WEBVTT NOTE The Economic Culture of Boom and Bust 1 00:00:00.000 --> 00:00:10.000 Well, seeing as Tom has used up some of my time, and as I'm the only thing standing between you and your lunch, I'll try to be brief. 2 00:00:10.000 --> 00:00:15.000 Several of our talks this morning have focused on war, problems with the warfare state, 3 00:00:15.000 --> 00:00:24.000 and I want to take us back to our discussions from yesterday and talk about the business cycle. 4 00:00:24.000 --> 00:00:30.600 And as we all know, the business cycle has very serious and harmful effects on the economy. 5 00:00:30.600 --> 00:00:32.720 My topic today is something a little different. 6 00:00:32.720 --> 00:00:41.280 I want to focus on the social and cultural effects of the business cycle. 7 00:00:41.280 --> 00:00:46.680 The relationship between social and cultural factors and economic factors is an interesting 8 00:00:46.680 --> 00:00:48.800 and complex one. 9 00:00:48.800 --> 00:00:56.120 It's widely recognized that social, cultural, legal, political factors are very important 10 00:00:56.120 --> 00:00:58.280 determinants of economic performance. 11 00:00:58.280 --> 00:01:03.120 Indeed, those are the primary determinants of economic performance, far more important 12 00:01:03.120 --> 00:01:10.240 than things like natural resource endowments, the weather, population density, and so on. 13 00:01:10.240 --> 00:01:17.220 However, what's less well known within the Austrian literature, certainly, is the degree 14 00:01:17.220 --> 00:01:25.220 The theory to which social and cultural factors are the result of economic activity, are affected by economic performance. 15 00:01:25.220 --> 00:01:30.220 It doesn't take much reflection to realize that this is true. 16 00:01:30.220 --> 00:01:40.220 We know that prosperity, for example, facilitates peace, intellectual and scientific development, the flourishing of literature and the arts, 17 00:01:40.220 --> 00:01:50.220 Whereas economic and financial distress brings about conflict, violence, and a general decline in social and cultural achievement. 18 00:01:50.220 --> 00:02:01.220 For instance, there's quite a bit of research in the social psychology literature on the effects of unemployment, the effects of recession, economic recession. 19 00:02:01.220 --> 00:02:17.220 Unemployment is associated with self-reported feelings of unhappiness, anxiety, stress, and so on, as well as observable manifestations like domestic violence, divorce, even suicide. 20 00:02:17.220 --> 00:02:27.220 Moreover, persistent unemployment is thought to lead to feelings of helplessness, despair, alienation, etc. 21 00:02:27.220 --> 00:02:47.220 And the most important consequence of recession, as I'll emphasize later, is the fostering of a general belief in society that the market has failed, that capitalism has failed, and that the sure hand of the state is required to rescue the victims, to provide a safety net, and so on. 22 00:02:47.220 --> 00:02:58.220 Now it turns out there's very little in the social psychology literature on the effects of inflationary booms. 23 00:02:58.220 --> 00:03:09.220 But the credit-induced boom that we study in the Austrian business cycle literature itself can have very important social and cultural consequences. 24 00:03:09.220 --> 00:03:15.220 Overconfidence, financial irresponsibility, an increase in time preferences, 25 00:03:15.220 --> 00:03:30.220 increased preference for present consumption as opposed to future consumption and even in extreme cases, such as hyperinflations, very serious changes in the larger social order itself. 26 00:03:30.220 --> 00:03:41.220 So let me spend a few minutes talking about booms, some of the social and cultural effects of booms, and then I'll conclude by talking about busts. 27 00:03:41.220 --> 00:03:54.220 I have to emphasize that by boom, I'm not talking about a general period of prosperity, secular economic growth, the overall level of well-being that we expect in a free market. 28 00:03:54.220 --> 00:04:04.220 I'm talking specifically about artificial booms, credit-induced booms, the inflationary boom that is the result of central bank intervention in the economy. 