WEBVTT NOTE Where Modern Economics Went Wrong 1 00:00:00.000 --> 00:00:06.000 Dr. Mark Skausen is a professor of economics at Rollins College in beautiful Winter Park, Florida. 2 00:00:06.000 --> 00:00:10.000 Love it. Can't get enough of going to Winter Park. 3 00:00:10.000 --> 00:00:18.000 Mark Skausen worked for the CIA as an economic analysis analyst before starting his own company 4 00:00:18.000 --> 00:00:24.000 and becoming famous in the world of investment and financial privacy advising. 5 00:00:24.000 --> 00:00:29.000 He's written widely in this area, most notably his complete guide to financial privacy, 6 00:00:29.000 --> 00:00:34.420 Policy, The Price Control Game, How Some People Will Profit from the Coming Controls, Closing 7 00:00:34.420 --> 00:00:51.900 the Door, The End of Financial Privacy in America, Forecast and Strategies, 100% Gold 8 00:00:51.900 --> 00:00:57.800 Standard, The Economics of Pure Commodity Money, The Structure of Production, New York 9 00:00:57.800 --> 00:01:04.560 University Press, Economics on Trial, The Lies, Myths and Realities, and I think most 10 00:01:04.560 --> 00:01:10.560 recently The Descent on Keynes, a collection of critical appraisals of Keynesian economics. 11 00:01:10.560 --> 00:01:15.680 And you'll find his writings just about everyplace else, including publications of the Ludwig 12 00:01:15.680 --> 00:01:21.720 von Mises Institute, so I'm very pleased to welcome Mark Skausen to Auburn University 13 00:01:21.720 --> 00:01:26.360 and I look forward to his discussion of how the economics profession has gone wrong. 14 00:01:26.360 --> 00:01:52.360 Good question. So the floor is yours. Thank you. Well, it is a delight to be here at Auburn for the first time, and actually what I'd like to talk about is on a more positive side of it, given that I think the profession has gone down the wrong road in many directions, particularly in the way economics is taught at the college level. 15 00:01:52.360 --> 00:02:04.360 I'm working on a project right now called Economic Logic, which is a new textbook, an introductory textbook on the college level. 16 00:02:04.360 --> 00:02:12.360 And my approach is very different from the way economics is taught. 17 00:02:12.360 --> 00:02:18.360 And so I would like to get your reaction to this. 18 00:02:18.360 --> 00:02:32.560 I think in explaining what I'm trying to do in this textbook, Economic Logic, you will 19 00:02:32.560 --> 00:02:44.160 see why I have problems with the way economics is presented to students today. 20 00:02:44.160 --> 00:02:50.640 Let me first say that I worked a long time on the title to try to get the title right. 21 00:02:50.640 --> 00:02:57.840 I want to emphasize the logical approach that I'm trying to take in economics, and I don't 22 00:02:57.840 --> 00:03:02.520 think economics is taught in a logical fashion right now. 23 00:03:02.520 --> 00:03:08.040 I think students would have a difficult time predicting what the next chapter will be in 24 00:03:08.040 --> 00:03:14.840 in a textbook because they just are not predictable. 25 00:03:14.840 --> 00:03:18.840 You don't know whether it's micro first or macro. 26 00:03:18.840 --> 00:03:22.520 You don't know when government is going to be introduced. 27 00:03:22.520 --> 00:03:28.800 It really is, I think, in a lot of ways a hodgepodge of throwing a little out here, 28 00:03:28.800 --> 00:03:30.360 a little out there. 29 00:03:30.360 --> 00:03:38.960 What I've tried to do is develop a simple to complex, logical step-by-step introduction 30 00:03:38.960 --> 00:03:48.200 to economics that will be presented in a way that students can understand and say, yeah, 31 00:03:48.200 --> 00:03:49.720 that makes sense to me. 32 00:03:49.720 --> 00:03:52.840 It's common sense from the beginning to the end. 33 00:03:52.840 --> 00:03:58.560 Although the conclusions when you're finished with the course may often be surprising, which 34 00:03:58.560 --> 00:04:02.520 which is what happens a lot in economics. 35 00:04:02.520 --> 00:04:15.560 So my first part of the textbook, and I've done about six chapters in the book, is I 36 00:04:15.560 --> 00:04:22.000 basically rely on a lot of Austrian concepts that were developed from Menger and from Barber 37 00:04:52.000 --> 00:05:22.000 and 38 00:05:22.000 --> 00:05:31.000 In my Economics on Trial book and in my Structure Production book, you have four stages of production. 39 00:05:31.000 --> 00:05:36.000 You start with natural resources, then you have manufacturing and semi-manufacturing, 40 00:05:36.000 --> 00:05:45.000 then you have the wholesale trade marketing part of the business, and then finally you have consumer goods and services. 41 00:05:45.000 --> 00:05:50.000 You notice each stage gets larger as you add value. 42 00:05:50.000 --> 00:06:20.000 Now, to me, you see, this is one thing Hayek never did, even though he had the, what you would call a trial, but the steps, if you will, he never identified them, as I've done here, and I've identified these because they fit very nicely into government statistics on, like on prices, you can get commodity price index, you can get a producer price index, you can get a wholesale price index, and you can get a consumer price index. 43 00:06:20.000 --> 00:06:38.000 I would like to see government statistics in this area broken down even more, where we'd look at unemployment in the natural resource sector, unemployment in the manufacturing sector, unemployment in the wholesale sector, unemployment in the retail market. 44 00:06:38.000 --> 00:06:44.000 I think you'd learn a lot about the economy by looking at it in this fashion. 45 00:06:44.000 --> 00:06:55.720 My first chapter of the book talks about what are we trying to achieve in studying economics? 46 00:06:55.720 --> 00:06:56.720 What is economics? 