WEBVTT NOTE 350 Years of Economic Theory in 50 Minutes 1 00:00:00.000 --> 00:00:06.000 I'm Dr. Mark Thornton, I'm a senior fellow here at the Ludwig von Mises Institute and 2 00:00:06.000 --> 00:00:17.080 my talk this morning is 350 years of economic theory in 50 minutes. 3 00:00:17.080 --> 00:00:23.080 You know I'd like to tell you about the whole history of economics, how it developed, who 4 00:00:23.080 --> 00:00:27.080 were the important contributors and what they did and when they did it, what their books 5 00:00:27.080 --> 00:00:36.080 What were their methods and all the debates that have gone on? Who made the big mistakes? Who were the crooks? Who were the villains? 6 00:00:36.080 --> 00:00:47.080 But that would take several months to do that and we might hit a few low points along the way. 7 00:00:47.080 --> 00:00:52.080 So the question is what can we do in our time here? 8 00:00:52.080 --> 00:01:01.420 Here, well, usually people want economists to tell them how to make money, right? 9 00:01:01.420 --> 00:01:07.340 And so that's one of the things we're going to do, is I'm going to show you how money 10 00:01:07.340 --> 00:01:08.340 is made. 11 00:01:08.340 --> 00:01:13.760 And I'm talking about lots of money, not just a little bit of money. 12 00:01:13.760 --> 00:01:18.720 We're going to give away a little bit of money here today, but we're going to be talking 13 00:01:18.720 --> 00:01:48.720 And I'm going to show you how to become an economist in five minutes, but before I do that, I want to give you an idea of what the Austrian School of Economics is all about, and how does it compare to other schools of economics, and to try to simplify that down to the very basics of economic points of view, and to try to simplify that down to the very basics of economic points of view, and to try to simplify that down to the very basics of economic points of view. 14 00:01:48.720 --> 00:01:51.720 So we're going to look at two views of money and economics. 15 00:01:51.720 --> 00:01:57.720 On the one hand, you have the Austrian School of Economics, which teaches about the market economy. 16 00:01:57.720 --> 00:02:02.720 On the other hand, you have what you could generally call the statists. 17 00:02:02.720 --> 00:02:13.720 And this would include everybody else, the Marxists, the Socialists, the Communists, the Keynesians, the Fascists, the Mercantilists, the Interventionists. 18 00:02:13.720 --> 00:02:19.420 economist, the Keynesians, the fascists, the mercantilists, the interventionist, which 19 00:02:19.420 --> 00:02:25.060 was mentioned on the movie here earlier. 20 00:02:25.060 --> 00:02:29.880 And just about everybody else, even those people who might consider themselves market 21 00:02:29.880 --> 00:02:39.000 oriented, except in their area of expertise, so for example we could have a market oriented 22 00:02:39.000 --> 00:02:46.960 and economists who worked at the Federal Reserve Bank, but only as long as that economist espoused 23 00:02:46.960 --> 00:02:50.280 government control of money and banking. 24 00:02:50.280 --> 00:02:53.800 So everybody else is going to be the status. 25 00:02:53.800 --> 00:03:00.320 Now the Austrian School is the champion of economic theory and the market economy. 26 00:03:00.320 --> 00:03:06.600 We have found that everything that is worth having is produced within the market economy 27 00:03:06.600 --> 00:03:12.600 and available to everyone including money, jobs, security, justice, goods and services, 28 00:03:12.600 --> 00:03:19.100 everything that's worth having is produced in the market economy. 29 00:03:19.100 --> 00:03:25.200 In addition, exchange in a market economy benefits all parties and harms none. 30 00:03:25.200 --> 00:03:31.600 So in an exchange of goods or services for money, both parties benefit and no one is harmed. 31 00:03:31.600 --> 00:03:41.600 So Austrians find the market process to be not only efficient but also to be a just system. 32 00:03:41.600 --> 00:03:50.480 As such, we are the champions of individual liberty, private property and honest money. 33 00:03:50.480 --> 00:03:58.000 We believe that it is the market economy that produces prosperity and nothing else. 34 00:03:58.000 --> 00:04:07.000 The statists, on the other hand, are generally apologists for government intervention and control. 35 00:04:07.000 --> 00:04:18.000 For you students out there, and you parents as well, in a typical college course in economics, you will be told all of the shortcomings of the market economy 36 00:04:18.000 --> 00:04:23.000 and all the possible government remedies for those problems. 37 00:04:23.000 --> 00:04:29.000 Generally, the cry is always for more government intervention to cure various social problems. 38 00:04:29.000 --> 00:04:39.000 More government regulation, more government spending, more government subsidies, more government price controls, all across the board. 39 00:04:39.000 --> 00:04:45.000 Austrian economists have shown that the social problems that the statists talk about 40 00:04:45.000 --> 00:04:50.880 about are actually caused by prior government interventions in the economy and cannot be 41 00:04:50.880 --> 00:04:57.480 cured with more government intervention. The bigger and more powerful government becomes, 42 00:04:57.480 --> 00:05:06.480 the less prosperous the people become. Poverty, unemployment and inflation do appear in the 43 00:05:06.480 --> 00:05:11.700 economy, right? These problems actually appear. People lose their jobs. People have to pay 44 00:05:11.700 --> 00:05:21.500 Pay Higher Prices, People Become Poor or Displaced or Homeless, Seemingly or Appearingly, 45 00:05:21.500 --> 00:05:24.700 in the Market Economy. 46 00:05:24.700 --> 00:05:31.080 But all of these problems are caused by government interventions that we don't necessarily see 47 00:05:31.080 --> 00:05:33.900 and not the marketplace. 48 00:05:33.900 --> 00:05:42.060 Many of you are being homeschooled because of how bad public schools have become. 49 00:05:42.060 --> 00:05:47.980 Actually, when government schools were first introduced more than a century ago in the 50 00:05:47.980 --> 00:05:53.260 United States, they really weren't that bad. 51 00:05:53.260 --> 00:06:01.660 They were thought of very highly, mostly because they were based on schools that had already 52 00:06:01.660 --> 00:06:08.660 appeared in the marketplace, so that government was just basically mimicking what people had been doing voluntarily. 