WEBVTT NOTE Why Does Economics Matter? 1 00:00:00.000 --> 00:00:05.680 Okay, it's a pleasure to be with you here today and to have you visit the Mises Institute. 2 00:00:05.680 --> 00:00:09.240 I want to welcome you from my perspective. 3 00:00:09.240 --> 00:00:13.360 I'm going to be addressing the question, why does Austrian economics matter? 4 00:00:13.360 --> 00:00:18.920 And if there's one thing I'd like everybody to get across here today, 5 00:00:18.920 --> 00:00:27.200 is the difference between economists on the one hand and Austrian economists on the other. 6 00:00:27.200 --> 00:00:31.720 because there's a great deal of difference between the two groups, 7 00:00:31.720 --> 00:00:36.360 some of which I'm going to try to explain today. 8 00:00:36.360 --> 00:00:40.840 Mainstream economists, all the other economists other than the Austrians 9 00:00:40.840 --> 00:00:45.600 have a different perspective on what economics is 10 00:00:45.600 --> 00:00:48.960 in your particular part in it. They 11 00:00:48.960 --> 00:00:53.140 devise mechanical type models 12 00:00:53.140 --> 00:00:58.340 of how the economy operates or how it should operate. 13 00:00:58.340 --> 00:01:02.340 They used advanced statistical software. 14 00:01:02.340 --> 00:01:08.300 They employed mountains and mountains of data in order to validate their models, in order 15 00:01:08.300 --> 00:01:12.660 to make predictions about the economy. 16 00:01:12.660 --> 00:01:19.780 And every time the economy doesn't fit their particular models, they call on the government 17 00:01:19.780 --> 00:01:24.780 to somehow change us so that we fit into their models. 18 00:01:24.780 --> 00:01:27.660 Austrians have a different perspective. 19 00:01:27.660 --> 00:01:31.220 We don't rely on computer software or computers 20 00:01:31.220 --> 00:01:33.860 or mathematical models. 21 00:01:33.860 --> 00:01:38.420 We rely on basic economic theorizing 22 00:01:38.420 --> 00:01:41.780 about using logic and deductive reasoning 23 00:01:41.780 --> 00:01:44.980 to determine what people are all about. 24 00:01:44.980 --> 00:01:49.540 What common traits do we see in humanity 25 00:01:49.540 --> 00:01:53.180 that we can distill down into particular theories 26 00:01:53.180 --> 00:01:58.140 that help us understand how the economy operates. 27 00:01:58.140 --> 00:01:59.260 And this is critical. 28 00:02:00.220 --> 00:02:04.220 Austrians want to understand how an economy 29 00:02:04.220 --> 00:02:09.220 can be successful, as well as why do economies fail? 30 00:02:10.340 --> 00:02:14.780 And so that's our total emphasis is in coming to grips 31 00:02:14.780 --> 00:02:17.540 with those two particular questions, 32 00:02:17.540 --> 00:02:24.340 Success and Failure. This is obviously going to tell us a great deal about the world we 33 00:02:24.340 --> 00:02:33.740 live in and that world which we ourselves are going to try to succeed or at least avoid 34 00:02:33.740 --> 00:02:39.100 lots of big failures. When we look at our own country, the United States of America, 35 00:02:39.100 --> 00:02:47.500 what we see is a very successful economy that was built literally from nothing to become 36 00:02:47.500 --> 00:02:58.500 The world's largest economy with one of the highest standards of living, basically over a few hundred years. 37 00:02:58.500 --> 00:03:13.500 Now what's the reason for that success? That's something that's very, very important to know how the United States has succeeded up until this point. 38 00:03:13.500 --> 00:03:22.860 It's something you really haven't been taught throughout all your school years. 39 00:03:22.860 --> 00:03:26.760 That's something that doesn't get raised very often, and it's something that, frankly, 40 00:03:26.760 --> 00:03:29.500 the mainstream economists also tend to ignore. 41 00:03:29.500 --> 00:03:32.580 So that's one of the things we're going to be looking at here today. 42 00:03:32.580 --> 00:03:39.700 We also see countries like India and China, which when you were born, basically their 43 00:03:39.700 --> 00:03:43.140 entire populations were poverty stricken. 44 00:03:43.140 --> 00:03:50.420 And yet now, over the last couple of decades, with economic reforms, they've become the 45 00:03:50.420 --> 00:03:53.860 growth engines of the world economy. 