47 00:06:56.720 --> 00:07:03.440 I basically focus on the idea of wealth creation and economic growth and improving and measuring 48 00:07:03.440 --> 00:07:07.040 standard of living. 49 00:07:07.040 --> 00:07:13.000 To me, that approach is much better than the traditional approach of choice and scarcity. 50 00:07:13.000 --> 00:07:20.280 I see choice and scarcity as kind of a subset of the whole concept of wealth creation. 51 00:07:20.280 --> 00:07:27.520 So my first chapter is focusing on how do we define wealth, what are we trying to achieve 52 00:07:27.520 --> 00:07:32.440 as economists in studying wealth creation or wealth destruction, because you can have 53 00:07:32.440 --> 00:07:33.440 both. 54 00:07:33.440 --> 00:07:40.200 And then I focus on how we measure wealth, and I measure basically using the criteria 55 00:07:40.200 --> 00:07:56.760 Quantity, Quality, and Variety of Goods and Services 56 00:07:56.760 --> 00:08:26.760 Standard of Living 57 00:08:26.760 --> 00:08:34.640 since 1975. However, when we talk about quantity, quality, and variety of goods and services, 58 00:08:34.640 --> 00:08:39.320 almost every student comes to the opposite conclusion that our standard of living has 59 00:08:39.320 --> 00:08:46.680 been rising since 1975. So it's a valuable exercise to go through to be talking about 60 00:08:46.680 --> 00:08:52.040 how we measure standard of living and wealth and so on. And we can introduce GDP at this 61 00:08:52.040 --> 00:09:03.560 This point is a major, not the only major, of wealth creation. 62 00:09:03.560 --> 00:09:10.600 After I've discussed this concept of the goal, we always keep in mind this goal of studying 63 00:09:10.600 --> 00:09:16.280 wealth creation, then we talk about how do we achieve this goal. 64 00:09:16.280 --> 00:09:18.720 That's the logic of my system. 65 00:09:18.720 --> 00:09:22.600 We talk about what the goal is and how do we achieve the goal. 66 00:09:22.600 --> 00:09:27.400 That's where I then introduce the four-stage model of the economy, which I've talked about 67 00:09:27.400 --> 00:09:28.640 here. 68 00:09:28.640 --> 00:09:41.200 I basically show that the four stages of production are necessary in order to achieve wealth. 69 00:09:41.200 --> 00:09:47.020 We talk about how natural resources in their natural state are basically unusable. 70 00:09:47.020 --> 00:09:56.460 No one can use iron ore or trees and what have you until they go through a whole series 71 00:09:56.460 --> 00:10:05.940 of stages of production to achieve that final consumer goods and services where we actually 72 00:10:05.940 --> 00:10:08.800 consume these things. 73 00:10:08.800 --> 00:10:17.280 So I introduce everything in terms of pointing down in this direction, in which here's our 74 00:10:17.280 --> 00:10:21.280 goal to increase, to achieve wealth creation. 75 00:10:21.280 --> 00:10:29.680 And we have these stages of production moving in a timely fashion toward that goal. 76 00:10:29.680 --> 00:10:37.120 And as a result, we can achieve our goal, which is the final rectangle. 77 00:10:37.120 --> 00:10:40.760 And then I talk about land, labor, and capital. 78 00:10:40.760 --> 00:10:44.920 And one of the things that I do which I think is very unique in this approach is I show 79 00:10:44.920 --> 00:10:53.840 that the economic system, the market system is actually, we often think of it as a competitive 80 00:10:53.840 --> 00:10:56.400 system, a dog-eat-dog world and so on. 81 00:10:56.400 --> 00:11:02.680 What I try to demonstrate with this stage of production model is that it's very much 82 00:11:02.680 --> 00:11:04.280 a cooperative system. 83 00:11:04.280 --> 00:11:08.440 The Capitalism is a cooperative system, not just a competitive system. 84 00:11:08.440 --> 00:11:15.720 It's actually both, but we often forget to develop the cooperative, the voluntary cooperative 85 00:11:15.720 --> 00:11:18.300 side of the market system. 86 00:11:18.300 --> 00:11:22.800 And so what I point out is that land, labor, and capital must work together at every stage 87 00:11:22.800 --> 00:11:27.240 of production in order to get to this final goal of wealth creation. 88 00:11:27.240 --> 00:11:32.700 And if they do not cooperate, you cannot achieve wealth creation. 89 00:11:32.700 --> 00:11:38.620 So that's very different than the standard neoclassical model of land, labor, capital 90 00:11:38.620 --> 00:11:48.500 and they're fighting over this economic pie, which I think is a very bad way to teach economics, 91 00:11:48.500 --> 00:11:54.700 but nevertheless is very much a part of standard modeling. 92 00:11:54.700 --> 00:12:00.060 When you don't develop this time sequential stage of production approach, which allows 93 00:12:00.060 --> 00:12:10.060 The Theory of Money and Credit 94 00:12:30.060 --> 00:12:34.060 of the Firm. 95 00:12:34.060 --> 00:12:41.900 At that point, I do something which I think is very simple but very powerful for students 96 00:12:41.900 --> 00:12:49.140 to grasp the relationship between micro and macro. 97 00:12:49.140 --> 00:12:55.080 Starting again with this four-stage model, I say, how does the individual company or 98 00:13:25.080 --> 00:13:30.080 The difference is the profit level, assuming this is a profitable firm. 99 00:13:30.080 --> 00:13:40.080 Now, to get there, I first introduce the student to a simple income statement. 100 00:13:40.080 --> 00:13:47.080 So you see, instead of supply and demand, I'm into chapter probably five here. 101 00:13:47.080 --> 00:13:52.080 I have not introduced the supply and demand curve yet. 102 00:13:52.080 --> 00:14:22.080 Supply and Demand Curve 103 00:14:22.080 --> 00:14:45.080 The basics of accounting and you can explain an income statement very pretty simply and I use a real example I use Microsoft Corporation 1992 to show their revenues, their expenditures including the cost of capital, cost of materials and total inputs and then we have net income or profit listed there. 