WEBVTT NOTE Senior Economics Seminar 1 00:00:00.000 --> 00:00:03.640 It's a pleasure to be here and thank you for the invitation. It's always good to 2 00:00:03.640 --> 00:00:09.100 get out and meet a new group of students and faculty and one of my favorite 3 00:00:09.100 --> 00:00:13.440 topics is to talk about the Austrian School of Economics and as I was driving 4 00:00:13.440 --> 00:00:19.000 up here I realized that it's kind of a funny school in economics in that it's 5 00:00:19.000 --> 00:00:27.000 the oldest continuously existing school of economics. It's the smallest school 6 00:00:27.000 --> 00:00:36.000 The Austrian School of Economics in terms of the number of professional economists who claim to work out of the Austrian tradition, and it's also the fastest growing. 7 00:00:36.000 --> 00:00:43.000 And so that's a very unusual combination to be the oldest, the smallest, and yet the fastest growing School of Economics. 8 00:00:43.000 --> 00:00:54.000 And I'm going to try to explain a little bit of that, give you a little history of the school, and show how Austrians approach problems different from the mainstream of economic thought. 9 00:00:54.000 --> 00:01:00.000 I'm going to have plenty of time, I hope, for questions and answers, well, at least some questions. 10 00:01:00.000 --> 00:01:03.000 Hopefully, I'll be able to come up with some answers as well. 11 00:01:03.000 --> 00:01:10.000 Now, the school starts out in 1870, and do you offer a history of economics course here? 12 00:01:10.000 --> 00:01:11.000 No. 13 00:01:11.000 --> 00:01:12.000 No? Okay. 14 00:01:12.000 --> 00:01:13.000 No. 15 00:01:13.000 --> 00:01:17.000 Well, this is a long time ago. 16 00:01:17.000 --> 00:01:22.440 And the school starts out with a guy named Carl Menger, who was a journalist who covered 17 00:01:22.440 --> 00:01:31.220 the stock and bond market in Vienna, Austria. And in looking at markets, he devised a theoretical 18 00:01:31.220 --> 00:01:37.480 approach to how to understand why stocks and bonds go up and down. And he did so by going 19 00:01:37.480 --> 00:01:45.740 back to the very fundamentals of economic action. And in doing so, he brought into economics 20 00:01:45.740 --> 00:01:53.220 marginal analysis, price theory, and the idea of opportunity costs, things which are now 21 00:01:53.220 --> 00:01:57.780 in the first couple of chapters of any economics text. 22 00:01:57.780 --> 00:02:04.800 And so the school starts with him, Menger goes on to become the tutor of the crown prince 23 00:02:04.800 --> 00:02:10.020 of Austria and gets the main professorship at the University of Vienna. 24 00:02:10.020 --> 00:02:17.440 So the school is an early success. Two of his students went on to become famous economists 25 00:02:17.440 --> 00:02:22.900 of the time, Friedrich von Wieser, don't try to spell these on your own, and Eugen von 26 00:02:22.900 --> 00:02:30.780 Boehm-Bawerk, who went on to become the finance minister of Austria, and Wieser replaced Menger 27 00:02:30.780 --> 00:02:39.460 as the lead professor in Austria. So the school had a lot of initial success in terms of making 28 00:02:39.460 --> 00:02:47.620 break through contributions in economics, making economics what it in part is today. 29 00:02:47.620 --> 00:02:54.260 Then the school went into decline. Basically, with the advent of World War I and World War 30 00:02:54.260 --> 00:03:03.740 II, it basically destroyed the Austrian school as it had flourished for about 45 years. World 31 00:03:03.740 --> 00:03:09.420 War I, a lot of the Austrian economists were drafted into the military. Ludwig von Mises 32 00:03:09.420 --> 00:03:14.580 Von Mises himself was drafted into the military as an artillery officer, was wounded in action, 33 00:03:14.580 --> 00:03:20.180 but several of them were killed, and of course whole classes at the university were cancelled. 34 00:03:20.180 --> 00:03:24.020 So that sort of snuffed out the Austrian school. 35 00:03:24.020 --> 00:03:30.140 And then later, even though von Mises himself was becoming prominent, was the lead economist 36 00:03:30.140 --> 00:03:36.980 for the Chamber of Commerce in Vienna, in Austria, a very important position, it would 37 00:03:36.980 --> 00:03:50.980 World War II was on the horizon, the rise of Nazi Germany, and that also broke up the Austrian School. 38 00:03:50.980 --> 00:03:58.980 The Austrian economists were very prominent in Austria at that time, but in the 1930s they started leaving because of the threat of Nazism. 39 00:03:58.980 --> 00:04:06.500 And sure enough, the Nazis invaded Austria, they invaded Vienna, and of course they snuffed 40 00:04:06.500 --> 00:04:09.660 out a lot of opposition to fascism. 41 00:04:09.660 --> 00:04:15.060 And interestingly enough, Mises had made it out of the country, and one of the first things 42 00:04:15.060 --> 00:04:23.800 the Nazis did when they came into Vienna was go to Mises' apartment, and they confiscated 43 00:04:23.800 --> 00:04:28.880 all his papers, all his books, all his furniture even. 44 00:04:28.880 --> 00:04:34.020 And we in the Austrian School thought that all that had been destroyed actually until 45 00:04:34.020 --> 00:04:40.880 a few years ago when they found his furniture and papers in Moscow. 46 00:04:40.880 --> 00:04:43.680 Now how does that work? 47 00:04:43.680 --> 00:04:49.280 Well, the Nazis came in, Mises was the big opponent of socialism and fascism, so they 48 00:04:49.280 --> 00:04:56.120 gathered all his papers and all his belongings to look for some clue as to Mises' theories 49 00:04:56.120 --> 00:05:02.760 of Why Socialism was Impossible and Why it was Chaotic Economically and so forth. 50 00:05:02.760 --> 00:05:08.980 And then, when the Russians took Berlin, they confiscated those papers and brought them back 51 00:05:08.980 --> 00:05:12.960 to Moscow, thinking the same thing, that they could figure out some way of improving the 52 00:05:12.960 --> 00:05:17.180 economic performance of socialism if they only had von Mises' papers. 53 00:05:17.180 --> 00:05:22.940 And so when the Soviet Union broke down, we found the papers. 54 00:05:22.940 --> 00:05:29.960 Basically, the Austrian School had been decimated at these time periods. 55 00:05:29.960 --> 00:05:34.180 The remaining Austrians had been spread around the country, around Europe, around mostly 56 00:05:34.180 --> 00:05:38.860 to the United States actually, but very few were at degree-granting institutions in terms 57 00:05:38.860 --> 00:05:49.420 of PhDs, and there were no, there were very few people working in terms of directing PhDs, 58 00:05:49.420 --> 00:05:54.100 And so there were no new Austrian PhDs in the United States and when I went to graduate 59 00:05:54.100 --> 00:06:01.100 school hoping to study Austrian economics, I was told that Austrian economics was being 60 00:06:01.100 --> 00:06:03.660 phased out. 61 00:06:03.660 --> 00:06:09.120 There was only a few Austrians still alive and still teaching and none of those were 62 00:06:09.120 --> 00:06:11.700 at PhD-granting universities. 63 00:06:11.700 --> 00:06:19.300 So that's one of the reasons why your professors and most professors in economics are not exposed 64 00:06:19.300 --> 00:06:25.140 to Austrian Economics because it had been essentially phased out. 65 00:06:25.140 --> 00:06:29.940 And so that's sort of the origins and the fall of Austrian Economics. 66 00:06:29.940 --> 00:06:33.900 And I'm going to talk about the resurgence of Austrian Economics a little bit later. 67 00:06:33.900 --> 00:06:39.580 But I wanted to get into some of the basic differences of Austrians versus mainstream 68 00:06:39.580 --> 00:06:45.660 economics, sort of lumping together most other schools of economics. 