WEBVTT NOTE The Road to Prosperity 1 00:00:00.000 --> 00:00:05.320 It is good to see all of you here this morning. It's great to be back in the Bay Area. It's 2 00:00:05.320 --> 00:00:09.720 certainly good to be among friends. As Lew mentioned, I spent several years across the 3 00:00:09.720 --> 00:00:13.920 Bay at the University of California at Berkeley in the economics department, a home of such 4 00:00:13.920 --> 00:00:20.760 illustrious scholars as Laura Tyson, President Clinton's first head of his Council of Economic 5 00:00:20.760 --> 00:00:29.320 Advisors and now special economic policy assistant, whatever that may entail. It certainly was 6 00:00:29.320 --> 00:00:34.520 kind of being behind enemy lines is the feeling that I had. 7 00:00:34.520 --> 00:00:39.600 People would sometimes ask me, well, were there any conservatives in your department 8 00:00:39.600 --> 00:00:41.040 at Berkeley? 9 00:00:41.040 --> 00:00:44.360 And I had to respond, well, yes, there was one conservative fellow. 10 00:00:44.360 --> 00:00:48.920 The only problem was he was a native of communist China. 11 00:00:48.920 --> 00:00:53.480 So to be a conservative to him meant he thought that the crackdown at Tiananmen Square had 12 00:00:53.480 --> 00:00:55.480 been a little bit too soft. 13 00:00:55.480 --> 00:01:00.480 So that was the kind of conservatism, gives you something about the range of opinion that 14 00:01:00.480 --> 00:01:07.000 existed in the economics department there. Among my teachers were several economists who 15 00:01:07.000 --> 00:01:11.400 have now gone on to become bureaucrats. Some of you may have seen an article in the Wall 16 00:01:11.400 --> 00:01:18.000 Street Journal a few months ago about the Berkeley economics department where the article 17 00:01:18.000 --> 00:01:21.960 was praising the fact that so many members of the department have gone on to service 18 00:01:21.960 --> 00:01:27.360 is quote-unquote in Washington, apparently that's the measure these days of a quality 19 00:01:27.360 --> 00:01:34.680 economics department is how many of its members can go on and become members of various agencies 20 00:01:34.680 --> 00:01:37.420 in our nation's capital. 21 00:01:37.420 --> 00:01:43.300 And among my teachers was Richard Gilbert who is now the chief economist at the Antitrust 22 00:01:43.300 --> 00:01:49.880 Division of the Department of Justice where he toils at tasks such as trying to stop that 23 00:01:49.880 --> 00:01:56.880 That Great Menace to American Civilization, the Microsoft Corporation, another fellow named 24 00:01:56.880 --> 00:02:01.000 Michael Katz, who is the chief economist at Federal Communications Commission. 25 00:02:01.000 --> 00:02:05.880 And maybe at the end, during the question period, we might talk a little bit about things 26 00:02:05.880 --> 00:02:10.560 like this new telecommunications bill that was just passed on Thursday and the issue 27 00:02:10.560 --> 00:02:16.600 of censorship in electronic communications and censorship, especially in the case of the 28 00:02:16.600 --> 00:02:17.600 internet. 29 00:02:17.600 --> 00:02:22.600 I know that some of you were present at the most recent John Randolph Club meeting here 30 00:02:22.600 --> 00:02:29.320 just down on the peninsula, and I spoke there about the issue of Internet censorship and 31 00:02:29.320 --> 00:02:32.560 a little bit about the history of the Internet, and I'd certainly be happy to talk about 32 00:02:32.560 --> 00:02:37.640 that some more for those who are interested. 33 00:02:37.640 --> 00:02:43.960 Just to make one brief comment, right now, I have kind of mixed feelings about this question 34 00:02:43.960 --> 00:02:50.960 of Money, The Theory of Money and State, The Theory of Money and State, The Theory of Money 35 00:03:13.960 --> 00:03:19.760 will be other forms of offensive speech and offensive text and pictures, which of course 36 00:03:19.760 --> 00:03:25.960 would include all the various hate crimes that are so defined today. So of course most 37 00:03:25.960 --> 00:03:29.360 of the things that any of us in this room would like to say may end up being banned 38 00:03:29.360 --> 00:03:35.560 on the internet as well. Just to give you one recent example, there's a bulletin board 39 00:03:35.560 --> 00:03:41.080 or an electronic mailing list on the internet supposed to be devoted to Austrian economics. 40 00:03:41.080 --> 00:03:50.200 In fact, it's dominated by a group of slightly wacko theoreticians who call themselves Austrian economists. 41 00:03:50.200 --> 00:03:53.960 And there was a very interesting comment last week where someone made the charge, one of 42 00:03:53.960 --> 00:04:00.800 these people made the charge that those of us who are opposed to central banking and 43 00:04:00.800 --> 00:04:07.040 indeed opposed to fractional reserve banking are really motivated not by scholarly concerns 44 00:04:07.040 --> 00:04:12.960 but by anti-Semitism that it's a hatred of the Jewish merchant banking elite that motivated 45 00:04:12.960 --> 00:04:21.880 people like Murray Rothbard in his critique of fractional reserve banking. 46 00:04:21.880 --> 00:04:25.800 So clearly, if those people were in charge, there would be no discussions on the internet 47 00:04:25.800 --> 00:04:30.080 or anywhere else about the problems of the fractional reserve system. 48 00:04:30.080 --> 00:04:34.320 Indeed, many of the issues that we're here to talk about this weekend. 49 00:04:34.320 --> 00:04:38.640 But I do just want to say thank you to all of you here who helped make it possible for 50 00:04:38.640 --> 00:04:41.440 me to survive those dark years. 51 00:04:41.440 --> 00:04:48.060 And it really is true that among the many roles that the Mises Institute plays, giving 52 00:04:48.060 --> 00:04:55.560 support to students, graduate students, young professors such as myself is really a crucial, 53 00:04:55.560 --> 00:05:02.220 it's a very crucial role, not only financial support but also moral support, intellectual 54 00:05:02.220 --> 00:05:03.960 ammunition and so on. 55 00:05:03.960 --> 00:05:08.760 You can only, I can't tell you what it is like to be in a place like that day in and 56 00:05:08.760 --> 00:05:13.660 day out and then get to come for a weekend to a Mises Institute conference, or get to 57 00:05:13.660 --> 00:05:17.760 come for a week to the Mises University in the summer and spend a whole week with other 58 00:05:17.760 --> 00:05:20.920 Austrian economists, free market intellectuals. 59 00:05:20.920 --> 00:05:26.480 It really is not just a breath of fresh air, it's almost a whole sort of intellectual rebirth 60 00:05:26.480 --> 00:05:30.280 that gets the juices flowing, gets you charged up, makes you want to go back and finish the 61 00:05:30.280 --> 00:05:37.280 the work that you're doing, complete your degree, write articles, whatever it is, whatever you're up to. 62 00:05:37.280 --> 00:05:44.280 So that really is crucial and I don't think I would have been able to do it had it not been for the support of people like yourselves. 63 00:05:44.280 --> 00:05:50.280 What I want to talk about this morning is the road to prosperity, the road to prosperity. 64 00:05:50.280 --> 00:05:58.280 And in fact I could make this a very short speech, some of you, which some of you might prefer, and just give you a short answer that, I mean, it's very simple. 65 00:05:58.280 --> 00:06:07.280 The road to prosperity depends on the L word, the great L word, and I don't mean liberal, of course I mean liberty. 66 00:06:07.280 --> 00:06:17.280 Liberty is the key to prosperity, the key to progress, and what we really need to have prosperity in the United States 67 00:06:17.280 --> 00:06:25.280 is a political system that promotes the traditional Lockean virtues of the right to life, liberty and property. 68 00:06:25.280 --> 00:06:34.280 Not life, liberty and the pursuit of happiness as Jefferson mistakenly inserted it into our founding documents, but life, liberty and property. 69 00:06:34.280 --> 00:06:43.280 So the freedom in a sense, especially the freedom to own property, to write contracts, freedom to associate with whomever we please. 70 00:06:43.280 --> 00:06:52.280 That's the easy answer. That's the short answer. That's the means by which we can achieve our goal. 71 00:06:52.280 --> 00:07:22.280 Let me, what I want to talk to you is give you a longer answer and talk a little bit this morning about some strategies that we might use, talk a little bit about strategies that other free market thinkers have advocated and I especially want to talk to you about this because strategy was a great passion of Murray Rothbard, he lamented often that whereas those on the left especially the traditional Marxists spent lots on 72 00:07:22.280 --> 00:07:29.280 The Marxists spent about 10% of their time developing the theory and 90% of their time planning how they would do it, how they would take over. 73 00:07:29.280 --> 00:07:37.280 Whereas free market intellectuals or libertarians or paleoconservatives, with them the proportions have been almost the reverse. 