It is good to see all of you here this morning. It's great to be back in the Bay Area. It's
certainly good to be among friends. As Lew mentioned, I spent several years across the
Bay at the University of California at Berkeley in the economics department, a home of such
illustrious scholars as Laura Tyson, President Clinton's first head of his Council of Economic
Advisors and now special economic policy assistant, whatever that may entail. It certainly was
kind of being behind enemy lines is the feeling that I had.
People would sometimes ask me, well, were there any conservatives in your department
at Berkeley?
And I had to respond, well, yes, there was one conservative fellow.
The only problem was he was a native of communist China.
So to be a conservative to him meant he thought that the crackdown at Tiananmen Square had
been a little bit too soft.
So that was the kind of conservatism, gives you something about the range of opinion that
existed in the economics department there. Among my teachers were several economists who
have now gone on to become bureaucrats. Some of you may have seen an article in the Wall
Street Journal a few months ago about the Berkeley economics department where the article
was praising the fact that so many members of the department have gone on to service
is quote-unquote in Washington, apparently that's the measure these days of a quality
economics department is how many of its members can go on and become members of various agencies
in our nation's capital.
And among my teachers was Richard Gilbert who is now the chief economist at the Antitrust
Division of the Department of Justice where he toils at tasks such as trying to stop that
That Great Menace to American Civilization, the Microsoft Corporation, another fellow named
Michael Katz, who is the chief economist at Federal Communications Commission.
And maybe at the end, during the question period, we might talk a little bit about things
like this new telecommunications bill that was just passed on Thursday and the issue
of censorship in electronic communications and censorship, especially in the case of the
internet.
I know that some of you were present at the most recent John Randolph Club meeting here
just down on the peninsula, and I spoke there about the issue of Internet censorship and
a little bit about the history of the Internet, and I'd certainly be happy to talk about
that some more for those who are interested.
Just to make one brief comment, right now, I have kind of mixed feelings about this question
of Money, The Theory of Money and State, The Theory of Money and State, The Theory of Money
will be other forms of offensive speech and offensive text and pictures, which of course
would include all the various hate crimes that are so defined today. So of course most
of the things that any of us in this room would like to say may end up being banned
on the internet as well. Just to give you one recent example, there's a bulletin board
or an electronic mailing list on the internet supposed to be devoted to Austrian economics.
In fact, it's dominated by a group of slightly wacko theoreticians who call themselves Austrian economists.
And there was a very interesting comment last week where someone made the charge, one of
these people made the charge that those of us who are opposed to central banking and
indeed opposed to fractional reserve banking are really motivated not by scholarly concerns
but by anti-Semitism that it's a hatred of the Jewish merchant banking elite that motivated
people like Murray Rothbard in his critique of fractional reserve banking.
So clearly, if those people were in charge, there would be no discussions on the internet
or anywhere else about the problems of the fractional reserve system.
Indeed, many of the issues that we're here to talk about this weekend.
But I do just want to say thank you to all of you here who helped make it possible for
me to survive those dark years.
And it really is true that among the many roles that the Mises Institute plays, giving
support to students, graduate students, young professors such as myself is really a crucial,
it's a very crucial role, not only financial support but also moral support, intellectual
ammunition and so on.
You can only, I can't tell you what it is like to be in a place like that day in and
day out and then get to come for a weekend to a Mises Institute conference, or get to
come for a week to the Mises University in the summer and spend a whole week with other
Austrian economists, free market intellectuals.
It really is not just a breath of fresh air, it's almost a whole sort of intellectual rebirth
that gets the juices flowing, gets you charged up, makes you want to go back and finish the
the work that you're doing, complete your degree, write articles, whatever it is, whatever you're up to.
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.
What I want to talk about this morning is the road to prosperity, the road to prosperity.
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.
The road to prosperity depends on the L word, the great L word, and I don't mean liberal, of course I mean liberty.
Liberty is the key to prosperity, the key to progress, and what we really need to have prosperity in the United States
is a political system that promotes the traditional Lockean virtues of the right to life, liberty and property.
Not life, liberty and the pursuit of happiness as Jefferson mistakenly inserted it into our founding documents, but life, liberty and property.