53 00:06:08.660 --> 00:06:15.660 However, 100 years of government intervention and ever-increasing control over government schools 54 00:06:15.660 --> 00:06:23.660 have made these government schools more about indoctrination and very little about education. 55 00:06:23.660 --> 00:06:40.660 That's basically the problem. You look back in history and people thought very highly of public schools at one time. That's no longer the case as the home school movement grows ever and ever larger. 56 00:06:40.660 --> 00:06:49.660 The Austrian economists are like David, where the statist economists are like Goliath. 57 00:06:49.660 --> 00:06:58.660 They are much bigger, they are much stronger, and they control powerful government bureaucracies like the Federal Reserve System. 58 00:06:58.660 --> 00:07:02.660 They control all the prestigious economics departments. 59 00:07:02.660 --> 00:07:13.660 You might be taken aback by the fact that one of the most market-oriented economics departments in the United States is actually Harvard University. 60 00:07:13.660 --> 00:07:21.660 The Statist Economist also control all the important journalistic posts in the nation. 61 00:07:21.660 --> 00:07:26.660 However, like David, we do have a special weapon and it's called the truth. 62 00:07:26.660 --> 00:07:33.660 And we regularly use it to bop the Statist in the head in the hopes of knocking some sense into them. 63 00:07:33.660 --> 00:07:38.660 Now before going on to showing you what it is to become an economist, 64 00:07:38.660 --> 00:07:44.660 I'd like to share with you a little bit about my personal journey through 65 00:07:44.660 --> 00:07:49.340 Austrian economics because when I went to college I found Austrian economics 66 00:07:49.340 --> 00:07:55.940 independently of the curriculum and I said you know I want to go into graduate 67 00:07:55.940 --> 00:07:59.140 school and learn more about Austrian economics so I went searched all over 68 00:07:59.140 --> 00:08:02.460 the world all over the country and there weren't any programs in Austrian 69 00:08:02.460 --> 00:08:07.740 economics period the only place where Austrian economics had a following was 70 00:08:07.740 --> 00:08:09.660 here at Auburn University. 71 00:08:09.660 --> 00:08:14.980 So in 1982, I got in my little Ford Fiesta 72 00:08:14.980 --> 00:08:20.220 with all my possessions and drove from Geneva, New York 73 00:08:20.220 --> 00:08:25.740 to Auburn, Alabama and enrolled in the graduate program 74 00:08:25.740 --> 00:08:27.220 here at Auburn University. 75 00:08:27.220 --> 00:08:30.020 And it was a good program back then. 76 00:08:30.020 --> 00:08:31.580 We had a lot of free market economists 77 00:08:31.580 --> 00:08:34.260 and a couple of Austrians. 78 00:08:34.260 --> 00:08:38.700 But I was told in the course of the first semester 79 00:08:38.700 --> 00:08:43.740 that Austrian economics was really a thing of the past. 80 00:08:43.740 --> 00:08:46.300 That there were only about a dozen Austrian economists 81 00:08:46.300 --> 00:08:48.220 left in the world. 82 00:08:48.220 --> 00:08:51.100 Half of those were already retired, 83 00:08:51.100 --> 00:08:56.020 and the other six weren't at prestigious economics 84 00:08:56.020 --> 00:08:57.580 departments with graduate degrees. 85 00:08:57.580 --> 00:09:09.580 And if there's no Austrians working at PhD-granting institutions, then that means there's not going to be any more Austrian PhDs. 86 00:09:09.580 --> 00:09:17.580 So it was very disheartening. I was told by one of my professors that the Austrian theory of the business cycle was a grisly embarrassment. 87 00:09:17.580 --> 00:09:26.280 and so I was very dejected at that time in my first year in graduate school it 88 00:09:26.280 --> 00:09:32.460 looked hopeless the the government was growing ever bigger and ever more 89 00:09:32.460 --> 00:09:38.140 powerful and this thing that I thought might be able to save us Austrian 90 00:09:38.140 --> 00:09:43.460 economics was on its way out it was a thing of the past and so I had basically 91 00:09:43.460 --> 00:10:13.460 I finally decided to just about decided to drop out of graduate school and I almost didn't show up for one of my final exams but fortunately I did it was an econometrics exam and I didn't do quite as well as I had hoped to do but shortly thereafter I found out that the Ludwig von Mises Institute was coming to Auburn University that they were going to be on campus that they were going to be 92 00:10:13.460 --> 00:10:23.460 providing seminars, publishing Austrian Economics, and they were going to give me a fellowship to stay in graduate school and study in Austrian Economics. 93 00:10:23.460 --> 00:10:30.460 And I thought, wow, this is a pretty good turnaround. It certainly made my day. 94 00:10:30.460 --> 00:10:39.460 So, Lew Rockwell, Marty Rockwell, and Pat Barnett showed up a couple months later and I helped them move the boxes in. 95 00:10:39.460 --> 00:10:49.460 The Mises Institute at that time in 1983 consisted of a room that was about this big over to that wall and from here to there. 96 00:10:49.460 --> 00:10:58.460 We had a table, four chairs I think, and an IBM electric typewriter, and that was it. 97 00:10:58.460 --> 00:11:11.460 So you can see, and you're going to see this afternoon, how much bigger and how much more effective the Institute has become over the last 25 years. 98 00:11:11.460 --> 00:11:23.460 A couple of things that Mr. Tucker didn't point out was that our webpage now is the most visited, most trafficked, most downloaded economic webpage in the world. 99 00:11:23.460 --> 00:11:44.460 And the Wall Street Journal recently visited us this year and wrote up a story about the Institute, which appeared in August of this year, which showed how much influence the Institute is not just having here in the United States, but around the world with young intellectuals. 100 00:11:44.460 --> 00:12:00.460 So, despite our minority status, our underdog status, we are making gains, we are taking ground, we are making progress, and you're all welcome in to join in the fight. 101 00:12:00.460 --> 00:12:07.460 And to that end, I'm going to now make you an economist, and then we'll go on to make some money. 102 00:12:07.460 --> 00:12:17.460 Almost all economic fallacies result from the fact that people only consider the immediate impact of a policy on a particular group of people. 103 00:12:17.460 --> 00:12:28.460 The economists, the good ones anyways, always consider how a policy, a government project or a piece of legislation would affect all other groups. 