69 00:06:45.660 --> 00:06:50.160 And I don't want this to, it's going to sound confrontational, you know, this is what we 70 00:06:50.160 --> 00:06:54.220 do and we're better and this is what they do and it's not so good. 71 00:06:54.220 --> 00:07:00.260 But Austrian economics can work together with mainstream methodologies as well. 72 00:07:00.260 --> 00:07:06.640 I myself have published articles with econometrics in it, with mathematical economics in it, 73 00:07:06.640 --> 00:07:11.100 with experimental economics, with survey data and all the rest. 74 00:07:11.100 --> 00:07:18.180 and I work at the home of Austrian Economics at Auburn University, and I haven't been 75 00:07:18.180 --> 00:07:24.380 thrown out, so it's an open-ended approach in that you can be an Austrian or you can 76 00:07:24.380 --> 00:07:30.920 be a mainstream economist and understand Austrian Economics and use that as a way of helping 77 00:07:30.920 --> 00:07:34.620 your own research and your own understanding. 78 00:07:34.620 --> 00:07:47.700 Okay, well, in terms of the differences between the two schools, on the concept of rationality, 79 00:07:47.700 --> 00:07:51.900 are people economically rational? 80 00:07:51.900 --> 00:07:56.500 Everybody knows that they themselves are economically rational, but there are other people who are 81 00:07:56.500 --> 00:07:59.260 not quite so rational. 82 00:07:59.260 --> 00:08:10.140 And so the Austrians have a more reasonable view of rationality and that it's based on 83 00:08:10.140 --> 00:08:14.060 what you would normally see out there in the real world. 84 00:08:14.060 --> 00:08:25.860 The mainstream uses a concept of rationality where humans are rational calculators, where 85 00:08:25.860 --> 00:08:30.060 They work at this margin and they rationally calculate things. 86 00:08:30.060 --> 00:08:35.580 And even if they're not quite rational, there's enough of us in markets in general so that 87 00:08:35.580 --> 00:08:40.220 markets turn out to be rational. 88 00:08:40.220 --> 00:08:47.100 So we have a more weaker view of rationality, where everything turns out to be rational 89 00:08:47.100 --> 00:08:52.980 even if it doesn't look so good on the surface, like getting addicted to drugs. 90 00:08:52.980 --> 00:09:01.580 That doesn't sound rational, but you can rationalize why people do it or how it occurs. 91 00:09:01.580 --> 00:09:06.380 In the mainstream, people have stable preferences. 92 00:09:06.380 --> 00:09:12.500 That's a requirement for a lot of mainstream methodology. 93 00:09:12.500 --> 00:09:18.460 And one thing you're going to find in mainstream economics is a lot of mathematics, statistics, 94 00:09:18.460 --> 00:09:21.380 econometrics, those sorts of things. 95 00:09:21.380 --> 00:09:29.780 Whereas the Austrians view all of that with a lot of skepticism. 96 00:09:29.780 --> 00:09:33.540 Because we view people as not having stable preferences, that people can change their 97 00:09:33.540 --> 00:09:42.460 minds and do so often, that people can be fooled and are on a regular basis. 98 00:09:42.460 --> 00:09:47.820 The goal of mainstream economics is, I see it, and has been sort of handed down from 99 00:09:47.820 --> 00:09:53.780 from the grandfathers of mainstream economics is prediction. 100 00:09:53.780 --> 00:09:59.860 The mainstream wants to be able to predict. 101 00:09:59.860 --> 00:10:07.420 The famous saying of the econometric society, for example, is science is prediction, and 102 00:10:07.420 --> 00:10:10.520 that everything else can take a back seat to that. 103 00:10:10.520 --> 00:10:17.260 We can use unrealistic assumptions in our models as long as it helps us make better 104 00:10:17.260 --> 00:10:22.140 Predictions. 105 00:10:22.140 --> 00:10:27.740 Austrians are, per se, not interested in prediction. 106 00:10:27.740 --> 00:10:49.340 We're interested in understanding. 107 00:10:49.340 --> 00:10:50.980 So those are some basic differences. 108 00:10:50.980 --> 00:10:57.720 In other words, Austrians sit down with paper and pencil and logic and deductions and try 109 00:10:57.720 --> 00:11:04.440 Try to generate economic analysis, try to generate understanding of economic phenomenon 110 00:11:04.440 --> 00:11:06.240 and economic policy. 111 00:11:06.240 --> 00:11:12.360 The mainstream brings a lot more powerful tools to bear in terms of large data sets, 112 00:11:12.360 --> 00:11:20.220 computers, programming software, and so forth, in order to try to use some theory in order 113 00:11:20.220 --> 00:11:28.540 to create empirical models which will generate predictions. 114 00:11:28.540 --> 00:11:32.360 So those are some of the basic differences, and I'm going to give you a microapplication 115 00:11:32.360 --> 00:11:39.960 and a macroapplication of some of those differences as I see them, and the microapplication is 116 00:11:39.960 --> 00:11:46.900 going to be to the concept of prohibition, things like alcohol and drug prohibition, 117 00:11:46.900 --> 00:11:52.340 And this is what I did my PhD dissertation on. 118 00:11:52.340 --> 00:12:01.100 Now the basic mainstream price theory approach to prohibition is fairly straightforward. 119 00:12:01.100 --> 00:12:19.980 I know you're all familiar with that. 120 00:12:19.980 --> 00:12:28.380 Where you have a particular product which is deemed to have socially negative consequences. 121 00:12:28.380 --> 00:12:30.100 So how do you address that? 122 00:12:30.100 --> 00:12:37.100 You create a prohibition which drives up the price. 123 00:12:37.100 --> 00:12:43.100 Prohibition with law enforcement and penalties, prison sentences, confiscation of assets, 124 00:12:43.100 --> 00:12:50.100 that all creates risk for the entrepreneur or the drug dealer or the moonshiner or whatever. 125 00:12:50.100 --> 00:12:59.100 So that price in the market becomes considerably higher with the prohibition. 126 00:12:59.100 --> 00:13:16.220 In the price theory of prohibition, you introduce a penalty, you decrease the supply, you increase 127 00:13:16.220 --> 00:13:24.940 the price, you decrease the quantity consumed, so therefore you reduce those social problems. 128 00:13:24.940 --> 00:13:29.340 So you achieve your goal in that manner. 129 00:13:29.340 --> 00:13:36.140 And that's essentially how alcohol prohibition was introduced, at least at the academic level. 130 00:13:36.140 --> 00:13:44.060 And we're going to be talking about one of the most important American economists of 131 00:13:44.060 --> 00:13:48.220 all time, Irving Fisher. 132 00:13:48.220 --> 00:13:55.780 He's basically the architect of modern mainstream economics. 133 00:13:55.780 --> 00:14:00.260 And he's the only American economist from the first half of the 20th century who's 134 00:14:00.260 --> 00:14:10.500 still discussed in the mainstream, the top level mainstream journals. 135 00:14:10.500 --> 00:14:15.220 And Irving Fisher was a promoter of alcohol prohibition. 136 00:14:15.220 --> 00:14:21.020 He held a symposium at the American Economic Association where he brought out several prominent 137 00:14:21.020 --> 00:14:26.940 economists to speak in favor of prohibition. 138 00:14:26.940 --> 00:14:32.240 And at the end he said that he had invited any member of the American Economic Association 139 00:14:32.240 --> 00:14:36.400 to come forward and oppose alcohol prohibition. 140 00:14:36.400 --> 00:14:39.240 He said he got no responses. 141 00:14:39.240 --> 00:14:44.800 So in contrast today, back then economists were proponents of alcohol prohibition with 142 00:14:44.800 --> 00:14:50.520 The idea being that if we can stop people from drinking, they'll show up for work more 143 00:14:50.520 --> 00:14:53.640 often. 144 00:14:53.640 --> 00:14:58.760 And they'll have more money in their paycheck to give to their family. 145 00:14:58.760 --> 00:15:04.560 And so we'll solve a lot of social problems simply by limiting the intake of alcohol on 146 00:15:04.560 --> 00:15:14.320 the part of basically male laborers who did drink a lot back then. 147 00:15:14.320 --> 00:15:23.880 So with Irving Fisher, the idea of prohibition is productivity, along with other things like 148 00:15:23.880 --> 00:15:34.800 enhancing health, reducing crime, those things, health, crime, violence, guys go out to bars, 149 00:15:34.800 --> 00:15:52.780 Drink, Fight. And you also, he attributed the booming economy of the 1920s to two things. 