WEBVTT

NOTE Austrian Economics versus Mainstream Economics

1
00:00:00.000 --> 00:00:04.320
It's a pleasure to be here with you today. I want to welcome you to the Mises Institute,

2
00:00:04.320 --> 00:00:11.680
which is really the worldwide hub of Austrian economics. And my purpose, my goal here is

3
00:00:11.680 --> 00:00:18.200
to explain to you what Austrian economics is and distinguish that from the mainstream

4
00:00:18.200 --> 00:00:23.360
of economic thought. Your typical average economist out there that you might see on

5
00:00:23.360 --> 00:00:30.360
on television, might be working for the Federal Reserve or the Treasury Department, things

6
00:00:31.080 --> 00:00:35.080
of that nature.

7
00:00:35.080 --> 00:00:41.520
Austrian economics is the oldest continuous school of economic thought. It was essentially

8
00:00:41.520 --> 00:00:48.520
founded in 1870, but we date our roots back to 1730. So we're the oldest school of economic

9
00:00:48.520 --> 00:00:54.320
So we're the oldest school of economic thought. We're actually also the smallest school of

10
00:00:54.320 --> 00:00:59.440
economic thought. There's probably a hundred or maybe a thousand mainstream economists for

11
00:00:59.440 --> 00:01:06.920
every Austrian economist today. And oddly, we are also the fastest growing school of

12
00:01:06.920 --> 00:01:12.440
economic thought. So we're the oldest, the smallest, and yet we're the fastest growing.

13
00:01:12.440 --> 00:01:21.640
And that growth has intensified in the last few years, largely due to the economic crisis.

14
00:01:21.640 --> 00:01:27.320
Mainstream economics, generally Keynesian economics, but there are other schools of thought out

15
00:01:27.320 --> 00:01:39.640
there as well, they use very complicated methods. They use elaborate mathematical modeling, supercomputers,

16
00:01:39.640 --> 00:01:49.240
laboratory rats, all sorts of things to try to predict the future of the economy. That's

17
00:01:49.240 --> 00:01:57.000
their goal is prediction and they're willing to use anything and go to any expense to come

18
00:01:57.000 --> 00:02:04.840
up with accurate predictions even using unrealistic models about human behavior. The Austrians

19
00:02:04.840 --> 00:02:11.600
Economics on the other hand have a very simple approach to economics of using logic and reasoning

20
00:02:11.600 --> 00:02:19.320
to try to understand human economic behavior and various economic processes.

21
00:02:19.320 --> 00:02:25.480
And while that's simple, it's not necessarily easy, we've spent several hundred years now

22
00:02:25.480 --> 00:02:30.920
trying to develop economics as a realistic approach to human behavior.

23
00:02:30.920 --> 00:02:41.080
And so what I'm going to do is look at about a half a dozen different aspects of our approaches

24
00:02:41.080 --> 00:02:49.240
to economics, our various views on economics, to try to distinguish the Austrians from mainstream

25
00:02:49.240 --> 00:02:50.240
economists.

26
00:02:50.240 --> 00:02:57.200
And this is very important for me in particular because economists in public opinion polls

27
00:02:57.200 --> 00:03:00.800
actually rank lower than the US Congress.

28
00:03:00.800 --> 00:03:04.640
Okay, so we've got a reputation to build here.

29
00:03:04.640 --> 00:03:08.320
Let's look at the basic differences

30
00:03:08.320 --> 00:03:13.000
between success and failure in terms of economics and economies.

31
00:03:13.000 --> 00:03:17.180
The US, the United States, was a very successful

32
00:03:17.180 --> 00:03:21.260
economy built from virtually nothing

33
00:03:21.260 --> 00:03:24.680
to what it is today, which is the world's largest economy.

34
00:03:24.680 --> 00:03:30.220
You can look at other countries as well, like Hong Kong, very, very successful.

35
00:03:30.220 --> 00:03:33.880
And then you can look at other areas which were not successful.

36
00:03:33.880 --> 00:03:37.800
Various African economies have fared very poorly.

37
00:03:37.800 --> 00:03:42.960
Many of the former communist countries fared very poorly, where the economies actually

38
00:03:42.960 --> 00:03:45.400
shrank over time.

39
00:03:45.400 --> 00:03:50.960
And then you can look in more recent times, and you look at China and India, which have

40
00:03:50.960 --> 00:03:56.480
gone from very low levels of economic development to the fastest growing economies in the world.