So the freedom in a sense, especially the freedom to own property, to write contracts, freedom to associate with whomever we please.
That's the easy answer. That's the short answer. That's the means by which we can achieve our goal.
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
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.
Whereas free market intellectuals or libertarians or paleoconservatives, with them the proportions have been almost the reverse.
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.
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
I know that other speakers throughout the day will go into greater detail on these.
Let me begin by talking to you a little bit about the classic book that is evoked by the
title of my talk today, and that's the book by Friedrich Hayek, The Road to Serfdom, published
in 1944.
Hayek of course was one of the most eminent of the modern Austrian economists.
He was a student, an indirect student, younger colleague and in many ways a disciple of Ludwig
von Mises.
Hayek of course won the Nobel Prize in economics in 1974 and helped to give some legitimacy
to the Austrian school right at the start of the so-called Austrian revival when modern
and Austrian Economics was coming back back into play. Incidentally, the relationship
between Hayek and Mises is very important because Hayek says that as a young man, he,
along with many others of his generation who had just been through the First World War,
were mild socialists. Hayek says he was a socialist of the Fabian variety, along with
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.
Hobbler was also converted to the free market, to laissez-faire, by reading Mises' book, Socialism.
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,
and Free Market to laissez-faire by reading Mises' book Socialism.
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.
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
and will have a chance to convert from their whatever it is that they currently believe.
So Hayek published The Road to Serfdom first in Britain and then later in the United States
right around the end of World War II, and it was a very controversial book. Hayek's main point
was that the kind of central planning that had already begun to be implemented in Britain,
and of course was being undertaken in the United States as well as part of the war,
that this central planning was leading us down the road to serfdom, that it would bring not
not prosperity, but the opposite of that. In short, Hayek was trying to show that all
forms of collectivism and not just fascism of the German or Italian varieties would lead
us down the same road to tyranny, the same road that the Axis powers had taken, that
in a sense Britain and the United States were headed down that same road, that by imposing
sort of what were considered mild collectivist measures to assist in the war, and of course
in Britain the road, socialist measures had already been introduced. Hayek tried to argue
that those were the wrong tactics, those tactics would lead us down the same road that Germany,
Italy and Russia had taken. The book caused quite a sensation, mostly among the, in the
among lay readers not so much among the intellectuals to whom Hayek thought he
was addressing his thesis. He made some very other very some other important and
interesting points in that book and I do recommend that you that you look at the
road to serfdom. He in one place attacked the spurious distinction between so-called
positive liberty and negative liberty. This is the what you get in the political
of Science textbooks today that, well, of course, the kind of thing that we're interested in,
true liberty, genuine freedom, well, that's just one kind of liberty.
That's a limited notion of liberty. That's negative liberty, meaning the freedom
not to be interfered with, which is, of course, what liberty means, right?
The right to do what you want to do without restrictions from the state.
This is defined as only a limited kind of liberty. There's also so-called positive liberty.
of Liberty. And that's the liberty to have things, right? The freedom from want, freedom
from need, freedom from hunger, the right to a decent job, the right to housing, so
on. So the whole notion of freedom and liberty has been completely corrupted in modern day
usage. Here's how Hayek says it in the Road to Serfdom. Hayek notes that, quote, to make
To make a totalitarian system function efficiently, it is not enough that everybody should be
forced to work for the ends selected by those in control. It is essential that the people
should come to regard these ends as their own. This is brought about by propaganda and by
complete control of all sources of information. The most effective way of making people accept
the validity of the values they are to serve is to persuade them that these are really
the same as those they have always held. And the most efficient technique to this end is
is to use the old words but change their meaning.
Few traits of totalitarian regimes are at the same time so confusing to the superficial
observer and yet so characteristic of the whole intellectual climate as this complete
perversion of language.
He's talking about this misuse of the term liberty.
And of course we see this around us all the time today.
For example, the word racist, which used to refer to hatred towards a particular race,
now refers to any opposition to the welfare state. Restaurants that don't serve all customers
and exactly the way those customers demand to be served, as Lew explained last night
in the Denny's case. Hayek continues, the worst suffer in this respect is the word liberty.
