It's a pleasure to be here. Doug always tries to disorient me by mentioning my book on Catholic
music. It always shakes me up a little bit. I never know how to turn that into a joke
or anything. But anyway, it's true. I do have a book on music. That's not what we're talking
about today. I'm curious, how many of you have worked in a business enterprise yet in
your life? Have worked in some sort of shop or, yeah, been on the producer side of things?
To me, my beginning of my own personal economic understanding began when I got my first job,
which is more difficult now than it was when I was young. We had a little tactic when you
were 14 or so in those days for getting a job, for subverting the child labor laws.
You would simply lie about your age. Now it's not as easy to do that anymore, but back in
those days, the boss would ask you, how old are you, son? And you'd say, 16. However old
One of my first jobs was working for a department store. The boss wanted me to work in returns.
This is where people bring back their products and you sort of deal with them. So the first
The first return I got was the first day on the job and a guy walks in with, I still remember,
there was a time when everybody wore these little sort of silky running suits, I don't
know, like guys would wear them, they would sort of be silky and I don't know, everybody
wanted them, I guess that's not true anymore, but in those days, so we used to sell these
silky running suits, I mean, very strange, they had stripes on the sides, vibrant blue
or something, and he walked in and he said, look, I just have to return this thing because
it fell apart.
I looked at this running suit and it was clear that he ran like 200 miles in this thing.
It was just disheveled and falling apart and it had, like the polyester had sort of like
those little peels on it, you know, when the legs would rub together or something like
this.
It was horrible.
I didn't want to touch the thing.
I thought, why didn't you get it cleaned before you brought it in?
It was terrible.
And he said, well, look, it's got this little tear over here on the side.
And I said, you know, I'm sorry, this just looks like a used piece of clothing.
I mean, how can you possibly bring this back to us?
And he said, well, you sold it to me, you have to stand behind your product.
So I was a little confused, you know, so I went to the boss and he said, well, of course
we have to take it back.
And, you know, I remember just being appalled by this, you know, what?
And I said to my boss, I said, what are we, slaves to these people or something?
This is nuts.
He said, yes, in fact, we are, we're slaves to these people, they're called our customers.
And I never quite got over that, you know, working from the producer angle, you do get
It's sympathetic with the point of view of business enterprise. I think many of us walk
around as consumers all the time. We only think about our rights and our choices in
life and we don't think about it from the point of view of the producer or the business.
Part of thinking about economics involves thinking about the way the world works from
the point of view of the producer. I hope to talk about a little of that today.
My second job, by the way, was working in that same shop. He took me out of returns
and put me in the business of cleaning the bathrooms. Yeah, that really made me sympathetic
with the department, from the department store point of view. And I developed a radical anti-consumer
attitude, which I think actually all businesses would if they weren't utterly and completely
dependent on the consumers for their very lifeblood. So my third job was working in
in the Catering Service. So I got to see how consumers aren't always well treated, you
know, but anyway. So often, my subject today concerns technology. The picture I put up
here on the board, I don't know if you can see it very well, it's kind of regrettable.
What you see are several ships and everybody on the ship is killing each other. They're
killing the other people on the other ship and the people on the other ship again, they're
That is not an example of productivity. That is wealth destruction.
So if you can remember that when you see people on boats and they're all killing each other and blowing each other up, that's wealth destruction.
That's not a good thing for a civilization when that sort of thing happens.
This book I have here is on life in the Middle Ages and basically there are two kinds of pictures.
In one set of pictures people are killing each other and the other set of pictures people
are producing things, you know. So I thought it was interesting because there's two great
forces in the history of civilization, you know, on the one hand there's coercion, on
the other hand, voluntary cooperation and production and that's the essential divide
in life, you know, between the activity we might call politics on one hand and the other
we might call just markets on the other. Yeah, so that's the great dividing line in world
History, Rothbard called it power and market, we could call it politics or technology, whatever
you want to call it. Let me switch this to a much more beautiful picture. Here's a much
nicer picture here. You see that? These people sort of hammering stones and carrying them
around. That's probably about the 13th century. A fantastic number of pictures in this charming
in a book are about technology and to a large extent we define ourselves as people according
to the tools we use and the technology we use. I remember, I'll never forget the first
time one of my children asked me, Dad, were you born before the internet? Yeah, I remember
when the internet first came along and I reminisce about these old days and they're just sitting
I hardly remember myself, I mean, so we did things like we would take out this paper stuff
and you'd write things on it, you know, and then you'd fold it and put it in an envelope
with a special sticker and give it to a government employee, you know, who would get in a car
We define ourselves as the digital age. It's a very exciting time to be alive. I would
encourage you to look back in history and remember that this digital age hasn't always
A wonderful novel I would encourage you all to read is by Garrett Garrett. It's called
The Cinder Buggy. What he does is chronicle the switch between the age of iron and the
advent of steel in the 19th century in America and all of the attendant social upheavals
that are associated with that change of technology, the vast productivity that came about, the
The enormous risk that entrepreneurs and businesses took to bring about this social transformation.