104 00:14:45.080 --> 00:14:52.280 And on the next page, using a two-stage micro model of my macroeconomy, remember it was 105 00:14:52.280 --> 00:15:00.000 four stages, and now I've got it down to two stages, it's basically the same kind of model 106 00:15:00.000 --> 00:15:08.000 where I have expenses, revenues, and then you show the profit. 107 00:15:08.000 --> 00:15:17.480 And what's nice about this method is that you can then show what companies need to do. 108 00:15:17.480 --> 00:15:20.120 You can introduce the dynamics of a market economy. 109 00:15:20.120 --> 00:15:25.000 See, the problem with supply and demand curves is that you have a point of equilibrium and 110 00:15:25.000 --> 00:15:31.680 it's hard to show why a firm would ever move away from that point of equilibrium when you're 111 00:15:31.680 --> 00:15:32.680 at equilibrium. 112 00:15:32.680 --> 00:15:35.540 You know, it wants to just keep producing the wide switches. 113 00:15:35.540 --> 00:15:37.680 Why do you want to always cut your costs? 114 00:15:37.680 --> 00:15:41.280 Why are you always looking for new products? 115 00:15:41.280 --> 00:15:48.240 How can you explain the dynamics of the world economy when you go into any grocery store 116 00:15:48.240 --> 00:15:54.080 or any Walmart and you'll notice that they're constantly trying out new products and you're 117 00:15:54.080 --> 00:15:56.080 seeing an increase in variety? 118 00:15:56.080 --> 00:16:00.880 Why is it that Procter & Gamble produces 60,000 different products? 119 00:16:00.880 --> 00:16:04.200 I can show this with this diagram. 120 00:16:04.200 --> 00:16:07.520 It's hard to show that with the supply and demand curve. 121 00:16:07.520 --> 00:16:14.960 And the way I show it is, we'll say, suppose Microsoft wants to introduce Windows 95 or 122 00:16:14.960 --> 00:16:17.440 a new software package. 123 00:16:17.440 --> 00:16:18.440 What's the dynamics here? 124 00:16:18.440 --> 00:16:27.640 And the dynamics here is, well, we want to increase revenues and marginal revenues, and 125 00:16:27.640 --> 00:16:31.240 to what extent will the marginal cost increase as a result of that? 126 00:16:31.240 --> 00:16:36.200 And if marginal revenue exceeds marginal cost, then we have a profitable item and it's worth 127 00:16:36.200 --> 00:16:37.200 pursuing. 128 00:16:37.200 --> 00:16:59.200 I have arrows moving the expenses and revenues up and down showing the dynamics of the economy and why new products are constantly being introduced. 129 00:16:59.200 --> 00:17:06.200 I can also show downsizing very nicely with this graph. Why do corporations go through this downsizing process? 130 00:17:06.200 --> 00:17:36.200 and the whole idea is to cut expenditures more than you cut revenues because if you cut expenditure you're probably going to cut revenues but the question is you can introduce this marginality concept right away at the beginning level again without any discussion of supply and demand you can introduce marginal principles here so I like the dynamics of this very simple model and I go through a lot of different cases downsizing introducing new products 131 00:17:36.200 --> 00:17:48.100 and so forth, and why companies have to constantly be vigilant on both their revenue side and 132 00:17:48.100 --> 00:17:54.240 their expenditure side. Another thing that's nice about this is that a lot of companies 133 00:17:54.240 --> 00:17:59.080 as well as individuals make the mistake of just concentrating on their income side and 134 00:17:59.080 --> 00:18:04.840 not their expense side, and this shows why both, kind of like the scissors, you need 135 00:18:04.840 --> 00:18:11.840 The Theory of Money and Credit The Theory of Money and Credit 136 00:18:34.840 --> 00:18:40.200 break even and Sears was losing money and what's nice then is you can sit down with 137 00:18:40.200 --> 00:18:46.320 your students and talk about well what can each one do to improve their situation and 138 00:18:46.320 --> 00:18:53.680 we talk about Sears and how they could go through a variety of choices to get back on 139 00:18:53.680 --> 00:18:56.040 an income level. 140 00:18:56.040 --> 00:19:00.420 Again I relate the micro to the macro, I say the macro model you notice you have value 141 00:19:00.420 --> 00:19:04.640 added at each stage of production and that's what you're trying to do on a micro level 142 00:19:04.640 --> 00:19:34.640 Profitability is a reflection of value added. 143 00:19:34.640 --> 00:19:39.640 Introduction to the Concepts of Short-Term Versus Long-Term Profitability 144 00:20:04.640 --> 00:20:19.640 How do I introduce supply and demand using the simple micro-system? 145 00:20:19.640 --> 00:20:31.880 What I essentially do is take the bottom revenue side, which basically represents P times Q, 146 00:20:31.880 --> 00:20:41.180 to introduce the ordinances of the supply and demand curve, price and quantity. 147 00:20:41.180 --> 00:20:50.740 So this is my first dot on a demand curve that I'm going to develop basically showing 148 00:20:50.740 --> 00:20:58.140 this is the same thing as the revenue bar in my micro model. 149 00:20:58.140 --> 00:21:03.980 So I've got one dot here with price and quantity for a particular product at Microsoft, in 150 00:21:03.980 --> 00:21:06.980 this case Windows 95. 151 00:21:06.980 --> 00:21:17.780 And then I talk about the decision-making process of choosing different prices. 152 00:21:17.780 --> 00:21:24.620 What if Microsoft raised the price of Windows 95 from $24.95 to $34.95? 153 00:21:24.620 --> 00:21:26.260 What would be the results? 