104 00:12:28.460 --> 00:12:33.460 And what are the long-run effects that we can expect from those particular policies? 105 00:12:33.460 --> 00:12:39.460 For example, let us say that we pass a law that everyone in this room should get a million dollars. 106 00:12:39.460 --> 00:12:43.460 Okay? That's the law. Everyone gets a million dollars. 107 00:12:43.460 --> 00:12:49.460 Well, this is going to allow each and every one of you to go out and get a good education, to purchase a nice home, 108 00:12:49.460 --> 00:12:54.460 to buy great medical care, to have the time to develop your talents and skills, 109 00:12:54.460 --> 00:13:01.460 have time to devote to your family, charities, public works, whatever it happens to be, 110 00:13:01.460 --> 00:13:08.460 Explore your various career choices, everything is taken care of, all the bases are addressed. 111 00:13:08.460 --> 00:13:17.460 It must be a great policy because it's positively affected everyone that it was designed to affect. 112 00:13:17.460 --> 00:13:20.460 But what this leaves out is everybody else. 113 00:13:20.460 --> 00:13:26.460 It means 25 or 30 million dollars in higher taxes for everybody else. 114 00:13:26.460 --> 00:13:33.300 It means $25 million of lower take-home pay for the other taxpayers. 115 00:13:33.300 --> 00:13:36.380 It means less food for those families to eat. 116 00:13:36.380 --> 00:13:39.700 It means fewer repairs on their homes and automobiles. 117 00:13:39.700 --> 00:13:44.600 It means that they'll have a lower standard of living so that you can enjoy a higher standard 118 00:13:44.600 --> 00:13:45.700 of living. 119 00:13:45.700 --> 00:13:50.340 It means that other people are going to want to become millionaires too, right? 120 00:13:50.340 --> 00:13:54.220 The easy way, via a government grant. 121 00:13:54.220 --> 00:13:59.220 The more people who get these government grants, the higher tax rates will have to go. 122 00:13:59.220 --> 00:14:04.220 Eventually, the government is going to have to hire more and more bureaucrats to collect these taxes, 123 00:14:04.220 --> 00:14:09.220 to select the recipients of these grants, to monitor their behavior. 124 00:14:09.220 --> 00:14:13.220 Because, of course, if you start giving away millions of dollars to people, 125 00:14:13.220 --> 00:14:17.220 they're probably going to get lazy and slothful and so on. 126 00:14:17.220 --> 00:14:22.220 Higher taxes in the economy means that workers will have to be fired, 127 00:14:22.220 --> 00:14:46.220 And of course, if you take this policy to the extreme, it gets absurd. We couldn't give everybody in the economy a million dollars and just let them stand back and spend the money. I mean, somebody's got to do the work. Somebody's got to produce those goods. 128 00:14:46.220 --> 00:15:06.220 When you understand economics, you'll understand why it is the case that everything the government attempts to do ultimately backfires. 129 00:15:06.220 --> 00:15:29.220 Let's take the example of the minimum wage. It's something that's currently back in vogue, gubernatorial candidates are talking about raising or creating a new Alabama minimum wage, and it's actually being discussed and talked about all over the country, about raising the minimum wage at state and national levels. 130 00:15:29.220 --> 00:15:37.220 Now, if we look at the direct and immediate effect on the group that it impacts, the impact is positive. 131 00:15:37.220 --> 00:15:44.220 People who earn the minimum wage are now going to see their wage rates rise in conjunction with that new law. 132 00:15:44.220 --> 00:15:51.220 If you ask them, are they for or against it, they're going to say they're for a higher minimum wage. 133 00:15:51.220 --> 00:15:58.220 But if we look beyond the immediate effects and we look at the indirect effects and the effects on other people, 134 00:15:58.220 --> 00:16:07.220 What do we see happening? Well, a higher minimum wage means that some people who are making the minimum wage are going to have to lose their job. 135 00:16:07.220 --> 00:16:21.220 Because if you're just making the minimum wage and you're just producing enough production for the firm to cover that wage rate, if we raise the wage, some people are going to have to be let go. 136 00:16:21.220 --> 00:16:31.220 And the people who are let go typically, not always, but typically are the least advantaged people in the workplace. 137 00:16:31.220 --> 00:16:40.220 The least productive, the least educated minorities in particular can be discriminated against as a result of the minimum wage. 138 00:16:40.220 --> 00:16:49.220 And so the attempt of the minimum wage is supposedly to help the least advantaged people in the economy. 139 00:16:49.220 --> 00:17:02.220 What it ends up doing is hurting the very least advantaged workers in the economy, keeping them out of the workforce and maybe causing a lifetime of living on welfare roles. 140 00:17:02.220 --> 00:17:16.220 If we look at who the policy helps, this is a little harder to see, but raising the minimum wage actually helps high wage workers, union workers, manufacturing workers, 141 00:17:16.220 --> 00:17:19.220 for the High-Skilled Workers 142 00:17:19.220 --> 00:17:24.220 who compete in some sense with the low-skilled, low-wage workers. 143 00:17:24.220 --> 00:17:29.220 And when we raise the wages of the low-skilled workers, 144 00:17:29.220 --> 00:17:33.220 that creates more demand for the high-skilled workers. 145 00:17:33.220 --> 00:17:41.220 So we find that unions are actually one of the biggest proponents of higher minimum wages. 146 00:17:41.220 --> 00:17:49.500 So it actually ends up helping some of the highest paid workers. 147 00:17:49.500 --> 00:17:52.220 So we have to look beyond the direct and immediate effects. 148 00:17:52.220 --> 00:17:53.820 We have to look at the indirect effects. 149 00:17:53.820 --> 00:17:58.600 We have to look at the longer run effects and what it does to people's incentives. 150 00:17:58.600 --> 00:18:02.540 When you understand economics, you will understand why it is the case that everything the government 151 00:18:02.540 --> 00:18:05.960 attempts to do ultimately backfires. 152 00:18:05.960 --> 00:18:10.280 The more it spends on government schools, the less education we get. 153 00:18:10.280 --> 00:18:14.800 The more it spends on research, the less technology we get. 154 00:18:14.800 --> 00:18:22.340 The more it spends on medicine and healthcare, the less healthy we end up being and the less 155 00:18:22.340 --> 00:18:24.580 access we have to healthcare. 