 00:24:17.280 --> 00:24:22.280 He healed the micro-macro split. In other words, the Austrians still had only talked about micro. 229 00:24:22.280 --> 00:24:27.280 They weren't able to extend Austrian economics to the theory of money. 230 00:24:27.280 --> 00:24:31.280 So that was Mises' first great accomplishment. 231 00:24:31.280 --> 00:24:36.280 His magnificent first book, Theory of Money and Credit, came out in 1912. 232 00:24:36.280 --> 00:24:40.280 It's still the best thing ever written on money. 233 00:24:40.280 --> 00:24:43.280 What he did was he healed the split, this artificial split. 234 00:24:43.280 --> 00:24:48.920 He applied the marginal utility theory of Austrian economics to money, integrated it, 235 00:24:48.920 --> 00:24:57.000 he made micro and macro one whole beautiful integrated system of economic analysis. 236 00:24:57.000 --> 00:25:02.600 So he pointed out for example, when you get the money you don't use M and V, you don't 237 00:25:02.600 --> 00:25:07.040 forget about supply and demand, that the purchasing power of money, in other words the value of 238 00:25:07.040 --> 00:25:11.880 money can be decided on the same basis as individual goods and services, namely supply 239 00:25:11.880 --> 00:25:17.440 Supply and Demand. An increase of the supply of money lowers its value, just as in the 240 00:25:17.440 --> 00:25:22.400 case of bubble gum or coffee. An increase of demand for money raises its value, just 241 00:25:22.400 --> 00:25:26.840 like any other good. However, there's a big difference. In this he applies some of the 242 00:25:26.840 --> 00:25:32.880 Ricardian currency school insights. The big difference between money on the one hand and 243 00:25:32.880 --> 00:25:36.600 other goods on the other hand is that other goods are necessary to production, in other 244 00:25:36.600 --> 00:25:41.280 words, specific quantities. For example, if other things being equal, if you increase 245 00:25:41.280 --> 00:25:54.680 resources or increase the supply of goods and services, people's standard of living go up, that's a good thing, so to speak, to have more, to find new resources, to find new oil strike, or to increase productivity, okay. 246 00:25:54.680 --> 00:26:02.680 In the field, the sphere of money is very different, the only real use of money is exchange, you don't eat money, to put it bluntly, 247 00:26:02.680 --> 00:26:08.120 And once you have enough money to become money on the market, you don't need any more. 248 00:26:08.120 --> 00:26:11.920 In other words, any supply of money, which is arrived at on the market, is optimal. 249 00:26:11.920 --> 00:26:15.080 You don't need any more money coming in. 250 00:26:15.080 --> 00:26:21.080 So the only thing that increases the money supply does then, the only social effect, 251 00:26:21.080 --> 00:26:29.080 is to dilute purchasing power of each pre-existing dollar or gold ounce or mark or whatever the currency unit is. 252 00:26:29.080 --> 00:26:34.080 So, any increase in the money supply, increase in goods and services is good. It increases the standard of living. 253 00:26:34.080 --> 00:26:38.080 Increase in capital equipment is good. It increases future standards of living. 254 00:26:38.080 --> 00:26:45.080 An increase in the money supply is pointless, because all it does is dilute the purchasing power of the original or the existing unit. 255 00:26:45.080 --> 00:26:47.080 There's no social utility whatsoever. 256 00:26:47.080 --> 00:26:52.080 Now, under the gold standard, it does because the increase of gold supply has a non-monetary function. 257 00:26:52.080 --> 00:26:57.080 In other words, you can use more gold for jewelry, watches, teeth, that sort of stuff. 258 00:26:57.080 --> 00:27:05.080 But under paper money, of course, there's no social function whatsoever. It simply dilutes the purchasing power of a dollar. 259 00:27:05.080 --> 00:27:15.080 So, Mises goes into this and he shows, basically, that more money, an increase in money supply, beyond the amount of gold available or silver available, 260 00:27:15.080 --> 00:27:24.080 redistributes, destroys economic calculation, generally messes everything up, messes up the production system. 261 00:27:24.080 --> 00:27:29.080 What happens is a tax where the first receivers of money benefit the expense of the late receivers. 262 00:27:29.080 --> 00:27:32.080 It's pretty much like counterfeiting. As a matter of fact, it is. 263 00:27:32.080 --> 00:27:36.080 The Fed is essentially our legalized monopoly counterfeiter. 264 00:27:36.080 --> 00:27:44.080 And the effect of the Fed increasing the money supply on the Bank of England or any central bank is almost the same as any counterfeiter. 265 00:27:44.080 --> 00:27:49.080 You have a legalized counterfeiter pouring out money down here in Anaheim, you'll have the same sort of effect. 266 00:27:49.080 --> 00:27:55.360 An increase in the income of people in Anaheim, first of the counterfeiters, next of the people 267 00:27:55.360 --> 00:27:59.840 the counterfeiters spend the good money on, retailers let's say in Anaheim, they're 268 00:27:59.840 --> 00:28:02.080 in great shape, they love counterfeiting, right? 269 00:28:02.080 --> 00:28:05.360 And so then they begin to spend more, prices begin to go up, those of us who don't live 270 00:28:05.360 --> 00:28:08.880 in Anaheim who have a fixed income lose. 271 00:28:08.880 --> 00:28:13.840 So the inflation process is essentially a counterfeiting process, except it's not people 272 00:28:13.840 --> 00:28:17.760 on the run from the Treasury Department, it is the Treasury, it is the Federal Reserve 273 00:28:17.760 --> 00:28:19.760 doing it. 274 00:28:19.760 --> 00:28:27.240 Okay, so Mises also built on Carl Menger's classic article on the origin of how money 275 00:28:27.240 --> 00:28:32.600 originates and expanded it to show that money has to originate in this way, namely out of 276 00:28:32.600 --> 00:28:38.200 the free market, out of the voluntary actions of individuals trying to overcome the tremendous 277 00:28:38.200 --> 00:28:40.400 difficulties of barter. 