29 00:04:04.220 --> 00:04:33.220 Let's just briefly review the characteristics of the inflationary boom. Credit expansion, interest rates that are pushed below their natural or market rates of interest, increases in debt both at the personal and corporate level, over investment in the higher order goods or capital goods relative to the lower order or consumer goods, so malinvestment, and some form of price inflation. 30 00:04:33.220 --> 00:04:39.220 Now, how the price inflation manifests itself obviously differs from boom to boom. 31 00:04:39.220 --> 00:04:43.220 Sometimes it's reflected in higher prices for consumer goods. 32 00:04:43.220 --> 00:04:48.220 Sometimes a lot of the price inflation is channeled into the real estate market. 33 00:04:48.220 --> 00:04:53.220 Some of it can dissipate into the foreign exchange market and so on. 34 00:04:53.220 --> 00:04:58.220 However, persistent inflation is everywhere and always, we might say, a monetary phenomena 35 00:04:58.220 --> 00:05:02.220 as a result of central bank intervention. 36 00:05:02.220 --> 00:05:06.020 The overall result of these characteristics 37 00:05:06.020 --> 00:05:09.260 is what we might call an illusion of prosperity, 38 00:05:09.260 --> 00:05:12.200 an illusion of material prosperity. 39 00:05:12.200 --> 00:05:14.540 It's an illusion because it's artificial. 40 00:05:14.540 --> 00:05:16.840 It's temporary, right? 41 00:05:16.840 --> 00:05:20.240 As Mises, Hayek, Rothbard and others have shown, 42 00:05:20.240 --> 00:05:24.100 every such inflationary boom contains the seeds 43 00:05:24.100 --> 00:05:29.100 of its own destruction, will inevitably lead to the bust. 44 00:05:29.100 --> 00:05:35.500 to the Bust. I want to talk about two categories of social and cultural 45 00:05:35.500 --> 00:05:40.580 consequences of the boom. The first we might categorize as sort of general 46 00:05:40.580 --> 00:05:45.820 consequences of artificial prosperity, this illusion of prosperity. This would 47 00:05:45.820 --> 00:05:51.040 include intangibles like overconfidence, particularly among entrepreneurs, the 48 00:05:51.040 --> 00:05:55.340 belief that there are no trade-offs in life, we can accomplish whatever we want, 49 00:05:55.340 --> 00:06:13.340 pursuit of instant gratification, along with tangible manifestations such as higher fertility rates, higher school dropout rates, increased entry of women into the labor force, reduced scrutiny by investors of corporate activities. 50 00:06:13.340 --> 00:06:43.340 We could also talk about specific consequences of the mechanism by which the boom comes into being, namely credit expansion, lower interest rates, specific consequences of cheap and easy credit, such as increases in debt, increases in consumer debt, changes in housing patterns, and when accompanied by significant price inflation, we have reduced savings, what we might describe as a reduction in 51 00:06:43.340 --> 00:06:56.340 Prudent behavior more generally, potentially class conflict between debtors and creditors and in extreme cases a wholesale rejection of the traditional social order. 52 00:06:56.340 --> 00:07:08.340 So let me discuss both first the general consequences of artificial prosperity and then the specific consequences of credit expansion. 53 00:07:08.340 --> 00:07:22.340 The artificial boom, as mentioned, creates this sort of general feeling that things are good, that we have widespread prosperity. 54 00:07:22.340 --> 00:07:31.340 This sort of what we might call illusionary hubris manifests itself in several ways. 55 00:07:31.340 --> 00:07:45.340 It encourages irresponsibility on the part of entrepreneurs, unusual excessive risk-taking, entrepreneurship of course is intimately tied up with risk. 56 00:07:45.340 --> 00:07:57.340 The nature of entrepreneurship in the Misesian sense is bearing of risk, trying to align factors of production in ways that will yield future benefits. 57 00:07:57.340 --> 00:08:02.140 Entrepreneurs are, of course, always taking risks. Sometimes they guess right, sometimes they guess wrong. 58 00:08:02.140 --> 00:08:06.640 Entrepreneurs who consistently guess wrong eventually cease to be entrepreneurs. 59 00:08:06.640 --> 00:08:10.340 That's the role of the profit and loss system. 60 00:08:10.340 --> 00:08:20.340 The general climate of prosperity that we find with a credit created or inflationary boom tends to distort the profit and loss mechanism, 61 00:08:20.340 --> 00:08:22.640 distorts these profit signals, right? 