156 00:18:24.580 --> 00:18:28.460 The more it spends on NASA, the less progress is made in space. 157 00:18:28.460 --> 00:18:32.760 The more it spends on the military, the less secure we become. 158 00:18:32.760 --> 00:18:37.460 Now I realize that some of these statements are going to sound contradictory to you or 159 00:18:37.460 --> 00:18:39.360 are Politically Charged. 160 00:18:39.360 --> 00:18:42.500 All I ask is that you examine them over time 161 00:18:42.500 --> 00:18:46.180 with your new economic lenses and see whether or not 162 00:18:46.180 --> 00:18:46.860 they are true. 163 00:18:50.780 --> 00:18:52.900 Now we're going to do a little bit here 164 00:18:52.900 --> 00:18:55.020 about making some money. 165 00:18:55.020 --> 00:18:57.020 I'm going to ask for some volunteers here 166 00:18:57.020 --> 00:18:58.660 from the students. 167 00:18:58.660 --> 00:19:02.620 And this is kind of be like a game show format. 168 00:19:02.620 --> 00:19:06.620 So I'd like the Auburn person, any other Auburn fans here? 169 00:19:07.460 --> 00:19:13.300 okay there's another Auburn one and there's another Auburn one okay we'll get 170 00:19:13.300 --> 00:19:17.780 you up here in the three chairs and then we need some alternates to help these 171 00:19:17.780 --> 00:19:23.300 these three people how about you you and you and you stand behind these three 172 00:19:23.300 --> 00:19:30.140 contestants now that this game is actually pretty straightforward I have 173 00:19:30.140 --> 00:19:34.380 these envelopes we're going to do three rounds the contestants will open the 174 00:19:34.380 --> 00:19:58.380 There's two coins in each envelope and they're going to choose to keep one of the coins and whoever ends up with the most money at the end of three rounds is going to pick from envelope number one or number two or number three, it's a little prize that's attached to the game, okay? 175 00:19:58.380 --> 00:20:04.380 So whoever ends up with the most value here, after the three rounds, is going to be the winner. 176 00:20:04.380 --> 00:20:08.380 Okay, so you're contestant number one, round number one, you just open up that, 177 00:20:08.380 --> 00:20:14.380 and you choose one of the two coins that are in the envelope. And they're American coins, there's no... 178 00:20:14.380 --> 00:20:16.380 You can just rip them open. 179 00:20:20.380 --> 00:20:24.380 And whatever coin you don't want, you'll hand to your alternate behind you. 180 00:20:28.380 --> 00:20:55.220 Okay, round number two, yeah, you keep one coin from each round, you don't go in between 181 00:20:55.220 --> 00:21:18.580 10 rounds there, okay? 182 00:21:18.580 --> 00:21:21.340 Okay let's see what the contestants chose here. 183 00:21:21.340 --> 00:21:36.340 You've got a $1.25. $1.25 and a $1.25. Let's see, that's, let me see what you get. 184 00:21:36.340 --> 00:21:42.340 You got, now you got two dimes and a quarter. What'd you guys end up with? 185 00:21:42.340 --> 00:22:02.340 Oh, but you know, you actually ended up with the pre-1964 coins, and so a dime is, this dime is actually worth a dollar, and this quarter is actually worth over two dollars, so the winners I guess are the three alternates in the back here. 186 00:22:02.340 --> 00:22:16.980 okay so we'll go ladies first you can pick one of the three cards just just 187 00:22:16.980 --> 00:22:28.060 pick just pick one okay and you guys fight over the other two okay you can 188 00:22:28.060 --> 00:22:42.180 I'll return to your seats. So yeah, the 1964 silver dime is now worth almost a 189 00:22:42.180 --> 00:22:50.340 dollar. The current dime of course is it doesn't have any silver content to it, so 190 00:22:50.340 --> 00:22:56.860 So it's only worth a dime, basically. 191 00:22:56.860 --> 00:23:02.420 And so the point of this little exercise is to show you the difference between what honest 192 00:23:02.420 --> 00:23:09.740 money is in gold and silver and what we have in the current monetary system. 193 00:23:09.740 --> 00:23:18.540 Our original U.S. dollar, if we had the original U.S. dollar, it would be worth about 35 of 194 00:23:18.540 --> 00:23:28.540 of Today's Dollars, so that our dollar has actually lost about 97% of its purchasing power. 195 00:23:28.540 --> 00:23:44.540 And if we look back at American history to say 1890, the 1890 dollar was worth almost exactly the same purchasing power as a dollar in 1790. 196 00:23:44.540 --> 00:23:49.340 So 100 years went by and you have the same purchasing power. 197 00:23:49.340 --> 00:23:59.500 Now the dollar in 1990 was only worth about 7% of the 1890 dollar. 198 00:23:59.500 --> 00:24:08.580 So during the period when we went off of gold and stopped issuing silver coins, instead 199 00:24:08.580 --> 00:24:17.580 Instead of the value of the dollar staying constant, it lost 93% of its value over that century. 200 00:24:17.580 --> 00:24:24.580 Since 1990, it's lost 50% of that remaining 7%. 201 00:24:24.580 --> 00:24:30.580 So what this indicates to Austrians is that process isn't going to stop, 202 00:24:30.580 --> 00:24:37.580 that our dollars are going to continue to lose value and ultimately may become worthless. 203 00:24:37.580 --> 00:24:48.580 That happens very often with paper money is not only does it change in value and lose value, but it can actually become completely worthless. 204 00:24:48.580 --> 00:24:57.580 This has happened in recent times in Bolivia, it's happened in Yugoslavia, it happened in Iraq, 205 00:24:57.580 --> 00:25:08.580 It happened in the Civil War, in the Confederacy, all those currencies became completely worthless. 206 00:25:08.580 --> 00:25:18.580 Actually, the Confederate currency is actually doing much better today than the U.S. dollar. 207 00:25:18.580 --> 00:25:26.580 The Confederate currency is actually increasing in value, and to show you how bad off the U.S. dollar is, 208 00:25:26.580 --> 00:25:30.580 The Confederate dollar is now worth about eight U.S. dollars. 209 00:25:35.580 --> 00:25:41.580 Now, when you look at higher prices, it's very important to look at them with an economist's eye. 210 00:25:42.580 --> 00:25:45.580 What causes our money to lose purchasing power? 