278 00:28:40.400 --> 00:28:43.920 And he shows that money has to originate that way. 279 00:28:43.920 --> 00:28:48.200 Money cannot originate as a government edict or by some social compact where everybody 280 00:28:48.200 --> 00:28:51.320 gets together at one big convention and says, let's make that money. 281 00:28:51.320 --> 00:28:52.320 It can't work that way. 282 00:28:52.320 --> 00:28:54.520 It has to work out of a marketable market commodity. 283 00:28:54.520 --> 00:28:59.440 Unfortunately, of course, then the government can take it over and mess it up, but it has 284 00:28:59.440 --> 00:29:04.920 to originate as a market, valuable market commodity such as gold or silver, which have 285 00:29:04.920 --> 00:29:09.000 always out-competed all the other marketable commodities once it's given a chance. 286 00:29:09.000 --> 00:29:20.000 Also, Mises showed in The Theory of Money and Credit that fractional reserve banking 287 00:29:20.000 --> 00:29:28.960 is essentially an issue of fraudulent warehouse receipts to non-existent gold or cash, and 288 00:29:28.960 --> 00:29:32.840 it creates this whole process, and the ideal system would be 100% reserve banking. 289 00:29:32.840 --> 00:29:38.600 He believed, however, and I think it's true, under a genuine free banking system, in other 290 00:29:38.600 --> 00:29:43.600 The banks were compelled to meet their contracts, like everybody else is, forced to meet their contracts. 291 00:29:43.600 --> 00:29:48.600 They say, I'm going to give you gold on demand. If you don't give it to them, you go bankrupt. 292 00:29:48.600 --> 00:29:53.600 If that were true, we'd have a hard money, we'd have an approach toward a 100% reserve system. 293 00:29:53.600 --> 00:29:59.600 Unfortunately for us, it's never worked that way because the banks are always being bailed out one way or another. 294 00:29:59.600 --> 00:30:07.600 And also he showed in The Theory of Money and Credit that utility, he fixed up the marginal utility theory. 295 00:30:37.600 --> 00:31:01.600 The Theory of Money and Credit had a genesis. In a few pages, he outlined what would become his Theory of the Business Cycle, the Great Austrian Theory of the Business Cycle, the Misesian Theory of the Business Cycle. 296 00:31:01.600 --> 00:31:10.600 During the 1920s, he expanded on that, a work which has been translated since then, on manipulation of money and credit. 297 00:31:10.600 --> 00:31:22.600 Interestingly enough, what happened was that most of his students rejected this application of money in business cycles, because of the sound and so forth. 298 00:31:22.600 --> 00:31:28.600 Mises was a pioneer, scorned even in Austria in that situation. 299 00:31:28.600 --> 00:31:34.280 In Austrian business cycle theory, which developed during the 1920s, with F. A. Hayek as a famous 300 00:31:34.280 --> 00:31:42.440 major follower, but lots of other followers as well, basically what Mises did was he took 301 00:31:42.440 --> 00:31:51.000 his own money and banking theory, what determines the purchasing power of money, and he also 302 00:31:51.000 --> 00:31:55.320 took the currency school, the old Ricardian currency school insight, which is a famous 303 00:31:55.320 --> 00:31:59.200 The first model that if you increase the money supply, prices will go up and then you have 304 00:31:59.200 --> 00:32:03.840 a deficit in the balance of payments because prices will be too high and imports will go 305 00:32:03.840 --> 00:32:05.880 up and exports will go down. 306 00:32:05.880 --> 00:32:09.280 He realized with tremendous insight, this is essentially a business cycle theory. 307 00:32:09.280 --> 00:32:12.160 He's never talked about it as such in the textbooks. 308 00:32:12.160 --> 00:32:16.360 It was not only a theory of money and a theory of international payments, it was also a business 309 00:32:16.360 --> 00:32:17.360 cycle theory. 310 00:32:17.360 --> 00:32:19.280 It's a simple model. 311 00:32:19.280 --> 00:32:23.640 The banks pump in money, prices go up as euphoria, and then something happens, they have to contract 312 00:32:23.640 --> 00:32:53.640 Bankruptcies and Liquidations, 313 00:32:53.640 --> 00:33:23.640 and the Breaking Theory of the Business Cycle and essentially what it is, what it says is an increase in the supply of money and credit through the banking system, through central banking, not only it causes inflation, everybody will admit that, at least all the neoclassicals will admit that, excuse me, admit that, it also causes other disturbances, it's not just what Milton Friedman called a helicopter effect. Milton Friedman says we assume that everybody gets a proportionate increase in the money supply dropped by some magical government helicopter, so everybody gets 30% increase in their cash. 314 00:33:23.640 --> 00:33:27.240 It doesn't work that way, of course. If it did work that way, there would be no point to it. 315 00:33:27.240 --> 00:33:38.040 The reason why you start off, because we don't have an angel Gabriel doubling everybody's money supply overnight to try to improve their lot. 316 00:33:38.040 --> 00:33:44.040 What we have is legalized counterfeiters in Washington or in London, increasing their money supply first, 317 00:33:44.040 --> 00:33:47.440 and lending it out or spending it, and then it ripples out to the rest of the society. 318 00:33:47.440 --> 00:33:53.440 So they're always one leg up in this expropriation process. 