41
00:03:56.480 --> 00:03:59.160
Okay, so what explains that?

42
00:03:59.160 --> 00:04:09.280
Austrians, on our view, is that free markets in the economy lead to success.

43
00:04:09.280 --> 00:04:15.960
That private property rights, where individuals have clear title to their houses, their factories,

44
00:04:15.960 --> 00:04:20.640
their warehouses, their goods and services, that's also very important.

45
00:04:20.640 --> 00:04:27.240
People want to feel secure in their property rights, and if they do feel secure, they're

46
00:04:27.240 --> 00:04:30.080
willing to increase the amount of property.

47
00:04:30.080 --> 00:04:31.080
They're willing to save.

48
00:04:31.080 --> 00:04:33.560
They're willing to invest.

49
00:04:33.560 --> 00:04:39.840
We also feel that sound money is very important for an economy so that the measuring rod in

50
00:04:39.840 --> 00:04:43.640
all exchanges stays stable over time.

51
00:04:43.640 --> 00:04:50.000
And so, Austrians advocate a gold standard where gold coins and silver coins are the

52
00:04:50.000 --> 00:04:56.160
the medium of exchange and that medium is essentially stable over long periods of time

53
00:04:56.160 --> 00:05:01.240
so that when we're measuring things, just like with the yardstick, we don't want the

54
00:05:01.240 --> 00:05:07.440
length of that yardstick changing very much. Now, mainstream economists have a different

55
00:05:07.440 --> 00:05:15.880
view. They are very heavily into regulation. Government regulation of the economy is essential

56
00:05:15.880 --> 00:05:25.880
to create a growing economy. They find market failures all over the place. They believe in

57
00:05:25.880 --> 00:05:31.520
a government safety net is important for economic growth, and they view things like the Federal

58
00:05:31.520 --> 00:05:37.880
Reserve or central banking, which controls the money supply as well as the banking system

59
00:05:37.880 --> 00:05:44.160
is the key to economic success. So we disagree wholeheartedly with that approach, but that's

60
00:05:44.160 --> 00:05:51.960
That's the difference. The issue of prediction is very important for the mainstream economists.

61
00:05:51.960 --> 00:05:57.600
That's their goal. And it's a worthy one. Everybody wants to know the future. Austrians

62
00:05:57.600 --> 00:06:05.200
believe that you can't know the future with certainty. However, Austrian economists have

63
00:06:05.200 --> 00:06:13.000
successfully predicted all of the major economic crises over the last century. Ludwig von Mises,

64
00:06:13.000 --> 00:06:18.180
For example, the namesake of this institute correctly predicted the Great Depression in

65
00:06:18.180 --> 00:06:27.180
a book that he published in 1928. F. A. Hayek also predicted it, who was Mises' student.

66
00:06:27.180 --> 00:06:32.440
Mainstream economists at the time thought we were in a new era of prosperity that would

67
00:06:32.440 --> 00:06:39.800
never turn back. The same was true for the stagflation of the 1970s. Murray Rothbard,

68
00:06:39.800 --> 00:06:44.900
who was the first academic vice president of this institute successfully predicted the

69
00:06:44.900 --> 00:06:51.040
oncoming stagflation of the 1970s where mainstream economists thought we were, again, in a new

70
00:06:51.040 --> 00:06:52.040
era.

71
00:06:52.040 --> 00:06:59.720
When we came to the tech stock bubble of the late 1990s, Austrian economists, by the dozens,

72
00:06:59.720 --> 00:07:07.960
were warning about the bubble and the crisis to come while mainstream economists were predicting

73
00:07:07.960 --> 00:07:13.520
Once again, a new era, because of technology, the only thing that they were worrying about

74
00:07:13.520 --> 00:07:17.880
was that the technology was going to put people, we wouldn't have anything left to do in terms

75
00:07:17.880 --> 00:07:24.680
of work. And then of course with the housing bubble, in the current economic crisis, Austrian

76
00:07:24.680 --> 00:07:31.400
economists were writing about that in 2003, 2004, 2005, while mainstream economists were

77
00:07:31.400 --> 00:07:38.200
predicting a new era. You could never lose money in housing, they were telling us. Real

78
00:07:38.200 --> 00:07:46.760
estate prices never go down. So that's the story in terms of prediction. How about the

79
00:07:46.760 --> 00:07:52.920
cause of this economic crisis? Well, it's already been mentioned that Austrians view

80
00:07:52.920 --> 00:08:01.800
The Federal Reserve policy of setting interest rates at 1% in 2002, 3, 4 was the cause of

81
00:08:01.800 --> 00:08:10.400
this crisis, that low interest rates led to increased demand for housing, more homes,

82
00:08:10.400 --> 00:08:14.900
bigger homes and a lot more debt.