154 00:21:26.260 --> 00:21:32.460 And so what I basically do is start getting points and you can see how I develop my demand 155 00:21:32.460 --> 00:21:36.520 Supply and Demand Curve, then, right from the income statement, the revenue side of 156 00:21:36.520 --> 00:21:39.100 the income statement. 157 00:21:39.100 --> 00:21:42.620 And then I can do the same thing with the supply curve, that's the idea. 158 00:21:42.620 --> 00:21:50.680 So I get a supply and demand curve from the revenue portion of the income statement by 159 00:21:50.680 --> 00:22:01.420 using certain assumptions and that way developing an equilibrium point using supply and demand 160 00:22:01.420 --> 00:22:07.860 from the Revenue, and then the other thing that I do is, and I need to do that in the 161 00:22:07.860 --> 00:22:15.580 next chapter, the next chapter is I then have the cost, so you have supply and demand determining 162 00:22:15.580 --> 00:22:24.220 the price, but then you've got the cost revenue, the cost or the expenditure side which I also 163 00:22:24.220 --> 00:22:29.460 put on the supply and demand model, which is similar to what economists do with the 164 00:22:29.460 --> 00:22:32.460 the average cost curve and the marginal cost curve. 165 00:22:32.460 --> 00:22:34.780 But I think that's an important principle 166 00:22:34.780 --> 00:22:39.780 to add that cost figure into the supply and demand model 167 00:22:40.840 --> 00:22:45.840 so that you can show that there is this dynamic going on. 168 00:22:47.500 --> 00:22:49.780 There's a lot of examples in the real world, 169 00:22:49.780 --> 00:22:51.940 and I don't know how most of you teach, 170 00:22:51.940 --> 00:22:54.520 when you teach economics, how you explain this, 171 00:22:54.520 --> 00:22:57.980 but a lot of pricing is cost driven. 172 00:22:59.460 --> 00:23:07.460 and you see this all the time in the computer industry and in other dynamic industries where 173 00:23:07.460 --> 00:23:12.580 the cost is reduced and reduced and then they bring the price right down with it and then you 174 00:23:12.580 --> 00:23:22.980 can show the profitability increasing while that's happening so by emphasizing the cost aspect 175 00:23:22.980 --> 00:23:36.980 In fact, you can show how by cutting costs, it allows the firm to cut their prices and maintain market share. 176 00:23:36.980 --> 00:23:44.980 And you'd be surprised how many companies emphasize market share as a reflection of controlling the market. 177 00:23:44.980 --> 00:23:50.980 I've met with a number of firms that market share is more important to them than profitability. 178 00:23:50.980 --> 00:24:02.980 So, it's these kinds of practical things that I learn in the business world which I've tried to develop in my economic model. 179 00:24:02.980 --> 00:24:14.980 So, once I finish, let me go on to say that on the expenditure side, when I emphasize the expense side or the cost side, that's when I talk about factors of production. 180 00:24:14.980 --> 00:24:26.980 I have a chapter on wages and labor. I have a chapter on rent and land. I have a chapter on capital and interest. I have a chapter on entrepreneurship. 181 00:24:26.980 --> 00:24:39.980 So there's a logical step when I introduce the expense or cost side of the firm. That's when I introduce these ideas of land, labor and capital as the factors of production. 182 00:24:39.980 --> 00:24:59.980 I talk about GDP as a measure of economic activity, but I do make an important difference in discussing GDP, and that is, I make a big point that GDP is only one of the four stages of the economy. 183 00:24:59.980 --> 00:25:14.980 But I do make an important difference in discussing GDP, and that is I make a big point that GDP only reflects the output of final goods and services. 184 00:25:14.980 --> 00:25:25.480 So on my four-stage model, it's only the last stage that represents GDP, and the other stages earlier are very important and should not be ignored. 185 00:25:25.480 --> 00:25:38.040 So I've created a new economic statistic called GDO, Gross Domestic Output, which represents 186 00:25:38.040 --> 00:25:40.320 all spending in the economy. 187 00:25:40.320 --> 00:25:41.320 Is it double-counting? 188 00:25:41.320 --> 00:25:46.800 Yes, it is double-counting, but it's like you take all the sales of all corporations 189 00:25:46.800 --> 00:25:52.920 and you add it all together, and that's an important statistic because it indicates a 190 00:25:52.920 --> 00:25:59.400 Total amount of expenditure or spending that goes on in the economy. 191 00:25:59.400 --> 00:26:10.640 And when you do that, you find out that the total capital investment is substantially larger 192 00:26:10.640 --> 00:26:12.640 than consumption. 193 00:26:12.640 --> 00:26:21.200 And that's valuable because there's a lot of air, I think, in the thinking that we're 194 00:26:21.200 --> 00:26:29.200 The Final Consumption is the biggest part of the economy when in fact it is not. 195 00:26:29.200 --> 00:26:42.200 The stages of production leading up to final consumption is substantially larger if you include investment with that. 196 00:26:42.200 --> 00:26:50.040 So this first graph here, if you want to pass that around, you can see what I'm doing. 197 00:26:50.040 --> 00:26:51.040 This is from 1986. 198 00:26:51.040 --> 00:26:58.880 I haven't updated it, but at least you get an idea of what I would be showing in my textbook. 199 00:26:58.880 --> 00:27:04.080 You know, normally what happens is that everything starts here with gross national or gross domestic 200 00:27:04.080 --> 00:27:06.120 product, the middle graph. 201 00:27:06.120 --> 00:27:10.760 You've all seen those kind of charts or bar charts before. 