319 00:33:53.440 --> 00:33:58.520 So at any rate, so Mises show that an increase in money and credit not only increases prices, 320 00:33:58.520 --> 00:34:03.880 it also disturbs, messes up the production system, the whole capital structure. 321 00:34:03.880 --> 00:34:09.120 And because one of the problems with the business cycle theory, there are two really basic problems 322 00:34:09.120 --> 00:34:11.720 which any business cycle theory has to explain. 323 00:34:11.720 --> 00:34:15.320 One is, how come entrepreneurs suddenly make severe losses? 324 00:34:15.320 --> 00:34:17.640 In other words, entrepreneurs are trained in forecasting. 325 00:34:17.640 --> 00:34:18.640 They tend to be great forecasters. 326 00:34:18.640 --> 00:34:22.480 If they're lousy forecasters, they go out of business pretty quickly. 327 00:34:22.480 --> 00:34:26.800 So successful entrepreneurs tend to be good forecasters. How come all of a sudden it turns 328 00:34:26.800 --> 00:34:31.040 out that all of them, or many of them, or most of them, went, go bankrupt? They didn't 329 00:34:31.040 --> 00:34:35.440 forecast successfully that their costs would be much higher than the selling prices. And 330 00:34:35.440 --> 00:34:41.440 it was sudden. There's a sudden cluster of entrepreneurial error. Now this doesn't usually 331 00:34:41.440 --> 00:34:45.640 happen, okay? And usually economists are trained, or Austrian is certainly trained, if something's 332 00:34:45.640 --> 00:34:48.800 really messed up in the system, you look at government. Government must be messing things 333 00:34:48.800 --> 00:34:57.320 The second thing which has to be explained is, how come there is a much greater fluctuation 334 00:34:57.320 --> 00:34:59.440 in capital goods than there is in consumer goods? 335 00:34:59.440 --> 00:35:05.080 In other words, there is a much bigger boom, let's say, in machine tools, construction, 336 00:35:05.080 --> 00:35:08.360 industrial raw materials than there is in retail sales. 337 00:35:08.360 --> 00:35:13.800 Contrarily, when a depression or recession hits, there is a much bigger crash in machine 338 00:35:43.800 --> 00:36:01.840 The Increase in Supply of Money and Credit disturbs the production structure, messes 339 00:36:01.840 --> 00:36:07.040 up the interest rate, because more money is pouring into business loans and would-have 340 00:36:07.040 --> 00:36:13.780 by voluntary savings, and leads to an over-expansion of capital goods, so-called higher order goods 341 00:36:13.780 --> 00:36:19.660 is a particular construction, raw materials, machine tools, that sort of thing, plants, 342 00:36:19.660 --> 00:36:22.380 basic plants, and underproduction of consumer goods. 343 00:36:22.380 --> 00:36:28.500 So what you have then is a malinvestment in a whole bunch of capital goods. 344 00:36:28.500 --> 00:36:32.940 And the longer the boom continues, the more, the worse the malinvestment gets. 345 00:36:32.940 --> 00:36:37.100 And so what happens is costs are bid up too high for the supply of savings available, 346 00:36:37.100 --> 00:36:43.580 and as soon as the credit expansion stops or slows down significantly, the recession hits 347 00:36:43.580 --> 00:37:01.580 Because then these malinvestments are revealed, it's revealed now starkly to the people, the entrepreneurs that they've now, they've overbid costs and wage rates too high and much too high for what they can sell to their buyers, not to the consumers so much, but to the other people down the capital good structure. 348 00:37:01.580 --> 00:37:08.220 What happens then is the recession, in the Austrian analysis, the recession is an unfortunate 349 00:37:08.220 --> 00:37:13.900 but necessary process by which the market returns, washes out the unsound investments 350 00:37:13.900 --> 00:37:17.260 and returns to a proper balance between capital goods and consumer goods. 351 00:37:17.260 --> 00:37:22.820 In other words, labor, land and capital resources are shifted back to consumer goods to a certain 352 00:37:22.820 --> 00:37:26.580 amount and out of these excessive capital goods. 353 00:37:26.580 --> 00:37:34.780 The recession is a necessary liquidation process, and any government interference in the recession 354 00:37:34.780 --> 00:37:40.420 prolongs it and makes it permanent, doesn't allow the recession process, adjustment process 355 00:37:40.420 --> 00:37:41.420 to work. 356 00:37:41.420 --> 00:37:46.860 Also, in particular, the key thing that has to happen is resources have to shift out of 357 00:37:46.860 --> 00:37:50.740 capital goods and into consumer goods, and this means that wage rates and capital goods 358 00:37:50.740 --> 00:38:16.500 This is essentially a capsule summary of the Austrian business cycle analysis and also explains 359 00:38:16.500 --> 00:38:37.500 The only theory that explains inflationary recession, because in every business cycle whether it was pre-World War II or right now, capital goods prices are always going up higher than consumer goods prices in a boom, and consumer goods prices are always going up higher relative to capital goods prices in a recession. 360 00:39:07.500 --> 00:39:11.620 First prices would be higher relative to capital goods prices than they were before, which 361 00:39:11.620 --> 00:39:16.820 is what you need in a recession. However, consumers loved it because their absolute prices were 362 00:39:16.820 --> 00:39:25.260 in money terms were cheaper. Well, now that we have a Keynesian monetarist, a semi-Keynesian 363 00:39:25.260 --> 00:39:30.060 takeover since the 1930s, the money supply has never permitted the fall ever, ever again. 