It all involved, of course, business enterprise and the profit and loss system.
And it led to dramatic cultural and social upheaval that benefited civilization.
And you can look back at history and see that this happens again and again throughout history.
Mankind has always been struggling to improve his lot in life.
In this little picture we see here, we see people carrying around stones and using various tools to do it.
And this one, I thought this was very interesting. We have a fancy little 16th century machine here for crushing rocks, you know.
One of the most famous inventions in human history, you probably all know, is the printing press.
with the first Gutenberg Salter in 1450 which led to a total upheaval in dramatic ways especially
in the culture of the monasteries. This gentleman you see right here is a scribe and there are
Before the age of the printing press, most of the works of the scribes were devoted entirely
to preserving works. That was the main thing. Today we have print-on-demand printing so
So everybody can be an author. Back in those days, to be a new author you had to have a
lot of social standing or be particularly brilliant because it would take a whole team
of scribes many years to complete your original manuscript. You had to be St. Thomas Aquinas
or Cardinal So-and-so or Bishop So-and-so. Then you could get your book published, but
typical workers and peasants did not get new books published. Most of the works of the
was devoted to preserving great manuscripts. For example, the great book by St. Isidore
of Seville of the 8th century which sought to compile all human knowledge in one great
treatise called Etymologiae, continued to be reprinted by scribes over the centuries
and in fact it was one of the first books that was printed in the age of movable type.
And you can imagine what kind of effects printing had from the producer point of view.
The scribes worried very much that they would be out of business and in fact they were.
They were an exalted class especially within the monasteries to be a scribe was a much
coveted position.
And some heads of monasteries actually resisted the printing press because they feared that
it was going to lead to widespread unemployment of their smartest people.
And it took about 50 to 100 years for monasteries of Europe to reconcile themselves to the printing
press realizing that it was actually a good thing if they could print their own things
that it would be able to, this gentleman who is obviously very wise and very smart, would
The innovation actually led to a more economical use of his own time and talents. So it was
up and down the entire monastery. We can always expect some kind of transition difficulties
anytime there are new technologies. If you look back at the history in the first millennium,
The first, I think Tom Woods points this out in his wonderful, wonderful book on, I think
it's called, it was the How Catholic Church Saves Civilizations, something like that, yeah.
But he talks about technology in the first millennium and points to the fact that the
largest, the first large-scale capitalist enterprises in Europe actually dated from
the eighth and ninth centuries, they occurred in monasteries.
And here's the way it would work, it's very interesting, the new monastery would be founded
with some ideal that everybody would share in the workload.
So some would go out and tend to the livestock, others would do woodworking, work out in the
fields and so on, and everybody would share equally in these tasks.
But as the years would go on, they also discovered that there were peasants and other workers
that were not monks out in the community who needed jobs.
So they would hire them.
industrial hiring techniques, some monks needed to turn their attention away from tending
livestock to running the books in the monastery, so they would come from the outdoors to the
indoors, and the tools would improve and become ever more efficient and people would have
to specialize in using the tools and making the tools, well over several hundred years
The monastery would completely change, instead of a place of perfect equality where all monks
would work hard out in the fields and then pray when they weren't working, you developed
a kind of a class system where the monks would all stay indoors doing sort of indoor intellectual
work while the workers and peasants were all outside doing the hard manual labor.
Some one monk would come along and say, look, look at this system we've created, this is
This is just contrary to our founding ideals and would break off and start a new order
of monks and every new order of monks that was founded was ever more dedicated to stricter
and stricter rules concerning what people had to do in terms of their work.