46 00:03:53.860 --> 00:03:55.860 Where did that success come from? 47 00:03:55.860 --> 00:03:58.140 Why did that just pop up? 48 00:03:58.140 --> 00:04:00.860 We need to know the reason why. 49 00:04:00.860 --> 00:04:07.620 And similarly, we look at Africa, where most of the population is poverty-stricted. 50 00:04:07.620 --> 00:04:09.020 Why is that the case? 51 00:04:09.020 --> 00:04:16.120 Why is that continual economic failure on that particular continent? 52 00:04:16.120 --> 00:04:21.760 We can look at even smaller problems, but just as perplexing, like if we took the city 53 00:04:21.760 --> 00:04:24.580 of Atlanta. 54 00:04:24.580 --> 00:04:31.380 Millions of people all over the place, all sorts of different jobs, daily schedules, 55 00:04:31.380 --> 00:04:42.360 likes and dislikes, and yet somehow, someway, the people of Atlanta are fed on a daily basis. 56 00:04:42.360 --> 00:04:48.700 They basically get to eat what they want, when they want, and all of that takes place 57 00:04:48.700 --> 00:04:52.860 in a rather smooth, well-functioning process. 58 00:04:52.860 --> 00:04:58.620 But if you have to actually sit down and think about how can we get Atlanta fed, the problem 59 00:04:58.620 --> 00:05:04.180 would be so complex that it would be on anybody's ability or all of our abilities together in 60 00:05:04.180 --> 00:05:08.340 order to come to grips with that particular question. 61 00:05:08.340 --> 00:05:15.660 And then we've got the economic crisis here in the United States, 10% unemployment. 62 00:05:15.660 --> 00:05:20.980 If we add in discouraged workers who are no longer looking for work, if we add in people 63 00:05:20.980 --> 00:05:26.900 who are working part-time who would prefer to be working full-time, we have something 64 00:05:26.900 --> 00:05:34.400 We're losing like 17 or 18% of our labor force that is unemployed, and that's a big problem. 65 00:05:34.400 --> 00:05:38.240 We've got people losing their houses to foreclosure. 66 00:05:38.240 --> 00:05:42.800 We've got people losing their houses to bankruptcy. 67 00:05:42.800 --> 00:05:43.800 It's a big problem. 68 00:05:43.800 --> 00:05:53.000 It's a huge problem, and it's one that Americans have never faced during our particular lifetime. 69 00:05:53.000 --> 00:05:58.780 The problem is so big that the government is spending trillions of dollars to try to 70 00:05:58.780 --> 00:06:08.820 address that problem. 71 00:06:08.820 --> 00:06:12.920 Stimulus money, bailouts, and so forth, and what's a trillion dollars? 72 00:06:12.920 --> 00:06:22.100 Well, a trillion dollars is enough money to give everyone in this room a million dollars 73 00:06:22.100 --> 00:06:29.220 every day for two years. So each and every one of us would end up with six or seven 74 00:06:29.220 --> 00:06:34.980 hundred million dollars. It's also enough money that if we put a trillion dollars into 75 00:06:34.980 --> 00:06:40.740 the bank at five and a half percent interest, each one of us could earn a million dollars 76 00:06:40.740 --> 00:06:49.340 of interest every day for our entire lives and then your family thereafter forever would 77 00:06:49.340 --> 00:06:55.760 would get a million dollars every day for the rest of their lives in perpetuity and 78 00:06:55.760 --> 00:07:01.280 we'd never have to touch the principle on that money. 79 00:07:01.280 --> 00:07:03.620 So it's a lot of money. 80 00:07:03.620 --> 00:07:10.340 So the next time your parents point out what a big mess you've made, just tell them that 81 00:07:10.340 --> 00:07:16.820 government has made a much bigger mess in Washington D.C. 82 00:07:16.820 --> 00:07:25.260 Now in terms of the differences between Austrians and mainstream economists, there was a video 83 00:07:25.260 --> 00:07:34.940 that came out last year featuring characters named F.A. Hayek and John Maynard Keynes. 84 00:07:34.940 --> 00:07:40.980 Keynes is sort of the leading light of mainstream economists and Friedrich von Hayek was an Austrian 85 00:07:40.980 --> 00:07:47.140 and Economist, and they're basically debating what we should do about the economic crisis 86 00:07:47.140 --> 00:07:54.380 and the business cycle, with Hayek saying we need to let markets be free, and Cain saying 87 00:07:54.380 --> 00:07:57.140 no, we need to regulate those markets. 