364 00:39:30.060 --> 00:39:33.380 In other words, the Fed is always pumping more money into the system, sometimes a little 365 00:39:33.380 --> 00:39:34.980 and the last sometimes a little more. 366 00:39:34.980 --> 00:39:40.580 As a result, during a recession, we never had a fall in prices, ever, and so this healthy 367 00:39:40.580 --> 00:39:45.220 mask of the sugar-coating of the pill has now gone, so the consumer is in a recession 368 00:39:45.220 --> 00:39:48.360 now faced with two problems, one, unemployment and bankruptcies and all that, which they 369 00:39:48.360 --> 00:39:53.660 always were faced with, plus, of course, living keeps going up, because consumer goods prices 370 00:39:53.660 --> 00:39:57.440 are still going up relative to capital goods prices, except now they're both going up in 371 00:39:57.440 --> 00:39:58.440 absolute terms. 372 00:39:58.440 --> 00:40:00.220 They're not going down because of healthy deflation. 373 00:40:00.220 --> 00:40:04.600 So at any rate, we now have a situation where we're getting the worst of both worlds every 374 00:40:04.600 --> 00:40:05.600 time there's a recession. 375 00:40:05.600 --> 00:40:09.500 We've still got a big increase in the cost of living, plus we've got unemployment. 376 00:40:09.500 --> 00:40:16.220 This is the result of 50 years of fine-tuning by our beloved economic experts in Washington. 377 00:40:16.220 --> 00:40:25.980 Okay, to get back to Mises personally, Mises taught and developed his views at the University 378 00:40:25.980 --> 00:40:26.980 of Vienna. 379 00:40:26.980 --> 00:40:27.980 It's true. 380 00:40:27.980 --> 00:40:28.980 He never had a pay post at the University of Vienna. 381 00:40:28.980 --> 00:40:58.980 and he discriminated against even in Austria and he worked for the Chamber of Commerce or Department of Commerce I guess in Austria and his seminar, a very famous seminar was purely private, he held it in his offices in the Chamber of Commerce and this seminar was the one that attracted all the top young economists in Europe and philosophers and whatever and he converted very many of them, I mean I'll just list a few Hayek, Machlab, Haberler, Robbins, Vogel and Schutz and on and on. 382 00:40:58.980 --> 00:41:03.620 British Prime Minister Gateskull was a Mises seminar, was a Labour Party Prime Minister, 383 00:41:03.620 --> 00:41:07.460 it wasn't nearly as bad as the other Labour Party people, possibly because of Misesian influence. 384 00:41:08.820 --> 00:41:15.300 In addition to that, this is a tremendous intellectual force that Mises had and a so-called Mises 385 00:41:15.300 --> 00:41:19.060 Christ, which means Mises Circle. By the way, it must have been a wonderful thing, they used to go out, 386 00:41:19.060 --> 00:41:22.740 every group of intellectuals of Vienna in those days had their own café, in other words, two 387 00:41:22.740 --> 00:41:28.020 2000 cafes and so each one has the psychoanalysts, the shrinks have their 388 00:41:28.020 --> 00:41:35.420 cafe and the positivists have their cafe and the Misesians have their cafe. So after the Mises seminar over they all repair the cafe and 389 00:41:35.420 --> 00:41:41.900 and talk and so forth over coffee whatever and it's been great. Also politically Mises 390 00:41:41.900 --> 00:41:46.300 single-handedly stopped the Austrian inflation in the 1920s, stopped it from 391 00:41:46.300 --> 00:41:50.420 becoming hyperinflation. There was a big inflation but it didn't get as bad as 392 00:41:50.420 --> 00:41:58.100 in Germany, largely because of Mises constant pressure by memos and political influence. 393 00:41:58.100 --> 00:42:00.740 He later in his notes in recollection said maybe he shouldn't have done that, maybe 394 00:42:00.740 --> 00:42:02.740 it would have been better if the whole thing collapsed earlier. 395 00:42:02.740 --> 00:42:07.660 But anyway, he was quite depressed at that point, as I mentioned in a minute. 396 00:42:07.660 --> 00:42:09.700 Another thing that Mises does is he warned about the Great Depression. 397 00:42:09.700 --> 00:42:15.940 In the 1920s was a period where essentially a Friedmanite period in many ways, a monetarist 398 00:42:15.940 --> 00:42:16.940 period. 399 00:42:16.940 --> 00:42:21.940 Benjamin Strong, the leader of the Federal Reserve Banks here, was putting into effect 400 00:42:21.940 --> 00:42:26.100 Irving Fisher's Doctrine, which is essentially pre-Freedmanite, and basically what it was 401 00:42:26.100 --> 00:42:27.500 is to keep the price level constant. 402 00:42:27.500 --> 00:42:31.140 That's just the key thing, to keep the price level, and the price level was indeed constant. 403 00:42:31.140 --> 00:42:35.300 Wholesale prices remained the same all during the 1920s, so they figured there's no problem 404 00:42:35.300 --> 00:42:36.300 with inflation. 405 00:42:36.300 --> 00:42:37.940 What's everybody complaining about? 406 00:42:37.940 --> 00:42:40.940 By definition, if the price level is constant, there's no problem. 407 00:42:40.940 --> 00:42:45.820 However, the Austrian position was, and still is, that the price level is not the key thing, 408 00:42:45.820 --> 00:42:51.100 Especially because in capitalist development, in free market capitalism, prices tend to 409 00:42:51.100 --> 00:42:56.540 fall because you have a tremendous increase in outpouring of goods and services, especially 410 00:42:56.540 --> 00:43:01.740 in productive goods, and so prices tend to fall in a free and unhampered market, thereby 411 00:43:01.740 --> 00:43:06.940 spreading the advantages of capitalist development to everybody in the country. 412 00:43:06.940 --> 00:43:11.700 We can see that now with specific things like computers and calculators, which calculators 413 00:43:11.700 --> 00:43:16.700 The Federal Reserve started off at $500 and had much better ones at $18, or TV sets or personal computers. 414 00:43:16.700 --> 00:43:21.700 Tremendous fall in prices during a tremendous inflationary period, by the way. 415 00:43:21.700 --> 00:43:26.700 And so what Mises pointed out was that the fact that price levels constant is not such a great thing, but they should be falling. 