So the new monastery would be founded and in my monastery nobody is going to be even
allowed to wear shoes or you're not going to own any property at all, you're only going
to be allowed to have a bed and a crucifix and that's it.
were more strict and part of this was having to do with having to crack down on the prosperity
that would come about from the development of these large-scale capitalist enterprises.
That always leads to some kind of upheaval. And every age can be defined according to
the technology that comes about and I'm sure you all in this room will define yourselves.
I mean there will be a common time when you have children and you'll be talking about
What was it like when you were kids?
We can't even imagine what it's going to be like in the future
and you'll talk about what it was like to use the World Wide Web
or when you first held your first iPod
and these kinds of things will reminisce with you
and say, well, that's amazing, what was that like?
You know?
So it has been...
There's a picture hanging in my own house
and I love this picture, it tells you so much.
It was taken about in 1923
and has my, you know, great-great,
I don't know, ancestors there, cousins.
So on the front row, you've got
We've got these old guys in beards with war medals on from the Civil War and they're sitting
there very crabby and annoyed about something, probably the photographer. And then next to
them are their wives and then you've got the second generation behind them and then behind
them on the back row is a long row of young men. They look like they're about 17, 18 or
something. And they're all looking there sort of disdainful, like why am I having to be
Macro are driving a car now for the first time. They're the first driving generation.
They define themselves that way. We drive, they don't. They're really cocky. So that's
the way it is. Every new generation has this attachment to the technology they use. It
was true in the Middle Ages and it's true in our own time.
The term technology itself, it didn't come into popular usage, you won't believe this,
until after World War II. It's not the common term. It's the term we use now. I found a
little bit about the etymology of the term itself. It comes from the Indo-European root
of the, called, the word is tex, T-E-K-S, and it means to fabricate or to weave. Very
nice imagery there. The Greek word tectron, referred to as a carpenter or a builder. Before
The 20th century, back in the 19th century, 18th century, the word technology was usually
replaced with, which I think is a much nicer term, called the practical arts. The practical
arts. That's what technology used to be called back then. And it referred to the fact that
technology is really about a creative process of generating something that's truly artistic.
requires human ingenuity and skill and testing really with the consumer base to try new things
out to achieve certain practical ends in life, the practical arts.
And the focus on the practical arts helps us understand that so much of the world we
live in and have always lived in, as far back as we look, is human built.
You know, nature gives us raw resources, but nature is itself an extremely dangerous place
and unpleasant. Everything else that we experience and everything we strive to live for is made
with human hands. This is, and we're going to hear a little bit more about this later,
this is to me the absurdity of the environmentalist vision to herald the natural environment beyond
that which people made. Nobody in this room would be alive if we had the pure environmentalist
Dream Achieved. The world that we experience and that we want to experience and that we've
always experienced is largely made by human hands. So the great question from an economic
point of view is whether or not, what are the means that lead to the ever greater perfection
of this human built world? And traditionally, there are two ways to understand the means
by which this comes about. One is the theory of collective innovation and the other is
is the theory of individual innovation. I would like to talk about both those points
of view. In the collective view, the idea is that the government or society at large
has to be responsible for making great innovations. This view is still with us whenever you hear
presidents, whether it's Obama or Bush or anybody else talking about the need to invest
as a society in something. Invest in large-scale infrastructure. You know, in World War II,
government fought the war, built the bomb, you know, so there's a great explosion in
technological advance and it comes about collectively that we need to invest in arts and sciences
or whatever the case may be. The problem with that method of collective innovation is that
There's really no market test to find out whether or not that's a good use of social
resources or not. In the market economy, there's constantly a test. In the collective economy
of government-built things, there is no test to find out if the resources are being used
efficiently or not. One example that people point to as a great case of collective entrepreneurship
would be the invention of the Internet, which everybody knows was built by the government.
Well, it was built back by the government, but the government never did anything with
it.
It was private enterprise that turned it into a productive, useful thing for us.
Government technology can come too soon, it can come too late, quite often.
Government constantly funds old technologies or funds them too soon before society is ready
for them.
And let's be clear about technology, it has to come around at the right time.
Let's say you lived in the age of the scribe and a monk walked in and said to the scribe,
Listen, I've got a great new innovation. It's called one-click ordering.