It is a word used freely in totalitarian states as elsewhere. Indeed, it could almost be said
that wherever liberty as we know it has been destroyed, this has been done in the name
of some new freedom promised to the people. Even among us, and Hayek's writing in the
1940s, even among us we have planners who promise us collective freedom, which is as
misleading as anything said by totalitarian politicians. Collective freedom is not the
freedom of the members of society, but the unlimited freedom of the planner to do with
society what he pleases.
And these are important words to keep in mind when we hear politicians and their media flunkies
talk about the new eras of liberty and freedom that people like Bill Clinton are going to
usher in.
Okay, they're talking about, they're taking our words and using them to mean their opposite,
Hayek was ostracized and outcast in the intellectual community among economists, and Hayek had
already by this time achieved a great reputation as a skilled technical economist.
He was working out the details of Mises' Theory of the Business Cycle, and he had won great acclaim for that.
But after writing The Road to Serfdom, Hayek was dismissed by the intellectuals as being a mere polemicist,
a mere polemicist journalist and not a real serious scholar for having written a popular book.
Now, what were Hayek's ideas about strategy? How to bring about freedom, genuine freedom,
in an era of great totalitarian sentiment? Well, Hayek did have a consciously articulated
strategy and Hayek's strategy was that what you need to do is convert the intellectuals.
You need to persuade fellow academics and top-level scholars, philosophers, that the
and the free market, that laissez-faire is the proper creed.
And Hayek believed that people, that intellectual opponents of laissez-faire, that prominent
socialist academics, were not motivated by any malice or ill will, but were merely misinformed
about the facts.
They just didn't understand, they were well intentioned, they thought that their policies
would bring about prosperity, but they just didn't understand how markets really work,
and what the real consequences would be, and if you could get all these great minds together,
you could persuade the socialists, persuade the socialists that the free market was the
right way to go.
In fact, the road to serfdom, if you notice, is dedicated to, quote, the socialists of
all parties, close quote.
And Hayek didn't mean that to be facetious.
He really believed, or claims he believed, that socialists would read this book and would
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.
gets most of his ideas about these kinds of issues and so what Hayek did to bring this
about was to found an organization called the Mont Pelerin Society which you've probably
heard of.
It was founded in 1947 with the first ever meeting of a group of these like-minded intellectuals
from all over the world in this period.
Now, why did Hayek feel like an organization like the Mont Pelerin Society would be necessary?
Well, partly he wanted to do this because the role of the economist, of the intellectual
but especially the economist, had changed dramatically during the war.
The traditional role of economists has been to say no to what the state says.
When the king says, I'm going to tax the people, I'm going to levy heavy taxes on the people,
that will bring great prosperity to me, the economist says, no, you don't understand,
that's not going to work.
That's going to cripple production, it's going to ruin the economy, it will devastate
the land.
No, you can't do that.
That's not going to work.
No, you can't have more guns and more butter at the same time.
No, this policy is not going to work.
This policy is going to have an adverse effect, and so on.
That's historically what the role of the economist has been.
In World War II, that role was completely corrupted. What happened in World War II was
this strange phenomenon of all the economists going to Washington, which we now see culminated
in things like what we were talking about earlier about the Berkeley Economics Department.
In World War II, the economists en masse headed off to Washington to work for various government
agencies, to do statistical work, to assist in procurement and wartime planning. And this
This included not just people like John Kenneth Galbraith, who was head of the Office of Price
Administration, whose job was to impose price controls during wartime.
I don't mean just people like Galbraith, also people like Milton Friedman.
Milton Friedman worked for the Treasury Department during World War II to come up with new ways
of raising revenue to support the war.
Friedman was the one who came up with the idea of the withholding tax, and by the way,
some of us at the Mises Institute have been accused from time to time of Friedman bashing.
Certainly to Friedman's credit, he admits now that that was a mistake, that a payroll
tax, automatic deductions during peacetime are certainly not a good idea, although he
He doesn't acknowledge any knowledge of that during the war when he imposed this as a temporary expediency.
Those of you who have read Robert Higgs's great book, Crisis and Leviathan,
know that Higgs's main thesis is the way big government expands is through this kind of ratchet effect,
that there's some kind of crisis, like war for example, for which temporary emergency powers must be claimed.