416 00:43:26.700 --> 00:43:33.700 And the reason why it's not falling is that the Fed and other central banks were inflating money and credit and propping it up and causing malinvestment, 417 00:43:33.700 --> 00:43:37.700 which will cause a recession, a big recession, even though prices haven't gone up. 418 00:43:37.700 --> 00:43:44.700 He was laughed at, considered ridiculous. Of course, the depression, the crash proved him correct. 419 00:43:44.700 --> 00:43:50.700 At any rate, he was doing that during the 20s, developing his business cycle theory. 420 00:43:50.700 --> 00:43:56.700 He did many other things during the 20s, unbelievable achievements, unbelievable decades for Mises. 421 00:43:56.700 --> 00:44:03.700 Socialism arises, of course, in World War I. After World War I, communism is really the same thing. 422 00:44:03.700 --> 00:44:13.700 and everybody has to start analyzing socialism, socialist economy. Everybody realizes then and now, by the way, that socialism has an incentive problem. That's clear to everybody. 423 00:44:13.700 --> 00:44:23.700 In other words, even socialists will admit this. Yes, yes, we have an incentive problem. The incentive problem is summed up in the famous motto, under socialism, who will take out the garbage? 424 00:44:23.700 --> 00:44:34.700 And that doesn't really work. Or who will go to Siberia, another way to put it, or who will go to Alaska, who's going to develop the underdeveloped, who will schlep out the underdeveloped regions and build it up? 425 00:44:34.700 --> 00:44:47.700 Well, you can't use economic incentive under socialism because either incomes are equal unless they're set by some government authority, the good communists get higher incomes, whatever, it's certainly not set by marginal productivity. 426 00:44:47.700 --> 00:44:51.700 So who's going to go to Siberia? Who's going to carry out the garbage? 427 00:44:51.700 --> 00:44:54.700 Well the socialist traditional answer is of course moral incentive. 428 00:44:54.700 --> 00:44:58.700 In other words, people will, or the creation of this is called a new socialist man. 429 00:44:58.700 --> 00:45:04.700 Everybody will be molded by socialist government to become totally altruistic and love the collective and do everything for the collective. 430 00:45:04.700 --> 00:45:10.700 In other words, slave labor will carry out the garbage and go to Siberia. 431 00:45:10.700 --> 00:45:13.700 So even socialists recognize that this is a problem. 432 00:45:13.700 --> 00:45:43.700 But what Mises saw was something nobody else had seen to the land, but there's another problem, an even deeper economic problem, even if everybody has the incentive, even if everybody has been brainwashed to be a new socialist man or woman and go out there and work for the collective, whatever the collective does, I'll do it, okay? I'll go to Siberia, I'll go to the salt mines, I don't care, as long as the state tells me I'll do it. How will the state decide what to tell them to do? That's the real problem of socialism. There's no way that socialist government can calculate and try to figure out who do we send to Siberia, how many people, 433 00:45:43.700 --> 00:45:48.700 What price do we set? Who's going to carry out the garbage? How many people should carry out the garbage? 434 00:45:48.700 --> 00:45:53.700 There's no way the socialist government can calculate because, as Mises pointed out, there's no free price system. 435 00:45:53.700 --> 00:45:59.700 There's no private ownership of the means of production by definition, and therefore there's no property titles. 436 00:45:59.700 --> 00:46:03.700 There's no free market in property titles. There's no way to set up a real price system. 437 00:46:03.700 --> 00:46:06.700 There's no way a socialist government can calculate. It's economic chaos. 438 00:46:06.700 --> 00:46:10.700 He pointed out in his famous article in 1920, which really upset the socialists in Europe. 439 00:46:10.700 --> 00:46:25.700 He also expanded his great book called Socialism a couple of years later, he dealt with other aspects of Socialism. 440 00:46:25.700 --> 00:46:33.700 At any rate, when I was going to college, too many years ago, the answer was that Oscar Longa had already solved it. 441 00:46:33.700 --> 00:46:38.700 There's no problem, because you have equations and all that, and the government acts as if it was a market. 442 00:46:38.700 --> 00:46:41.700 Well, as Mises already pointed out, this is a lot of nonsense. 443 00:46:41.700 --> 00:46:46.700 This so-called solution assumes perfect competition, perfect knowledge. 444 00:46:46.700 --> 00:46:50.700 The socialist government has the perfect knowledge already, of course, in prices, which obviously they don't have. 445 00:46:50.700 --> 00:46:51.700 That's the whole point. 446 00:46:51.700 --> 00:46:56.700 And also, no socialist government has ever tried to put the longest solution into effect. Never. 447 00:46:56.700 --> 00:47:00.700 As a matter of fact, what's happening is that socialist planning has broken down, 448 00:47:00.700 --> 00:47:04.700 Yugoslavia has gone, and Hungary has gone fairly rapidly toward a free price system, 449 00:47:04.700 --> 00:47:09.700 and even China has gone in the direction of a free price system. They realize this doesn't work. 450 00:47:09.700 --> 00:47:13.700 And this isn't true in a situation where they still have the world market, 451 00:47:13.700 --> 00:47:18.700 and world prices to which the socialist governments could refer, because they know what the price of wheat is. 452 00:47:18.700 --> 00:47:30.700 Mises pointed out that in addition to its other problems, socialism can't work. It can't calculate a modern economic system. 