202 00:27:10.760 --> 00:27:22.260 I start earlier if you'll notice in the first bar there I have my gross national output 203 00:27:22.260 --> 00:27:27.920 or gross domestic output and it includes this gross intermediate product which is the earlier 204 00:27:27.920 --> 00:27:29.880 stages of production. 205 00:27:29.880 --> 00:27:38.740 And I put that in there to demonstrate how big the economy is in terms of total spending. 206 00:27:38.740 --> 00:27:50.020 So I find that this is an easy way to explain my concept of GDO or GNO, and it is helpful 207 00:27:50.020 --> 00:27:56.160 to give a perspective of how big the economy is and where economic activity is taking place. 208 00:27:56.160 --> 00:28:00.740 It's a mistake to focus only on final output of goods and services. 209 00:28:00.740 --> 00:28:08.920 And so this would be a considerable change in the National Income Accounting section 210 00:28:08.920 --> 00:28:19.140 of my textbook with the addition of this additional concept of GDO or GNO. 211 00:28:19.140 --> 00:28:24.780 The other thing that I try to do is introduce the concept of economic growth very early 212 00:28:24.780 --> 00:28:54.780 The Theory of Money and Credit 213 00:28:54.780 --> 00:29:10.780 This is an excellent way to contrast my approach versus the, let me have an extra one if there's one too, thank you. 214 00:29:10.780 --> 00:29:28.300 You'll see the first model is the standard Keynesian model that was in Samuelson's textbook 215 00:29:28.300 --> 00:29:33.780 for many years and it really does form, you've all seen the circular flow diagram, that's 216 00:29:33.780 --> 00:29:39.260 essentially what you have, there's the circular flow diagram, which is in all the textbooks 217 00:29:39.260 --> 00:29:47.260 The Circular Flow Diagram is the way our economy works. 218 00:29:47.260 --> 00:30:00.260 In this case, Samuelson has savings leaking out and hopefully coming back in the form of investment, but the connection is questionable. 219 00:30:00.260 --> 00:30:10.020 Well, the second model, which I discovered in Paul Eakins' book, Professor Paul Eakins at University of London, 220 00:30:10.020 --> 00:30:26.260 he's a very pro-environmentalist economist who would shudder to think that a free market Austrian economist was using his model. 221 00:30:26.260 --> 00:30:36.900 But I thank God the day I discovered this graph here because, and I think one of the reasons to, 222 00:30:39.140 --> 00:30:42.660 I always make the case that it's valuable to read people you don't agree with. 223 00:30:43.380 --> 00:30:46.740 And this is an example of it where this guy had this brilliant 224 00:30:49.220 --> 00:30:55.380 flow diagram here, which to me is far more eloquently presenting how the economy really 225 00:30:55.380 --> 00:31:25.380 The Theory of Money and Credit 226 00:31:25.380 --> 00:31:31.180 of the Economy, which is what the above chart does and which is what the normal circular 227 00:31:31.180 --> 00:31:33.220 flow diagram does. 228 00:31:33.220 --> 00:31:37.020 It's very much spending is what really matters. 229 00:31:37.020 --> 00:31:42.400 And here down below it demonstrates very clearly that it's capital formation investment that 230 00:31:42.400 --> 00:31:45.800 drives the economy and drives economic growth. 231 00:31:45.800 --> 00:31:50.540 So I like the dynamics of this lower model and this is what I use in my textbook with 232 00:31:50.540 --> 00:32:19.540 The Diamond Economic Process is basically my four-stage production model that I would insert right in that point. 233 00:32:19.540 --> 00:32:47.040 I like that in demonstrating the dynamics and then the final section of my textbook deals with government policy, monetary policy, fiscal policy, tax policy, and how it affects this model and so that completes the concept, the basic structure of my textbook. 234 00:32:47.040 --> 00:32:52.680 I believe it does qualify with the objectives I originally had in mind of starting in a 235 00:32:52.680 --> 00:32:59.960 logical fashion and moving in a way that students will walk away saying, yes, I now understand 236 00:32:59.960 --> 00:33:06.880 how the economy works using these kind of methods. 237 00:33:06.880 --> 00:33:14.440 There is a lot of interest in my textbook, primarily among smaller schools. 238 00:33:14.440 --> 00:33:22.240 I have over 50 professors of economics who have reviewed my first six chapters and sent 239 00:33:22.240 --> 00:33:26.480 me all kinds of notes on how to improve it. 240 00:33:26.480 --> 00:33:33.840 My objective is to get a mainstream publisher. 241 00:33:33.840 --> 00:33:41.160 I have Erwin, which is quite interested in the textbook project, and also Harper Collins. 242 00:33:41.160 --> 00:33:49.160 Roger Leroy Miller, who is not an Austrian, really likes my textbook, and what I've tried 243 00:33:49.160 --> 00:33:56.360 to do in this textbook is not ever call it Austrian per se, I present it as a logical 244 00:33:56.360 --> 00:33:58.200 way to explain economics. 245 00:33:58.200 --> 00:34:06.480 But people will wonder when the first chapter, well I highlight a different economist in 246 00:34:06.480 --> 00:34:21.480 The Fundamentals of Economic Behavior 247 00:34:36.480 --> 00:34:42.480 and but I do plan to have a full biography when I have the the section on labor I'll probably have 248 00:34:42.480 --> 00:34:52.880 Karl Marx as the economist and talk about him and stuff but my intention is to have have a textbook 249 00:34:53.440 --> 00:35:00.960 that can be acceptable as a as a textbook that will give the basics of supply and demand and 250 00:35:00.960 --> 00:35:09.460 and everything that economists currently teach, but in a much broader way so that these Austrian principles can develop it. 251 00:35:09.460 --> 00:35:19.460 And I also think, I'm having a lot of business students read the textbook to make sure it fits in nicely with accounting majors. 