88 00:07:57.140 --> 00:08:07.220 And I'd like to show you that particular video, but there's drinking and dancing and carrying 89 00:08:07.220 --> 00:08:13.300 on and all sorts of stuff, and so it's really not appropriate for me to recommend this video. 90 00:08:13.300 --> 00:08:19.640 So I'm not going to recommend this video to you as a way of seeing the differences between 91 00:08:19.640 --> 00:08:23.060 the Austrians and the Keynesians or mainstream economists. 92 00:08:23.060 --> 00:08:30.380 And then just recently, another animated video came out within the last couple of weeks which 93 00:08:30.380 --> 00:08:38.420 which explained quantitative easing and it's a YouTube video called quantitative easing 94 00:08:38.420 --> 00:08:43.900 explained but there's some bad language in it so I'm not going to recommend, I'm not 95 00:08:43.900 --> 00:08:50.900 I'm not going to show you that video here today, or recommend that you see it. 96 00:09:05.460 --> 00:09:12.460 So economics, Austrian economics in particular, is going to be a way of theorizing that's 97 00:09:13.900 --> 00:09:21.900 is going to provide an understanding for people to understand success in the economy and failure in the economy. 98 00:09:31.900 --> 00:09:38.900 In economics, things can be complicated and they can be simple. 99 00:09:38.900 --> 00:09:44.500 Simple things can be quite complicated, complicated things can be made quite simple. 100 00:09:44.500 --> 00:09:46.660 Take for example the pencil. 101 00:09:46.660 --> 00:09:49.140 Some of you have pencils in your hand. 102 00:09:49.140 --> 00:09:51.860 You can pick it up and take a look at it. 103 00:09:51.860 --> 00:09:52.860 And what do you see? 104 00:09:52.860 --> 00:09:56.300 Well, there's not much there to meet the eye. 105 00:09:56.300 --> 00:10:01.060 There's some wood, there's some paint, there's some graphite, a little metal band around 106 00:10:01.060 --> 00:10:04.700 it, an eraser on one end. 107 00:10:04.700 --> 00:10:06.960 This is pretty simple stuff. 108 00:10:06.960 --> 00:10:15.660 And yet, not a single person on earth knows how to make a modern pencil. 109 00:10:15.660 --> 00:10:20.760 I know that must sound unbelievable given that millions of pencils are produced every 110 00:10:20.760 --> 00:10:24.400 year, but think about it. 111 00:10:24.400 --> 00:10:32.460 Each component of the pencil, the wood, the graphite, the eraser, the paint, and so on, 112 00:10:32.460 --> 00:10:37.420 is made out of material that has been individually harvested using lots of different tools and 113 00:10:37.420 --> 00:10:39.080 heavy machinery. 114 00:10:39.080 --> 00:10:44.800 These materials had to be processed and transported to a factory. 115 00:10:44.800 --> 00:10:50.080 The materials were then cut into exact size pieces and finally all the pieces have to 116 00:10:50.080 --> 00:10:53.060 be assembled at the factory. 117 00:10:53.060 --> 00:11:00.580 Each stage of a unit's input production requires all sorts of specialized labor as well as 118 00:11:00.580 --> 00:11:08.020 Specialized Tools, the people who harvested the trees for the pencil and the people who 119 00:11:08.020 --> 00:11:13.700 harvested the rubber for the eraser are probably working on different continents, probably don't 120 00:11:13.700 --> 00:11:20.300 know what their harvesting is going to be used for, don't know one another, probably 121 00:11:20.300 --> 00:11:30.340 couldn't do each other's job and yet everything does get put together and those pencils ultimately 122 00:11:30.580 --> 00:11:58.580 And so it goes along a chain of production, when we get to the factory floor, we find specialized labor at each stage of production using highly specialized tools and pencils are actually made with multi-million dollar machinery. 123 00:11:58.580 --> 00:12:05.220 All these tools are in turn made by people using different sets of tools in other locations, 124 00:12:05.220 --> 00:12:12.140 possibly in other countries, and this process goes on and on, backward into the chain of 125 00:12:12.140 --> 00:12:13.140 production. 