150 00:15:52.780 --> 00:15:57.240 One was alcohol prohibition and the other was how the Federal Reserve was managing the 151 00:15:57.240 --> 00:15:58.240 and Money Supply. 152 00:15:58.240 --> 00:16:13.240 That's also going to be important later on. 153 00:16:13.240 --> 00:16:15.000 Austrians see this a little differently. 154 00:16:15.000 --> 00:16:22.080 This is all true to a certain extent, but when Austrians look at going from an open 155 00:16:22.080 --> 00:16:29.640 and Marketplace to a prohibition, the thing that goes from being the most important aspect 156 00:16:29.640 --> 00:16:35.440 of economic analysis goes to becoming the least important item of economic analysis, 157 00:16:35.440 --> 00:16:37.940 and that is the price of the product. 158 00:16:37.940 --> 00:16:43.400 And I know that you've had many classes where the price of something is sort of, we're zeroing 159 00:16:43.400 --> 00:16:48.120 in on that all the time because we're usually talking about markets of various kinds all 160 00:16:48.120 --> 00:16:49.620 the time. 161 00:16:49.620 --> 00:16:55.420 But prohibition takes us from one world of the marketplace to another world which is 162 00:16:55.420 --> 00:16:58.140 completely different. 163 00:16:58.140 --> 00:17:05.560 And so price becomes the least important component of economic analysis of prohibition. 164 00:17:05.560 --> 00:17:12.940 All institutions in the marketplace are radically altered. 165 00:17:12.940 --> 00:17:20.300 They're basically completely changed as a result of prohibition. 166 00:17:20.300 --> 00:17:26.100 So it really doesn't matter what happens to price and quantity. 167 00:17:26.100 --> 00:17:29.500 That's still debated today. 168 00:17:29.500 --> 00:17:45.540 The modern version of Irving Fisher is actually another very famous economist, Gary Becker, 169 00:17:45.540 --> 00:17:53.340 who realizes that Fisher's prohibition was wrong-headed, and he instead proposes that 170 00:17:53.340 --> 00:18:01.980 We place a very large excise tax on alcohol. 171 00:18:01.980 --> 00:18:12.180 Now note that the, in this blackboard view of the world, if we were to scrap the prohibition 172 00:18:12.180 --> 00:18:20.580 and go back to the marketplace, the price then falls, the quantity increases, the quantity 173 00:18:20.580 --> 00:18:28.140 Consumed increases in all of those social problems involved with alcohol and drugs would 174 00:18:28.140 --> 00:18:32.540 essentially double here, going from this quantity to this quantity. 175 00:18:32.540 --> 00:18:37.380 If there was a relationship between the quantity consumed and the amount of social problems 176 00:18:37.380 --> 00:18:47.060 that existed, then all of those social problems, in terms of health, crime, violence, disease, 177 00:18:47.060 --> 00:18:55.180 would also double. 178 00:18:55.180 --> 00:18:58.780 The Austrians don't see it this way. 179 00:18:58.780 --> 00:19:08.540 We see the institutional changes, those radically changed institutions of prohibition as being 180 00:19:08.540 --> 00:19:14.060 the major culprit of a lot of those social problems. 181 00:19:14.060 --> 00:19:15.060 What does prohibition do? 182 00:19:15.060 --> 00:19:20.200 Well, it takes away the legal structure from the marketplace. 183 00:19:20.200 --> 00:19:28.800 It takes away the property rights structure of the marketplace, two very important components 184 00:19:28.800 --> 00:19:31.740 of well-functioning markets. 185 00:19:31.740 --> 00:19:38.600 So drug dealers are not held responsible for their products in the same way that Wal-Mart 186 00:19:38.600 --> 00:19:42.060 is or that Winn-Dixie is. 187 00:19:42.060 --> 00:19:53.260 If a drug dealer sells a product that has been contaminated with dangerous components, 188 00:19:53.260 --> 00:20:02.780 or if the product is altered in such a way as it causes whatever, death, seizure, stroke, 189 00:20:02.780 --> 00:20:09.700 heart attack, birth defects, the drug dealer is not liable. 190 00:20:09.700 --> 00:20:14.340 There's no court, there's no lawsuits or anything like that. 191 00:20:14.340 --> 00:20:19.420 Now if Walmart did something like that, they'd be sued. 192 00:20:19.420 --> 00:20:22.700 They could be put out of business. 193 00:20:22.700 --> 00:20:32.980 If there was one day where McDonald's restaurants around the country put out one hamburger each 194 00:20:32.980 --> 00:20:37.740 that made people end up in the hospital. 195 00:20:37.740 --> 00:20:41.300 What would happen to McDonald's? 196 00:20:41.300 --> 00:20:48.180 They'd be faced by thousands of lawsuits. 197 00:20:48.180 --> 00:20:52.060 And not only that, what have they lost? 198 00:20:52.060 --> 00:20:56.440 Say they have 5,000 restaurants, 5,000 lawsuits, 199 00:20:56.440 --> 00:21:01.440 and million-dollar awards for all of those losses. 200 00:21:03.420 --> 00:21:04.720 What else have they lost? 201 00:21:08.240 --> 00:21:09.720 Their business. 202 00:21:09.720 --> 00:21:11.840 Who's gonna wanna go back to McDonald's 203 00:21:11.840 --> 00:21:15.480 when everybody, every hometown in America 204 00:21:15.480 --> 00:21:19.060 has seen somebody that got rat poison in their hamburger 205 00:21:19.060 --> 00:21:20.520 and ended up in the hospital? 206 00:21:23.720 --> 00:21:26.180 That doesn't happen to drug dealers. 207 00:21:26.180 --> 00:21:33.940 They can just vanish, surface someplace else. It's a secret business. 208 00:21:33.940 --> 00:21:41.220 So that's completely out of the picture. So that a lot of the problems are because the 209 00:21:41.220 --> 00:21:49.500 legal structure has been eliminated. And then, of course, there's the property rights structure. 210 00:21:49.500 --> 00:21:57.300 There are no property rights enforced by the government in black markets or in underground 211 00:21:57.300 --> 00:21:59.140 economy. 212 00:21:59.140 --> 00:22:06.260 So as a consequence, in terms of enforcing contracts, enforcing sales territories, a 213 00:22:06.260 --> 00:22:11.660 lot of the business concepts that go over to the underground economy, they aren't enforced 214 00:22:11.660 --> 00:22:18.860 by the threat of the government or the sheriff coming in and settling this dispute. 215 00:22:18.860 --> 00:22:27.180 How are they settled? It's in the newspaper every day. People shoot each other. People 216 00:22:27.180 --> 00:22:38.140 shoot each other. The gangs in this country exist in large part as enforcement mechanisms 217 00:22:38.140 --> 00:22:48.700 for drug distribution chains. Large drug distribution chains use street gangs to just be the final 218 00:22:48.700 --> 00:22:56.300 The Federal Distributor and to enforce their little territories, their little contracts. 219 00:22:56.300 --> 00:23:04.620 None of that would be going on if Wal-Mart was selling marijuana. 220 00:23:04.620 --> 00:23:07.420 That just wouldn't happen. 221 00:23:07.420 --> 00:23:13.780 And another thing that doesn't happen in the market economy, that does happen in the underground 222 00:23:13.780 --> 00:23:25.780 In the black market economy is the issue of miners, people who are 18 years or younger. 223 00:23:25.780 --> 00:23:31.780 In the market economy, miners can't make valid contracts. 224 00:23:31.780 --> 00:23:37.860 Any contract they do make, they can back out of at any time without any recourse. 225 00:23:37.860 --> 00:23:42.300 So if a 17-year-old went into a car dealership and said, yeah, I want to buy that car over 226 00:23:42.300 --> 00:23:50.180 And the dealer went along with it. The person could drive that car for 30 days and then 227 00:23:50.180 --> 00:23:58.180 turn it back in. No problem. Minors aren't allowed to make contracts. They're not allowed 228 00:23:58.180 --> 00:24:07.460 to be conducting certain transactions without the consent of their parents or guardians. 