74 00:07:37.280 --> 00:07:46.280 We spend 90% of our time thinking about developing our doctrine and only about 10% of our time thinking about how we would do it. 75 00:07:46.280 --> 00:08:16.280 and only about 10% of our time thinking about developing our doctrine and only about 10% of our time thinking about how we would actually put these kinds of reforms into place and something that Murray Rothbard cared about quite a lot and something that we here at the Mises Institute are thinking about actively is this question of tactics, means, given what we want to accomplish, how is it that we're going to be able to do it given the current political realities and I want to start to get us thinking a little bit about some of these issues 76 00:08:16.280 --> 00:08:23.080 I know that other speakers throughout the day will go into greater detail on these. 77 00:08:23.080 --> 00:08:31.760 Let me begin by talking to you a little bit about the classic book that is evoked by the 78 00:08:31.760 --> 00:08:36.560 title of my talk today, and that's the book by Friedrich Hayek, The Road to Serfdom, published 79 00:08:36.560 --> 00:08:41.560 in 1944. 80 00:08:41.560 --> 00:08:47.560 Hayek of course was one of the most eminent of the modern Austrian economists. 81 00:08:47.560 --> 00:08:53.560 He was a student, an indirect student, younger colleague and in many ways a disciple of Ludwig 82 00:08:53.560 --> 00:08:54.560 von Mises. 83 00:08:54.560 --> 00:09:00.800 Hayek of course won the Nobel Prize in economics in 1974 and helped to give some legitimacy 84 00:09:00.800 --> 00:09:06.000 to the Austrian school right at the start of the so-called Austrian revival when modern 85 00:09:06.000 --> 00:09:16.160 and Austrian Economics was coming back back into play. Incidentally, the relationship 86 00:09:16.160 --> 00:09:22.960 between Hayek and Mises is very important because Hayek says that as a young man, he, 87 00:09:22.960 --> 00:09:28.720 along with many others of his generation who had just been through the First World War, 88 00:09:28.720 --> 00:09:34.380 were mild socialists. Hayek says he was a socialist of the Fabian variety, along with 89 00:09:34.380 --> 00:09:43.380 Hayek and many other prominent men of his generation, such as Gottfried Hobbler, a great economist and scholar in Europe and at Harvard, and an associate of the Mises Institute. 90 00:09:43.380 --> 00:09:50.380 Hobbler was also converted to the free market, to laissez-faire, by reading Mises' book, Socialism. 91 00:09:50.380 --> 00:09:59.380 And so something that, I think, is very important to me, and I think it's very important to me, and I think it's very important to me, and I think it's very important to me, and I think it's very important to me, and I think it's very important to me, 92 00:09:59.380 --> 00:10:03.380 and Free Market to laissez-faire by reading Mises' book Socialism. 93 00:10:03.380 --> 00:10:10.380 And so something that we're all very conscious of is the fact that we need to always be on the lookout for more potential Hayek's. 94 00:10:10.380 --> 00:10:19.380 Part of our educational strategy is to make sure that bright young people who might be interested in free market ideas will get exposed to them 95 00:10:19.380 --> 00:10:27.380 and will have a chance to convert from their whatever it is that they currently believe. 96 00:10:27.380 --> 00:10:32.100 So Hayek published The Road to Serfdom first in Britain and then later in the United States 97 00:10:32.100 --> 00:10:38.340 right around the end of World War II, and it was a very controversial book. Hayek's main point 98 00:10:38.340 --> 00:10:45.380 was that the kind of central planning that had already begun to be implemented in Britain, 99 00:10:45.940 --> 00:10:50.420 and of course was being undertaken in the United States as well as part of the war, 100 00:10:50.420 --> 00:10:55.060 that this central planning was leading us down the road to serfdom, that it would bring not 101 00:10:55.060 --> 00:11:01.780 not prosperity, but the opposite of that. In short, Hayek was trying to show that all 102 00:11:01.780 --> 00:11:10.060 forms of collectivism and not just fascism of the German or Italian varieties would lead 103 00:11:10.060 --> 00:11:18.300 us down the same road to tyranny, the same road that the Axis powers had taken, that 104 00:11:18.300 --> 00:11:23.340 in a sense Britain and the United States were headed down that same road, that by imposing 105 00:11:23.340 --> 00:11:28.940 sort of what were considered mild collectivist measures to assist in the war, and of course 106 00:11:28.940 --> 00:11:34.840 in Britain the road, socialist measures had already been introduced. Hayek tried to argue 107 00:11:34.840 --> 00:11:42.020 that those were the wrong tactics, those tactics would lead us down the same road that Germany, 108 00:11:42.020 --> 00:11:49.020 Italy and Russia had taken. The book caused quite a sensation, mostly among the, in the 109 00:11:53.340 --> 00:11:58.080 among lay readers not so much among the intellectuals to whom Hayek thought he 110 00:11:58.080 --> 00:12:05.220 was addressing his thesis. He made some very other very some other important and 111 00:12:05.220 --> 00:12:08.520 interesting points in that book and I do recommend that you that you look at the 112 00:12:08.520 --> 00:12:15.180 road to serfdom. He in one place attacked the spurious distinction between so-called 113 00:12:15.180 --> 00:12:21.100 positive liberty and negative liberty. This is the what you get in the political 114 00:12:21.100 --> 00:12:26.100 of Science textbooks today that, well, of course, the kind of thing that we're interested in, 115 00:12:26.100 --> 00:12:30.100 true liberty, genuine freedom, well, that's just one kind of liberty. 116 00:12:30.100 --> 00:12:35.100 That's a limited notion of liberty. That's negative liberty, meaning the freedom 117 00:12:35.100 --> 00:12:40.100 not to be interfered with, which is, of course, what liberty means, right? 118 00:12:40.100 --> 00:12:45.100 The right to do what you want to do without restrictions from the state. 119 00:12:45.100 --> 00:12:50.100 This is defined as only a limited kind of liberty. There's also so-called positive liberty. 120 00:12:50.100 --> 00:12:56.940 of Liberty. And that's the liberty to have things, right? The freedom from want, freedom 121 00:12:56.940 --> 00:13:01.860 from need, freedom from hunger, the right to a decent job, the right to housing, so 122 00:13:01.860 --> 00:13:09.220 on. So the whole notion of freedom and liberty has been completely corrupted in modern day 123 00:13:09.220 --> 00:13:18.060 usage. Here's how Hayek says it in the Road to Serfdom. Hayek notes that, quote, to make 124 00:13:18.060 --> 00:13:22.420 To make a totalitarian system function efficiently, it is not enough that everybody should be 125 00:13:22.420 --> 00:13:26.860 forced to work for the ends selected by those in control. It is essential that the people 126 00:13:26.860 --> 00:13:31.820 should come to regard these ends as their own. This is brought about by propaganda and by 127 00:13:31.820 --> 00:13:37.260 complete control of all sources of information. The most effective way of making people accept 128 00:13:37.260 --> 00:13:41.180 the validity of the values they are to serve is to persuade them that these are really 129 00:13:41.180 --> 00:13:45.900 the same as those they have always held. And the most efficient technique to this end is 130 00:13:45.900 --> 00:13:50.060 is to use the old words but change their meaning. 131 00:13:50.060 --> 00:13:57.140 Few traits of totalitarian regimes are at the same time so confusing to the superficial 132 00:13:57.140 --> 00:14:01.860 observer and yet so characteristic of the whole intellectual climate as this complete 133 00:14:01.860 --> 00:14:04.140 perversion of language. 134 00:14:04.140 --> 00:14:06.540 He's talking about this misuse of the term liberty. 135 00:14:06.540 --> 00:14:11.700 And of course we see this around us all the time today. 136 00:14:11.700 --> 00:14:18.000 For example, the word racist, which used to refer to hatred towards a particular race, 137 00:14:18.000 --> 00:14:26.100 now refers to any opposition to the welfare state. Restaurants that don't serve all customers 138 00:14:26.100 --> 00:14:30.460 and exactly the way those customers demand to be served, as Lew explained last night 139 00:14:30.460 --> 00:14:36.420 in the Denny's case. Hayek continues, the worst suffer in this respect is the word liberty. 