211 00:25:45.580 --> 00:25:49.580 Most people are under the impression that it's just a part of the market process, 212 00:25:49.580 --> 00:25:52.580 that things are just always becoming more expensive, 213 00:25:52.580 --> 00:26:09.580 And so when we look at the market economy, we want to see, well, let's see, in some cases, prices are going down, if we look at clothing, computers, electronics, pencils, things of that nature, things that are completely in the marketplace, they're actually going down in price. 214 00:26:09.580 --> 00:26:19.580 If we look at clothing, computers, electronics, pencils, things of that nature, things that are completely in the marketplace, they're actually going down in price. 215 00:26:19.580 --> 00:26:35.580 Well, now there's other areas where the government is heavily involved, where they regulate, they restrict, they have controls, they have taxes, subsidies, places like education, health care and energy, 216 00:26:35.580 --> 00:26:37.580 The Theory of Money and Credit 217 00:27:05.580 --> 00:27:10.140 where prices are going up and where prices are going down, but the reason that prices 218 00:27:10.140 --> 00:27:17.340 are going up in general is because of monetary inflation by the government itself. 219 00:27:17.340 --> 00:27:22.940 They're creating more money and when you get too much money in the economy, prices are 220 00:27:22.940 --> 00:27:25.940 going to rise overall. 221 00:27:25.940 --> 00:27:33.060 Since we had the Federal Reserve system established in the U.S. in 1914, the amount of money in 222 00:27:33.060 --> 00:28:03.060 in the U.S. economy has increased 500 times, I mean that's 50,000 percent, okay, from $20 billion to $10 plus trillion dollars, okay, so we've got lots and lots and lots of monetary inflation, and it's just a new version of the same old thing, in the old days, kings would, whenever they get tax revenues, 223 00:28:03.060 --> 00:28:11.060 The King would take all those clippings and make new coins out of them. 224 00:28:11.060 --> 00:28:19.100 So if the King took in ten coins in tax revenue, he would end up being able to spend eleven 225 00:28:19.100 --> 00:28:21.780 coins because he made that new coin from the clippings. 226 00:28:21.780 --> 00:28:24.180 And of course, people caught on to that. 227 00:28:24.180 --> 00:28:26.460 You see a hole in your coin. 228 00:28:26.460 --> 00:28:29.440 It's pretty obvious that something's wrong here. 229 00:28:29.440 --> 00:28:35.200 And so what the king would do after that was they started shaving the outside of coins. 230 00:28:35.200 --> 00:28:40.800 So you just take a little shavings from around the outside of the coin, not the flat part, 231 00:28:40.800 --> 00:28:43.320 but the rounded part. 232 00:28:43.320 --> 00:28:48.200 And then you take those shavings and make new coins so the government would have more 233 00:28:48.200 --> 00:28:50.360 money to spend. 234 00:28:50.360 --> 00:28:55.040 And if you look at our modern coins, you'll notice they have a very rough edge to them. 235 00:28:55.040 --> 00:28:59.400 Well, we don't really need that anymore because nobody's interested in scraping these things. 236 00:28:59.400 --> 00:29:07.400 But the reason that rough edge is there is to prove that the coin is relatively whole and hasn't been shaved. 237 00:29:07.400 --> 00:29:15.400 Okay, then paper money comes into prominence during the American Revolution and the course of civil war. 238 00:29:15.400 --> 00:29:25.400 And now paper money inflation has been institutionalized since 1914 with the establishment of the Federal Reserve banking system. 239 00:29:25.400 --> 00:29:30.760 system, gold was taken out of circulation in the Great Depression, silver was taken 240 00:29:30.760 --> 00:29:39.280 out of circulation in the mid-1960s, and the gold window where our central bank would exchange 241 00:29:39.280 --> 00:29:47.080 gold with other central banks was closed in 1971, and we've been on a fiat paper monetary 242 00:29:47.080 --> 00:29:53.120 system that is completely unbacked and is completely disconnected from any kind of gold 243 00:29:53.120 --> 00:30:02.880 or silver backing. We are on a monetary system by law. We are required to pay our taxes with 244 00:30:02.880 --> 00:30:11.240 this paper money. We are required to accept this paper money for any kind of debts, public 245 00:30:11.240 --> 00:30:17.560 or private. This is something we're being forced to use, and that's why we still use 246 00:30:17.560 --> 00:30:22.320 Institute. 247 00:30:22.320 --> 00:30:25.920 So we have a fiat paper monetary system. 248 00:30:25.920 --> 00:30:34.480 We also have a banking system that is highly leveraged and highly regulated as well, but 249 00:30:34.480 --> 00:30:39.260 a lot of people are surprised when this leveraging effect is explained to them. 250 00:30:39.260 --> 00:30:44.740 It makes people feel uncomfortable and they would rather have this sort of fairy tale version 251 00:30:44.740 --> 00:30:49.180 of what banking is all about. 252 00:30:49.180 --> 00:30:51.620 When you think of your checking account, 253 00:30:51.620 --> 00:30:55.740 you think of your money is in that bank 254 00:30:55.740 --> 00:30:59.220 and I can go get that money any time I want. 255 00:30:59.220 --> 00:31:00.580 And I tell my students, do you really 256 00:31:00.580 --> 00:31:05.300 think that they have a vault in there with your money 257 00:31:05.300 --> 00:31:08.780 and it's like on a shelf and it's got your name written 258 00:31:08.780 --> 00:31:09.940 in front of it? 259 00:31:09.940 --> 00:31:13.020 And that's the way people like to feel it. 260 00:31:13.020 --> 00:31:14.200 but 261 00:31:14.200 --> 00:31:17.100 the money isn't really there 262 00:31:17.100 --> 00:31:23.220 we have what's called a fractional reserve banking system 263 00:31:23.220 --> 00:31:26.780 it means basically there's no money in the bank 264 00:31:26.780 --> 00:31:30.880 the banks hold money just like wal-mart holds money 265 00:31:30.880 --> 00:31:33.540 just enough to make change 266 00:31:33.540 --> 00:31:36.460 but they don't have a huge storehouse 267 00:31:36.460 --> 00:31:38.060 of bank money 268 00:31:38.060 --> 00:31:41.780 most of their reserves especially in the big banks 269 00:31:41.780 --> 00:31:51.220 are in electronic format with the Federal Reserve itself, and the system depends upon 270 00:31:51.220 --> 00:31:58.340 the idea that not everybody is going to want all their money at the same time. 271 00:31:58.340 --> 00:32:04.020 So the modern form of inflation, and this is really the most important thing to understand 272 00:32:04.020 --> 00:32:09.780 about money and banking, is that it's an electronic form of inflation. 