126 00:12:13.140 --> 00:12:21.300 So no one person actually knows the entire process involved in all of the raw materials 127 00:12:21.300 --> 00:12:26.140 and all the machines and all the tools and all the different specialized labor that goes 128 00:12:26.140 --> 00:12:33.420 into the production of a single pencil so that simple product you're holding in 129 00:12:33.420 --> 00:12:39.220 your hand is actually the result of a process that is so complex that no one 130 00:12:39.220 --> 00:12:48.620 fully knows all the knowledge necessary for the process to be successful. The 131 00:12:48.620 --> 00:12:53.660 economic question then becomes how do all of these people cooperate in such a 132 00:12:53.660 --> 00:12:59.380 Such a way is to produce pencils that are so cheap, in this case the pencil in your hand 133 00:12:59.380 --> 00:13:02.780 was probably cost less than 10 cents. 134 00:13:02.780 --> 00:13:09.900 What brings about a smooth production process and the coordination of all these people, 135 00:13:09.900 --> 00:13:12.980 all of their duties and all of their resources? 136 00:13:12.980 --> 00:13:19.940 What brings about cooperation both within firms and between companies across continents 137 00:13:19.940 --> 00:13:26.840 along the chain of production that turns raw materials into finished consumer goods. 138 00:13:26.840 --> 00:13:30.860 The answer to this question is the price system. 139 00:13:30.860 --> 00:13:37.520 The price of the consumer goods, such as a pencil, is established by competition amongst 140 00:13:37.520 --> 00:13:44.280 all the various pencil suppliers, as well as the consumer of pencils. 141 00:13:44.280 --> 00:13:56.280 You first choose amongst the various brands, just as you do other goods, and between alternatives, such as pens, markers, computers, whatever. 142 00:13:56.280 --> 00:14:08.280 The revenue from selling the pencils is then used in turn to pay the workers, the materials, the machines, and all the other expenses of producing pencils. 143 00:14:08.280 --> 00:14:15.760 Money left over, the owners of the firm profit. If money is not left over, they suffer a loss. 144 00:14:15.760 --> 00:14:23.040 Initially, of course, all of the companies had to invest large amounts of money in order 145 00:14:23.040 --> 00:14:31.000 to establish their firms. And so those entrepreneurs that established those companies have a tremendous 146 00:14:31.000 --> 00:14:45.740 So again, system of profit and loss guides the entrepreneur in the direction of the wishes 147 00:14:45.740 --> 00:14:50.800 of the consumer. 148 00:14:50.800 --> 00:14:56.560 When there are profits, owners may reinvest that money into their companies, expanding 149 00:14:56.560 --> 00:14:59.780 production and increasing the workforce. 150 00:14:59.780 --> 00:15:05.580 When a company suffers losses over time and is not able to compete in satisfying the consumer's 151 00:15:05.580 --> 00:15:09.300 demands, it's going to go out of business. 152 00:15:09.300 --> 00:15:15.000 It is this system of profits and losses that ties the whole system together and keeps the 153 00:15:15.000 --> 00:15:20.580 system targeted towards satisfying consumers' desires. 154 00:15:20.580 --> 00:15:28.420 All these people, including the labor force, are actually all working in their own self-interest. 155 00:15:28.420 --> 00:15:33.380 The company owner is trying to increase profits, the workers are trying to get the best jobs 156 00:15:33.380 --> 00:15:40.160 in terms of wages and working conditions, and through this system, the consumer interests 157 00:15:40.160 --> 00:15:44.620 are ultimately satisfied. 158 00:15:44.620 --> 00:15:53.080 This is what is making places like China and India much more successful, because instead 159 00:15:53.080 --> 00:15:58.460 Instead of the state running the production, telling people what to do, entrepreneurs are 160 00:15:58.460 --> 00:16:05.120 now in charge of resources and they're goaded along by the lure of profits. 161 00:16:05.120 --> 00:16:10.640 As a result, they're hiring more people, they're raising wages, they're making tons of money 162 00:16:10.640 --> 00:16:14.320 for themselves. 163 00:16:14.320 --> 00:16:18.840 So the system ultimately depends on prices. 164 00:16:18.840 --> 00:16:20.800 So how are prices determined? 165 00:16:20.800 --> 00:16:23.380 That's pretty important. 166 00:16:23.380 --> 00:16:28.640 The answer is that no one gets to set prices. 167 00:16:28.640 --> 00:16:34.840 In a free market economy, no one person gets to determine prices. 