453 00:47:30.700 --> 00:47:36.700 Also during the 1920s, Mises put out a critique of interventionism, which shows that interventionism doesn't work. 454 00:47:36.700 --> 00:47:45.700 In other words, price controls create shortages, taxes cripple saving and investment, inflation causes problems, protectionism is destructive. 455 00:47:45.700 --> 00:47:51.700 and also he shows that interventionism tends to be cumulative, as we see all the time. 456 00:47:51.700 --> 00:47:54.700 In other words, interventionism, the government sets out to solve a problem. 457 00:47:54.700 --> 00:47:56.700 Somebody goes to the government and says it's a big problem. 458 00:47:56.700 --> 00:48:00.700 Too many people over 60 have hangnails. Let's say they have a big hangnail gap. 459 00:48:00.700 --> 00:48:05.700 So we need a multi-billion dollar hangnail solving federal funding. 460 00:48:05.700 --> 00:48:08.700 So the government then investigates hangnails towards billions of dollars, 461 00:48:08.700 --> 00:48:12.700 doesn't solve the hangnail problem, it creates other problems at the same time. 462 00:48:12.700 --> 00:48:15.700 I mean, too many side effects from anti-hangnail drugs or whatever it is. 463 00:48:15.700 --> 00:48:19.700 So we wind up that every time the government intervenes, it doesn't solve the original problem 464 00:48:19.700 --> 00:48:22.700 and creates two or three more problems at which the government can say, 465 00:48:22.700 --> 00:48:25.700 well, we have to have more intervention to solve the two or three others, 466 00:48:25.700 --> 00:48:27.700 or they can just forget the whole thing. 467 00:48:27.700 --> 00:48:30.700 So interventionism is unstable. It has a cumulative effect. 468 00:48:30.700 --> 00:48:33.700 Either you go onward towards socialism or you go back to the free market. 469 00:48:33.700 --> 00:48:36.700 What Mises has already shown is socialism can't work. 470 00:48:36.700 --> 00:48:39.700 So if socialism can't work, interventionism is unstable, 471 00:48:39.700 --> 00:48:52.540 and so Mises then becomes an uncompromising, hardcore laissez-faire capitalist, pounding 472 00:48:52.540 --> 00:48:58.540 away day after day on his question, making himself very unpopular as you might expect. 473 00:48:58.540 --> 00:49:03.340 And his great book on liberalism, which came out in 1927, since his 40s, he also shows 474 00:49:03.340 --> 00:49:09.420 in liberalism the political and civil liberties aspect, the economic, private property rights, 475 00:49:09.420 --> 00:49:15.820 free market, civil liberties and international peace are all inextricably tied together. 476 00:49:15.820 --> 00:49:21.380 They're all tied together, which is something pretty few of us even know to this day. 477 00:49:21.380 --> 00:49:25.540 So that's a book that everybody can read with tremendous profit. 478 00:49:25.540 --> 00:49:29.820 So this is, in addition to all this in the 1920s, we're not through yet with Mises's 479 00:49:29.820 --> 00:49:34.980 accomplishments, you also see there's a challenge to Austrian economics and the methodological 480 00:49:34.980 --> 00:49:39.180 and the philosophical front, and the challenge was twofold basically, and it's still there 481 00:49:39.180 --> 00:49:42.980 by the way, seeing two challenges. On the one hand, institutionalism, which Mises called 482 00:49:42.980 --> 00:49:47.540 anti-economics, and the idea that economic theory is no good anyway, there's no such 483 00:49:47.540 --> 00:49:51.620 thing as economic theory, and essentially economics becomes only history, a record of 484 00:49:51.620 --> 00:49:57.260 what's going on. Okay, so that's one form, this is very, quite dominant in the United 485 00:49:57.260 --> 00:50:02.340 States in the 1920s, institutionalist approach, and two, which has been the dominant neoclassical 486 00:50:02.340 --> 00:50:08.740 Logical Positivism The idea that economics has to be like physics, a quantitative, measurable 487 00:50:08.740 --> 00:50:12.860 science where you deduce things, you have full axioms as good as you deduce stuff from 488 00:50:12.860 --> 00:50:13.860 them and predict. 489 00:50:13.860 --> 00:50:19.220 The whole thing with the whole unfortunate econometrics mechanistic approach which we're 490 00:50:19.220 --> 00:50:25.060 very familiar with now, where people are treated as if they are stones and atoms, unfortunately 491 00:50:25.060 --> 00:50:28.660 people are not stones and atoms, they're people who have choices, they have consciousness, 492 00:50:28.660 --> 00:50:34.060 They choose their purposes and goals, etc., and so this whole neoclassical economics is 493 00:50:34.060 --> 00:50:35.660 totally off on a wrong track. 494 00:50:35.660 --> 00:50:41.460 And so he thinks about this, he sets forth his views on praxeology, what he calls the 495 00:50:41.460 --> 00:50:45.460 correct, what he calls praxeology, the correct analysis, the Austrian analysis of individual 496 00:50:45.460 --> 00:50:51.340 action, where economics essentially deals with the logical implication of the fact that people 497 00:50:51.340 --> 00:50:52.340 act. 498 00:50:52.340 --> 00:50:53.340 How do you know that people act? 499 00:50:53.340 --> 00:50:56.220 You just look at yourself, you look at other people, you see that they act, they don't 500 00:50:56.220 --> 00:50:58.220 like stones and atoms, they have purposes. 501 00:50:58.220 --> 00:51:01.220 In this knowledge, all of the economic theory is deduced. 502 00:51:01.220 --> 00:51:04.720 This is very unfashionable. It's even more unfashionable now than the free market is. 503 00:51:04.720 --> 00:51:10.720 You see, Mises had a tough problem. He not only had to fight for laissez-faire capitalism, which was unfashionable enough, 504 00:51:10.720 --> 00:51:17.720 he also had to fight for methodology, which is totally out of fashion, has been in a race to try to ape physics, 505 00:51:17.720 --> 00:51:23.720 to try to imitate physics and the success of nuclear energy and that sort of thing. 