273 00:32:09.780 --> 00:32:20.780 It's not clipping, it's not shaving, it's not printing. They don't print money inflation nowadays, they just create it electronically. 274 00:32:20.780 --> 00:32:37.780 And how the Fed does this is that they buy government bonds from banks and then they tell the bank, we've got reserves for you at the Fed. 275 00:32:37.780 --> 00:32:47.780 You've got an account. We've added money to it. We haven't really added money to it. We've just put some more zeros in there. 276 00:32:47.780 --> 00:32:57.780 And so that's how they electronically increase the money supply is just by writing money into existence. 277 00:32:57.780 --> 00:33:02.780 And so when you want to learn what the real secret of the Federal Reserve is, that's it. 278 00:33:02.780 --> 00:33:10.020 that's it they buy government bonds with electronic bookkeeping entries so the 279 00:33:10.020 --> 00:33:17.140 government spends money they borrow to pay for it and then they buy their own 280 00:33:17.140 --> 00:33:25.740 government bonds back with an electronic bookkeeping entry and I teach money and 281 00:33:25.740 --> 00:33:34.140 and Banking courses and we go through this whole thing about money and banking over the 282 00:33:34.140 --> 00:33:38.140 course of an entire semester and people come up and they say, you know, I still don't get 283 00:33:38.140 --> 00:33:41.140 it. 284 00:33:41.140 --> 00:33:47.340 There seems to be something wrong here and I said, there is something wrong here. 285 00:33:47.340 --> 00:33:50.460 They are ripping us off. 286 00:33:50.460 --> 00:33:56.720 And so that is one of the secrets of inflation. 287 00:33:56.720 --> 00:34:06.260 It's monetary inflation is causing price inflation and in the modern electronic era, that's how 288 00:34:06.260 --> 00:34:07.380 inflation is done. 289 00:34:07.380 --> 00:34:14.380 It's done electronically with a bookkeeping entry. 290 00:34:14.380 --> 00:34:17.340 Higher prices have their problems. 291 00:34:17.340 --> 00:34:23.820 It's not just that prices are going up, higher prices make accounting difficult, they make 292 00:34:23.820 --> 00:34:30.420 long-term contracting difficult, they make entrepreneurs' economic calculations more 293 00:34:30.420 --> 00:34:32.980 difficult. 294 00:34:32.980 --> 00:34:39.660 But the first secret of inflation is that monetary inflation at the Fed causes price 295 00:34:39.660 --> 00:34:41.700 inflation. 296 00:34:41.700 --> 00:34:48.660 The second secret, which you can't really see, you can feel it, you can't see it, is 297 00:34:48.660 --> 00:34:55.060 that inflation secretly redistributes money from some groups of people to other groups 298 00:34:55.060 --> 00:34:57.540 of people. 299 00:34:57.540 --> 00:35:02.340 Some people are hurt by inflation, some people are helped by inflation. 300 00:35:02.340 --> 00:35:08.660 A lot of it depends on how soon you can get your hands on the money as it comes into the 301 00:35:08.660 --> 00:35:09.660 economy. 302 00:35:09.660 --> 00:35:31.660 If you're the person who first spends the new money, then you're buying all your stuff before prices go up, and so you're getting a great deal, but as prices rise and the money filters through the economy, the people who get the money at the end, or don't get it at all, are going to be hurt because they're paying higher prices. 303 00:35:31.660 --> 00:35:57.660 So their real income is drawn down. So that the people who are hurt the most are people on fixed incomes, people in retirement for example, people who work for a living and are on wage, who earn wages and salaries and of course wages and salaries only get adjusted to inflation after the fact. 304 00:36:01.660 --> 00:36:16.360 People who buy things like education, housing, energy are hurt due to inflation because those prices go up the most. 305 00:36:16.360 --> 00:36:31.000 Who does it help? Well, people who sell housing, energy and health care, education, those areas, they tend to get the money before everybody else. 306 00:36:31.000 --> 00:36:42.000 And the biggest beneficiary is government itself. I mean, if you can borrow money and then pay for it electronically in this mysterious way, it's really great for them. 307 00:36:42.000 --> 00:36:54.000 I mean, they've got trillions of dollars of debt. And every time those dollars go down in value, it makes their debt easier to pay off. 308 00:36:54.000 --> 00:37:04.000 So the second secret of inflation is that it redistributes money away from some groups and helps other groups, primarily government. 309 00:37:04.000 --> 00:37:18.000 The third secret of inflation is that monetary inflation causes the booms and busts of the business cycle. 310 00:37:18.000 --> 00:37:22.000 Everybody loves the boom and doesn't think it's a problem. 311 00:37:22.000 --> 00:37:27.000 Everybody hates the bust and thinks it's a complete mystery. 312 00:37:27.000 --> 00:37:37.000 Austrians view it as when the Fed gets active in increasing the money supply and lowering interest rates, they cause a boom. 313 00:37:37.000 --> 00:37:49.000 That boom causes a lot of misallocations in the economy, which eventually have to resurface as bad investments. 314 00:37:49.000 --> 00:37:58.000 Right now we're in a cycle where we've seen a lot of investment in housing, a lot of new home construction, 315 00:37:58.000 --> 00:38:28.000 in development during a period of low interest rates that existed over the last several years and in some places in the economy there's been too many houses built, there's been too many second homes, there's been too much mortgage debt that has occurred within the American economy and around the world as a matter of fact in some places and eventually 316 00:38:28.000 --> 00:38:35.000 The bust is going to occur, the downfall, the business cycle is going to, the contraction phase of the business cycle is going to set in. 317 00:38:35.000 --> 00:38:44.000 And some of those bad investments are going to come to the surface in the form of bankruptcies and unemployment. 318 00:38:44.000 --> 00:38:50.000 Hopefully it won't be too severe. 319 00:38:50.000 --> 00:39:06.000 There have been housing bubbles in the past which haven't resulted in severe contractions because of the nature of housing being a consumption good for many people. 