168 00:16:34.840 --> 00:16:41.620 For example, as a professor of economics, if I wanted to determine my own price, then 169 00:16:41.620 --> 00:16:49.740 I would think that maybe a million dollars a year would be the appropriate wage for myself 170 00:16:49.740 --> 00:16:52.900 because after all, I do a lot of good, 171 00:16:52.900 --> 00:16:57.000 much more than like a baseball player or a rock star, 172 00:16:57.000 --> 00:17:00.560 so a million dollars is really not too unreasonable to ask. 173 00:17:02.020 --> 00:17:04.540 My employer, on the other hand, 174 00:17:04.540 --> 00:17:09.540 if they were just to sit down and come up with a figure, 175 00:17:09.660 --> 00:17:13.260 they might say, well, how about the minimum wage? 176 00:17:13.260 --> 00:17:18.220 $7.25 an hour, that sounds like a good wage for them 177 00:17:18.220 --> 00:17:23.220 and they leave extra money available for other things 178 00:17:23.780 --> 00:17:26.140 that the firm wants to do. 179 00:17:26.140 --> 00:17:29.980 So if I set my wage, it would be very high. 180 00:17:29.980 --> 00:17:33.620 If the employer set the wage, they would want it very low. 181 00:17:35.500 --> 00:17:38.380 Therefore, there's a wide gap between what I want 182 00:17:38.380 --> 00:17:42.640 and what my potential employer would like to pay. 183 00:17:42.640 --> 00:17:45.060 The resolution of my salary comes about 184 00:17:45.060 --> 00:17:49.060 by the competitive forces of supply and demand. 185 00:17:49.060 --> 00:17:52.620 Here the supply is all the people who wanna work 186 00:17:52.620 --> 00:17:55.580 in a particular job and offer their services 187 00:17:55.580 --> 00:17:58.380 in a particular career that they're qualified for. 188 00:17:59.860 --> 00:18:02.340 While the demand side in this market 189 00:18:03.640 --> 00:18:07.460 is all the people who are interested 190 00:18:07.460 --> 00:18:09.720 in hiring an economics professor. 191 00:18:09.720 --> 00:18:25.720 Every hiring decision contributes to the process of establishing a market determined wage rate, so that every time somebody looks for a job or somebody wants to hire somebody, it's not like we have to start from scratch. 192 00:18:25.720 --> 00:18:31.720 We can look at what people were paying in the recent past to start the negotiations. 193 00:18:31.720 --> 00:19:01.720 And of course there's always certain differences in wages based on the quality of a worker, the particular area of expertise and so on so that an economics professor who specialized in the history of economic thought might not make as much as somebody who specialized in macroeconomics because for example macroeconomics is a hotter topic right now 194 00:19:01.720 --> 00:19:03.680 and the History of Economic Thought. 195 00:19:05.320 --> 00:19:09.160 So there's always gonna be individual variances 196 00:19:09.160 --> 00:19:12.400 in particular wages and prices based on quality, 197 00:19:12.400 --> 00:19:14.920 location, working conditions, so forth. 198 00:19:17.480 --> 00:19:20.920 Suppose economic professors at the University of Alabama 199 00:19:20.920 --> 00:19:24.600 were making twice what economic professors 200 00:19:24.600 --> 00:19:26.040 at Auburn were making. 201 00:19:27.400 --> 00:19:30.800 What would go on that would somehow create 202 00:19:30.800 --> 00:19:35.040 more market-determined wages in a situation like that where there was a wide 203 00:19:35.040 --> 00:19:37.320 disparity between 204 00:19:37.320 --> 00:19:40.480 one group and another. What we typically see 205 00:19:40.480 --> 00:19:46.920 is that if the wages were that much higher at the University of Alabama 206 00:19:46.920 --> 00:19:52.960 an Auburn economics professor would even be willing to go to Alabama to work 207 00:19:52.960 --> 00:19:55.900 for that higher wages and so 208 00:19:55.900 --> 00:20:00.540 Alabama could offer maybe slightly lower wages and still 209 00:20:00.540 --> 00:20:05.020 be able to hire everybody they wanted while Auburn would have to start to increase its 210 00:20:05.020 --> 00:20:11.260 wage offers in order to retain professors in order to get new professors and in this 211 00:20:11.260 --> 00:20:17.520 way of professors moving from one university to another tends to reduce the wages at one 212 00:20:17.520 --> 00:20:23.320 university and raise wages at another. 