252 00:35:19.460 --> 00:35:25.360 And so far the accountants really like it, although when I use the term working capital, 253 00:35:25.360 --> 00:35:33.360 One of my accountant friends, he said, Skousen, I don't know what economists mean by working capital, but this is not it. 254 00:35:34.360 --> 00:35:39.360 Because working capital has quite a different meaning in accounting than it does for economists. 255 00:35:39.360 --> 00:35:44.360 So that's valuable information for me to make sure I don't make those kinds of mistakes. 256 00:35:44.360 --> 00:35:54.360 Working capital is not actually used that much anymore by economists, but I used it in my textbook and used it very much differently than the accountants. 257 00:35:55.360 --> 00:36:06.000 So that sort of thing is valuable. I've been told that the textbook publishers spend a million 258 00:36:06.000 --> 00:36:12.480 dollars of their own capital in developing a market for a new textbook. So they're pretty 259 00:36:14.240 --> 00:36:19.280 difficult to deal with. They want to make sure they can get a lot of sales. So one of the reasons 260 00:36:19.280 --> 00:36:28.080 I'm speaking to a number of colleges and universities about this idea is to try to engender support, 261 00:36:28.080 --> 00:36:43.760 trying to get professors to say, this is a textbook I could adopt, and that's going to be helpful to have a series of letters like that to give to the publishers to say, I think there's going to be demand here. 262 00:36:43.760 --> 00:36:56.320 They frankly said that you've got to be able to guarantee at least $15,000 to start $15,000 in sales, in adoptions, before they will really consider it. 263 00:36:56.320 --> 00:37:04.600 So that's a pretty uphill battle and I'll probably end up self-publishing or getting Phillips Publishing, my newsletter publisher, to publish it. 264 00:37:04.600 --> 00:37:25.600 They published my investments lectures and I may start off that way and I just think it's going to take some time because the textbook approach is very different and it's going to require a different way of presenting the material. 265 00:37:25.600 --> 00:37:35.600 So I recognize that it's an uphill battle for me to get this published by a mainstream publisher, but that's my goal anyway. 266 00:37:35.600 --> 00:37:39.600 So that's basically what I wanted to present. 267 00:37:39.600 --> 00:37:45.600 And if you have some questions or comments or criticisms, I would be glad to hear them. 268 00:37:45.600 --> 00:37:46.600 Yes? 269 00:37:46.600 --> 00:37:51.600 What happened to the Cain-Hill cross and the idea of demand, idea of supply analysis? 270 00:37:51.600 --> 00:37:53.600 Yeah, that's a good point. 271 00:37:53.600 --> 00:38:04.320 In my macro section I probably will not, I considered at one time to introduce the aggregate 272 00:38:04.320 --> 00:38:12.280 supply and aggregate demand curves that come out of Keynesian economics, but I felt that 273 00:38:12.280 --> 00:38:13.920 that would confuse the student. 274 00:38:13.920 --> 00:38:19.680 I am going to have an appendix on the Keynesian cross and a little bit on Keynesian economics. 275 00:38:19.680 --> 00:38:31.680 I think aggregate supply and aggregate demand is so far wrong that it's best to just drop it and not have it in there in the first place. 276 00:38:31.680 --> 00:38:34.680 That's another reason it probably won't be adopted. 277 00:38:34.680 --> 00:38:43.680 I do have my own form of aggregate supply and aggregate demand, which I introduce in my structure production book. 278 00:38:43.680 --> 00:38:51.680 And I don't know how many of you have seen that, but it actually, it's a little bit difficult to explain to students. 279 00:38:51.680 --> 00:38:58.680 I don't know if any of you have tried to explain my vectors, kind of a vector analysis. 280 00:38:58.680 --> 00:39:10.680 So it's a little bit advanced, but I think that it's best to just, I've decided to be pretty hardcore on my textbook. 281 00:39:10.680 --> 00:39:16.680 While still trying to get the mainstream to adopt it, I'm not going to put things in there. I just don't believe. I'm just not going to do it. 282 00:39:16.680 --> 00:39:22.680 So given that kind of situation, that does lessen my chance of being published. 283 00:39:22.680 --> 00:39:26.680 But Paul Hayne did a pretty good job of publishing his textbook. 284 00:39:26.680 --> 00:39:30.680 He did introduce aggregate supply and demand in one of his editions. 285 00:39:30.680 --> 00:39:33.680 Then he dropped it in the next one. His latest edition doesn't have it. 286 00:39:33.680 --> 00:39:45.680 So, I think you can publish a textbook without compromising your principles, but most professors do compromise their principles. 287 00:39:45.680 --> 00:39:54.680 I mean, I talked to Roger Leroy Miller, and he says, oh, I put in the Agri-Spina Man, but this is BS, and I don't really believe it, and I don't know anyone who does. 288 00:39:54.680 --> 00:40:00.680 And I said, well, Roger, why do you put it in there? And he said, well, because I'm selling textbooks. 289 00:40:00.680 --> 00:40:07.440 Well, you know, as you know, the textbook market changes so slowly because people change 290 00:40:07.440 --> 00:40:12.440 their classroom tactics or antics so slowly. 291 00:40:12.440 --> 00:40:15.040 And you know, people want to teach. 292 00:40:15.040 --> 00:40:20.440 Aggregates imply an aggregate demand, and so that's what people are given. 293 00:40:20.440 --> 00:40:24.920 There's no doubt it's fulfilling the customer's desire. 294 00:40:24.920 --> 00:40:30.560 And the customer is the professor, not necessarily the student, but indirectly the student because 295 00:40:30.560 --> 00:40:48.560 The Profession is Gradually Shifting on Aggregate Supply and Aggregate Demand 296 00:42:30.560 --> 00:42:42.560 The beginning part, which I think students are going to more easily grasp, and with unemployment as low as it is in the United States, the emphasis is going to be on long-term equilibrium. 