140 00:14:36.420 --> 00:14:41.980 It is a word used freely in totalitarian states as elsewhere. Indeed, it could almost be said 141 00:14:41.980 --> 00:14:45.860 that wherever liberty as we know it has been destroyed, this has been done in the name 142 00:14:45.860 --> 00:14:50.820 of some new freedom promised to the people. Even among us, and Hayek's writing in the 143 00:14:50.820 --> 00:14:56.900 1940s, even among us we have planners who promise us collective freedom, which is as 144 00:14:56.900 --> 00:15:01.780 misleading as anything said by totalitarian politicians. Collective freedom is not the 145 00:15:01.780 --> 00:15:06.020 freedom of the members of society, but the unlimited freedom of the planner to do with 146 00:15:06.020 --> 00:15:08.900 society what he pleases. 147 00:15:08.900 --> 00:15:16.460 And these are important words to keep in mind when we hear politicians and their media flunkies 148 00:15:16.460 --> 00:15:22.900 talk about the new eras of liberty and freedom that people like Bill Clinton are going to 149 00:15:22.900 --> 00:15:23.900 usher in. 150 00:15:23.900 --> 00:15:27.940 Okay, they're talking about, they're taking our words and using them to mean their opposite, 151 00:15:27.940 --> 00:15:49.700 Hayek was ostracized and outcast in the intellectual community among economists, and Hayek had 152 00:15:49.700 --> 00:15:53.980 already by this time achieved a great reputation as a skilled technical economist. 153 00:15:53.980 --> 00:16:00.980 He was working out the details of Mises' Theory of the Business Cycle, and he had won great acclaim for that. 154 00:16:00.980 --> 00:16:07.980 But after writing The Road to Serfdom, Hayek was dismissed by the intellectuals as being a mere polemicist, 155 00:16:07.980 --> 00:16:18.980 a mere polemicist journalist and not a real serious scholar for having written a popular book. 156 00:16:18.980 --> 00:16:25.980 Now, what were Hayek's ideas about strategy? How to bring about freedom, genuine freedom, 157 00:16:26.420 --> 00:16:33.420 in an era of great totalitarian sentiment? Well, Hayek did have a consciously articulated 158 00:16:34.740 --> 00:16:41.740 strategy and Hayek's strategy was that what you need to do is convert the intellectuals. 159 00:16:41.980 --> 00:16:48.380 You need to persuade fellow academics and top-level scholars, philosophers, that the 160 00:16:48.380 --> 00:16:52.060 and the free market, that laissez-faire is the proper creed. 161 00:16:52.060 --> 00:16:57.660 And Hayek believed that people, that intellectual opponents of laissez-faire, that prominent 162 00:16:57.660 --> 00:17:05.620 socialist academics, were not motivated by any malice or ill will, but were merely misinformed 163 00:17:05.620 --> 00:17:06.900 about the facts. 164 00:17:06.900 --> 00:17:11.060 They just didn't understand, they were well intentioned, they thought that their policies 165 00:17:11.060 --> 00:17:17.860 would bring about prosperity, but they just didn't understand how markets really work, 166 00:17:17.860 --> 00:17:22.500 and what the real consequences would be, and if you could get all these great minds together, 167 00:17:22.500 --> 00:17:27.500 you could persuade the socialists, persuade the socialists that the free market was the 168 00:17:27.500 --> 00:17:28.500 right way to go. 169 00:17:28.500 --> 00:17:33.060 In fact, the road to serfdom, if you notice, is dedicated to, quote, the socialists of 170 00:17:33.060 --> 00:17:35.140 all parties, close quote. 171 00:17:35.140 --> 00:17:37.080 And Hayek didn't mean that to be facetious. 172 00:17:37.080 --> 00:17:42.940 He really believed, or claims he believed, that socialists would read this book and would 173 00:17:42.940 --> 00:18:12.940 So Hayek's strategy was first to convert or convince the intellectuals, and the top intellectuals would then go on to convert the people that Hayek called, in a wonderful phrase, the second-hand dealers in ideas, by which he meant journalists, teachers, writers, the clergy, etc., the people where the average person gets the most money. 174 00:18:12.940 --> 00:18:17.900 gets most of his ideas about these kinds of issues and so what Hayek did to bring this 175 00:18:17.900 --> 00:18:23.440 about was to found an organization called the Mont Pelerin Society which you've probably 176 00:18:23.440 --> 00:18:24.440 heard of. 177 00:18:24.440 --> 00:18:31.780 It was founded in 1947 with the first ever meeting of a group of these like-minded intellectuals 178 00:18:31.780 --> 00:18:39.860 from all over the world in this period. 179 00:18:39.860 --> 00:18:46.900 Now, why did Hayek feel like an organization like the Mont Pelerin Society would be necessary? 180 00:18:46.900 --> 00:18:55.320 Well, partly he wanted to do this because the role of the economist, of the intellectual 181 00:18:55.320 --> 00:18:59.820 but especially the economist, had changed dramatically during the war. 182 00:18:59.820 --> 00:19:07.340 The traditional role of economists has been to say no to what the state says. 183 00:19:07.340 --> 00:19:12.180 When the king says, I'm going to tax the people, I'm going to levy heavy taxes on the people, 184 00:19:12.180 --> 00:19:16.900 that will bring great prosperity to me, the economist says, no, you don't understand, 185 00:19:16.900 --> 00:19:17.900 that's not going to work. 186 00:19:17.900 --> 00:19:23.140 That's going to cripple production, it's going to ruin the economy, it will devastate 187 00:19:23.140 --> 00:19:24.140 the land. 188 00:19:24.140 --> 00:19:25.140 No, you can't do that. 189 00:19:25.140 --> 00:19:26.140 That's not going to work. 190 00:19:26.140 --> 00:19:28.900 No, you can't have more guns and more butter at the same time. 191 00:19:28.900 --> 00:19:30.940 No, this policy is not going to work. 192 00:19:30.940 --> 00:19:33.560 This policy is going to have an adverse effect, and so on. 193 00:19:33.560 --> 00:19:36.580 That's historically what the role of the economist has been. 194 00:19:36.580 --> 00:19:41.460 In World War II, that role was completely corrupted. What happened in World War II was 195 00:19:41.460 --> 00:19:48.780 this strange phenomenon of all the economists going to Washington, which we now see culminated 196 00:19:48.780 --> 00:19:53.380 in things like what we were talking about earlier about the Berkeley Economics Department. 197 00:19:53.380 --> 00:19:57.380 In World War II, the economists en masse headed off to Washington to work for various government 198 00:19:57.380 --> 00:20:05.980 agencies, to do statistical work, to assist in procurement and wartime planning. And this 199 00:20:05.980 --> 00:20:11.180 This included not just people like John Kenneth Galbraith, who was head of the Office of Price 200 00:20:11.180 --> 00:20:15.340 Administration, whose job was to impose price controls during wartime. 201 00:20:15.340 --> 00:20:19.660 I don't mean just people like Galbraith, also people like Milton Friedman. 202 00:20:19.660 --> 00:20:23.700 Milton Friedman worked for the Treasury Department during World War II to come up with new ways 203 00:20:23.700 --> 00:20:28.980 of raising revenue to support the war. 204 00:20:28.980 --> 00:20:38.500 Friedman was the one who came up with the idea of the withholding tax, and by the way, 205 00:20:38.500 --> 00:20:45.700 some of us at the Mises Institute have been accused from time to time of Friedman bashing. 206 00:20:45.700 --> 00:20:52.540 Certainly to Friedman's credit, he admits now that that was a mistake, that a payroll 207 00:20:52.540 --> 00:20:56.500 tax, automatic deductions during peacetime are certainly not a good idea, although he 208 00:20:56.500 --> 00:21:04.500 He doesn't acknowledge any knowledge of that during the war when he imposed this as a temporary expediency. 209 00:21:04.500 --> 00:21:09.500 Those of you who have read Robert Higgs's great book, Crisis and Leviathan, 210 00:21:09.500 --> 00:21:17.500 know that Higgs's main thesis is the way big government expands is through this kind of ratchet effect, 211 00:21:17.500 --> 00:21:24.500 that there's some kind of crisis, like war for example, for which temporary emergency powers must be claimed. 212 00:21:24.500 --> 00:21:33.500 Well, of course, we're not going to impose totalitarianism, but just for the duration of the war, we need to have these price controls, we need to raise additional revenues, we need a payroll tax, etc., etc. 213 00:21:33.500 --> 00:21:46.500 But then, of course, once the war is over, we never go back to the way it was before the war. The temporary measures always remain, sometimes not in exactly the same form. They're disguised a little bit, but in essence, they remain. 214 00:21:46.500 --> 00:21:52.500 And so we ratchet upwards towards statism during the crisis and never really fall back very much once the crisis is over. 215 00:21:52.500 --> 00:22:08.720 So Hayek founds this society more or less as a debating group, where the ideas of liberty 216 00:22:08.720 --> 00:22:13.800 would be worked out and would then be disseminated to the second-hand dealers of ideas and then 217 00:22:13.800 --> 00:22:18.500 on to the general populace. 