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.
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.
And so we ratchet upwards towards statism during the crisis and never really fall back very much once the crisis is over.
So Hayek founds this society more or less as a debating group, where the ideas of liberty
would be worked out and would then be disseminated to the second-hand dealers of ideas and then
on to the general populace.
And Hayek did assemble a very impressive group of scholars for the first meeting of this
group which met at Mont Pelerin in Switzerland from which they decided to call themselves
the Mont Pelerin Society.
And present at that first meeting included people like Mises, Henry Hazlitt, Hayek of
course, Wilhelm Rupka and Fritz Machlup, notable Austrian economists, Leonard Reed, the founder
of the Foundation for Economic Education, and also some Chicago School economists like Friedman,
George Stigler and Frank Knight. Among the specifics of Hayek's plan for this kind of
group were the following. It should be composed mainly of economists, but also of scholars
from other disciplines. In other words, economics is key, but economics is not the only thing.
You also need political theorists, legal scholars, historians, philosophers, etc.
As Hayek said, a political philosophy can never be based exclusively on economics or
expressed mainly in economic terms.
Because as we all know, economics is certainly very interesting to all of us here in this
room.
But to the man on the street, economics is, well, they might want to talk about it for
for a few minutes, but they quickly get tired of it and want to move on to something else.
It's sometimes hard to get people motivated and stirred up to action merely by catching
things in economic terms.
So we need more of an interdisciplinary approach, and I'm going to come back to that in just
a few minutes.
History was particularly important according to Hayek, because those who write the history
Books have a disproportionate influence on the minds of the next generation.
Can we have some great historians associated with the Mises Institute?
And that's very key, because where do people get most of their ideas?
These things like the distinction between positive and negative liberty, well, they learned
it in school.
They learned it from their textbooks or from their teachers in school and have never thought
to question these kinds of things.
Hayek also believed that the group should include some journalists, not to officially
because you need to have some members of that profession involved in these kinds of discussions
because they could have a great influence on the people for an obvious reason.
One example of a success that came from this Hayekian strategy is the case of Ludwig Erhard
who became the Minister of Economic Affairs for West Germany at the end of the war and
who later became Chancellor in the 60s.
Ludwig Erhard was himself a member of the Mont Pelerin Society
and his two main economic advisors were Wilhelm Rupke, who was a founder along with Hayek of the Mont Pelerin Society
and another German scholar named Walter Oiken.
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.
The result was a spectacular post-war recovery in West Germany.
The result of which was Germany is one of the great prosperous economies of the day.
And it's interesting to note what the mainstream economist's reaction at the time was to Erhard's proposal,
this decision to deregulate prices and wages, to remove the wartime price controls.
You can only imagine what the mainstream economist thought about this.
John Kenneth Galbraith, for example, to make an easy target, said in 1948,
there has never been the slightest possibility of getting German recovery
by the wholesale repeal of controls and regulations.
Walter Heller, another prominent economist who became John F. Kennedy's,
the head of Kennedy's Council of Economic Advisors, said a couple years later,
quote, the positive use of fiscal and monetary measures which he supports,
In other words, intervention, is to be sure, not in harmony with the orthodox free market
policies espoused by the current administration of the West German Federal Republic.
So he wanted to make it clear that he did not support any of this free market stuff
that was going on in Germany.
Now what's the situation today among economists when asked about these kinds of issues?
Well, things have changed.
Things have certainly changed for the better, but we still have a very long way to go.
And what I mean by that is most of us thought that the collapse of socialism and the fall
of the Berlin Wall in 89 and then the collapse of the Soviet Union would prove to be the
final irrefutable evidence that Mises was right in his prediction back in the 1920s
that socialism couldn't work, that a socialist economy was just not possible.
And Austrians have been arguing over the years that developing Mises' position, showing how
Mises would be right.
And then finally, in one glorious moment, the whole thing fell down and Mises was demonstrated
to have been correct by the evidence.
And you would think that would be enough to convince everybody.
But of course it hasn't.
Of course it hasn't.
And this is especially true among academic economists.