297 00:42:42.560 --> 00:42:58.560 So I like what he's doing there. It's quite different than what I'm doing here, but still it's a movement away from the Keynesian episode, as Leland called it. 298 00:42:58.560 --> 00:43:04.560 What do you call it? Keynesian Diversion. That was your phrase. 299 00:43:04.560 --> 00:43:12.560 It seemed to me, listening to you talking, you're trying to talk about the practical business aspects and using the income statement. 300 00:43:12.560 --> 00:43:19.560 There's sort of a lot of what I think mainstream would consider managerial economics in a lot of ways. 301 00:43:19.560 --> 00:43:25.560 How do we use economics principles in businesses? How do we see them being applied to businesses? 302 00:43:25.560 --> 00:43:54.560 I do have a lot of management. My approach in economics is to include a lot of management, marketing, as well as pure economics, business, corporate structure, and I also have a chapter on finance, which I think is very important. 303 00:43:54.560 --> 00:44:03.060 on Stocks and Bonds and Corporate Finance, which economics, in large measure, does a very poor job in developing. 304 00:44:03.060 --> 00:44:11.060 While you talk to Friedman and so on, he still argues it's kind of a casino aspect of the markets. 305 00:44:11.060 --> 00:44:14.060 They don't think he really understands the role of capital. 306 00:44:14.060 --> 00:44:20.560 And the Chicago schools has always been, their emphasis on capital has been low. 307 00:44:20.560 --> 00:44:30.560 It's kind of funny, though, because Friedman considers the best chapter in his price theory book his chapter on capital. 308 00:44:30.560 --> 00:44:40.560 And it's so standard, neoclassical capital and interest rate kind of stuff. 309 00:44:40.560 --> 00:44:47.240 One of the things going through this discussion in the layout of the book that I noted is 310 00:44:47.240 --> 00:44:52.520 there's two basic types of students that you're going to get in an economics class, the very 311 00:44:52.520 --> 00:44:56.640 few who actually understand it and get something out of the material, and then the vast majority 312 00:44:56.640 --> 00:44:57.640 who don't. 313 00:44:57.640 --> 00:45:01.400 Who are there just to get into the tree part? 314 00:45:01.400 --> 00:45:05.880 Well, they really don't get the essence of economics and really understand what's really 315 00:45:05.880 --> 00:45:10.180 generating the economic process and all that kind of stuff. 316 00:45:10.180 --> 00:45:17.940 The people who get it tend to be the people who have experience in the market, they already 317 00:45:17.940 --> 00:45:22.500 have felt the competitive pressures in the balance sheet and supply, or not supply and 318 00:45:22.500 --> 00:45:25.780 demand, but revenues and expenses and all that stuff. 319 00:45:25.780 --> 00:45:30.380 People who have that kind of experience tend to latch on to the economic principles much 320 00:45:30.380 --> 00:45:36.700 quicker when you take the standard approach of starting out with supply and demand and 321 00:45:36.700 --> 00:45:38.660 then going on from there. 322 00:45:38.660 --> 00:45:45.980 I think that may be a big benefit if you're dealing with a standard student who really 323 00:45:45.980 --> 00:45:50.580 doesn't have any economic experience, who really doesn't know much more than the names 324 00:45:50.580 --> 00:45:57.260 of these companies, to work them through some of the real business aspects before they actually 325 00:45:57.260 --> 00:46:04.460 get to supply and demand because I think that's the real, the fact that most classes, most 326 00:46:04.460 --> 00:46:13.460 The first approach in textbooks really don't get to the students because they don't have the experience necessary to understand the underlying forces of supply and demand. 327 00:46:13.460 --> 00:46:23.460 Well, I have a whole appendix, even though I introduce an income statement, a very basic income statement, and then I have an appendix on accounting. 328 00:46:23.460 --> 00:46:31.460 But most textbooks do that as well, but I integrate it more and I put it up near the beginning of the course. 329 00:46:31.460 --> 00:46:37.420 And so a number of my colleagues have said you really are writing a business economics 330 00:46:37.420 --> 00:46:42.380 textbook or a managerial economics textbook and I think that's because they haven't seen 331 00:46:42.380 --> 00:46:49.900 the entire book where I do start off that way but I have a lot of pure economics that 332 00:46:49.900 --> 00:46:58.740 comes in, especially in the macro section at the end. 333 00:46:58.740 --> 00:47:05.500 Your gross domestic output statistic, the Investors Business Daily reviewed that very 334 00:47:05.500 --> 00:47:11.740 favorably and I think it really does tell you a lot more about the economy because you're 335 00:47:11.740 --> 00:47:18.240 looking at all the sectors of the economy rather than just final output, but in terms 336 00:47:18.240 --> 00:47:23.820 of the Austrian theory of the business cycle, do you think it improves or doesn't really 337 00:47:23.820 --> 00:47:29.820 Do you do anything in terms of telling us where we are in the cycle and that sort of thing? 338 00:47:29.820 --> 00:47:31.820 Does it give you any better information? 339 00:47:31.820 --> 00:47:40.820 Yeah, I think it does because what I try to do is, when I come to, I have a chapter on the business cycle, 340 00:47:40.820 --> 00:47:47.820 and what I do is try to disaggregate the economy according to these time, these stages of production. 