218 00:22:18.500 --> 00:22:23.100 And Hayek did assemble a very impressive group of scholars for the first meeting of this 219 00:22:23.100 --> 00:22:29.260 group which met at Mont Pelerin in Switzerland from which they decided to call themselves 220 00:22:29.260 --> 00:22:31.020 the Mont Pelerin Society. 221 00:22:31.020 --> 00:22:36.780 And present at that first meeting included people like Mises, Henry Hazlitt, Hayek of 222 00:22:36.780 --> 00:22:44.740 course, Wilhelm Rupka and Fritz Machlup, notable Austrian economists, Leonard Reed, the founder 223 00:22:44.740 --> 00:22:50.180 of the Foundation for Economic Education, and also some Chicago School economists like Friedman, 224 00:22:50.180 --> 00:22:56.860 George Stigler and Frank Knight. Among the specifics of Hayek's plan for this kind of 225 00:22:56.860 --> 00:23:06.420 group were the following. It should be composed mainly of economists, but also of scholars 226 00:23:06.420 --> 00:23:12.300 from other disciplines. In other words, economics is key, but economics is not the only thing. 227 00:23:12.300 --> 00:23:20.140 You also need political theorists, legal scholars, historians, philosophers, etc. 228 00:23:20.140 --> 00:23:25.060 As Hayek said, a political philosophy can never be based exclusively on economics or 229 00:23:25.060 --> 00:23:28.220 expressed mainly in economic terms. 230 00:23:28.220 --> 00:23:33.540 Because as we all know, economics is certainly very interesting to all of us here in this 231 00:23:33.540 --> 00:23:34.540 room. 232 00:23:34.540 --> 00:23:39.280 But to the man on the street, economics is, well, they might want to talk about it for 233 00:23:39.280 --> 00:23:44.400 for a few minutes, but they quickly get tired of it and want to move on to something else. 234 00:23:44.400 --> 00:23:53.160 It's sometimes hard to get people motivated and stirred up to action merely by catching 235 00:23:53.160 --> 00:23:54.800 things in economic terms. 236 00:23:54.800 --> 00:23:58.760 So we need more of an interdisciplinary approach, and I'm going to come back to that in just 237 00:23:58.760 --> 00:24:01.080 a few minutes. 238 00:24:01.080 --> 00:24:05.700 History was particularly important according to Hayek, because those who write the history 239 00:24:05.700 --> 00:24:10.140 Books have a disproportionate influence on the minds of the next generation. 240 00:24:10.140 --> 00:24:13.220 Can we have some great historians associated with the Mises Institute? 241 00:24:13.220 --> 00:24:18.020 And that's very key, because where do people get most of their ideas? 242 00:24:18.020 --> 00:24:21.460 These things like the distinction between positive and negative liberty, well, they learned 243 00:24:21.460 --> 00:24:22.460 it in school. 244 00:24:22.460 --> 00:24:26.020 They learned it from their textbooks or from their teachers in school and have never thought 245 00:24:26.020 --> 00:24:30.060 to question these kinds of things. 246 00:24:30.060 --> 00:24:35.100 Hayek also believed that the group should include some journalists, not to officially 247 00:24:35.100 --> 00:24:43.900 because you need to have some members of that profession involved in these kinds of discussions 248 00:24:43.900 --> 00:24:48.980 because they could have a great influence on the people for an obvious reason. 249 00:24:48.980 --> 00:24:56.260 One example of a success that came from this Hayekian strategy is the case of Ludwig Erhard 250 00:24:56.260 --> 00:25:03.140 who became the Minister of Economic Affairs for West Germany at the end of the war and 251 00:25:03.140 --> 00:25:06.140 who later became Chancellor in the 60s. 252 00:25:09.140 --> 00:25:13.140 Ludwig Erhard was himself a member of the Mont Pelerin Society 253 00:25:13.140 --> 00:25:21.140 and his two main economic advisors were Wilhelm Rupke, who was a founder along with Hayek of the Mont Pelerin Society 254 00:25:21.140 --> 00:25:25.140 and another German scholar named Walter Oiken. 255 00:25:25.140 --> 00:25:41.140 And what Erhard did, his first major act on assuming his post as essentially Minister of Finance was to remove all price and wage controls, to completely deregulate prices and wages. 256 00:25:41.140 --> 00:25:48.140 The result was a spectacular post-war recovery in West Germany. 257 00:25:48.140 --> 00:25:57.140 The result of which was Germany is one of the great prosperous economies of the day. 258 00:25:57.140 --> 00:26:06.140 And it's interesting to note what the mainstream economist's reaction at the time was to Erhard's proposal, 259 00:26:06.140 --> 00:26:11.140 this decision to deregulate prices and wages, to remove the wartime price controls. 260 00:26:11.140 --> 00:26:15.140 You can only imagine what the mainstream economist thought about this. 261 00:26:15.140 --> 00:26:21.700 John Kenneth Galbraith, for example, to make an easy target, said in 1948, 262 00:26:21.700 --> 00:26:25.300 there has never been the slightest possibility of getting German recovery 263 00:26:25.300 --> 00:26:30.100 by the wholesale repeal of controls and regulations. 264 00:26:30.100 --> 00:26:35.300 Walter Heller, another prominent economist who became John F. Kennedy's, 265 00:26:35.300 --> 00:26:40.260 the head of Kennedy's Council of Economic Advisors, said a couple years later, 266 00:26:40.260 --> 00:26:44.020 quote, the positive use of fiscal and monetary measures which he supports, 267 00:26:44.020 --> 00:26:48.740 In other words, intervention, is to be sure, not in harmony with the orthodox free market 268 00:26:48.740 --> 00:26:53.220 policies espoused by the current administration of the West German Federal Republic. 269 00:26:53.220 --> 00:26:56.980 So he wanted to make it clear that he did not support any of this free market stuff 270 00:26:56.980 --> 00:27:00.740 that was going on in Germany. 271 00:27:00.740 --> 00:27:08.060 Now what's the situation today among economists when asked about these kinds of issues? 272 00:27:08.060 --> 00:27:10.580 Well, things have changed. 273 00:27:10.580 --> 00:27:15.260 Things have certainly changed for the better, but we still have a very long way to go. 274 00:27:15.260 --> 00:27:23.020 And what I mean by that is most of us thought that the collapse of socialism and the fall 275 00:27:23.020 --> 00:27:28.960 of the Berlin Wall in 89 and then the collapse of the Soviet Union would prove to be the 276 00:27:28.960 --> 00:27:34.780 final irrefutable evidence that Mises was right in his prediction back in the 1920s 277 00:27:34.780 --> 00:27:39.240 that socialism couldn't work, that a socialist economy was just not possible. 278 00:27:39.240 --> 00:27:48.480 And Austrians have been arguing over the years that developing Mises' position, showing how 279 00:27:48.480 --> 00:27:50.880 Mises would be right. 280 00:27:50.880 --> 00:27:55.640 And then finally, in one glorious moment, the whole thing fell down and Mises was demonstrated 281 00:27:55.640 --> 00:27:58.140 to have been correct by the evidence. 282 00:27:58.140 --> 00:28:01.440 And you would think that would be enough to convince everybody. 283 00:28:01.440 --> 00:28:02.440 But of course it hasn't. 284 00:28:02.440 --> 00:28:04.180 Of course it hasn't. 285 00:28:04.180 --> 00:28:07.800 And this is especially true among academic economists. 286 00:28:07.800 --> 00:28:15.720 Here's what these people say. There are very few sort of outright explicit Marxists or socialists 287 00:28:15.720 --> 00:28:22.080 among the economics profession today. Everybody says, well, yeah, of course, sure, we know 288 00:28:22.080 --> 00:28:27.060 that socialism didn't work. Pure socialism didn't work. You need to have markets in 289 00:28:27.060 --> 00:28:35.240 some form or some fashion. You can't completely have central planning from the top down. So 290 00:28:35.240 --> 00:28:41.160 So markets are good, but markets are good only in moderation. 291 00:28:41.160 --> 00:28:47.960 Capitalism is okay only if it's just a little bit of capitalism, not a lot. 292 00:28:47.960 --> 00:28:52.480 Free markets, markets are good, markets are better than central planning, but only if 293 00:28:52.480 --> 00:29:00.280 there's a strong central government to perform essential functions, such as targeting strategic 294 00:29:00.280 --> 00:29:06.880 industries, maintaining infrastructure, especially investments in quote-unquote human capital, 295 00:29:06.880 --> 00:29:13.720 which means state-run education, of course regulation of monopolies, the establishment 296 00:29:13.720 --> 00:29:19.020 of a strong central bank to assure macroeconomic stability, the wonderful glories that we've 297 00:29:19.020 --> 00:29:23.620 experienced here in the United States. 