229 00:24:07.460 --> 00:24:14.460 You can't get a credit card, you can't rent a car, you can't make a real estate transaction, 230 00:24:14.460 --> 00:24:21.920 you can't get a professional license because the law protects minors. 231 00:24:21.920 --> 00:24:26.600 Most pharmacies don't allow minors to pick up prescriptions unless they're in the presence 232 00:24:26.600 --> 00:24:29.620 of an adult or guardian. 233 00:24:29.620 --> 00:24:36.560 You're not allowed to buy beer or wine or liquor. 234 00:24:36.560 --> 00:24:43.240 You're not allowed to enter the armed services without permission of your parents. 235 00:24:43.240 --> 00:24:44.640 So that's what the marketplace does. 236 00:24:44.640 --> 00:24:48.900 That's what the legal system has been doing for hundreds and hundreds of years. 237 00:24:48.900 --> 00:24:55.580 But in an underground economy, if you're 17, the drug dealer is not going to make any distinction 238 00:24:55.580 --> 00:24:58.520 between a 17 and a 19-year-old. 239 00:24:58.520 --> 00:25:04.640 If they've got 20 bucks, 50 bucks, 100 bucks, they're going to get the drugs. 240 00:25:04.640 --> 00:25:06.880 No problem, no questions. 241 00:25:06.880 --> 00:25:09.640 There's no drug dealer who discriminates on that basis that I know of. 242 00:25:09.640 --> 00:25:15.320 Of course, I don't know any, but that's pretty much a pretty good assumption. 243 00:25:15.320 --> 00:25:22.120 As a matter of fact, the drug trade actually encourages young people not just to consume 244 00:25:22.120 --> 00:25:24.160 drugs, but to deal drugs. 245 00:25:24.160 --> 00:25:30.320 Because if you're caught when you're 15 or 16, the penalties for being a retailer of 246 00:25:30.320 --> 00:25:35.260 Illegal Drugs is much lower than if you were 19 or 20. 247 00:25:35.260 --> 00:25:46.680 So the prohibition is actually dragging minors into the illicit underground criminal economy. 248 00:25:46.680 --> 00:25:57.880 So where the mainstream blackboard price diagram shows that legalization would cause significant 249 00:25:57.880 --> 00:26:02.600 increases in social problems, and I know there's a lot of mainstream economists who don't buy that. 250 00:26:03.880 --> 00:26:09.400 But as far as their lesson gets into the policy debates, that's exactly what would happen. If I 251 00:26:09.400 --> 00:26:16.920 advocated prohibition be eliminated and something be legalized, the first response on the part of 252 00:26:16.920 --> 00:26:22.520 whatever my opposition opponent would be, would they would say if we legalized it, it would become 253 00:26:22.520 --> 00:26:34.800 and less expensive and more people would be tempted to consume it and I don't buy that. 254 00:26:34.800 --> 00:26:37.520 Has anybody tried heroin in here? 255 00:26:37.520 --> 00:26:45.000 Okay, now if it were legalized and became real cheap, is anybody in here really interested 256 00:26:45.000 --> 00:26:49.920 in doing heroin? 257 00:26:49.920 --> 00:26:50.920 Come on. 258 00:26:50.920 --> 00:26:58.720 No guts, no glory. Of course not. And I've asked that question to rooms of 2,000 259 00:26:58.720 --> 00:27:08.120 people and everybody all of a sudden realizes, well gee, you know, it's not 260 00:27:08.120 --> 00:27:16.520 going to be running for the door type legalization. So that's why we, that's how 261 00:27:16.520 --> 00:27:24.520 But, couldn't you say that a lot of people in this room would say they wouldn't want 262 00:27:24.520 --> 00:27:30.520 to do it because it was socially not right, but if it was legal, then socially it's acceptable 263 00:27:30.520 --> 00:27:36.520 to them, wouldn't more people probably be willing to say, oh yeah, maybe I would? 264 00:27:46.520 --> 00:27:50.960 But again, there are a lot of things in place, as you mentioned, you know, is it socially acceptable? 265 00:27:51.800 --> 00:27:53.800 Would it be acceptable to your employer? 266 00:27:54.800 --> 00:27:58.080 When you take that drug test and they find out you've been doing heroin. 267 00:27:59.300 --> 00:28:01.220 I don't think so. 268 00:28:01.220 --> 00:28:06.760 The market imposes some very stern consequences on drug users. 269 00:28:09.000 --> 00:28:12.620 You're not even allowed into certain professions or certain jobs. 270 00:28:12.620 --> 00:28:24.620 And people who abuse drugs or alcohol don't get nearly as many promotions or opportunities for pay raises. 271 00:28:24.620 --> 00:28:31.620 They always get left behind. So there's a very significant penalty paid. 272 00:28:31.620 --> 00:28:38.620 It's sort of secret, but it's out there. And there's been studies that have been done that show that that is the case. 273 00:28:38.620 --> 00:28:55.620 There is a few studies that show that people who drink more earn more, but that's really kind of a flawed study and I know who the author of the study was and he just likes to drink and he got this thing published. 274 00:28:55.620 --> 00:29:04.460 But generally, people who abuse drugs and abuse alcohol pay a significant economic penalty 275 00:29:04.460 --> 00:29:09.360 in the marketplace, even though that's not well known out there. 276 00:29:09.360 --> 00:29:14.820 When you sit back and think about it and you explore your group of people that you have 277 00:29:14.820 --> 00:29:21.820 known, your friends, your relatives, your classmates, you'll see that that is the case. 278 00:29:21.820 --> 00:29:42.980 The Legalization in and of itself is not going to solve the problems of drug abuse. We have 279 00:29:42.980 --> 00:29:51.520 have a social safety net in the United States, as do most advanced countries or developing 280 00:29:51.520 --> 00:30:01.660 countries even have social safety nets that include things like public housing, welfare, 281 00:30:01.660 --> 00:30:08.580 food assistance, unemployment insurance, right on down the list. 282 00:30:08.580 --> 00:30:14.700 Other countries even have more extensive social safety nets than we do. 283 00:30:14.700 --> 00:30:21.900 Public health departments, access to hospitals, emergency rooms, this is all part of the social 284 00:30:21.900 --> 00:30:24.420 safety net. 285 00:30:24.420 --> 00:30:30.640 But it's that same social safety net that cushions not just people who fall through 286 00:30:30.640 --> 00:30:36.660 the cracks for unexplained reasons, but it cushions the blow of abusing drugs and alcohol. 287 00:30:36.660 --> 00:30:42.660 Because if you get into a car accident, the government is going to pay for an ambulance 288 00:30:42.660 --> 00:30:47.260 to show up and bring you to the emergency room and get you into that hospital and fix 289 00:30:47.260 --> 00:30:53.100 you up if you get into a crash. 290 00:30:53.100 --> 00:30:56.380 If you lose your job, you'll have benefits. 291 00:30:56.380 --> 00:31:03.900 They're not great, obviously, and I certainly don't recommend that, but that is there. 292 00:31:03.900 --> 00:31:10.500 And so to really get rid of the problems of abuse, you'd have to lock down on all that 293 00:31:10.500 --> 00:31:18.220 business as well as on who gets to use the public roads. 294 00:31:18.220 --> 00:31:25.300 And a lot of people just aren't willing to even consider those kind of changes. 295 00:31:25.300 --> 00:31:30.380 But within the Austrian School, you think in those terms, you know, what would a complete 296 00:31:30.380 --> 00:31:36.780 Marketplace, what would be the constraints that people would be under, versus what we 297 00:31:36.780 --> 00:31:45.160 have right now, the myriad of policies, and what constraint does that place on individuals? 298 00:31:45.160 --> 00:31:53.380 So that's the micro-application of how Austrians view things a little bit differently. 