62 00:08:22.640 --> 00:08:27.640 Entrepreneurs can get away with risky activities that they would normally not be able to get away with. 63 00:08:27.640 --> 00:08:32.640 We only need to think about the dot-com bubble of the late 1990s, 64 00:08:32.640 --> 00:08:39.640 not of course talking about the wonderful benefits of the dot-com era such as Mises.org, 65 00:08:39.640 --> 00:08:41.640 as Jeff was talking about this morning, 66 00:08:41.640 --> 00:08:46.640 but some of the crazier schemes and ventures that are familiar to you. 67 00:08:46.640 --> 00:08:59.640 So entrepreneurs have sort of a feeling of invulnerability that leads them to engage in excessively risky behavior because the profit and loss mechanism, profit and loss signals are distorted. 68 00:08:59.640 --> 00:09:11.640 But Mises puts it this way in a 1946 essay. He says the wealth generated during an inflationary boom is, quote, a castle built on the sands of illusion. 69 00:09:11.640 --> 00:09:20.640 So entrepreneurs as well as consumers are given a sort of a detachment from reality. 70 00:09:20.640 --> 00:09:26.640 This overconfidence also manifests itself in consumer behavior. 71 00:09:26.640 --> 00:09:31.640 Consumers increase their spending. They tend to discount opportunity costs. 72 00:09:31.640 --> 00:09:39.640 They tend to ignore things like retirement planning, engage in day trading as they watch stock prices soar, and so on. 73 00:09:39.640 --> 00:09:40.640 and so on. 74 00:09:40.640 --> 00:09:46.600 You know, I might add that the famous book by Thorsten Veblen called The Theory of the 75 00:09:46.600 --> 00:09:55.440 Leisure Class, which was published in 1898, became famous in the 1920s during the boom 76 00:09:55.440 --> 00:09:58.000 that preceded the Great Depression. 77 00:09:58.000 --> 00:10:06.560 Veblen's book introduced the phrase conspicuous consumption that our left-wing friends often 78 00:10:06.560 --> 00:10:10.880 and used to describe the result of capitalism. 79 00:10:10.880 --> 00:10:13.280 But it was precisely the climate of the 1920s, 80 00:10:13.280 --> 00:10:16.480 the freewheeling, free-spending climate that 81 00:10:16.480 --> 00:10:20.920 was created by Federal Reserve policy, that made people 82 00:10:20.920 --> 00:10:22.560 take Veblen seriously. 83 00:10:22.560 --> 00:10:25.000 Social critics began to think, well, maybe this Veblen guy's 84 00:10:25.000 --> 00:10:25.960 really onto something. 85 00:10:25.960 --> 00:10:29.680 It sure looks like conspicuous consumption all around me. 86 00:10:29.680 --> 00:10:32.400 So had it not been for Fed policy, 87 00:10:32.400 --> 00:10:50.400 The boom leads to a rise in time preferences, greater discount of future rewards on the part of consumers. 88 00:10:50.400 --> 00:10:56.400 Buy now, pay later. Times are good. Newer is better than older. 89 00:10:56.400 --> 00:11:03.400 There's sort of a glorification of youth culture that we typically see during inflationary periods. 90 00:11:03.400 --> 00:11:13.400 This struck me, the contrast between this and what we found in prior, struck me just recently reading a biography of Joseph Schumpeter. 91 00:11:13.400 --> 00:11:25.400 And there was a passage that caught my eye on the way Schumpeter and young men of his generation behaved in the early 1900s. 92 00:11:25.400 --> 00:11:30.600 in the first five years of the 20th century, Mises of course being Schumpeter's Contemporary. 93 00:11:30.600 --> 00:11:36.100 Young men in that era tended to imitate old men. 94 00:11:36.100 --> 00:11:40.800 So young men would wear glasses even if they had perfect vision. 95 00:11:40.800 --> 00:11:45.600 They would walk kind of with a limp or a stoop to imitate their elders. 96 00:11:45.600 --> 00:11:49.600 This was a way of showing respect to the wisdom of the past. 97 00:11:49.600 --> 00:11:54.300 Nowadays, of course, it's completely reversed such that it's youth culture 98 00:11:54.300 --> 00:11:58.700 that drives social and cultural phenomena. 99 00:11:58.700 --> 00:12:05.600 One need only go to the mall and observe legions of soccer moms 100 00:12:05.600 --> 00:12:10.500 who dress like Britney Spears to realize how much times have changed. 101 00:12:14.500 --> 00:12:20.000 There are important tangible or observable measurable effects 102 00:12:20.000 --> 00:12:23.200 of the feeling of artificial prosperity. 