Here's what these people say. There are very few sort of outright explicit Marxists or socialists
among the economics profession today. Everybody says, well, yeah, of course, sure, we know
that socialism didn't work. Pure socialism didn't work. You need to have markets in
some form or some fashion. You can't completely have central planning from the top down. So
So markets are good, but markets are good only in moderation.
Capitalism is okay only if it's just a little bit of capitalism, not a lot.
Free markets, markets are good, markets are better than central planning, but only if
there's a strong central government to perform essential functions, such as targeting strategic
industries, maintaining infrastructure, especially investments in quote-unquote human capital,
which means state-run education, of course regulation of monopolies, the establishment
of a strong central bank to assure macroeconomic stability, the wonderful glories that we've
experienced here in the United States.
These things have to be in place for markets to be okay, according to the academic economist,
the mainstream economist today.
These things have to be in place for markets to be okay, according to the academic economist,
the mainstream economist today.
And again, I want to read you some quotes from some prominent mainstream economists,
and I'm not going to pick on people like Galbraith, although it would be easy to dig
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.
It's too easy to go after those people. It's not enough of a challenge. It's not any fun.
Incidentally, let me quote from three very prestigious economists, younger economists working today.
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.
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.
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.
He then became a bureaucrat, was the chief economist at the World Bank, later the Treasury
Secretary for International Affairs, and I want to quote him from some remarks he made
in a World Bank publication in 1993 on the issue of economic development and the transition
towards a market economy in the former socialist countries.
This is a hot issue, of course.
And these comments that I made earlier about markets being okay in moderation applies especially
to these situations, to those countries.
This is where all the big shot Harvard economists are going over to Eastern Europe and Russia
and the former Soviet republics to be advisors and consultants and to tell them how to plan
the transition.
Slowly, don't go too fast, don't rush things.
Gradually try to impose a little bit of liberty, a little bit of economic freedom in these
Formerly Planned Societies Here's what Summers has to say on the subject.
He says, market development itself requires government action.
The socialist economies in transition from Eastern Europe to East Asia are finding out
that the establishment of the rules of the game by the government is crucial to the success
of market reforms.
And by the way, by rules of the game, he doesn't mean establishing the rule of law or having
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
Spill-overs. We might talk a little bit later about what these people mean by spill-overs.
The benefits to literacy go well beyond the gains of the individuals becoming literate.
In the case of physical infrastructure such as roads, there are production-related externalities
– I'll come back to externalities in a minute – based on the need to make lumpy
investments – by which he means big investments, like the Hoover Dam – or to integrate the
Service in Large Networks. Negative spillovers, too, justify government intervention. Environmental
pollution and congestion are inadequately accounted for by the market. Of course, he
doesn't go into the property rights solutions for things like environmental pollution that
have been discussed by market economists. So, Summers winds up, the central issue then
is one of the state and the market, but it is not a question of intervention versus laissez-faire.
a popular dichotomy, but a false one.
As he goes on to show, it is rather a question of the proper division of
responsibilities between the two
and of efficiency in their respective functions.
So these people are not outright explicit socialists saying we need to
nationalize everything.
They want to allow markets to work a little bit, but only in the presence of
the only if the strong hand of the state is there
to correct market failure, to provide things that the markets
are not providing. Another notable economist is Paul Krugman, who's formerly a professor
at MIT and now at Stanford, and a specialist in international trade and development. Krugman
said a little earlier, well last year in the fall of 95, talking about the kinds of things
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.
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.
Families in the middle are not much affected either way.
And I think Lew gave us some statistics, plenty of evidence last night for how people in the middle sure as heck are affected.
We can go on to talk about that later.
Krugman goes on with a bizarre quote about social welfare programs are really just insurance.
They're not transfers, they're just insurance.
and that's the best justification for them and he's surprised that he doesn't see that in the
justification discussed much in the literature. I mean of course if all it is is insurance then why
doesn't private insurance handle that? Why do we need state insurance to take care of those problems?
Let me just read you one more quote which I think you'll find amusing if not completely
by Joseph Stiglitz
The Standard Theories of the Efficiency of Competitive Markets are based on the premise
that there is perfect information, or more precisely, that the information held by individuals
or firms is not affected by what they observe in the market and cannot be altered by any
action they can undertake, including acquiring more information.