83
00:08:14.900 --> 00:08:21.080
Mainstream economists say it was a lack of regulation of the economy, that we had bad

84
00:08:21.080 --> 00:08:27.260
had regulations, and the consumers and investors were, for whatever reason, exhibiting highly

85
00:08:27.260 --> 00:08:34.260
speculative behavior. So they were blaming the consumer, people, for the crisis. We find

86
00:08:35.400 --> 00:08:41.380
that it was the Federal Reserve. Well, how about the cure to this crisis? Well, Austrians

87
00:08:41.380 --> 00:08:47.080
believe that easy credit and low interest rates led to too much debt and too little saving,

88
00:08:47.080 --> 00:08:53.080
Keeping households and businesses at risk for lower housing prices.

89
00:08:53.080 --> 00:09:02.080
Therefore, the key to curing this crisis is less debt and more savings.

90
00:09:02.080 --> 00:09:10.080
Mainstream economists view that we need more regulation and that government must provide a stimulus

91
00:09:10.080 --> 00:09:15.080
in the form of increased government spending and even more debt.

92
00:09:15.080 --> 00:09:24.080
So the mainstream wants us to take on even more debt while the Austrians view that debt is key to the problem.

93
00:09:24.080 --> 00:09:34.080
So what should the Fed do? What should the federal government do and the Federal Reserve do at this point?

94
00:09:34.080 --> 00:09:43.080
Well, Austrians believe that interest rates, as been previously shown, should be determined by the marketplace,

95
00:09:43.080 --> 00:09:51.860
Bailouts by the free interchange of borrowers and lenders, savers and investors.

96
00:09:51.860 --> 00:09:57.420
So the Fed should do, in our view, nothing that it should allow interest rates to find

97
00:09:57.420 --> 00:10:00.600
their own level.

98
00:10:00.600 --> 00:10:08.680
Bailouts by the Fed only lead investors to even worse behavior, knowing that the Fed

99
00:10:08.680 --> 00:10:12.400
will bail them out.

100
00:10:12.400 --> 00:10:18.880
is a moral hazard. If you see people getting bailed out, then why not undertake risky behavior

101
00:10:18.880 --> 00:10:26.640
yourself? It should be noted that the chairman of the Federal Reserve is a Ph.D., mainstream

102
00:10:26.640 --> 00:10:37.480
economist. He got his doctorate in economics. He wrote his dissertation on the Great Depression

103
00:10:37.480 --> 00:10:44.920
where he found that the Great Depression was caused by the failure of the Federal Reserve,

104
00:10:44.920 --> 00:10:54.720
their failure to bail out the banks. So in terms of bailing out banks, Mr. Bernanke literally

105
00:10:54.720 --> 00:11:05.400
wrote the book. So in retrospect, I guess it shouldn't be too surprising that he moved

106
00:11:05.400 --> 00:11:15.320
his way up the ladder to become the nation's chief inflationist.

107
00:11:15.320 --> 00:11:19.880
Deflation is an interesting topic. You might have heard that occasionally in the news and

108
00:11:19.880 --> 00:11:27.960
in the newspaper and the financial news. Deflation for mainstream economists is literally the

109
00:11:27.960 --> 00:11:36.920
and the black hole of economics. In other words, if you see prices falling in the economy,

110
00:11:36.920 --> 00:11:43.040
for them that can lead to bankruptcies and foreclosures with assets having to be sold

111
00:11:43.040 --> 00:11:49.620
off at auctions and that's causing lower prices which is causing bankruptcies, foreclosures

112
00:11:49.620 --> 00:11:57.640
and failures and layoffs leading to even still lower prices and the economy literally swirls

113
00:11:57.640 --> 00:12:06.240
goes down the black hole like water down a toilet. So they're fearful of this and they're