Well, what would anybody be able to do with a one-click method of ordering things on the internet in the age of the scribe?
It doesn't make any sense, right? So it's not just about the ideas or the notion.
It's about its usability and its economic viability.
Now, the other theory of innovation is that it's entirely individual and it's about
great individuals. I think we have to be careful about this interpretation as well. This theory
of entrepreneurship or the theory of innovation and development that it all comes down to
the great individuals and their great ideas really developed in the Gilded Age in the
late 19th century when there was a new class of capitalists that came along that wanted
I wanted to replace the traditional view that the great figures in human history were politicians
and war makers and wanted to replace it with a view that the industrial captains of industry
were really the people we need to be celebrating. I have no problem with that, but it led to
certain exaggerations. Let me just give you a couple of cases in point. I think we're
We're all taught in school that Eli Whitney invented the cotton gin. I think I was taught
that. And I had a vision of everybody taking these lumps of cotton off the ... I grew up
in Texas, so you take the lump of cotton off the plant there and sort of have to pick out
the seed all the time. And that's the way people built with cotton until the great Eli
Whitney genius came along and invented a machine where you sort of stuff the cotton in the
machine that sped out the seeds on one end and then out came the cloth or whatever. I
Well, you know, if you look at the details of this history, it turns out this is an amazing
myth. It turns out cotton ginning has been around since about the 5th century and with
great improvements and innovations made from the 12th to the 14th century and long before
Eli Whitney, all throughout the American South, cotton was always ginned, usually with roller
pens or some other machine. And there have been continual innovations throughout history.
It wasn't just that Eli Whitney came along with one brilliant idea and changed history.
No, it's not at all true. What happened is that Eli Whitney took an existing machine and
thanks to a suggestion made to him by a friend of his, who was a woman by the way, he added
a small brush technique to the machine. Why we know about Eli Whitney versus everybody
else involved in the long 2,000 year process of coming up with the modern cotton gin is
The truth is that he got to the patent office first before anybody else did, and then turned
around and used his patent to beat up all the competition, and went around the South
suing everybody.
He was ginning cotton, claiming that they owed him money.
Okay, so this is the truth about our friend, Eli Whitney.
A similar story can be told about Alexander Graham Bell, who did not invent the telephone,
and those rotten Wright brothers.
I'm just fed up with hearing about the Wright brothers.
The Evil Wright Brothers, you know, they were running a little scam outfit that was really
just a, I mean, they paid more lawyers than they did anybody else, and their goal was
to, of course, to get the first patent, you know, on the first in flight. There were about
20 competitors for the title first in flight. They made one little improvement in the wing,
raced to the patent office, and then demanded that the U.S. government buy their airplane
and spent the next 15 years suing everybody who was really trying to make real improvements
in the Airplane, and succeeding. So by the time World War I rolled around, the U.S.
was so backward in its air technology that we had to buy our planes from France, you
know, that didn't actually have any patents on airplanes, flying technology. So fortunately,
during World War I, U.S. government suspended patent enforcement on the airplane and then
advances could be made. So anyway, my point is that the history of innovation is not really
the history of great men or great women doing amazing things out of nowhere. You know, one
One minute everybody is talking on like cups of strings and then Alexander Graham Bell
and the iPod or whatever, I don't know, but it doesn't happen like that. What happens
is a series of small steps and this is the way it happens in our world today. You know
every day you go online you find some small improvements. Somebody takes an existing technology
and improves it just slightly a little bit and markets it. In order to understand how
How that works though, you need to understand something about the way the process of market
competition works. And it works like this. An entrepreneur sees a need. For example,
in Auburn for many years we didn't have any donut shops. So one guy opens up a donut shop
right over here in college and he's making enormous profits with this donut shop. I mean,
you can tell it. You go in there and I talk to him all the time, how much do you make
by selling that 50-cent doughnut. Well, you know, I don't know, it cost me about 10 cents
to make. Okay, he's making 40 cents a doughnut, but he's still got to pay people, got to pay
taxes. Nonetheless, the profits are there. This serves as a signal to other possible
entrepreneurs in town that this is a profitable enterprise. That signal, that profit signal
is like broadcasting out to every entrepreneur, every owner of capital in Auburn, look, this
This is a possible way that you can make money by selling donuts.