298 00:29:23.620 --> 00:29:30.800 These things have to be in place for markets to be okay, according to the academic economist, 299 00:29:30.800 --> 00:29:33.360 the mainstream economist today. 300 00:29:33.360 --> 00:29:40.540 These things have to be in place for markets to be okay, according to the academic economist, 301 00:29:40.540 --> 00:29:43.660 the mainstream economist today. 302 00:29:43.660 --> 00:29:48.460 And again, I want to read you some quotes from some prominent mainstream economists, 303 00:29:48.460 --> 00:29:53.220 and I'm not going to pick on people like Galbraith, although it would be easy to dig 304 00:29:53.220 --> 00:30:11.220 I think you could pick up a lot of quotes that would make you chuckle from people like Paul Samuelson and Galbraith and others saying things even up to 1988 about the glories of the Soviet system and how the Soviet Union was soon going to eclipse the Western economies and its GNP and so on. 305 00:30:11.220 --> 00:30:17.220 It's too easy to go after those people. It's not enough of a challenge. It's not any fun. 306 00:30:17.220 --> 00:30:24.820 Incidentally, let me quote from three very prestigious economists, younger economists working today. 307 00:30:24.820 --> 00:30:34.820 All of these have won what's called the Clark Medal, which is an award that's given out to the best economist under the age of 40. 308 00:30:34.820 --> 00:30:40.420 This is supposed to be kind of the first thing that you win before you go on to win a Nobel Prize in your 60s or 70s. 309 00:30:40.420 --> 00:30:59.420 One of these is Lawrence Summers. Lawrence Summers was an economist at Harvard, one of the youngest people ever to get tenure in the economics department at Harvard. Incidentally, he had a very distinguished pedigree, being Paul Samuelson's nephew. 310 00:30:59.420 --> 00:31:08.780 He then became a bureaucrat, was the chief economist at the World Bank, later the Treasury 311 00:31:08.780 --> 00:31:13.980 Secretary for International Affairs, and I want to quote him from some remarks he made 312 00:31:13.980 --> 00:31:20.920 in a World Bank publication in 1993 on the issue of economic development and the transition 313 00:31:20.920 --> 00:31:24.180 towards a market economy in the former socialist countries. 314 00:31:24.180 --> 00:31:27.680 This is a hot issue, of course. 315 00:31:27.680 --> 00:31:32.920 And these comments that I made earlier about markets being okay in moderation applies especially 316 00:31:32.920 --> 00:31:35.840 to these situations, to those countries. 317 00:31:35.840 --> 00:31:42.320 This is where all the big shot Harvard economists are going over to Eastern Europe and Russia 318 00:31:42.320 --> 00:31:47.760 and the former Soviet republics to be advisors and consultants and to tell them how to plan 319 00:31:47.760 --> 00:31:48.760 the transition. 320 00:31:48.760 --> 00:31:51.840 Slowly, don't go too fast, don't rush things. 321 00:31:51.840 --> 00:31:57.160 Gradually try to impose a little bit of liberty, a little bit of economic freedom in these 322 00:31:57.160 --> 00:32:03.160 Formerly Planned Societies Here's what Summers has to say on the subject. 323 00:32:03.160 --> 00:32:09.160 He says, market development itself requires government action. 324 00:32:09.160 --> 00:32:13.100 The socialist economies in transition from Eastern Europe to East Asia are finding out 325 00:32:13.100 --> 00:32:18.120 that the establishment of the rules of the game by the government is crucial to the success 326 00:32:18.120 --> 00:32:19.920 of market reforms. 327 00:32:19.920 --> 00:32:24.860 And by the way, by rules of the game, he doesn't mean establishing the rule of law or having 328 00:32:24.860 --> 00:32:54.860 The Need for Government Action goes further, its rationale resting on various notions of market failure. Investment in human capital and physical infrastructure by the government are usually justified because of externalities or spillover effects in the consumption or production of both of these categories and the inadequate incentives for markets to take them into account. In the case of primary education, for example, there are consumption-related spillover 329 00:32:54.860 --> 00:32:59.700 Spill-overs. We might talk a little bit later about what these people mean by spill-overs. 330 00:32:59.700 --> 00:33:05.080 The benefits to literacy go well beyond the gains of the individuals becoming literate. 331 00:33:05.080 --> 00:33:09.540 In the case of physical infrastructure such as roads, there are production-related externalities 332 00:33:09.540 --> 00:33:14.420 – I'll come back to externalities in a minute – based on the need to make lumpy 333 00:33:14.420 --> 00:33:21.840 investments – by which he means big investments, like the Hoover Dam – or to integrate the 334 00:33:21.840 --> 00:33:27.680 Service in Large Networks. Negative spillovers, too, justify government intervention. Environmental 335 00:33:27.680 --> 00:33:32.760 pollution and congestion are inadequately accounted for by the market. Of course, he 336 00:33:32.760 --> 00:33:37.720 doesn't go into the property rights solutions for things like environmental pollution that 337 00:33:37.720 --> 00:33:44.360 have been discussed by market economists. So, Summers winds up, the central issue then 338 00:33:44.360 --> 00:33:50.560 is one of the state and the market, but it is not a question of intervention versus laissez-faire. 339 00:33:50.560 --> 00:33:54.320 a popular dichotomy, but a false one. 340 00:33:54.320 --> 00:33:58.120 As he goes on to show, it is rather a question of the proper division of 341 00:33:58.120 --> 00:33:59.920 responsibilities between the two 342 00:33:59.920 --> 00:34:03.640 and of efficiency in their respective functions. 343 00:34:03.640 --> 00:34:07.120 So these people are not outright explicit socialists saying we need to 344 00:34:07.120 --> 00:34:08.480 nationalize everything. 345 00:34:08.480 --> 00:34:12.320 They want to allow markets to work a little bit, but only in the presence of 346 00:34:12.320 --> 00:34:14.920 the only if the strong hand of the state is there 347 00:34:14.920 --> 00:34:18.640 to correct market failure, to provide things that the markets 348 00:34:18.640 --> 00:34:27.640 are not providing. Another notable economist is Paul Krugman, who's formerly a professor 349 00:34:27.640 --> 00:34:38.300 at MIT and now at Stanford, and a specialist in international trade and development. Krugman 350 00:34:38.300 --> 00:34:46.860 said a little earlier, well last year in the fall of 95, talking about the kinds of things 351 00:34:46.860 --> 00:35:03.860 The great myth of American politics is that the middle class is groaning under the burden of huge taxes deployed to support the undeserving poor. 352 00:35:03.860 --> 00:35:13.860 In fact, what the welfare state really does is to take from the well off, a little, and give to the poor, also a little, but because they are so poor it matters a lot. 353 00:35:13.860 --> 00:35:16.860 Families in the middle are not much affected either way. 354 00:35:16.860 --> 00:35:24.860 And I think Lew gave us some statistics, plenty of evidence last night for how people in the middle sure as heck are affected. 355 00:35:24.860 --> 00:35:27.860 We can go on to talk about that later. 356 00:35:27.860 --> 00:35:36.860 Krugman goes on with a bizarre quote about social welfare programs are really just insurance. 357 00:35:36.860 --> 00:35:39.860 They're not transfers, they're just insurance. 358 00:35:39.860 --> 00:35:46.020 and that's the best justification for them and he's surprised that he doesn't see that in the 359 00:35:47.060 --> 00:35:51.460 justification discussed much in the literature. I mean of course if all it is is insurance then why 360 00:35:51.460 --> 00:35:58.100 doesn't private insurance handle that? Why do we need state insurance to take care of those problems? 361 00:35:59.060 --> 00:36:03.940 Let me just read you one more quote which I think you'll find amusing if not completely 362 00:36:03.940 --> 00:36:10.940 by Joseph Stiglitz 363 00:36:33.940 --> 00:36:51.300 The Standard Theories of the Efficiency of Competitive Markets are based on the premise 364 00:36:51.300 --> 00:36:55.480 that there is perfect information, or more precisely, that the information held by individuals 365 00:36:55.480 --> 00:36:59.420 or firms is not affected by what they observe in the market and cannot be altered by any 366 00:36:59.420 --> 00:37:02.020 action they can undertake, including acquiring more information. 367 00:37:02.020 --> 00:37:16.780 Thus, the fundamental theorems of welfare economics, which assert that every competitive 368 00:37:16.780 --> 00:37:21.420 equilibrium is Pareto-efficient, provide no guidance with respect to the question of whether 369 00:37:21.420 --> 00:37:26.020 markets such as financial markets, which are essentially concerned with the production, 370 00:37:26.020 --> 00:37:30.300 processing, dissemination and utilization of information, are efficient. 