114
00:12:06.240 --> 00:12:14.280
willing to do anything to prevent it. Going to extreme measures such as putting out hundreds

115
00:12:14.280 --> 00:12:20.520
of billions of dollars out there to try to keep prices up. Austrians have a completely

116
00:12:20.520 --> 00:12:27.520
different view. We view deflation as a perfectly normal part of the economy where we expect

117
00:12:27.640 --> 00:12:33.800
In a free market economy on sound money, for prices of things to go down, like the price

118
00:12:33.800 --> 00:12:39.600
of computers going down, the price of television sets going down, the price of cell phones

119
00:12:39.600 --> 00:12:45.800
going down, we would expect in a free market economy that the prices of everything would

120
00:12:45.800 --> 00:12:49.200
be going down slowly over time.

121
00:12:49.200 --> 00:12:51.240
So we're not afraid of it.

122
00:12:51.240 --> 00:12:57.440
We, just like everybody who shops at Wal-Mart, enjoy lower prices, where the mainstream

123
00:12:57.440 --> 00:12:59.600
economists fear them.

124
00:12:59.600 --> 00:13:05.160
They have a phobia of lower prices.

125
00:13:05.160 --> 00:13:12.800
In a crisis, deflation actually plays a critical role that the mainstream economists don't

126
00:13:12.800 --> 00:13:14.180
see.

127
00:13:14.180 --> 00:13:20.760
So let's think about a crisis and think about falling prices.

128
00:13:20.760 --> 00:13:25.820
What's actually happening? Well, the first thing in a crisis is that stock prices go

129
00:13:25.820 --> 00:13:32.820
down dramatically. The price of capital goods falls dramatically. The price of raw materials

130
00:13:33.560 --> 00:13:40.560
and commodities falls dramatically. There's also large decreases in real estate prices.

131
00:13:42.460 --> 00:13:49.460
There's a notable decrease in wages. As people get laid off, the wage pressures go downward.

132
00:13:50.760 --> 00:13:58.560
There's widespread bankruptcies, foreclosures, and layoffs. Resources are being dislocated, right?

133
00:13:58.560 --> 00:14:05.360
That's what's happening. Capital labor and real estate is being dislocated from where it was.

134
00:14:05.360 --> 00:14:13.060
And there are small decreases in consumer goods. Luxury goods might fall dramatically,

135
00:14:13.060 --> 00:14:19.260
but necessities fall very little because of consumers' inelastic demand.

136
00:14:19.260 --> 00:14:25.460
You're going to buy toilet paper. You're going to buy bread and milk, or rice or whatever.

137
00:14:25.460 --> 00:14:32.360
You're going to buy the necessities. And this seems awful and fair on the surface of it, doesn't it?

138
00:14:32.360 --> 00:14:36.560
Where the basic necessities are falling very little.

139
00:14:36.560 --> 00:14:47.860
However, what the mainstream economists miss here is that this changing of prices and this dislocating of resources

140
00:14:47.860 --> 00:14:50.740
is opening up profit opportunities.

141
00:14:50.740 --> 00:14:54.660
The price of consumer goods is staying firm,

142
00:14:54.660 --> 00:15:00.460
but capital is falling, land prices are falling, real estate prices are falling,

143
00:15:00.460 --> 00:15:04.740
raw material prices are falling, labor prices are falling,

144
00:15:04.740 --> 00:15:10.540
and so the gap between all the resources you need to make consumer goods

145
00:15:10.540 --> 00:15:14.300
and the price of those consumer goods is widening.

146
00:15:14.300 --> 00:15:20.700
And that widening between those prices is profit opportunities.

147
00:15:20.700 --> 00:15:28.100
As a result, people become more entrepreneurial because of these widening opportunities.

148
00:15:28.100 --> 00:15:38.200
They think, you know, I can get the land, I can buy that store or rent that store and hire a few kids and get some raw materials and sell at a profit.

149
00:15:38.200 --> 00:15:42.700
People also become more entrepreneurial because of lack of jobs.

150
00:15:42.700 --> 00:15:50.700
I've got to do something. I've got to make some money. That's what people are doing all over our economy and all over the world right now.

151
00:15:50.700 --> 00:16:02.700
So entrepreneurs put these resources back together. They reallocate those dislocated resources into new firms and new functions.

152
00:16:02.700 --> 00:16:08.700
This puts the brake on falling prices.