Thus, the fundamental theorems of welfare economics, which assert that every competitive
equilibrium is Pareto-efficient, provide no guidance with respect to the question of whether
markets such as financial markets, which are essentially concerned with the production,
processing, dissemination and utilization of information, are efficient.
On the contrary, economies with imperfect information or incomplete markets are in general not
constrained Pareto-efficient, and he has a citation to one of his own learned papers
on the subject as proof.
There are feasible government interventions that can make all individuals better off.
Thus, not only is there no presumption that competitive markets are efficient, but there
is a presumption that they are inefficient.
Moreover, even with no other barriers to entry, in the presence of costly information there
is a presumption that markets will not, in general, be fully competitive.
This strengthens the presumption that markets, in the absence of government intervention,
are not constrained Pareto-efficient.
And thus, obviously, the government has to step in to correct those failures to bring
about Pareto-efficiency.
And of course, Austrians completely reject the mainstream notions of welfare theory from
economics, general equilibrium, and the concept of Pareto-optimality.
And I mean, this is the reason why Austrian economics is so important and what's very
important that we continue to develop the Austrian school and encourage young scholars
to become, to read the Austrian literature, to get students to be exposed to these ideas
and not just the ideas of the Stiglitz.
People like Stiglitz are the ones who are writing the textbooks.
That's what the current generation of college students, that's what they're getting in
in most of their economics courses, unless they're fortunate enough to have one of the
speakers at this conference or a Mises Institute adjunct scholar as their professor, this is
the kind of stuff that they're getting.
I want to tell you a little bit about some of the popular examples of market failure
that are in the academic economics literature today, what people like Stiglitz mean by market
Failure.
One of these is a subject that's called path dependence.
Path dependence is the idea that has become very trendy lately among economists that certain
outcomes are sort of historically determined in the sense that, for example, in the choice
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.
The claim is made that the market will sometimes choose the wrong standard, the less efficient standard, and we get locked into that.
Because a standard by definition only works when everybody else is on the same standard.
So when we have technologies that have what these economists call a network externality,
a network externality, it's possible for the market to choose the wrong standard and we get locked into it.
The famous example of this was the example of the typewriter keyboard, the so-called QWERTY keyboard,
named after the letters in the first row.
There was a very influential article by a Stanford economist named Paul David claiming that,
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
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.
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.
We can't switch over to a new keyboard layout because everybody was trained to type with the QWERTY layout.
and of course now with computers and so on it doesn't matter it that there's
nothing about the key the keys jamming that makes any difference and economists
have picked up this QWERTY story like you would not believe okay and now we're
all looking out there around us to try to find more QWERTY's examples of bad
technologies inefficient inferior technologies that the market has locked
us into and of course what they propose as an alternative is that the government
set standards for these kinds of things that whenever there's a new technology
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.
Paul Davids claimed that there existed a rival keyboard, this Dvorak keyboard, that worked better.
The evidence for that claim turned out to be based only on a report by Dvorak himself.
Mr. Dvorak claimed that his own keyboard allowed people to type much faster.
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.
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.
Typing speeds all kind of converge at about the same amount no matter what keyboard arrangement you use.
Okay, so there's no evidence that there's anything wrong with the QWERTY standard, okay?
There's also no evidence that the Betamax technology was really better than the VHS technology,
even though now we're stuck with VHS.
In fact, they worked just as well, and VHS was cheaper at the time,
which is why the market selected it.
Another example, of course, is with Microsoft.
This is the big bugaboo of the network externality path dependence guys today.
They claim that Microsoft, the Microsoft sort of standard for its operating system, is not a good standard.
The MS-DOS and Microsoft's Windows are far inferior to other technologies like the Macintosh operating system
and ones provided by other manufacturers, yet Microsoft has 85% of the PC market.
So everybody is stuck with using Microsoft products, Microsoft's operating system, even though it's really not as good as rival operating systems.
Again, this claim turns out, upon closer inspection, to be, we can easily dismiss it as being false.
There's no evidence that from an economic perspective, as opposed to a purely technical perspective,
that Microsoft's operating system is any worse than any other.