341 00:47:47.820 --> 00:47:57.140 So in looking at, instead of just looking at the unemployment rate, what we try to look 342 00:47:57.140 --> 00:48:03.100 at, or the employment, total employment, that also, we try to look at each sector, 343 00:48:03.100 --> 00:48:07.660 like the natural resource sector, the manufacturing sector, what kind of statistics we have on 344 00:48:07.660 --> 00:48:13.560 those, and to see where is the boom actually taking place, where is the bust actually taking 345 00:48:13.560 --> 00:48:20.160 in Place, and so we don't look at just the consumer price index, we will look at commodity 346 00:48:20.160 --> 00:48:26.320 price index, and if the commodity price index is just skyrocketing, that's an indication 347 00:48:26.320 --> 00:48:30.700 of a boom, the early stages of the boom. 348 00:48:30.700 --> 00:48:39.220 So I do try to look at these sectors of the economy to determine where we are in the business 349 00:48:39.220 --> 00:48:48.220 and to what extent government is encouraging or causing the boom to take place and how far along is it. 350 00:48:48.220 --> 00:48:57.220 So it has a lot of predictive power as well in my opinion and that's what I try to do there on the business cycle. 351 00:48:57.220 --> 00:49:03.220 Of course now these statistics aren't very good and I wanted to ask you how you come down on the CPI debate 352 00:49:03.220 --> 00:49:25.860 I think the statistics on a relative basis are pretty good. 353 00:49:25.860 --> 00:49:32.740 In other words, if they're all using the same methodology, the error rate is fairly equalized 354 00:49:32.740 --> 00:49:40.500 is what I would estimate. Friedman and others, I've gone the rounds with them on this. I 355 00:49:40.500 --> 00:49:45.740 think that they do have a good point about quality changes and things like that as far 356 00:49:45.740 --> 00:49:51.340 as the CPI, and in that sense maybe it does overestimate prices. But on the other hand, 357 00:49:51.340 --> 00:49:57.980 the CPI is a poor indicator of cost of living. I would like to see a cost of living index 358 00:49:57.980 --> 00:50:03.780 Rather than a CPI. That's harder to judge, but for example it leaves out, generally leaves 359 00:50:03.780 --> 00:50:10.780 out taxation. The only time taxes play a role in the CPI is if you have an increase in the 360 00:50:10.780 --> 00:50:18.660 sales tax, then that can be reflected in the CPI. But like a change in real estate, especially 361 00:50:18.660 --> 00:50:27.660 income taxes is not included and that can be 30% of your cost of living, could be taxes. 362 00:50:27.660 --> 00:50:35.660 So, cost of living, if we had a cost of living index, I think it would be substantially higher than the CPI. 363 00:50:35.660 --> 00:50:42.900 I have a section in my textbook that I plan to write on this, and that would be my main point there. 364 00:50:42.900 --> 00:50:53.220 Well, we only have about one minute left for the seminar time, so I wanted to get you an opportunity to do some predicting about where we are in the cycle and where we're going. 365 00:50:53.220 --> 00:51:23.220 Money Supply is Loosening, Money Supply is Loosening, 366 00:51:53.220 --> 00:51:59.500 What you watch, what you watch is financial assets, particularly stocks. 367 00:51:59.500 --> 00:52:03.460 Stocks are where the new money, the extra money is going into. 368 00:52:03.460 --> 00:52:09.220 And I'm very bullish on all those markets, but it's headed for, it'll be a major correction 369 00:52:09.220 --> 00:52:11.360 here at some point. 370 00:52:11.360 --> 00:52:16.940 I think it'll be sharp, treacherous, and it'll be very hard to predict when it will happen. 371 00:52:16.940 --> 00:52:22.080 So I don't know, I'm not into market timing like I used to. 372 00:52:22.080 --> 00:52:29.040 And the reason is, is because even though government is playing its business cycle game 373 00:52:29.040 --> 00:52:36.880 and tight money, easy money and all that sort of thing, this worldwide global free market 374 00:52:36.880 --> 00:52:42.480 expansion that I've been seeing over the last, well, since the collapse of the Berlin Wall, 375 00:52:42.480 --> 00:52:51.080 I mean, I travel a lot and I was over in Europe, was down in Latin America, been to a number 376 00:52:51.080 --> 00:53:01.080 The demand for U.S. goods is really remarkable. I went into a mall in Santiago, Chile, and I thought I was stateside. 377 00:53:01.080 --> 00:53:14.080 They had The Gap and Rockford Shoes and McDonald's, and everybody spoke English. It was just mind-boggling. 378 00:53:14.080 --> 00:53:26.080 in the United States or outside the United States by U.S. companies. 379 00:53:26.080 --> 00:53:34.320 So that's why all these, there's no such thing as a U.S. stock market anymore. All markets 380 00:53:34.320 --> 00:53:42.800 are global. So I'm 100% invested in global stocks at the present time. Not bonds because 381 00:53:42.800 --> 00:53:47.880 the bond market, that's, that game is over to make money on bonds. I would not recommend 382 00:53:47.880 --> 00:53:54.280 anybody playing the bond market. 7%. Interest rates will probably be rising in this mini 383 00:53:54.280 --> 00:54:00.560 and the inflationary boom. Stocks can continue to rise also though. My prediction is that 384 00:54:00.560 --> 00:54:07.580 when the 1990s are over, this decade of the 1990s will statistically probably be the best 385 00:54:07.580 --> 00:54:16.120 return on stocks ever of the 20th century. So I'm not into market timing, 100% invested, 386 00:54:16.120 --> 00:54:17.640 but in stocks, not bonds. 387 00:54:17.640 --> 00:54:23.280 Well, as in bonds, as in the seminar time, we are all up with time and we've got some 388 00:54:23.280 --> 00:54:30.280 from students and instructors who have to get to their next class. I want to thank you, Mark, for coming.