320 00:39:06.000 --> 00:39:13.000 So we've analyzed all the major stock market and business cycle changes over the 20th century, 321 00:39:13.000 --> 00:39:28.000 The 20th Century found that this theory holds up very well in explaining the Great Depression, the tech stock bubble of the 1990s, the Japanese stock bubble, the housing bubble, and other changes in the economy. 322 00:39:28.000 --> 00:39:37.000 And so the third secret of inflation is that monetary inflation is the cause of the business cycle. 323 00:39:37.000 --> 00:39:41.560 I think I'll stop and if we have any questions I can be answer a few 324 00:39:41.560 --> 00:39:47.840 questions and then we'll break for lunch. 325 00:39:48.880 --> 00:39:50.880 Yes. 326 00:40:07.000 --> 00:40:17.880 I think both. For example, Alan Greenspan, who was the chairman of the Federal 327 00:40:17.880 --> 00:40:25.160 Reserve until recently, he knows about Austrian economics. He was a student of 328 00:40:25.160 --> 00:40:30.680 economics in the 1960s and attended Mises' seminar and Ayn Rand's philosophy 329 00:40:30.680 --> 00:40:35.080 seminar. He wrote that the gold standard is the only appropriate honest money 330 00:40:35.080 --> 00:40:42.240 Money, Monetary System, and so I think he understood it very well, and that listening 331 00:40:42.240 --> 00:40:47.120 or reading him was always misleading because he, I think he knew the truth but was telling 332 00:40:47.120 --> 00:40:53.160 a story to try to keep markets settled. 333 00:40:53.160 --> 00:40:59.880 And it was interesting, in his last year as chairman of the Fed, he said, first of all 334 00:40:59.880 --> 00:41:05.040 he said there's no housing bubble, and then he said, well there is a housing bubble, but 335 00:41:05.040 --> 00:41:07.040 The Theory of Money and Credit 336 00:41:35.040 --> 00:41:45.040 The Deal With Being a Statist Economist 337 00:42:05.040 --> 00:42:08.040 How tough is that? 338 00:42:08.040 --> 00:42:15.040 But you see that as being the next bubble that, because they've run out of places to go in the true economy, 339 00:42:15.040 --> 00:42:20.040 that they have to keep things afloat, they have to forge their own. 340 00:42:20.040 --> 00:42:26.040 So they will actually, the government will be the next bubble as far as they're spending. 341 00:42:26.040 --> 00:42:28.040 Yeah, what comes out of this is hard to tell. 342 00:42:28.040 --> 00:42:34.040 I mean, they do go through periods where they say, okay, let's let all this nasty business occur. 343 00:42:34.040 --> 00:42:37.840 and other points because maybe election is coming up they'll say we got to 344 00:42:37.840 --> 00:42:44.040 continue this on until after the election so very often what you do is you think 345 00:42:44.040 --> 00:42:48.160 of the Fed behavior in terms of elections so I expect them not to raise 346 00:42:48.160 --> 00:42:53.600 interest rates until after the election and even then they might not do it but I 347 00:42:53.600 --> 00:42:58.440 certainly don't believe they're going to do it before the next election they 348 00:42:58.440 --> 00:43:02.420 2008 elections or? 349 00:43:05.020 --> 00:43:07.460 No no, this one right here. 350 00:43:07.460 --> 00:43:13.100 Yeah, that they're going to keep interest rates where they are until at least after the election. 351 00:43:13.100 --> 00:43:22.620 So that's another sort of timing factor that you want to look for, is the Fed is considered independent and scientific. 352 00:43:22.620 --> 00:43:32.620 But it bends to political pressure, for sure. If it doesn't, Congress would simply, and the President would simply step in there and rewrite the legislation. 353 00:43:32.620 --> 00:43:47.620 As it is, being semi-independent is good for their image. And Bernanke will want to demonstrate his independence and his toughness in the first couple of years of his administration. 354 00:43:47.620 --> 00:43:50.620 So look for those things in particular. 355 00:43:50.620 --> 00:43:53.620 17 Increases and Do-It-All 356 00:44:20.620 --> 00:44:29.620 They wanted to let off a little steam there. We'll have to see what happens after the election. 357 00:44:29.620 --> 00:44:32.620 One of their last meetings just a couple of minutes ago. 358 00:44:32.620 --> 00:44:35.620 That's right. They didn't do anything. 359 00:44:35.620 --> 00:44:54.620 Is the gold standard gone? I know it was a big trouble for the government because they couldn't make all that money with their scam going on, but there's a big load of voices out there talking about tying it to something. 360 00:45:05.620 --> 00:45:17.620 and I think the momentum will depend a lot upon what's going on in the gold market and hopefully political change as well. 361 00:45:17.620 --> 00:45:27.620 The United States could start a return movement to the real gold standard just by our independent, without having any kind of international agreements. 362 00:45:27.620 --> 00:45:35.620 If we went on the gold standard, it would more or less force our trading partners and ultimately the whole world back onto the gold standard. 363 00:45:35.620 --> 00:45:49.620 But who knows? Those kind of ideological changes, and that's what it really is, is we've got to get people to think right before they do right. 364 00:45:49.620 --> 00:45:56.620 And some of the good thinking in the world is not necessarily going on just in the United States, it's going on elsewhere. 365 00:45:56.620 --> 00:46:24.620 Have you heard any talk about some of the Middle Eastern countries that we've filed or from beginning to mention the idea of being paid in some form of gold and gold certificate because they understand that they have to do that evaluation job? 366 00:46:26.620 --> 00:46:31.620 One of the things you want to understand is that the U.S. dollar is a world reserve currency, 367 00:46:31.620 --> 00:46:38.380 which means a lot of these other central banks hold dollars as part of their reserves. 368 00:46:38.380 --> 00:46:42.700 And so if the dollar is going down, they're losing money. 369 00:46:42.700 --> 00:46:52.700 And so there has been talk about selling oil in terms of euros rather than just dollars 370 00:46:52.700 --> 00:46:58.940 of Exchanges Trading Oil and Euros and Other Currencies, as well as gold. 371 00:46:58.940 --> 00:47:05.060 The people of the Middle East, the peoples of the Middle East, the peoples of South Asia, 372 00:47:05.060 --> 00:47:13.500 India, China, Southeast Asia, these are people who know the ravages of inflation historically, 373 00:47:13.500 --> 00:47:19.540 for hundreds and hundreds of years, and they keep their wealth, not in terms of local currency, 374 00:47:19.540 --> 00:47:25.080 What in terms of gold, of simple gold jewelry, and they wear, you know, they just keep on 375 00:47:25.080 --> 00:47:31.140 putting more and more necklaces, more and more rings and bracelets, and they wear their 376 00:47:31.140 --> 00:47:33.260 wealth around with them. 377 00:47:33.260 --> 00:47:37.140 They just keep on buying more gold jewelry. 