213 00:20:23.320 --> 00:20:30.980 The same competitive forces work on all aspects of the production of those pencils, from the 214 00:20:30.980 --> 00:20:37.260 value of the trees standing in the forest, to the wages of the lumberjack, to the cost 215 00:20:37.260 --> 00:20:44.280 of transporting the lumber to the factory, to the workers in the factory, to the machine 216 00:20:44.280 --> 00:20:50.820 operators in the factory, and even the commissions of the pencil salesmen are all going to be 217 00:20:50.820 --> 00:21:16.120 Influenced and guided by the forces of supply and demand 218 00:21:16.120 --> 00:21:24.120 depends vitally on the existence of property rights in order to properly function. 219 00:21:28.120 --> 00:21:32.120 So property rights are something that the Austrians stress. 220 00:21:32.120 --> 00:21:35.120 What kind of property rights do we have? 221 00:21:35.120 --> 00:21:38.120 Well, first of all, you have the right to your body, 222 00:21:38.120 --> 00:21:42.120 and no one has the right to make a slave out of you, 223 00:21:42.120 --> 00:21:46.720 except, of course, your parents. 224 00:21:46.720 --> 00:21:52.760 You have the right to the fruits of your labor and to all the materials that you own, rightfully 225 00:21:52.760 --> 00:21:54.240 own. 226 00:21:54.240 --> 00:22:02.600 You have the right to sell your labor, to exchange with others, to make contracts. 227 00:22:02.600 --> 00:22:07.920 You also have the right to any unclaimed natural resources. 228 00:22:07.920 --> 00:22:14.520 As a matter of fact, the very first pencil, use of a pencil, occurred about 500 years 229 00:22:14.520 --> 00:22:21.480 ago when this guy in Scotland discovered a solid graphite rock formation sticking out 230 00:22:21.480 --> 00:22:27.420 of the ground near his property that no one else had claimed, and he found that he could 231 00:22:27.420 --> 00:22:34.240 use chunks of this graphite to mark his sheep as his property. 232 00:22:34.240 --> 00:22:39.200 So you know with sheep you can't use a branding iron like you can on cattle or you ruin the 233 00:22:39.200 --> 00:22:45.720 wool and the wool sort of grows over the brand anyways so you can't use branding with sheep 234 00:22:45.720 --> 00:22:49.640 the same way you could with cattle. 235 00:22:49.640 --> 00:22:57.600 But this guy found out he could draw a particular design on his sheep and that would mark those 236 00:22:57.600 --> 00:23:02.320 sheep as his property and he also found that he could sell chunks of this graphite to other 237 00:23:02.320 --> 00:23:10.000 and other sheep farmers, so that ironically, the simple pencil played an important role 238 00:23:10.000 --> 00:23:17.500 in establishing concrete property rights in sheep in Scotland. 239 00:23:17.500 --> 00:23:24.840 It took people over 200 years to figure out a way of getting wood around that graphite 240 00:23:24.840 --> 00:23:27.800 to come up with sort of the modern pencil. 241 00:23:27.800 --> 00:23:34.800 Okay, violations of property rights are the things that make people poor. 242 00:23:34.800 --> 00:23:44.800 The existence of property rights is what allows us to have economic success, prosperity and growth. 243 00:23:44.800 --> 00:23:49.800 Where people, you can produce something and it's not just going to be taken away from you. 244 00:23:49.800 --> 00:23:56.800 But when we have violations of property rights, that's when the economic problem starts. 245 00:23:56.800 --> 00:24:25.500 If someone enslaves you, then you are obviously poor. If somebody steals your stuff, then you're going to be poor. If someone taxes your income, then you are going to be poor. If theft and taxation occur on a regular basis, then we lose our incentive to produce, and everyone is poor, including the thieves and governments themselves. There's less to go around. 246 00:24:25.500 --> 00:24:31.640 Now, the most common fallacy in economics is that you can make everyone better off by 247 00:24:31.640 --> 00:24:34.920 violating property rights. 248 00:24:34.920 --> 00:24:40.920 Consider what happens when government tries to direct the economy in any particular way. 249 00:24:40.920 --> 00:24:46.460 The problem is that the government must first take money away from people because it has 250 00:24:46.460 --> 00:24:50.220 no money or resources itself. 251 00:24:50.220 --> 00:24:56.500 Mistaking or taxing is really just a sophisticated form of theft. 