371 00:37:30.300 --> 00:37:35.460 On the contrary, economies with imperfect information or incomplete markets are in general not 372 00:37:35.460 --> 00:37:39.260 constrained Pareto-efficient, and he has a citation to one of his own learned papers 373 00:37:39.260 --> 00:37:41.480 on the subject as proof. 374 00:37:41.480 --> 00:37:46.220 There are feasible government interventions that can make all individuals better off. 375 00:37:46.220 --> 00:37:50.580 Thus, not only is there no presumption that competitive markets are efficient, but there 376 00:37:50.580 --> 00:37:52.660 is a presumption that they are inefficient. 377 00:37:52.660 --> 00:37:57.340 Moreover, even with no other barriers to entry, in the presence of costly information there 378 00:37:57.340 --> 00:38:02.160 is a presumption that markets will not, in general, be fully competitive. 379 00:38:02.160 --> 00:38:06.420 This strengthens the presumption that markets, in the absence of government intervention, 380 00:38:06.420 --> 00:38:09.780 are not constrained Pareto-efficient. 381 00:38:09.780 --> 00:38:13.380 And thus, obviously, the government has to step in to correct those failures to bring 382 00:38:13.380 --> 00:38:14.380 about Pareto-efficiency. 383 00:38:14.380 --> 00:38:20.340 And of course, Austrians completely reject the mainstream notions of welfare theory from 384 00:38:20.340 --> 00:38:25.540 economics, general equilibrium, and the concept of Pareto-optimality. 385 00:38:25.540 --> 00:38:30.620 And I mean, this is the reason why Austrian economics is so important and what's very 386 00:38:30.620 --> 00:38:37.500 important that we continue to develop the Austrian school and encourage young scholars 387 00:38:37.500 --> 00:38:43.700 to become, to read the Austrian literature, to get students to be exposed to these ideas 388 00:38:43.700 --> 00:38:46.220 and not just the ideas of the Stiglitz. 389 00:38:46.220 --> 00:38:49.380 People like Stiglitz are the ones who are writing the textbooks. 390 00:38:49.380 --> 00:38:52.800 That's what the current generation of college students, that's what they're getting in 391 00:38:52.800 --> 00:38:56.860 in most of their economics courses, unless they're fortunate enough to have one of the 392 00:38:56.860 --> 00:39:01.820 speakers at this conference or a Mises Institute adjunct scholar as their professor, this is 393 00:39:01.820 --> 00:39:05.220 the kind of stuff that they're getting. 394 00:39:05.220 --> 00:39:11.660 I want to tell you a little bit about some of the popular examples of market failure 395 00:39:11.660 --> 00:39:18.540 that are in the academic economics literature today, what people like Stiglitz mean by market 396 00:39:18.540 --> 00:39:23.420 Failure. 397 00:39:23.420 --> 00:39:33.780 One of these is a subject that's called path dependence. 398 00:39:33.780 --> 00:39:39.940 Path dependence is the idea that has become very trendy lately among economists that certain 399 00:39:39.940 --> 00:39:45.700 outcomes are sort of historically determined in the sense that, for example, in the choice 400 00:39:45.700 --> 00:39:57.700 The choice of technologies, the choice of establishing a standard, a technical standard, like for video cassettes, the VHS standard versus Sony's Betamax standard. 401 00:39:57.700 --> 00:40:06.700 The claim is made that the market will sometimes choose the wrong standard, the less efficient standard, and we get locked into that. 402 00:40:06.700 --> 00:40:11.700 Because a standard by definition only works when everybody else is on the same standard. 403 00:40:11.700 --> 00:40:17.200 So when we have technologies that have what these economists call a network externality, 404 00:40:17.200 --> 00:40:23.200 a network externality, it's possible for the market to choose the wrong standard and we get locked into it. 405 00:40:23.200 --> 00:40:30.700 The famous example of this was the example of the typewriter keyboard, the so-called QWERTY keyboard, 406 00:40:30.700 --> 00:40:34.200 named after the letters in the first row. 407 00:40:34.200 --> 00:40:40.700 There was a very influential article by a Stanford economist named Paul David claiming that, 408 00:40:40.700 --> 00:41:10.700 Talking a little bit about the history of the QWERTY keyboard, and some of you, I'm sure, know this, that the original layout, the sort of standard layout that we have today, had to do with the arrangement of keys that in the old fashioned typewriters with keys, designers put the, they tried to put letters, the most frequently typed letters evenly spaced apart on the keyboard so the keys would jam less frequently. And according to Paul David, this is an inferior alignment, this is not the 409 00:41:10.700 --> 00:41:23.700 The most efficient way to put the keys. He claimed that there are some rival keyboard arrangements, one called the Dvorak keyboard, which put the keys in different places and which are much more efficient. 410 00:41:23.700 --> 00:41:33.700 People can type much faster with the Dvorak keyboard. But because the market chose the QWERTY standard as the standard, now we're all locked in. 411 00:41:33.700 --> 00:41:39.700 We can't switch over to a new keyboard layout because everybody was trained to type with the QWERTY layout. 412 00:41:39.700 --> 00:41:43.300 and of course now with computers and so on it doesn't matter it that there's 413 00:41:43.300 --> 00:41:48.040 nothing about the key the keys jamming that makes any difference and economists 414 00:41:48.040 --> 00:41:52.260 have picked up this QWERTY story like you would not believe okay and now we're 415 00:41:52.260 --> 00:41:57.540 all looking out there around us to try to find more QWERTY's examples of bad 416 00:41:57.540 --> 00:42:01.480 technologies inefficient inferior technologies that the market has locked 417 00:42:01.480 --> 00:42:05.340 us into and of course what they propose as an alternative is that the government 418 00:42:05.340 --> 00:42:09.100 set standards for these kinds of things that whenever there's a new technology 419 00:42:09.100 --> 00:42:29.100 The VHS beta example is another good one. The problem is, all these examples, upon closer inspection, turn out to be wrong. They turn out to be false. For example, the QWERTY story is all wrong, or what's wrong, Paul David's claim that there is something wrong with the VHS beta is false. 420 00:42:29.100 --> 00:42:43.100 Paul Davids claimed that there existed a rival keyboard, this Dvorak keyboard, that worked better. 421 00:42:43.100 --> 00:42:49.100 The evidence for that claim turned out to be based only on a report by Dvorak himself. 422 00:42:49.100 --> 00:42:54.100 Mr. Dvorak claimed that his own keyboard allowed people to type much faster. 423 00:42:54.100 --> 00:43:08.100 And in fact studies, people went back and looked at the historical record and found studies, an Air Force study at the time, which showed that really any arrangement of the keys is just as good as any other once you learn it. 424 00:43:08.100 --> 00:43:17.100 It's just repetition that matters and it really doesn't matter where you put the keys as long as you learn to type on a particular keyboard and you stick to it. 425 00:43:17.100 --> 00:43:23.100 Typing speeds all kind of converge at about the same amount no matter what keyboard arrangement you use. 426 00:43:23.100 --> 00:43:27.620 Okay, so there's no evidence that there's anything wrong with the QWERTY standard, okay? 427 00:43:27.620 --> 00:43:33.140 There's also no evidence that the Betamax technology was really better than the VHS technology, 428 00:43:33.140 --> 00:43:35.540 even though now we're stuck with VHS. 429 00:43:35.540 --> 00:43:38.980 In fact, they worked just as well, and VHS was cheaper at the time, 430 00:43:38.980 --> 00:43:41.500 which is why the market selected it. 431 00:43:41.500 --> 00:43:44.180 Another example, of course, is with Microsoft. 432 00:43:44.180 --> 00:43:49.660 This is the big bugaboo of the network externality path dependence guys today. 433 00:43:49.660 --> 00:43:56.660 They claim that Microsoft, the Microsoft sort of standard for its operating system, is not a good standard. 434 00:43:56.660 --> 00:44:03.660 The MS-DOS and Microsoft's Windows are far inferior to other technologies like the Macintosh operating system 435 00:44:03.660 --> 00:44:09.660 and ones provided by other manufacturers, yet Microsoft has 85% of the PC market. 436 00:44:09.660 --> 00:44:18.660 So everybody is stuck with using Microsoft products, Microsoft's operating system, even though it's really not as good as rival operating systems. 