Let me briefly mention one other example of a market failure that is popular among economists today.
You would think that if there was any one issue that economists agreed on,
Obviously, everybody knows economists disagree on macroeconomic policy and things like that.
But you would think that just about everyone would agree that minimum wage laws create unemployment,
especially among teenage workers.
Just about all economists, mainstream economists, Austrian economists,
economists of just about every stripe, agreed that minimum wages cause unemployment among teenagers.
If you set the wage higher than what the market wage would be,
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.
Well, this consensus was shattered a couple of years ago by a sensational publication by two Princeton economists, and David Card and Alan Kruger.
Kruger was actually the chief economist for the Department of Labor before returning to Princeton.
Princeton, and they began to circulate some research where they claimed to show that minimum
wages actually, the imposition of minimum wages, especially left-wing economists nationwide
were proclaiming, aha, here we finally have some evidence that price controls are good.
They don't create, minimum wages don't create a surplus of labor, they don't create
unemployment, they're good, we need higher minimum wages.
And even now, some good economists stepped into the picture and showed that the Cardin-Kruger
study was a horrible study.
They based their numbers, they called some fast food restaurants to ask them about their
employment practices and whoever answered the phone, they wrote that down as the manager
and the manager reported that we hired this many people.
Anyway, they're saying it was just awful.
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,
we're still a long ways from any sort of agreement on laissez-faire among economists.
Economists all have this kind of middle of the road position, most of them.
Well, yeah, we have to have markets. You can't do away with markets. You've got to have them around.
But there's market failure lurking behind every tree.
There's a QWERTY lurking behind that tree
and there's some other kind of externality over there
and we've got to have a strong central state
to come in and combat these.
Of course, these people don't understand
and I'm sure have not read Mises' wonderful essay
from 1950 called Middle of the Road Leads to Socialism.
And I think we have that on the table.
I know we've recently republished it
along with Liberty and Property.
And Mises makes the very important point
that the sort of middle of the road, mixed economy solutions
are not stable.
It's not possible to have just one or two interventions,
but a free market the rest of the way,
because every intervention introduces
unintended consequences.
Minimum wages create unemployment.
And so, oh, well, then we need another intervention
to deal with the unemployment.
Unemployment Relief, Stronger Welfare State
Oh well, and that provides disincentives for people to enter the labor force in the first place
That causes another problem. Oh well, we need a new program to deal with that problem
So one intervention begats another intervention
So if you have this kind of attempt to have this kind of
mixture, it inevitably has to lead in one direction or another. In this case it has to lead
towards more and more intervention, till we end up at something that's more like
Okay, very briefly, I want to tell you about Murray Rothbard's, his approach to strategy.
What can we do, and how is it different from Hayek's strategy?
Well, Rothbard said that the kind of strategy that Hayek advocated, that's what Rothbard
or call that educationism, the educationist strategy where the goal is to try to persuade others.
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.
Show them that the ideas of liberty are true, correct and just. Show them that this will bring about prosperity to all.
There's a problem, unfortunately, with this strategy, a couple problems with what Rothbard called the pure educationist strategy.
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.
Some of us don't want to wait that long.
Another problem is that you can't rely just on the intellectuals because the media have
a huge influence. The media, of course, tend to ostracize any intellectuals who dissent
from the prevailing mainstream wisdom. Can we see this around us all the time? For example,
there's a very eminent epidemiologist at Berkeley named Peter Duisburg who's done some controversial
research on AIDS and is completely shunned and shut out by the media. Philip Johnson,
The law professor at Berkeley, who is critical of Darwin's theory of evolution, is seen
as portrayed as a right-wing religious kook by the mainstream media.
Oh, and I can't resist talking about the scholars who have done research in controversial
areas such as IQ testing, the relationship between IQ and socioeconomic performance and
IQ and heredity.
I don't know if any of you saw the article in this morning's San Francisco Chronicle
about some conference on IQ testing, where there was a report that a new study showed
that if we focus our efforts on babies, on young children, we can increase average IQ
scores, but we've got to get the kids very early.