299 00:31:53.380 --> 00:31:58.880 And obviously, this is a caricature almost of mainstream economics, there's so much research 300 00:31:58.880 --> 00:32:25.880 The Macro Application is about the business cycle, which is kind of a timely topic for graduating seniors when within the last few weeks or so everybody has changed their mind and said a recession is coming. 301 00:32:25.880 --> 00:32:45.880 I graduated from college in 1982, which was the last really severe economic downturn, which is also the reason why I went to graduate school, because I couldn't get a job, and after that I was just lucky. 302 00:32:45.880 --> 00:33:04.440 So, within the business cycle, business, there are a lot of mainstream theories, or there 303 00:33:04.440 --> 00:33:18.780 There are a lot of theories within mainstream economics over the last 75 years, but in large 304 00:33:18.780 --> 00:33:38.780 For the most part, they all come down to psychology, that the economy should grow like this. 305 00:33:38.780 --> 00:33:52.780 It should just grow, or maybe just stay flat, or if institutions aren't all that great, it should just decline. 306 00:33:52.780 --> 00:33:59.780 But generally speaking, we expect market economies to produce economic growth over time. 307 00:33:59.780 --> 00:34:06.780 And it's only psychological factors, sometimes external shocks, 308 00:34:06.780 --> 00:34:20.780 But basically psychological factors which cause certain periods of time to be where investors are over-exuberant and there's a bandwagon effect 309 00:34:20.780 --> 00:34:31.780 where people see people making profits so they make investments and this piling on of investments creates super profits 310 00:34:31.780 --> 00:34:42.780 And that's basically based on psychological factors which sort of snowball in the economy, creating what Austrians call a boom. 311 00:34:42.780 --> 00:34:50.780 A boom in investment, a boom in the economy. 312 00:34:50.780 --> 00:35:00.780 And then, for whatever reason, and that phrase is used very often by Keynesian economists and their offshoots 313 00:35:00.780 --> 00:35:10.700 and Behavioral Finance Analysts, they'll use this phrase for whatever reason and then 314 00:35:10.700 --> 00:35:14.620 people become less optimistic. 315 00:35:14.620 --> 00:35:24.580 They start cutting back and then that snowballs or just gets going in the negative direction. 316 00:35:24.580 --> 00:35:29.580 Everybody starts pulling back in terms of investment. 317 00:35:29.580 --> 00:35:35.260 They start saving too much money and consumer spending goes down and then the whole economy 318 00:35:35.260 --> 00:35:36.460 goes down. 319 00:35:36.460 --> 00:35:45.700 So the economy is actually characterized by a wave where you have, again, what Austrians 320 00:35:45.700 --> 00:35:52.780 call booms and busts in the economy. 321 00:35:52.780 --> 00:36:03.020 Now, mainstream economists, even the terminology that they use is psychologically based, right? 322 00:36:03.020 --> 00:36:06.060 A bad time in the economy is a panic. 323 00:36:06.060 --> 00:36:18.300 The economy collectively has a panic attack, or it goes into depression. 324 00:36:18.300 --> 00:36:29.820 Now we use more moderate phrases like recessions and slowdowns, try to take the edge off of 325 00:36:29.820 --> 00:36:38.580 those things like panic and depression, like bum people out. 326 00:36:38.580 --> 00:36:47.080 From John Maynard Keynes and people before him to Ben Bernanke, they attributed problems 327 00:36:47.080 --> 00:36:54.720 in the macroeconomy in the business cycle to psychological reasons. Ben Bernanke, his 328 00:36:54.720 --> 00:37:04.720 view is that structural and psychological problems in investing in finance markets, they get 329 00:37:04.720 --> 00:37:12.220 started and they get out of control and then they have effects in the real economy. So 330 00:37:12.220 --> 00:37:19.300 So there's these financial markets which are not perfectly stable and they can get a little 331 00:37:19.300 --> 00:37:25.860 bit out of control, panic can set in and all of a sudden the financial markets signal problems 332 00:37:25.860 --> 00:37:34.940 to the real economy that things are wrong and so the real economy starts to contract. 333 00:37:34.940 --> 00:37:40.300 Then you can also have external shocks, especially smaller economies can have external shocks 334 00:37:40.300 --> 00:38:00.300 The Austrian view it differently. We have a different sort of set of cause and effects. We don't think that the business cycle is psychologically caused. There are psychological aspects to the business cycle, but it's not psychologically caused. 335 00:38:00.300 --> 00:38:03.060 We have a different sort of set of cause and effects. 336 00:38:03.060 --> 00:38:04.620 We don't think that the business cycle 337 00:38:04.620 --> 00:38:06.500 is psychologically caused. 338 00:38:06.500 --> 00:38:08.820 There are psychological aspects to the business cycle, 339 00:38:08.820 --> 00:38:10.660 but it's not psychologically caused. 340 00:38:11.620 --> 00:38:15.200 The business cycle is a result of the government 341 00:38:15.200 --> 00:38:20.200 adjusting interest rates above and below the market rate. 342 00:38:22.220 --> 00:38:25.300 The rate that would exist in the marketplace 343 00:38:25.300 --> 00:38:27.980 had there not been any intervention by the government. 344 00:38:27.980 --> 00:38:37.980 The Federal Reserve, the central bank, as you know, targets interest rates. 345 00:38:37.980 --> 00:38:44.980 The central bank targets interest rates. It targets the federal funds rate and the discount rate. 346 00:38:44.980 --> 00:38:52.980 And it's like a price control for the interest rate, at least the short-term rates. 347 00:38:52.980 --> 00:39:02.980 And if that rate is set too far below what would have happened in the marketplace, what 348 00:39:02.980 --> 00:39:07.240 necessarily must take place? 349 00:39:07.240 --> 00:39:17.580 That means that the Federal Reserve is interjecting or injecting credit into the economy. 350 00:39:17.580 --> 00:39:24.400 gives banks the ability to make more loans than they otherwise could. 351 00:39:24.400 --> 00:39:32.100 So what must happen as a result of this injection of money if the banks are lending it and people 352 00:39:32.100 --> 00:39:38.100 are borrowing it, then generally speaking they're investing it. 353 00:39:38.100 --> 00:39:45.500 And when they invest it at these below market rates, Austrians view these as mostly male 354 00:39:45.500 --> 00:39:54.700 malinvestments, and girls you'll be able to remember this, that means bad investments. 355 00:39:54.700 --> 00:40:01.920 That should stick with you, not you, but others. 356 00:40:01.920 --> 00:40:09.260 And it's these investments that later on turn out to be bad investments. 357 00:40:09.260 --> 00:40:15.420 When the interest rate rises, maybe rises above the market rate, that all of a sudden 358 00:40:15.420 --> 00:40:22.700 people are trying to pay back these loans at the higher rates and the projects just 359 00:40:22.700 --> 00:40:26.780 aren't simply paying off. 360 00:40:26.780 --> 00:40:32.700 So the Austrians have a view of the business cycle where it's caused initially by the central 361 00:40:32.700 --> 00:40:35.540 bank. 362 00:40:35.540 --> 00:40:41.900 It's intervention in interest rate markets that lead to bad investments, which ultimately 363 00:40:41.900 --> 00:40:47.900 have to be washed out of the system. 364 00:40:47.900 --> 00:40:48.900 Does that sound familiar to anyone? 365 00:40:48.900 --> 00:41:07.900 I mean, to me, I've been exposed a bunch to Bill Friedman. I don't see, like in your micro-example and your little macro-example so far, to me it's like Chicago school. 366 00:41:07.900 --> 00:41:33.900 Well, Milton Friedman was exposed to the Austrians. Now, in his technical analysis, he's very Chicago, macro, almost Keynesian in the overall methodology. 