437 00:44:18.660 --> 00:44:25.260 Again, this claim turns out, upon closer inspection, to be, we can easily dismiss it as being false. 438 00:44:25.260 --> 00:44:30.560 There's no evidence that from an economic perspective, as opposed to a purely technical perspective, 439 00:44:30.560 --> 00:44:35.860 that Microsoft's operating system is any worse than any other. 440 00:44:35.860 --> 00:44:42.760 Let me briefly mention one other example of a market failure that is popular among economists today. 441 00:44:42.760 --> 00:44:48.060 You would think that if there was any one issue that economists agreed on, 442 00:44:48.060 --> 00:44:53.260 Obviously, everybody knows economists disagree on macroeconomic policy and things like that. 443 00:44:53.260 --> 00:44:59.060 But you would think that just about everyone would agree that minimum wage laws create unemployment, 444 00:44:59.060 --> 00:45:01.060 especially among teenage workers. 445 00:45:01.060 --> 00:45:05.260 Just about all economists, mainstream economists, Austrian economists, 446 00:45:05.260 --> 00:45:11.660 economists of just about every stripe, agreed that minimum wages cause unemployment among teenagers. 447 00:45:11.660 --> 00:45:15.360 If you set the wage higher than what the market wage would be, 448 00:45:15.360 --> 00:45:23.360 Then some teenagers are going to be priced out of the market. No one will hire them because they don't generate $4.25 an hour worth of productivity. 449 00:45:23.360 --> 00:45:31.360 Well, this consensus was shattered a couple of years ago by a sensational publication by two Princeton economists, and David Card and Alan Kruger. 450 00:45:31.360 --> 00:45:36.360 Kruger was actually the chief economist for the Department of Labor before returning to Princeton. 451 00:45:36.360 --> 00:45:42.080 Princeton, and they began to circulate some research where they claimed to show that minimum 452 00:45:42.080 --> 00:45:48.820 wages actually, the imposition of minimum wages, especially left-wing economists nationwide 453 00:45:48.820 --> 00:45:54.040 were proclaiming, aha, here we finally have some evidence that price controls are good. 454 00:45:54.040 --> 00:45:57.960 They don't create, minimum wages don't create a surplus of labor, they don't create 455 00:45:57.960 --> 00:46:02.720 unemployment, they're good, we need higher minimum wages. 456 00:46:02.720 --> 00:46:09.400 And even now, some good economists stepped into the picture and showed that the Cardin-Kruger 457 00:46:09.400 --> 00:46:13.280 study was a horrible study. 458 00:46:13.280 --> 00:46:18.440 They based their numbers, they called some fast food restaurants to ask them about their 459 00:46:18.440 --> 00:46:23.080 employment practices and whoever answered the phone, they wrote that down as the manager 460 00:46:23.080 --> 00:46:26.120 and the manager reported that we hired this many people. 461 00:46:26.120 --> 00:46:29.040 Anyway, they're saying it was just awful. 462 00:46:29.040 --> 00:46:39.040 I guess my point in bringing this up is that even with the collapse of socialism and the consensus that a pure planned economy isn't feasible, 463 00:46:39.040 --> 00:46:48.040 we're still a long ways from any sort of agreement on laissez-faire among economists. 464 00:46:48.040 --> 00:46:52.040 Economists all have this kind of middle of the road position, most of them. 465 00:46:52.040 --> 00:46:57.040 Well, yeah, we have to have markets. You can't do away with markets. You've got to have them around. 466 00:46:57.040 --> 00:47:01.440 But there's market failure lurking behind every tree. 467 00:47:01.440 --> 00:47:04.200 There's a QWERTY lurking behind that tree 468 00:47:04.200 --> 00:47:07.920 and there's some other kind of externality over there 469 00:47:07.920 --> 00:47:09.620 and we've got to have a strong central state 470 00:47:09.620 --> 00:47:11.020 to come in and combat these. 471 00:47:12.840 --> 00:47:14.880 Of course, these people don't understand 472 00:47:14.880 --> 00:47:17.620 and I'm sure have not read Mises' wonderful essay 473 00:47:17.620 --> 00:47:20.520 from 1950 called Middle of the Road Leads to Socialism. 474 00:47:20.520 --> 00:47:23.520 And I think we have that on the table. 475 00:47:23.520 --> 00:47:25.100 I know we've recently republished it 476 00:47:25.100 --> 00:47:27.820 along with Liberty and Property. 477 00:47:27.820 --> 00:47:30.660 And Mises makes the very important point 478 00:47:30.660 --> 00:47:34.780 that the sort of middle of the road, mixed economy solutions 479 00:47:34.780 --> 00:47:37.420 are not stable. 480 00:47:37.420 --> 00:47:40.780 It's not possible to have just one or two interventions, 481 00:47:40.780 --> 00:47:42.780 but a free market the rest of the way, 482 00:47:42.780 --> 00:47:44.900 because every intervention introduces 483 00:47:44.900 --> 00:47:47.480 unintended consequences. 484 00:47:47.480 --> 00:47:49.900 Minimum wages create unemployment. 485 00:47:49.900 --> 00:47:52.020 And so, oh, well, then we need another intervention 486 00:47:52.020 --> 00:47:53.320 to deal with the unemployment. 487 00:47:53.320 --> 00:47:57.320 Unemployment Relief, Stronger Welfare State 488 00:47:57.320 --> 00:48:01.320 Oh well, and that provides disincentives for people to enter the labor force in the first place 489 00:48:01.320 --> 00:48:05.320 That causes another problem. Oh well, we need a new program to deal with that problem 490 00:48:05.320 --> 00:48:09.320 So one intervention begats another intervention 491 00:48:09.320 --> 00:48:13.320 So if you have this kind of attempt to have this kind of 492 00:48:13.320 --> 00:48:17.320 mixture, it inevitably has to lead in one direction or another. In this case it has to lead 493 00:48:17.320 --> 00:48:21.320 towards more and more intervention, till we end up at something that's more like 494 00:48:21.320 --> 00:48:30.480 Okay, very briefly, I want to tell you about Murray Rothbard's, his approach to strategy. 495 00:48:30.480 --> 00:48:38.640 What can we do, and how is it different from Hayek's strategy? 496 00:48:38.640 --> 00:48:47.440 Well, Rothbard said that the kind of strategy that Hayek advocated, that's what Rothbard 497 00:48:47.440 --> 00:48:56.440 or call that educationism, the educationist strategy where the goal is to try to persuade others. 498 00:48:56.440 --> 00:49:05.440 We try to persuade the intellectuals and then we try to persuade the next lower level and then eventually we try to persuade the masses. 499 00:49:05.440 --> 00:49:16.440 Show them that the ideas of liberty are true, correct and just. Show them that this will bring about prosperity to all. 500 00:49:16.440 --> 00:49:29.440 There's a problem, unfortunately, with this strategy, a couple problems with what Rothbard called the pure educationist strategy. 501 00:49:29.440 --> 00:49:40.440 The first is that it takes a long time, it may be years and years, even hundreds of years before we see any concrete results as the true ideas gradually trickle down. 502 00:49:40.440 --> 00:49:43.440 Some of us don't want to wait that long. 503 00:49:43.440 --> 00:49:48.720 Another problem is that you can't rely just on the intellectuals because the media have 504 00:49:48.720 --> 00:49:54.680 a huge influence. The media, of course, tend to ostracize any intellectuals who dissent 505 00:49:54.680 --> 00:50:01.000 from the prevailing mainstream wisdom. Can we see this around us all the time? For example, 506 00:50:01.000 --> 00:50:05.920 there's a very eminent epidemiologist at Berkeley named Peter Duisburg who's done some controversial 507 00:50:05.920 --> 00:50:13.120 research on AIDS and is completely shunned and shut out by the media. Philip Johnson, 508 00:50:13.120 --> 00:50:19.680 The law professor at Berkeley, who is critical of Darwin's theory of evolution, is seen 509 00:50:19.680 --> 00:50:25.680 as portrayed as a right-wing religious kook by the mainstream media. 510 00:50:25.680 --> 00:50:33.080 Oh, and I can't resist talking about the scholars who have done research in controversial 511 00:50:33.080 --> 00:50:40.200 areas such as IQ testing, the relationship between IQ and socioeconomic performance and 512 00:50:40.200 --> 00:50:41.200 IQ and heredity. 513 00:50:41.200 --> 00:50:45.840 I don't know if any of you saw the article in this morning's San Francisco Chronicle 514 00:50:45.840 --> 00:50:51.760 about some conference on IQ testing, where there was a report that a new study showed 515 00:50:51.760 --> 00:51:00.760 that if we focus our efforts on babies, on young children, we can increase average IQ 516 00:51:00.760 --> 00:51:03.640 scores, but we've got to get the kids very early. 