506 00:51:23.720 --> 00:51:29.200 So he sets forth this in his great book, Gunn, Problem, International Economy in 1933, which 507 00:51:29.200 --> 00:51:35.520 has been translated later, follows this up as Theory and History, a marvelous book he 508 00:51:35.520 --> 00:51:41.480 wrote in 1957, showing the difference between theory and history and what their roles are. 509 00:51:41.480 --> 00:51:45.680 At any rate, having done all this, as if he hadn't done enough yet, which is 20 times 510 00:51:45.680 --> 00:51:50.320 as much as the average economist accomplishes in a lifetime, he now proceeds, while he sets 511 00:51:50.320 --> 00:52:00.320 The fourth proper methodology is now his task is to do something with it. In other words, to construct a whole integrated system of economic thought based on the correct methodology. And he does it. 512 00:52:00.320 --> 00:52:10.320 He does it with magnificent crowning achievement, National Economy, which came out in 1940 in Geneva, which unfortunately was neglected. It was during the middle of the war anyway, so it was totally neglected. 513 00:52:10.320 --> 00:52:18.320 And then expanded it and rewrote it in English and expanded it in Human Action in 1949, which is the great work, as far as I'm concerned, of the 20th century. 514 00:52:18.320 --> 00:52:26.320 So, while he was doing this in the 1930s, things were happening with Misesian economics, so to speak. 515 00:52:26.320 --> 00:52:34.320 In 1931, Mises' follower Hayek shifts from Vienna to the London School of Economics. 516 00:52:34.320 --> 00:52:37.320 He's brought there by Robbins, who had been in the Mises seminar. 517 00:52:37.320 --> 00:52:46.320 He starts giving lectures and translating his books on Austrian or Misesian capital and business cycle theory, and he wows everybody. 518 00:52:46.320 --> 00:52:50.320 In the middle of the Depression, the Depression hadn't been predicted by any orthodox economist. 519 00:52:50.320 --> 00:52:54.320 And Hayek managed to convert all the top young economists in England. 520 00:52:54.320 --> 00:52:59.320 Hicks, Lerner, Cowdor, Sir William Beveridge, it wasn't so young. 521 00:52:59.320 --> 00:53:01.320 But only these guys became Austrians at that point. 522 00:53:01.320 --> 00:53:06.320 If you read some of the literary journal articles in England, in the early 30s, they all sound like Mises. 523 00:53:06.320 --> 00:53:09.320 It was fantastic, for a great few years. 524 00:53:09.320 --> 00:53:12.320 And they accepted the Misesian analysis of the Depression. 525 00:53:12.320 --> 00:53:24.320 The question came about because of Federal Reserve and Bank of England, et cetera, central bank credit expansion and then was prolonged by New Deal intervention into the wage rates and public works, et cetera. 526 00:53:24.320 --> 00:53:35.320 Unfortunately, even Americans, in those days Americans thought essentially were followers of English. In other words, they looked at Britain as the biggest, England was the biggest, the center of economic thought. 527 00:53:35.320 --> 00:53:40.920 So with English economics becoming Hayekian, Americans began to pick up the bull. Alvin 528 00:53:40.920 --> 00:53:45.240 Hansen, a leader, became the top American Keynesian, was becoming sort of semi-Austrian 529 00:53:45.240 --> 00:53:49.800 and plus a few other people. And suddenly, bingo, Keynes' General Theory comes out in 530 00:53:49.800 --> 00:53:56.160 1936. That's it. It sweeps everything in its path. And by the way, Keynesianism did not 531 00:53:56.160 --> 00:54:02.240 win out by patiently refuting Austrian economics. It did not work that way. As a side fact, 532 00:54:02.240 --> 00:54:07.560 Hayek can't be refuted. They didn't even try doing it. It was simply a change in hemlines, 533 00:54:07.560 --> 00:54:14.080 a change in fashion. Everybody forgets the old stuff and goes on to the new bandwagon. 534 00:54:14.080 --> 00:54:19.320 And all these people, except Hayek, all the people Hayek had converted shifted to Keynesianism, 535 00:54:19.320 --> 00:54:24.560 which was now the big fashion, which was totally the opposite in almost every way of Austrian 536 00:54:24.560 --> 00:54:30.000 thought. Hayek had previously smashed, literally, Keynes' previous great work, The Treatise 537 00:54:30.000 --> 00:54:36.680 In 1931, Hayek had two long reviews in Economica showing the whole thing as hogwash. It was 538 00:54:36.680 --> 00:54:40.720 so effective it came to go back to the drawing board and do something else. So when the general 539 00:54:40.720 --> 00:54:45.400 theory came out, Hayek made his great strategic error. He said, why should I refute this? 540 00:54:45.400 --> 00:54:49.400 It will be gone in a couple of years also. And so unfortunately he didn't try, he didn't 541 00:54:49.400 --> 00:54:56.400 do anything about it. And the rest is unfortunately history, where everybody was looking for a 542 00:54:56.400 --> 00:55:03.880 to Defend. Historically, economists have always been the ones to oppose inflation and deficit 543 00:55:03.880 --> 00:55:07.800 spending. And here, all of a sudden, deficit spending becomes a great thing, becomes economically 544 00:55:07.800 --> 00:55:11.400 required. And so, of course, all the governments loved it, and all the economists loved it, 545 00:55:11.400 --> 00:55:17.000 because then they could get good, cushy jobs in the establishment. So, while this is going 546 00:55:17.000 --> 00:55:22.320 on, poor Mises is now being hit as a refugee. He goes to... He flees