So the guy, so a possible entrepreneur, goes into the donut shop and examines how they
do things and he's over there taking mental pictures, you know, of everything he sees
and so he copies, he copies the behavior of the donut shop down there.
It's a process of emulation and I hope you write down that word, emulation, because this
is the essence of entrepreneurship, this is how it begins.
It begins with copying what other people are doing, but it's not just enough just to copy
What you have to do is improve it just slightly, because you have to get the customers to come
to you as opposed to him.
Or your innovation may consist of better marketing, promoting the doughnuts in a better way than
the other guy did, so you get ever more customers, or it could consist of saving in the costs
associated with doughnut making.
Whatever it is, you've got to make an improvement on the existing profitable enterprise down
So you open up your business, you've made the improvement, you've reduced cost, you've made
the donuts even better tasting, you've got a better process for making them, you've rented
a spot that has lower rents, possibly.
So then what happens?
You get customers and that guy's losing customers, his profitability goes down or he has to compete
with you, adopt new technologies, new designs, cut costs, whatever the case might be, it's
going to reduce his profit margins.
So on one hand the guy over here is this profitable, you've opened up your shot, you're becoming
this profitable, but look, his profits begin to go down. Right? All through this process
of emulation first and competition second. Then a third doughnut shop opens up. Everybody's
profits are pushed further and further down. This is the way the process works. In the
competitive market process, everybody copies everybody else and improves just slightly
on the margin. Just a little bit enough to solicit more traffic, customer contact with
with himself, and profits are eventually driven down to what level? In an ideal world, if
you construct this thing out, profits are driven down to zero. And I always like to
tell people this as a way of addressing some of the socialists who are under the impression
that capitalism is a big conspiracy to protect the rights of profit makers. It strikes me
that capitalism is nothing but a gigantic conspiracy to reduce all profits in the world
0. It's a disaster for producers. You have to constantly stay alert and constantly innovate
or else you die. That's the way the truth of the market works.
Some of you are probably going to be looking into business in the future and I would urge
you as you look into this not to try to be a Wright Brothers, one of the Wright Brothers
or an Eli Whitney or an Alexander Graham Bell or these other guys, but rather to look for
and more successful behaviors in the market, emulate them, copy them and improve them just slightly.
That's how people make money in a market economy, through slight improvements on the margin.
It's true in our day and it was true in the 12th century, it was true all the way back to the beginning of time.
So I reject this model that entrepreneurship is collective or that innovation occurs collectively
and neither is it occurred through just great man, it occurs through people just like yourselves who are out there just trying to improve the world a little bit at a time.
What this depends on most fundamentally, it depends on the freedom to save and build capital.
It depends on the freedom to try and fail since not every experiment in the business
world is successful. Far more businesses fail than succeed. And you need the freedom to
constantly improve without interventions like high regulations or patents or other restrictions
on what people can and cannot do. You need a free flow of information precisely so that
people can learn from each other and emulate the success of other people. That's the way
we are going to progress as a society. You notice that government does none of these
things. It's only markets that do this. So my final advice to you in this short talk
is that as you pursue your lives, I hope that you all at some point go to work for a small
I'm a small producer of some sort so you can get a picture of what it's like to be on the
other side of the aisle.
It can drive you crazy.
I know my children hate to go shopping with me because I'll walk into something like Dick
Sporting goes over here in Tiger Town and I open the door and I'm overwhelmed at the
sheer volume of inventory, the inventory and I'll start calculating costs, you know, I'll
look up that ship on the wall and there's the fishing poles over there, the footballs
over there and the huge machines over there and I think, God, there's 20 million, there's
Probably 30 million, it's probably 50 million dollars worth of inventory in this place.
You realize kids, that this place had to buy all that stuff, and here we are, who do we
think we are? We can walk in, just kind of cruise around, look at these machines, go
well like that, kind of like that, we're not going to buy anything, and walk right out
of here again. And there's nothing these people can do about it. I mean, it's a terrifying
thing for me to walk into a store with a large amount of inventory. But it's good for you
Thank you to be able to think about the way the economy works from the point of view of
the producer. If you want to be one of these producers, get good at copying, get good at
emulating, get good at improving and perfecting and never rest until the day you die and then
you will leave something spectacular for the next generation. Thank you very much.