517 00:51:03.640 --> 00:51:10.960 There was a study that tried to show that if you have massive teaching and mental drills 518 00:51:10.960 --> 00:51:14.680 and I don't know exactly what they are for children as early as, but you have to get 519 00:51:14.680 --> 00:51:19.840 them before they're four months old and you have to begin this training in the first few 520 00:51:19.840 --> 00:51:24.580 months and they had some study trying to show that a control group who had had this done 521 00:51:24.580 --> 00:51:31.740 to them averaged so many points higher on IQ tests years later and so you can only imagine 522 00:51:31.740 --> 00:51:38.880 what this implies, right, that just head start, that's way too late, that's not enough, we've 523 00:51:38.880 --> 00:51:50.240 The Village has to begin educating the kids as soon as they come out of the womb. 524 00:51:50.240 --> 00:51:56.920 The other problem with the pure educationist strategy is that intellectuals aren't always 525 00:51:56.920 --> 00:52:01.120 motivated just by the search for truth. 526 00:52:01.120 --> 00:52:03.520 Intellectuals and academics have their own agendas. 527 00:52:03.520 --> 00:52:08.720 Sometimes they want fame and fortune and they enjoy going to Washington and serving in a 528 00:52:08.720 --> 00:52:13.720 and a position of power. You can't rely exclusively on the intellectual class to bring about this revolution, 529 00:52:13.720 --> 00:52:17.720 because they may not have purely altruistic motives. 530 00:52:17.720 --> 00:52:24.720 So education is key, education is crucial, but it's not sufficient, it's not enough. 531 00:52:24.720 --> 00:52:40.220 Rothbard's strategy was what he called right-wing populism, right-wing populism or right-wing 532 00:52:40.220 --> 00:52:46.960 radicalism, meaning that we have to use both the educationalist strategy, both intellectual 533 00:52:46.960 --> 00:52:54.280 educational means, but also we need to encourage a rebellion, resentment among the people against 534 00:52:54.280 --> 00:52:59.280 The Crimes Committed by the Elites, by the Regulators and by the State. 535 00:52:59.280 --> 00:53:09.280 Rothbard calls this, he describes his right-wing populism as exciting, dynamic, tough and confrontational, 536 00:53:09.280 --> 00:53:17.280 rousing and inspiring not only the exploited masses, but the often shell-shocked right-wing intellectual cadre as well. 537 00:53:17.280 --> 00:53:19.280 So how do we do this? What do we want? 538 00:53:19.280 --> 00:53:28.960 We need a cadre of intellectuals and academics on our side, and we certainly need that to 539 00:53:28.960 --> 00:53:35.560 achieve long run change and also sort of medium run change to attract students to listen to 540 00:53:35.560 --> 00:53:43.360 our ideas, to get young professors and so on to help develop and promote the ideas of 541 00:53:43.360 --> 00:53:47.200 of Austrian Economics and of Liberty. 542 00:53:47.200 --> 00:53:52.200 But we also need journalists, we need grassroots activists, 543 00:53:53.260 --> 00:53:56.660 we need sort of popular agitator types. 544 00:53:56.660 --> 00:53:59.760 Okay, because Rothbard felt that deep down 545 00:53:59.760 --> 00:54:03.440 the masses really were on our side, and I think he's right. 546 00:54:03.440 --> 00:54:08.200 The sort of Heartland folks certainly do not, 547 00:54:08.200 --> 00:54:12.960 despite the way they're portrayed in the media, okay, 548 00:54:12.960 --> 00:54:15.280 are definitely on our side. 549 00:54:15.280 --> 00:54:18.840 These are the people that, I think it was Bill Kaufman 550 00:54:18.840 --> 00:54:22.160 who drew this wonderful distinction between the people 551 00:54:22.160 --> 00:54:25.400 who run America and the people who live in America. 552 00:54:25.400 --> 00:54:27.280 So we're talking about the people who live in America, 553 00:54:27.280 --> 00:54:30.400 real Americans, not the beltway insiders, 554 00:54:30.400 --> 00:54:33.360 not the bicoastal cultural elite. 555 00:54:33.360 --> 00:54:36.040 But the people in the middle, what the elites refer to 556 00:54:36.040 --> 00:54:39.040 as people who live in flyover country, 557 00:54:39.040 --> 00:54:42.680 the Midwest, the South, those people 558 00:54:42.680 --> 00:55:01.680 So Rothbard's strategy was to try to mobilize the radical and revolutionary sentiment expressed in the 94 elections that Lew talked about last night. 559 00:55:01.680 --> 00:55:09.680 So we need to educate the public, we need to educate businessmen, we need to educate students and academics, journalists and politicians. 560 00:55:09.680 --> 00:55:27.680 We need to put pressure on legislators, we need to expose them for what they really are and we need to take back our language and not allow them to change the terms, to take our words and twist them around, as Hayek said, back in the 1940s. 561 00:55:29.680 --> 00:55:34.680 And how does the Mises Institute figure into this? 562 00:55:34.680 --> 00:55:42.680 Well, we're deeply committed to the same kind of strategy for change that Murray Rothbard outlined. 563 00:55:42.680 --> 00:55:50.680 So on the scholarly side, we're committed to the Rothbardian program of sort of a broad interdisciplinary science of liberty, 564 00:55:50.680 --> 00:56:03.680 with an emphasis on Austrian economics, but also attention to political theory and philosophy, history, law and so on. 565 00:56:03.680 --> 00:56:22.680 And we also have, certainly have great journalists as part of the team, you can look at the list of the Mises Institute's media fellows, find those few, just about everyone, every good member of the media is one of our group. 566 00:56:22.680 --> 00:56:52.680 Also, the Mises Institute, we insist on being independent. We're not sort of corrupted by power. We don't go off to Washington like the Berkeley economists and roam the corridors of power whispering in the ears of the great leaders and publishing opinion studies and working for the World Bank and the International Monetary Fund and the Federal Reserve Bank. 567 00:56:52.680 --> 00:56:56.320 Austrian economists and the Mises Institute economists don't do that. We're not interested 568 00:56:56.320 --> 00:57:06.380 in doing that. We have no desire to do that. So what is it that we can do? What can we 569 00:57:06.380 --> 00:57:15.320 expect to achieve our goals? Well, first of all, we can't rely on mainstream economists. 570 00:57:15.320 --> 00:57:19.320 As I've tried to make clear earlier, we can't rely on the mainstream economists to be on 571 00:57:19.320 --> 00:57:22.120 on our side. 572 00:57:22.120 --> 00:57:25.440 What we have to do is train more Austrian economists. 573 00:57:25.440 --> 00:57:30.600 We need more young scholars to be promoting the Austrian School of Economics. 574 00:57:30.600 --> 00:57:34.720 I want to see a day where, if you look at the list of adjunct scholars of the Mises 575 00:57:34.720 --> 00:57:38.880 Institute, that will be a longer list than the list of members of the American Economic 576 00:57:38.880 --> 00:57:39.880 Association. 577 00:57:39.880 --> 00:57:44.360 Then we'll know that we've got real progress, that we're really somewhere. 578 00:57:44.360 --> 00:57:46.960 We need to take back our language. 579 00:57:46.960 --> 00:57:52.080 We need to use liberty to mean liberty and not allow it to be twisted the way it has 580 00:57:52.080 --> 00:57:53.560 been. 581 00:57:53.560 --> 00:57:55.080 And we certainly don't want to play nice. 582 00:57:55.080 --> 00:57:57.320 That was another part of Hayek's strategy. 583 00:57:57.320 --> 00:58:03.200 Hayek had an idea that he had to be very sort of genteel and stay strictly within the mainstream 584 00:58:03.200 --> 00:58:05.920 and you don't say anything nasty about anybody. 585 00:58:05.920 --> 00:58:08.980 And I think this is a flawed strategy. 586 00:58:08.980 --> 00:58:11.320 We need to expose the people for what they are. 587 00:58:11.320 --> 00:58:16.560 Don't call the socialists nice, intelligent people who are a little bit misguided. 588 00:58:16.560 --> 00:58:22.640 Call them wrong, call them false, call them monstrous, as Murray Rothbard would say. 589 00:58:22.640 --> 00:58:29.280 Lew for example did this when Laura Tyson was first announced as Clinton's appointee. 590 00:58:29.280 --> 00:58:33.160 Lew was one of the first in print to expose, and it's very easy to do, you just quote 591 00:58:33.160 --> 00:58:38.640 from her previous writings, her work on comparative economic systems, her praise of the Ceausescu 592 00:58:38.640 --> 00:58:44.120 regime for the miraculous economic wonders that had worked in Romania. 593 00:58:44.120 --> 00:58:50.200 We need to show these people what they are. If we want prosperity, if we want real progress, 594 00:58:50.200 --> 00:58:55.320 then we need liberty. What we need is liberty. And Hayek says in The Road to Serfdom, a policy 595 00:58:55.320 --> 00:59:01.360 of freedom for the individual is the only true progressive policy. And that, that is 596 00:59:01.360 --> 00:59:03.200 the road to prosperity. Thank you.