367 00:41:33.900 --> 00:41:49.900 But I think he blames the Fed, I think, in her government intervention, the Fed, for instability. I mean, it's fixed money, so I think he blames the Fed, you know, it should be a fixed road where the money supplies, who to talk about. 368 00:41:49.900 --> 00:42:13.900 That's a perfect point because I want to take us back to the Great Depression and what happened there. 369 00:42:13.900 --> 00:42:17.900 What happened in 1929? 370 00:42:17.900 --> 00:42:36.900 There was a stock market crash. The economy had been booming up to that point, and then it stayed in a contracted form, in a depressed form, until after World War II. 371 00:42:36.900 --> 00:42:45.900 Per capita consumption, per capita real consumption was the same in 1929 as it was in 1946. 372 00:42:45.900 --> 00:42:50.900 So this is one of the worst economic episodes in our history. 373 00:42:50.900 --> 00:42:59.900 Now Milton Friedman blames the Fed for the Great Depression, and so do we. So do the Austrians. 374 00:42:59.900 --> 00:43:01.900 Questions. 375 00:43:01.900 --> 00:43:09.580 What we have tried to show, in contrast to Friedman, is that we placed the blame during 376 00:43:09.580 --> 00:43:23.980 this period when the money supply was increasing, GDP was increasing at a above average level. 377 00:43:23.980 --> 00:43:33.120 Friedman places the blame right here, where the economy was contracting, the banking sector 378 00:43:33.120 --> 00:43:45.700 was under pressure, banks were failing, and the Fed did not do enough to save those banks. 379 00:43:45.700 --> 00:43:56.780 As a result, they collapsed and squashed the economy for a long period of time. 380 00:43:56.780 --> 00:44:05.300 Now the interesting thing is that the money supply did contract during this period of 381 00:44:05.300 --> 00:44:06.580 time. 382 00:44:06.580 --> 00:44:12.260 But the Fed was actively reducing the interest rate at this point in time. 383 00:44:12.260 --> 00:44:17.540 They were actively increasing the monetary base at this time. 384 00:44:17.540 --> 00:44:21.660 They were actively reducing the discount rate at this time. 385 00:44:21.660 --> 00:44:27.300 They had raised it leading into 1929. 386 00:44:27.300 --> 00:44:34.180 But once the stock market crash occurred, they reduced those rates and they increased 387 00:44:34.180 --> 00:44:38.520 the monetary base to a considerable extent. 388 00:44:38.520 --> 00:44:45.120 The problem was, is that banks had a lot of bad loans, they had to meet reserve requirements 389 00:44:45.120 --> 00:44:50.400 and things of that nature, and they just really weren't interested in lending, and no one 390 00:44:50.400 --> 00:44:55.000 really was interested in borrowing, that was credit worthy, which wasn't really a whole 391 00:44:55.000 --> 00:44:56.000 lot of people. 392 00:44:56.000 --> 00:44:57.000 Okay, yes? 393 00:44:57.000 --> 00:45:07.000 I think the feds are going to start saying they can't push on a string in the near future. 394 00:45:07.000 --> 00:45:13.000 That's what I mean. They've got to relearn and can't push on a string. 395 00:45:13.000 --> 00:45:20.000 I think they're thinking about these things at the feds and at the regional feds. 396 00:45:20.000 --> 00:45:23.000 Conditions are different in various regions of the country. 397 00:45:23.000 --> 00:45:34.680 But pushing on a string is that the Fed is a point in the business cycle where the Fed tries to increase the money supply, but it doesn't have much of an effect. 398 00:45:34.680 --> 00:45:42.600 Certain measures of the money supply, for example, right now, even with all these rate cuts, it's not expanding. 399 00:45:42.600 --> 00:45:45.480 Certain measures are not expanding. 400 00:45:45.480 --> 00:45:49.480 Would you say the Schumpeter might have something to say here? 401 00:45:49.480 --> 00:45:53.480 You had Omobils, the radio, etc. 402 00:45:53.480 --> 00:46:04.480 And you could argue that the Schumpeter cycle in the 20s was the over-investment period in these new industries? 403 00:46:15.480 --> 00:46:20.440 it does get put to use even if like I'm really smart and I know that this easy 404 00:46:20.440 --> 00:46:27.440 credit is going to lead to failures down the road somebody's going to borrow that 405 00:46:27.440 --> 00:46:51.080 Money. Right, and every major boom in our American history has basically followed 406 00:46:51.080 --> 00:46:56.480 that pattern, whether it was the canals, the railroads, electronics, and automobiles, 407 00:46:56.480 --> 00:47:26.480 The money is becoming super available so people take great risks and then bring new products onto line maybe quicker than they otherwise would be and so they all involve that because there's so much credit there's a lot of investment and in each case those investments in canals and railroads and electronics and technology 408 00:47:26.480 --> 00:47:40.240 went under a lot of them lost money what's that sure I mean yeah I mean it's 409 00:47:40.240 --> 00:47:50.940 the same thing except housing is really not technological mm-hmm and in the 410 00:47:50.940 --> 00:47:54.980 house the house troubles in housing is not this is the first this is not the 411 00:47:54.980 --> 00:48:00.980 We had a point, well that's another thing that happened in the 20s. We had a real estate boom in the West. 412 00:48:00.980 --> 00:48:01.980 In Florida? 413 00:48:01.980 --> 00:48:02.980 Yeah. 414 00:48:02.980 --> 00:48:03.980 In particular? 415 00:48:03.980 --> 00:48:04.980 In particular in Florida. 416 00:48:04.980 --> 00:48:13.100 Now, leading into this, again, the major mainstream economist was Irving Fisher. He invented 417 00:48:13.100 --> 00:48:20.500 modern macroeconomics and the empirical approach to economics. He created the rules under which 418 00:48:20.500 --> 00:48:26.060 Central Banks Operate. He didn't dictate these rules but he invented them, published 419 00:48:26.060 --> 00:48:31.980 them and they were adopted by central banks and basically those rules with some refinements 420 00:48:31.980 --> 00:48:39.520 continue to this day. On the eve of the stock market crash, Fisher was quoted in the New 421 00:48:39.520 --> 00:48:46.600 York Times as saying that the American economy has reached a permanently high plateau of 422 00:48:46.600 --> 00:48:56.360 of Prosperity. This was less than two weeks before the crash began. In 1928, Ludwig von 423 00:48:56.360 --> 00:49:04.880 Mises published a book called The Cause of the Economic Crisis, where he specifically 424 00:49:04.880 --> 00:49:11.160 went through Irving Fisher and showed where he was wrong about business cycle analysis 425 00:49:11.160 --> 00:49:21.400 and he predicted a depression would result. 426 00:49:21.400 --> 00:49:28.760 In 1969, Murray Rothbard, who was a student of Ludwig von Mises and Henry Haslett, who 427 00:49:28.760 --> 00:49:37.440 was an editorial writer for the New York Times and a friend of Ludwig von Mises, Mises was 428 00:49:37.440 --> 00:49:53.440 This is very old at this point. Both published articles saying in 1969 that the policies of the federal government were going to result in a depression, an inflationary depression. 429 00:49:53.440 --> 00:50:15.440 Arthur Oaken, who was the chairman of the president of the Council of Economic Advisors, published a book in May of 1970, claiming that the new Keynesian economics had made the business cycle obsolete, that there was no longer going to be a business cycle. 430 00:50:15.440 --> 00:50:44.440 That was March of 1970. He had just stepped down. In April of 1970, the stock market corrected and in the second quarter, we had negative economic, real economic growth, which ignited basically the stagflation of the 1970s, which had very high interest rates. 431 00:50:44.440 --> 00:50:52.920 interest rates, very high levels of inflation for America, very high levels of unemployment. 432 00:50:52.920 --> 00:51:01.000 The unemployment rate remained above the average unemployment rate for virtually the entire 433 00:51:01.000 --> 00:51:08.080 decade, some of the highest inflation rates in the United States during the 20th century. 