252 00:24:56.500 --> 00:25:03.060 The taxpayer now has less income with which to solve their own problems, their own day-to-day 253 00:25:03.060 --> 00:25:10.940 problems and they have less incentive to work hard, earn money and save for the future. 254 00:25:10.940 --> 00:25:17.200 Even if government actually solve some problems, which it almost never does, it has created 255 00:25:17.200 --> 00:25:24.920 A whole bunch of unseen problems for each individual taxpayer. 256 00:25:24.920 --> 00:25:31.440 French economist Frederic Bastiat tells us a story of a young boy who was throwing rocks 257 00:25:31.440 --> 00:25:36.280 and broke the window of Felix's shoe store. 258 00:25:36.280 --> 00:25:41.400 A crowd gathers around the broken glass and someone remarks that this would be good news 259 00:25:41.400 --> 00:25:54.400 for Oscar the Glazier, the Glazier is the person who reinstalls windows, because he will probably earn more than a thousand dollars installing a new window for Felix. 260 00:25:54.400 --> 00:26:04.400 And then Thelma in the crowd says, well that's good news for me because Oscar and his family are overdue to buy new clothes and they shop at my store. 261 00:26:04.400 --> 00:26:16.400 Then Louise then says, and this is also good news for me because Thelma can now finally purchase the necklace that she has been wanting to buy at my jewelry store. 262 00:26:16.400 --> 00:26:23.400 Then George exclaims that this here broken window is the greatest thing that's ever happened to our town. 263 00:26:23.400 --> 00:26:28.400 And then Barack remarks that, quote, this was just the change we were looking for. 264 00:26:28.400 --> 00:26:44.240 Now, the fallacy, of course, of the broken window is that it doesn't stimulate the economy. 265 00:26:44.240 --> 00:26:52.840 The fallacy is that Felix would still have that $1,000 as well as an unbroken window, 266 00:26:52.840 --> 00:26:59.180 And that thousand dollars could then start this chain of spending throughout the economy 267 00:26:59.180 --> 00:27:03.780 with no loss of the window. 268 00:27:03.780 --> 00:27:08.440 With the broken window, there is no silver lining. 269 00:27:08.440 --> 00:27:13.360 It's a loss, plain and simple. 270 00:27:13.360 --> 00:27:21.560 This however does not prevent some of our friends in mainstream economics from violating 271 00:27:21.560 --> 00:27:24.060 in this fallacy on a regular basis. 272 00:27:24.060 --> 00:27:27.180 It seems like every time there's a natural disaster, 273 00:27:27.180 --> 00:27:29.060 there's a reporter putting a microphone 274 00:27:29.060 --> 00:27:31.680 in front of an economist who says, 275 00:27:31.680 --> 00:27:33.760 well, their silver lining is that this will, 276 00:27:33.760 --> 00:27:36.680 this is gonna stimulate the local economy. 277 00:27:36.680 --> 00:27:39.620 So that for example, when an earthquake hits, 278 00:27:39.620 --> 00:27:41.280 the headlines will be, 279 00:27:41.280 --> 00:27:43.720 the earthquake destroys hundreds of homes, 280 00:27:43.720 --> 00:27:47.120 but economist says that it will stimulate the economy. 281 00:27:47.120 --> 00:27:50.200 Or, quote, the hurricane destroyed buildings, homes 282 00:27:50.200 --> 00:28:09.200 This, of course, is nonsense. Destruction does not stimulate an economy. It forces people to rebuild, who would rather spend their time and money on other things. 283 00:28:09.200 --> 00:28:17.200 If we had a choice to push a button that would prevent any future earthquakes or hurricanes, 284 00:28:17.200 --> 00:28:24.680 Questions. Is there anyone possibly in favor of not pushing that button? 285 00:28:24.680 --> 00:28:30.780 This nonsense also applies to government efforts to stimulate the economy. When government 286 00:28:30.780 --> 00:28:36.980 spends a trillion dollars on a stimulus package, they must take that money away from taxpayers 287 00:28:36.980 --> 00:28:45.860 or borrow money from the future, which means higher taxes and more inflation in the future. 288 00:28:45.860 --> 00:28:52.580 Now, what does that mean? Well, you basically get four results. First, this means that taxpayers 289 00:28:52.580 --> 00:28:58.620 are going to have fewer resources with which to address or to deal with their own day to 290 00:28:58.620 --> 00:29:05.700 day problems. Everybody's got problems throughout the economy. And if you take money systematically 291 00:29:05.700 --> 00:29:12.700 away from taxpayers, that leaves them less able to deal with their day to day problems 292 00:29:12.700 --> 00:29:17.900 about health care, about education, and so forth. 