378 00:47:37.140 --> 00:47:43.500 And so these sorts of notions about the honesty, the validity, and the soundness of gold and 379 00:47:43.500 --> 00:47:48.060 silver in these other countries is much more systemic than it is here in the United States 380 00:47:48.060 --> 00:48:06.060 Anymore, and so we very well, if we went through a tough world depression or hyperinflation, we very well might end up with metallic monies in some of these other countries around the world. 381 00:48:18.060 --> 00:48:29.060 No, there's not. There is not. There's a nominal gold backing to the Swiss franc, but it's just a token. 382 00:48:29.060 --> 00:48:34.060 Renumeration or foundation for the value of that money. 383 00:48:34.060 --> 00:48:38.060 In other words, if you wanted the gold value, you'd be losing money. 384 00:48:38.060 --> 00:48:45.060 So there's no system in place. There's only theory in place. 385 00:48:48.060 --> 00:48:59.060 Well, we don't know how much they have. They supposedly have quite a bit. 386 00:48:59.060 --> 00:49:08.060 Well, nobody has. The Federal Reserve has a lot of gold. All the central banks around the world hold a lot of gold. 387 00:49:08.060 --> 00:49:17.060 We haven't lost gold in circulation. There's more gold right now than there's ever existed in the history of the world. 388 00:49:17.060 --> 00:49:21.580 There's a huge amount of silver. 389 00:49:21.580 --> 00:49:24.460 There's a lot of discoveries out there 390 00:49:24.460 --> 00:49:25.740 that could be further exploited. 391 00:49:25.740 --> 00:49:31.020 So I don't really worry about there being enough money. 392 00:49:31.020 --> 00:49:32.580 As far as Austrians are concerned, 393 00:49:32.580 --> 00:49:36.220 whatever the amount is, it could serve as a monetary system. 394 00:49:36.220 --> 00:49:39.820 It would just be a different level. 395 00:49:39.820 --> 00:49:43.380 And the only problem is the temporary problem 396 00:49:43.380 --> 00:49:44.460 of reaching that level. 397 00:49:44.460 --> 00:50:07.460 Is there any other country that by law stopped the purchase to go like the United States did, after the depression? 398 00:50:14.460 --> 00:50:19.460 The other countries, but I've never heard one way or the other. 399 00:50:19.460 --> 00:50:25.220 A lot of countries actually went off the gold standard altogether 400 00:50:25.220 --> 00:50:26.460 during the Great Depression. 401 00:50:29.980 --> 00:50:31.660 But the United States is the only one 402 00:50:31.660 --> 00:50:34.540 that I know of that actually said, 403 00:50:34.540 --> 00:50:36.500 people aren't allowed to own gold, 404 00:50:36.500 --> 00:50:39.940 and you have to sell it to the government. 405 00:50:39.940 --> 00:50:41.780 It's interesting, the Federal Reserve, 406 00:50:41.780 --> 00:50:54.780 from their impact on the Depression and then the removal, you know, actually stopping the ability to hold it was almost a threat in their ideology that they were trying to promote. 407 00:51:11.780 --> 00:51:18.740 is outside of war that ever well actually part of it was war but it was a huge increase 408 00:51:18.740 --> 00:51:23.580 during that period of time and everybody thinks well you know that was the market economy 409 00:51:23.580 --> 00:51:30.860 and it really wasn't we had gone through the progressive era progressive era and the 410 00:51:30.860 --> 00:51:33.860 The United States have been changed dramatically. 411 00:51:35.860 --> 00:51:42.860 You kind of touched on the fact that it's already 40% 412 00:51:42.860 --> 00:51:45.860 I know there were several European countries 413 00:51:45.860 --> 00:51:47.860 that were doing a fair attack 414 00:51:47.860 --> 00:51:50.860 and I'm wondering if you know any information 415 00:51:50.860 --> 00:51:52.860 on how that's changed, 416 00:51:52.860 --> 00:51:54.860 would they be here or not be in the states? 417 00:51:54.860 --> 00:51:57.860 I don't know if they've got a website for fair attacks. 418 00:51:57.860 --> 00:52:12.860 Yeah, there's a lot of movements to change the tax code, the way we tax things, you know, going to a national sales tax, going to a flat tax, going to the fair tax. 419 00:52:12.860 --> 00:52:22.860 There's a lot of suggestions. Yeah, that's what I like, is the no tax argument. 420 00:52:22.860 --> 00:52:52.860 argument. But one thing I think that these movements do highlight is that people are upset about taxes. They realize they're unfair, they're too high, and they're hopelessly clumsy and antiquated. So that I think it's a good sign that there are these movements, but I always stress the need for lower taxes to eliminate certain taxes altogether and to make the movement downward in every and all cases. 421 00:52:52.860 --> 00:53:03.620 not to create inner battles between one group and another, and so, you know, I think those 422 00:53:03.620 --> 00:53:08.700 movements do highlight the problem, but I think the solution is always and everywhere 423 00:53:08.700 --> 00:53:16.780 to just think downward and to never let them adopt a new tax with, you know, with the idea 424 00:53:16.780 --> 00:53:29.780 And you can even vote against the tax and then the governor will go ahead and pass his own tax without your permission anyway. 425 00:53:29.780 --> 00:53:39.780 I was just going to ask if there is ever going to be test participants by the government? 426 00:53:59.780 --> 00:54:29.780 The Theory of Money and Credit The Theory of Money and Credit 427 00:54:29.780 --> 00:54:35.780 You know, it's the same way with our economic theory. It's not perfect. We don't know the answer to everything. 428 00:54:35.780 --> 00:54:40.780 And there's things that we haven't come across that we need to extend the theory to. 429 00:54:40.780 --> 00:54:51.780 So it's not really a matter of ever shooting for perfection. It's always shooting for what human beings can do. 430 00:54:51.780 --> 00:55:00.780 And the basic answer is, we can do a whole heck of a lot if we're allowed to do it, with the absence of government intervention.