434 00:51:08.080 --> 00:51:13.040 We lost the gold standard, we lost the Bretton Woods standard, we had comprehensive wage 435 00:51:13.040 --> 00:51:25.680 and Price Controls in the United States. Things were nasty. Leisure suits, disco music, no 436 00:51:25.680 --> 00:51:52.600 The Japanese stock market is at 36,000. 437 00:51:52.600 --> 00:51:58.680 We were being told by people like Laura DeAndrea Tyson, who was President Clinton's Chairman 438 00:51:58.680 --> 00:52:04.280 of the Council of Economic Advisers, that if we don't adopt the Japanese method and 439 00:52:04.280 --> 00:52:10.640 system, that America will be buried, that we will be a second rate nation, a second 440 00:52:10.640 --> 00:52:19.800 rate economy, and that the Japanese stock market was headed for 100,000. 441 00:52:19.800 --> 00:52:40.600 Four months after Laura D. Anderson's published comments appeared, the Japanese stock market 442 00:52:40.600 --> 00:52:49.200 crashed and has been in a depressed state basically ever since. 443 00:52:49.200 --> 00:52:59.080 In the late 1990s, we were told by the mainstream macro-economists, the government forecasters, 444 00:52:59.080 --> 00:53:11.040 Wall Street, that technology was a new era, just like in the previous 1920s and so forth. 445 00:53:11.040 --> 00:53:18.620 That we were in a new era, and that the main problem we had to face is the possibility 446 00:53:18.620 --> 00:53:25.980 that there would no longer be the need for people to work that was the major 447 00:53:25.980 --> 00:53:31.340 problem that the mainstream theorists and outside of economics as well that was 448 00:53:31.340 --> 00:53:36.900 our big problem this technology thing was real it was building on itself 449 00:53:36.900 --> 00:53:40.340 because of technological reasons it wasn't the monetary system or anything 450 00:53:40.340 --> 00:53:45.100 else it was just technology was doubling every 18 months and you know all that 451 00:53:45.100 --> 00:53:50.140 kind of stuff. We'd never have another time where the business cycle was 452 00:53:50.140 --> 00:53:56.020 considered obsolete. Now the Austrians were, I have a paper outlining this where 453 00:53:56.020 --> 00:54:03.500 the Austrians were predicting in late 97 to into 1999 that this was a 454 00:54:03.500 --> 00:54:09.880 technological bubble and that it wouldn't last and that's essentially what 455 00:54:09.880 --> 00:54:21.280 came to pass, the Nasdaq lost about 80% of its value, just as what happened in the 1970s. 456 00:54:21.280 --> 00:54:26.880 I mean, all the hot stocks lost more than 80% of their value, and the stock market never 457 00:54:26.880 --> 00:54:33.360 even recovered in nominal terms for over a decade. 458 00:54:33.360 --> 00:54:44.120 And then, starting in late 2002, 2003, 2004, Austrians were calling the housing market 459 00:54:44.120 --> 00:54:51.280 in the United States and elsewhere a bubble, driven by monetary policy at the Fed. 460 00:54:51.280 --> 00:54:54.540 Everybody was making fun of us, essentially. 461 00:54:54.540 --> 00:54:58.800 They said, real estate never goes down. 462 00:54:58.800 --> 00:55:03.040 The best investment you could ever make is in your home. 463 00:55:03.040 --> 00:55:08.100 A lot of these sayings were out there, people have sort of forgot about those things now, 464 00:55:08.100 --> 00:55:17.360 but basically we were predicting during the boom itself that this bust must come to pass. 465 00:55:17.360 --> 00:55:23.720 Because it's not merely financial, it's actual structured investments that are being made 466 00:55:23.720 --> 00:55:30.160 during the boom, you just simply can't make those things go away, you can't make bad debts 467 00:55:30.160 --> 00:55:36.680 Let's go away. Somebody has to pay them. And that's where the real pain of the business 468 00:55:36.680 --> 00:55:43.960 cycle lays. So, Austrians disagree that the business cycle is caused psychologically. 469 00:55:43.960 --> 00:55:49.560 We agree that psychology is a big part about it. People get over-exuberant. They do get 470 00:55:49.560 --> 00:55:57.160 fearful. That's all part of it, but it's not caused by mass psychology. It's caused by 471 00:55:57.160 --> 00:56:00.160 by the Federal Reserve. 472 00:56:00.160 --> 00:56:03.920 And with that, I think I'll stop and see if we have any questions, I guess. 473 00:56:03.920 --> 00:56:04.920 Yes. 474 00:56:04.920 --> 00:56:11.920 It sounds to me as if, and I get this from other things I've heard about Austrian economics, 475 00:56:11.920 --> 00:56:16.920 which I don't know very much about, but that you're saying they want a hands-off approach 476 00:56:16.920 --> 00:56:23.920 from government, maybe even no government whatsoever, because it affects market behavior. 477 00:56:23.920 --> 00:56:34.920 And it kind of reminds me of, you know, the Heisberg in a certain sense or where you can mess with something and like just measuring something can affect the results. 478 00:56:34.920 --> 00:56:46.920 But then what would an economist do that was an Austrian economist because theorizing about it or talking about it or having it on the news would affect behavior. 479 00:56:46.920 --> 00:56:56.920 So, do they not see their own role in their policies or their theories that they put out that it would affect behavior as well, in the same way that government does? 480 00:57:16.920 --> 00:57:28.920 from causing a cycle. Austrians basically don't advocate anything. So we don't advocate any government. We just don't advocate. We just say, if you do this, this is what you can expect. 481 00:57:46.920 --> 00:57:50.920 What Happens Is What Happens 482 00:58:16.920 --> 00:58:21.120 track records who sell advice and that sort of thing. 483 00:58:21.120 --> 00:58:24.960 But generally speaking, the track record is very good. 484 00:58:24.960 --> 00:58:27.440 We don't make regular predictions. 485 00:58:27.440 --> 00:58:30.300 We only see big moves in markets. 486 00:58:30.300 --> 00:58:33.000 We don't see small moves in markets. 487 00:58:33.000 --> 00:58:39.960 That's where mainstream is more, you know, if the trend isn't changing, mainstream tools 488 00:58:39.960 --> 00:58:46.280 can pick up those spins and weaves along the trend much better than we could. 489 00:58:46.280 --> 00:58:55.280 What is Austrian liberalism compared to classical liberalism? 490 00:58:55.280 --> 00:58:59.280 What is Austrian liberalism compared to classical liberalism? 491 00:59:16.280 --> 00:59:29.280 Austrian school then were supporters of classical liberalism? 492 00:59:46.280 --> 00:59:53.160 but that's usually pretty rare. Or there's a lot of Austrian economists who 493 00:59:53.160 --> 00:59:59.440 don't even talk about their political orientations or their policy views. Mum's 494 00:59:59.440 --> 01:00:05.800 the word, so to speak, as in sort of a point to the previous question as well. 495 01:00:05.800 --> 01:00:07.800 Carol? 496 01:00:35.800 --> 01:00:51.800 20% of your gain. And that's the problem I have. A lot of people are forecasting woes. It's like sometime in the future, but you need, I mean, does that mean you don't invest in housing or stuff? I mean, I remember that. 497 01:00:51.800 --> 01:00:54.800 But you were predicting way too early. 498 01:00:54.800 --> 01:00:57.800 I said it would have to happen sooner or later. 499 01:00:57.800 --> 01:00:59.800 I know, but what does that mean? 500 01:00:59.800 --> 01:01:03.800 Well, I didn't mean 50 years, obviously. 501 01:01:03.800 --> 01:01:10.800 I'm just saying that, in my opinion, your theory is implicitly forecasting 502 01:01:10.800 --> 01:01:13.800 because I anticipate the housing crash, too. 503 01:01:13.800 --> 01:01:16.800 That's largely because I buy into a lot of your philosophy. 504 01:01:16.800 --> 01:01:20.800 So forecasting is implicit. 