293 00:29:17.900 --> 00:29:25.900 Two, higher tax rates means that people have less incentive to work hard. 294 00:29:25.900 --> 00:29:36.340 If the tax rate goes from 25 to 45 percent, people lose their desire to work because the 295 00:29:36.340 --> 00:29:42.580 return that you get for all of your efforts is likewise reduced, and as a result, the 296 00:29:42.580 --> 00:29:47.580 The entire economic pie shrinks. 297 00:29:47.580 --> 00:29:55.660 Third, higher taxes and inflation also discourage investment in our future, and this diminishes 298 00:29:55.660 --> 00:29:59.940 economic growth. 299 00:29:59.940 --> 00:30:04.740 That's one of the problems we're having right now with the economic crisis, is that people 300 00:30:04.740 --> 00:30:11.620 are very reluctant to invest money in the American economy, which would mean hiring 301 00:30:11.620 --> 00:30:18.380 more people in the American economy because of the prospects of higher taxes and higher 302 00:30:18.380 --> 00:30:26.380 inflation and therefore lower returns on all of those investments. 303 00:30:26.380 --> 00:30:36.020 Fourth, government spending rarely creates any kind of stimulus for the economy whatsoever. 304 00:30:36.020 --> 00:30:43.820 and in many ways that same government spending can actually retard economic progress and economic 305 00:30:43.820 --> 00:30:52.860 growth by taking resources out of the economy and out of the prospects of the hands of entrepreneurs. 306 00:30:52.860 --> 00:30:58.420 So if government is busy taking resources out of the economy in order to build bridges 307 00:30:58.420 --> 00:31:03.040 to nowhere or whatever it happens to be, that means they're not available for entrepreneurs 308 00:31:03.040 --> 00:31:14.120 In Austrian economics, everything is measured by opportunity cost. 309 00:31:14.120 --> 00:31:21.360 Opportunity cost is what actually determines the choices people make. 310 00:31:21.360 --> 00:31:29.560 For example, you can buy a gallon of milk in the grocery store for, say, $3. 311 00:31:29.560 --> 00:31:37.020 You can buy the same gallon of milk at the gas station for $4. 312 00:31:37.020 --> 00:31:42.760 So the price is different by a significant amount. 313 00:31:42.760 --> 00:31:48.280 And yet it's not the case that everybody buys milk at the grocery store and nobody buys 314 00:31:48.280 --> 00:31:50.040 it at the gas station. 315 00:31:50.040 --> 00:31:56.000 And the reason for the difference there is opportunity cost. 316 00:31:56.000 --> 00:32:02.960 The opportunity cost of going all the way to the grocery store just to make a purchase 317 00:32:02.960 --> 00:32:08.560 of one gallon of milk is a lot of time to give up if the gas station is just right down 318 00:32:08.560 --> 00:32:15.320 the street or on your way home from work or on your way home from school. 319 00:32:15.320 --> 00:32:22.500 So that's the opportunity cost and the opportunity cost of course the government, stimulus spending 320 00:32:22.500 --> 00:32:30.300 and so forth is a tremendous burden on the U.S. economy in terms of protracting the economic 321 00:32:30.300 --> 00:32:32.180 crisis. 322 00:32:32.180 --> 00:32:37.980 So there is also an important opportunity cost of government stimulus packages. 323 00:32:37.980 --> 00:32:43.540 What we give up to finance these stimulus packages are all the taxes we pay in our current 324 00:32:43.540 --> 00:32:47.980 and future tax bills to finance the stimulus. 325 00:32:47.980 --> 00:32:52.580 This really means all the things we could have done with our money but will never actually 326 00:32:52.580 --> 00:32:58.460 get to see to fruition. 327 00:32:58.460 --> 00:33:06.740 And I must say that government stimulus spending is often not much better than breaking windows. 328 00:33:06.740 --> 00:33:13.340 What are they actually spending the money on? 329 00:33:13.340 --> 00:33:21.660 When the spending is used simply to keep high-paid government bureaucrats in their jobs and building 330 00:33:21.660 --> 00:33:28.100 bridges to nowhere, this type of spending is every bit or more destructive than the 331 00:33:28.100 --> 00:33:29.900 little boy with his rocks. 332 00:33:29.900 --> 00:33:31.140 Thank you very much.