Vienna, which had become 547 00:55:22.320 --> 00:55:29.040 in the 30s and goes to Geneva and when Germany conquers Western Europe, he and his wife flee 548 00:55:29.040 --> 00:55:33.880 to the United States. It was really like a movie scenario because they go just ahead 549 00:55:33.880 --> 00:55:40.480 of the German army. In his Notes and Recollections, which is an autobiography he wrote during 1940, 550 00:55:40.480 --> 00:55:46.960 he was very depressed as you can imagine, he writes that he didn't think when he started 551 00:55:46.960 --> 00:56:16.760 Mises comes to the United States, he's penniless, he's about 60 years old or so, he starts 552 00:56:16.760 --> 00:56:21.920 writing in a new language, and he can't get an academic post. This is an eternal blot 553 00:56:21.920 --> 00:56:29.080 on academia. This is a situation where every Marxist, semi-Marxist and three-quarter Marxist 554 00:56:29.080 --> 00:56:36.160 were getting cushy top chairs, a guy at Harvard and Princeton and whatever, and Mises couldn't 555 00:56:36.160 --> 00:56:40.600 find an academic post. He finally got one at NYU as a visiting professor with a salary 556 00:56:40.600 --> 00:56:43.600 pay for by outside businessmen and foundations. 557 00:56:43.600 --> 00:56:51.600 The same thing happened to Hayek. Hayek's salary at the University of Chicago was never paid for by Chicago. It was paid for by outside business groups. 558 00:56:51.600 --> 00:56:59.600 As a result, Mises was scorned at NYU. The dean was against him. The dean would advise people not to take his courses and things like that. 559 00:56:59.600 --> 00:57:07.600 See, here he was in a fantastically miserable situation. And yet, here's where I come in the picture, because I got to know him at this point. 560 00:57:07.600 --> 00:57:14.600 When he started a seminar at NYU, what was his spirit about this? How did he act? It was magnificent. I couldn't believe it. 561 00:57:14.600 --> 00:57:19.600 He was cheerful. He was never bitter. He never said an uncaring word about anything, any person. 562 00:57:19.600 --> 00:57:23.600 He was constantly trying, very sweet. He was constantly trying to urge people to be productive. 563 00:57:23.600 --> 00:57:28.600 Any spark of productivity in any of us clunks was immediately nourished by Mises. 564 00:57:28.600 --> 00:57:35.600 And he was dealing with people far below the level of Hayek and Haberler, etc. He didn't seem to bother them at all. Just great. 565 00:57:35.600 --> 00:57:39.600 and try to reestablish the seminar atmosphere of Vienna. 566 00:57:39.600 --> 00:57:45.600 We went out to Child's Restaurant, I think it was, afterward and discussed things. 567 00:57:45.600 --> 00:57:53.600 So, he was kindly, he was uncomplaining, he was never bitter and it was just a magnificent experience. 568 00:57:53.600 --> 00:57:57.600 I've told the story before but I'm going to tell it again because I think it's classic about Mises. 569 00:57:57.600 --> 00:58:01.600 People were very intimidated. First of all, half the people didn't know anything, didn't care. 570 00:58:01.600 --> 00:58:04.600 They were just there to get their automatic B or A or something. 571 00:58:04.600 --> 00:58:10.600 The rest of the people, those who were interested, the outside auditors mostly, were too intimidated. 572 00:58:10.600 --> 00:58:15.600 He's a great man. What do we know? How can we say anything? So what he'd say is, look, say anything you want. 573 00:58:15.600 --> 00:58:21.600 Because whatever you say, however idiotic it is, has already been said before you by some eminent economist. 574 00:58:21.600 --> 00:58:25.600 Of course, he was right. 575 00:58:25.600 --> 00:58:31.600 And he'd tell these great anecdotes about his friend Max Weber and things like that. 576 00:58:31.600 --> 00:58:41.980 In this situation, being scorned, etc., and not having any followers at the beginning, 577 00:58:41.980 --> 00:58:46.320 he likes Human Action, this great, crowning work. 578 00:58:46.320 --> 00:58:49.420 When Human Action came out, I was going up the fee at the time, which was the Foundation 579 00:58:49.420 --> 00:58:54.000 for Economic Education, which was literally the only free market outfit in the country. 580 00:58:54.000 --> 00:59:01.000 It's not like now, every Tom, Dick and Harry says he's in favor of the free market. 581 00:59:01.000 --> 00:59:04.000 They said, Mises, I haven't met Mises yet. They said he's coming out with a new book. 582 00:59:04.000 --> 00:59:09.000 I said, oh, what's it about? They said, everything. And sure enough, it's about everything. That's 583 00:59:09.000 --> 00:59:15.000 it. It's the whole world of wax. And I urge you to read it. It's more than I urge you. 584 00:59:15.000 --> 00:59:21.000 It's magnificent. So, and I think, but some, despite these conditions, despite the fact 585 00:59:21.000 --> 00:59:26.000 of these oppression under which he worked, there were many good people that emerged out 586 00:59:26.000 --> 00:59:49.320 Hayek died in 1972 and 1973 after a remarkably productive life. A year later, Hayek got the 587 00:59:49.320 --> 00:59:53.000 Nobel Prize, which sort of inspired other economists, who is this guy Hayek? Why is 588 00:59:53.000 --> 00:59:55.000 Why is he getting a Nobel Prize? 589 00:59:55.000 --> 01:00:00.000 And it's interesting that he got the prize specifically for his Misesian work that he did in the 1930s. 590 01:00:00.000 --> 01:00:05.000 Misesian business cycle theory, which swept away in the Keynesian Revolution. 591 01:00:05.000 --> 01:00:08.000 And since then, there's been a notable Austrian revival. 592 01:00:08.000 --> 01:00:11.000 And I think it's all due to Mises, and it's just unfortunate that he didn't get to see it. 593 01:00:11.000 --> 01:00:13.000 Thank you very much.