505 01:01:20.800 --> 01:01:49.800 Well, the Austrians do not have any tools available to them to time these changes, or even the magnitudes. 506 01:01:49.800 --> 01:01:54.840 You can only get a feel for magnitudes and timing. 507 01:01:54.840 --> 01:01:59.720 Austrians did start predicting the bubble of the 1990s. 508 01:01:59.720 --> 01:02:05.880 In 1996, James Grant, who is one of the most astute observers of the markets and who is 509 01:02:05.880 --> 01:02:12.840 Austrian, published a book in 1996, way ahead of everything that happened. 510 01:02:12.840 --> 01:02:19.040 In terms of timing, I always step outside the Austrian schools and use technical tools 511 01:02:19.040 --> 01:02:24.960 Because Austrian analysis doesn't give you anything that predicts timing and magnitude. 512 01:02:24.960 --> 01:02:32.920 That's all feel and technical analysis have to be brought to bear on that stuff. 513 01:02:32.920 --> 01:02:38.800 The only time I actually got something right in terms of timing it is I published a short 514 01:02:38.800 --> 01:02:47.000 article in the beginning of October 2005 where I said that this week might be the turning 515 01:02:47.000 --> 01:03:11.800 If you always get out before the top, you win in a long run. 516 01:03:11.800 --> 01:03:18.800 Where you screw up is wait, wait, wait, wait, and you get caught in the down-turn. 517 01:03:18.800 --> 01:03:20.800 But I disagree with that. 518 01:03:20.800 --> 01:03:22.800 I knew you would. 519 01:03:22.800 --> 01:03:26.800 I mean, Carol, I imagine if you have not been heavily in stocks for the last four years, 520 01:03:26.800 --> 01:03:30.800 if you had been, you'd probably be way ahead of it. 521 01:03:30.800 --> 01:03:39.800 Well, you know, there's a couple of prominent investors in history when asked, 522 01:03:39.800 --> 01:03:45.800 How did they make so much money? And they both said they got out too soon. 523 01:03:45.800 --> 01:03:48.800 Yes? 524 01:03:48.800 --> 01:04:01.800 How should the, if the Federal Reserve has caused a lot of problems in the business cycle, then what type of behavior should they correct? What's their problem? 525 01:04:01.800 --> 01:04:10.800 Well, they're setting interest rates. They could do a whole lot better simply by letting the federal funds rate float. 526 01:04:10.800 --> 01:04:18.800 I mean, if I was put in charge of the Fed, there's absolutely no chance of that. 527 01:04:18.800 --> 01:04:28.800 That's my first directive would be is I'd say I would announce to markets that in 30 days we're letting the federal funds rate float. 528 01:04:28.800 --> 01:04:47.800 That was my assumption, based on what you were talking about pre-1929, and that's my intuition to it as well, is that they should have let the interest rates reflect the market a little better, so that people can make their own choices as to how they invest. 529 01:04:58.800 --> 01:05:08.440 Standard, a gold and silver standard monetary system, along with 100% reserve banking, 530 01:05:08.440 --> 01:05:15.040 so that any checking deposit money, any money on your debit card had to be in the bank in 531 01:05:15.040 --> 01:05:22.500 some form or another, whereas time deposits would be lent out for investment purposes. 532 01:05:22.500 --> 01:05:28.460 We think that, you know, that that was the system that evolved into the marketplace hundreds 533 01:05:58.460 --> 01:06:22.460 It's largely an education and academic institution, but ideologically, the Institute likes the idea of moving society back to freedom, back to private property, and to sound money, and to free markets. 534 01:06:22.460 --> 01:06:30.560 because those institutions that evolved over long periods of time set the 535 01:06:30.560 --> 01:06:38.420 preconditions for a stable prosperous society and eliminates a lot of the 536 01:06:38.420 --> 01:06:43.420 problems that are involved with trying to institutionally structure society 537 01:06:43.420 --> 01:06:51.680 through the political process and we've been in business since 1982 when I went 538 01:06:51.680 --> 01:06:58.480 to Graduate School and when basically the Austrian School was disintegrated and today 539 01:06:58.480 --> 01:07:01.320 it's actually very vibrant. 540 01:07:01.320 --> 01:07:06.760 We have an academic conference every spring. 541 01:07:06.760 --> 01:07:08.840 It's grown every year. 542 01:07:08.840 --> 01:07:16.780 We get people from around the globe attending this conference from many different countries 543 01:07:16.780 --> 01:07:27.060 And the average age, not only is the Austrian school getting much larger and growing at a very fast rate, but it's also getting younger. 544 01:07:27.060 --> 01:07:29.740 Every year, we get younger and younger. 545 01:07:29.740 --> 01:07:36.580 As a matter of fact, you know, in 1982, I was just a kid and now I'm an old fart. 546 01:07:36.580 --> 01:07:59.100 Yes, yeah that's, well that's that's still a problem. That is definitely still a 547 01:07:59.100 --> 01:08:05.580 problem to be able to offer PhDs. Now George Mason has a concentration in 548 01:08:05.580 --> 01:08:12.740 in Austrian Economics, and there are now several young PhDs at PhD-granting institutions around 549 01:08:12.740 --> 01:08:13.740 the country. 550 01:08:13.740 --> 01:08:18.400 You can get information about that at our webpage, and there's also a Masters in Austrian 551 01:08:18.400 --> 01:08:19.400 Economics. 552 01:08:19.400 --> 01:08:25.020 So you just do Austrian Economics at Grove City College in Pennsylvania, and that's coming 553 01:08:25.020 --> 01:08:30.780 online next year, and by online I don't mean that the classes are online just yet, but 554 01:08:30.780 --> 01:08:32.820 eventually they will be. 555 01:08:32.820 --> 01:08:39.140 But we actually advocate that if students really wanted to get their Ph.D., that you go get 556 01:08:39.140 --> 01:08:51.460 a regular Ph.D. If you want to get into academia, you are going to have to know mainstream economics. 557 01:08:51.460 --> 01:08:56.600 And so it's not, you know, so go to Harvard. Actually, Harvard is one of the most free 558 01:08:56.600 --> 01:09:08.800 We market PhD departments now, and so we advocate, go to a good school where you know one of 559 01:09:08.800 --> 01:09:14.640 the professors work and do your best and study Austrian economics as well. 560 01:09:14.640 --> 01:09:20.160 Do you offer summer workshops for students or for Ed and Oliver? 561 01:09:20.160 --> 01:09:25.520 We have a program in the summer, it's called Mises University, students come for one week, 562 01:09:55.520 --> 01:10:25.520 World. And it's a really neat place to go because you get to see and interact with students from around the world and students who are thinking about going to graduate school and that kind of stuff. So it's a really good program. You all have a brochure about that. And we have other conferences. We hold conferences around the country, introductory conferences. But Mises.org is probably the biggest resource that you guys have missed out on. It's the world's largest and most trafficked economic 563 01:10:25.520 --> 01:10:55.520 The Federal Reserve, the SEC, the White House, even The Economist magazine, in terms of traffic, downloads, hits, all that kind of stuff, and everything is there, 24-7-365, everything is free except things you purchase in the bookstore, and we have a lot of things that you can buy in the bookstore, and we have a lot of things you can buy in the bookstore, and we have a lot of things you can buy in the bookstore, and we have a lot of things you can buy in the bookstore, 564 01:10:55.520 --> 01:11:00.020 Books online, articles, journals, you name it, you got it. 565 01:11:00.020 --> 01:11:06.020 So please go take a look at this, and if you have anything that you've got to write a paper about, 566 01:11:06.020 --> 01:11:10.020 go do a search of Mises.org. Thank you very much.