153
00:16:08.700 --> 00:16:18.700
Instead of being a black hole that the mainstream economists see, we see deflation as a shock absorber.

154
00:16:18.700 --> 00:16:25.700
There's a shock to the economy, the deflationary process starts, but it's actually a shock absorber

155
00:16:25.700 --> 00:16:32.700
that reallocates those misallocated resources back to productive areas that consumers want.

156
00:16:32.700 --> 00:16:37.700
So again, entirely different vision of the world.

157
00:16:37.700 --> 00:16:46.700
And of course, our vision of stimulus and bailouts and other programs is also quite different.

158
00:16:46.700 --> 00:16:55.700
We view stimulus spending, we associate that with higher taxes, higher inflation,

159
00:16:55.700 --> 00:17:01.700
and if the money is borrowed, that just means our future taxes are going to go up.

160
00:17:01.700 --> 00:17:07.980
None of that is good, either for the people paying higher taxes today or investors looking

161
00:17:07.980 --> 00:17:19.360
at the future. It makes the outlook worse for entrepreneurs. It reduces our incentive

162
00:17:19.360 --> 00:17:26.120
to invest. And more importantly, it doesn't work. And if we're borrowing the money, it

163
00:17:26.120 --> 00:17:36.000
just adds to the national debt. Bailouts are also something we disapprove of. You're giving

164
00:17:36.000 --> 00:17:43.280
money to bad companies, the poorest run companies, sometimes it's just a matter of bad luck,

165
00:17:43.280 --> 00:17:50.520
but that's the capitalist system. You give bad incentives to both good companies and

166
00:17:50.520 --> 00:18:19.520
In terms of the Federal Reserve's policy, of course we disapprove of that. It discourages savings. Looking at those low interest rates that Doug was talking about, everybody I know, if I go to a party or something like that and they find out I'm an economist, they want to know what they can do, how can they make money on their savings.

167
00:18:19.520 --> 00:18:46.520
You know, what if I say, oh well just find the riskiest possible thing you can do and put your money in that. You might earn a few percentage points of interest over inflation. There's really nothing you can do. So it discourages savings, it discourages lending to households and businesses, and it devalues the dollar at the same time.

168
00:18:46.520 --> 00:18:52.520
Finally, cash for clunkers and the first-time homebuyer credit.

169
00:18:52.520 --> 00:18:59.520
Well, as Doug said, you know, those policies distort markets, they waste resources.

170
00:18:59.520 --> 00:19:02.520
I mean, they're kind of silly, in a way.

171
00:19:02.520 --> 00:19:11.520
But they are also a good illustration of what I was talking about with deflation.

172
00:19:11.520 --> 00:19:36.520
The first time homebuyer credit basically said, if you buy a house and this is your first house, you're going to get a $7,000 deduction off of your taxes so that in effect the house, the price you're paying for that house is actually being reduced by $7,000.

173
00:19:36.520 --> 00:19:42.520
If you buy a car, we're going to give you this cash for clunkers rebate.

174
00:19:42.520 --> 00:19:47.520
So you're in effect reducing the price of those cars, the new car purchases.

175
00:19:47.520 --> 00:19:53.520
So what this illustrates is not that we want to follow these policies indefinitely,

176
00:19:53.520 --> 00:19:59.520
but what it illustrates is that lower prices cause people to buy things.

177
00:19:59.520 --> 00:20:04.520
That's really the solution. We shouldn't fear deflation.

178
00:20:04.520 --> 00:20:11.960
We shouldn't fear allowing the marketplace to work even if it involves a lot of pain

179
00:20:11.960 --> 00:20:21.020
in the short run. It's my feeling and my conclusion that if we had allowed the crisis to take

180
00:20:21.020 --> 00:20:28.520
its natural course, we would already be viewing it as a historical phenomenon, not a current

181
00:20:28.520 --> 00:20:37.560
phenomenon, that it essentially would be over and we would be on to progress and the future.

182
00:20:37.560 --> 00:20:43.260
So in conclusion, there is a great deal of difference between Austrian economics and

183
00:20:43.260 --> 00:20:50.640
mainstream economics. We've had a lot of success in predicting these crisis events

184
00:20:50.640 --> 00:20:58.720
and understanding the events as they unfold and how do we go about curing such events.

185
00:20:58.720 --> 00:20:59.480
Thank you very much.