There was a study that tried to show that if you have massive teaching and mental drills
and I don't know exactly what they are for children as early as, but you have to get
them before they're four months old and you have to begin this training in the first few
months and they had some study trying to show that a control group who had had this done
to them averaged so many points higher on IQ tests years later and so you can only imagine
what this implies, right, that just head start, that's way too late, that's not enough, we've
The Village has to begin educating the kids as soon as they come out of the womb.
The other problem with the pure educationist strategy is that intellectuals aren't always
motivated just by the search for truth.
Intellectuals and academics have their own agendas.
Sometimes they want fame and fortune and they enjoy going to Washington and serving in a
and a position of power. You can't rely exclusively on the intellectual class to bring about this revolution,
because they may not have purely altruistic motives.
So education is key, education is crucial, but it's not sufficient, it's not enough.
Rothbard's strategy was what he called right-wing populism, right-wing populism or right-wing
radicalism, meaning that we have to use both the educationalist strategy, both intellectual
educational means, but also we need to encourage a rebellion, resentment among the people against
The Crimes Committed by the Elites, by the Regulators and by the State.
Rothbard calls this, he describes his right-wing populism as exciting, dynamic, tough and confrontational,
rousing and inspiring not only the exploited masses, but the often shell-shocked right-wing intellectual cadre as well.
So how do we do this? What do we want?
We need a cadre of intellectuals and academics on our side, and we certainly need that to
achieve long run change and also sort of medium run change to attract students to listen to
our ideas, to get young professors and so on to help develop and promote the ideas of
of Austrian Economics and of Liberty.
But we also need journalists, we need grassroots activists,
we need sort of popular agitator types.
Okay, because Rothbard felt that deep down
the masses really were on our side, and I think he's right.
The sort of Heartland folks certainly do not,
despite the way they're portrayed in the media, okay,
are definitely on our side.
These are the people that, I think it was Bill Kaufman
who drew this wonderful distinction between the people
who run America and the people who live in America.
So we're talking about the people who live in America,
real Americans, not the beltway insiders,
not the bicoastal cultural elite.
But the people in the middle, what the elites refer to
as people who live in flyover country,
the Midwest, the South, those people
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.
So we need to educate the public, we need to educate businessmen, we need to educate students and academics, journalists and politicians.
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.
And how does the Mises Institute figure into this?
Well, we're deeply committed to the same kind of strategy for change that Murray Rothbard outlined.
So on the scholarly side, we're committed to the Rothbardian program of sort of a broad interdisciplinary science of liberty,
with an emphasis on Austrian economics, but also attention to political theory and philosophy, history, law and so on.
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.
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.
Austrian economists and the Mises Institute economists don't do that. We're not interested
in doing that. We have no desire to do that. So what is it that we can do? What can we
expect to achieve our goals? Well, first of all, we can't rely on mainstream economists.
As I've tried to make clear earlier, we can't rely on the mainstream economists to be on
on our side.
What we have to do is train more Austrian economists.
We need more young scholars to be promoting the Austrian School of Economics.
I want to see a day where, if you look at the list of adjunct scholars of the Mises
Institute, that will be a longer list than the list of members of the American Economic
Association.
Then we'll know that we've got real progress, that we're really somewhere.
We need to take back our language.
We need to use liberty to mean liberty and not allow it to be twisted the way it has
been.
And we certainly don't want to play nice.
That was another part of Hayek's strategy.
Hayek had an idea that he had to be very sort of genteel and stay strictly within the mainstream
and you don't say anything nasty about anybody.
And I think this is a flawed strategy.
We need to expose the people for what they are.
Don't call the socialists nice, intelligent people who are a little bit misguided.
Call them wrong, call them false, call them monstrous, as Murray Rothbard would say.
Lew for example did this when Laura Tyson was first announced as Clinton's appointee.
Lew was one of the first in print to expose, and it's very easy to do, you just quote
from her previous writings, her work on comparative economic systems, her praise of the Ceausescu
regime for the miraculous economic wonders that had worked in Romania.
We need to show these people what they are. If we want prosperity, if we want real progress,
then we need liberty. What we need is liberty. And Hayek says in The Road to Serfdom, a policy
of freedom for the individual is the only true progressive policy. And that, that is
the road to prosperity. Thank you.