103 00:12:23.200 --> 00:12:30.200 There's quite a bit of evidence suggesting that fertility rates rise during booms and decline during busts. 104 00:12:30.200 --> 00:12:36.200 The U.S. fertility rate actually at present is the highest it's been in about 30 years. 105 00:12:36.200 --> 00:12:43.200 Or I should say at the end of the, around the year 2000 when this data came, at the end of the 1990s boom, 106 00:12:43.200 --> 00:12:51.200 it was over, it was about 2.1 children per woman, which is substantially higher than it was in the 70s and the 80s. 107 00:12:51.200 --> 00:12:55.200 And there are a lot of theories about what factors affect fertility. 108 00:12:55.200 --> 00:13:14.200 One common idea that's probably not true is probably not the case that during a boom because the male head of the household has a higher income, women exit the labor force to have children. 109 00:13:14.200 --> 00:13:22.200 That's probably not the case because women, in fact, tend to enter the labor force at higher rates during booms, 110 00:13:22.200 --> 00:13:31.200 which suggests, one way to think about this in economist terms is that the women's labor supply curve is upward sloping. 111 00:13:31.200 --> 00:13:35.200 In other words, women are attracted into the labor force by the prospect of higher wages, 112 00:13:35.200 --> 00:13:42.200 not by the necessity to make up for the husband's lost income during a bust, for example. 113 00:13:42.200 --> 00:13:51.860 Economists would also say this fertility data suggests, or one way to interpret it, is that children are what we call a normal good. 114 00:13:51.860 --> 00:13:58.400 Meaning as your income rises, you prefer to consume more of this good. 115 00:13:58.400 --> 00:14:02.400 Parents, you may insert your own jokes here. 116 00:14:02.400 --> 00:14:07.000 Now, I want to be clear, I'm not saying that higher fertility rates are good or bad. 117 00:14:07.000 --> 00:14:15.500 I'm simply pointing out that using this as an example of how macroeconomic conditions can have important social consequences. 118 00:14:15.500 --> 00:14:23.700 And of course, the entrance of women into the labor force is another example of this. 119 00:14:23.700 --> 00:14:34.440 There's this huge literature on the effects of households in which both parents work, a generation of latchkey children and so on, 120 00:14:34.440 --> 00:14:36.140 and Increased Strain on the Family. 121 00:14:36.140 --> 00:14:47.940 Again, one needn't take the view that this is necessarily a bad thing to recognize that it's an important social or cultural consequence of what's going on in the economy. 122 00:14:47.940 --> 00:14:49.440 Other tangibles. 123 00:14:49.440 --> 00:14:59.140 There's evidence that teenagers tend to drop out of school during the boom and go back to school during the bust. 124 00:14:59.140 --> 00:15:08.740 Again, on average, labor force participation rates for 16 to 19 year olds are substantially higher during periods of expansion than they are during periods of contraction. 125 00:15:08.740 --> 00:15:15.940 The data seem pretty conclusive in this sense. 126 00:15:15.940 --> 00:15:25.440 If we think it's desirable that teenagers be in school rather than be in the workforce, we might be alarmed about this, but we might not necessarily think that. 127 00:15:25.440 --> 00:15:32.040 Another important consequence that has a tangible, consequence of the boom that has a very tangible manifestation. 128 00:15:32.040 --> 00:15:38.680 So we might call sort of a greater tolerance for shady practices within the private sector. 129 00:15:38.680 --> 00:15:49.560 The whole corporate accounting scandals, Enron, Worldcom, Global Crossing and so on, I think reflect this in the following sense. 130 00:15:49.560 --> 00:15:55.560 Keep in mind that what brought these controversial episodes to light 131 00:15:55.560 --> 00:16:01.560 was not some government investigative committee that discovered that irregular accounting practices were being used. 132 00:16:01.560 --> 00:16:04.560 Rather, it was the market that discovered this. 133 00:16:04.560 --> 00:16:11.560 It was the rapid decline in the share prices of these firms that made the Fed start thinking about it, 134 00:16:11.560 --> 00:16:17.560 that put the SEC onto the trail that, oh, gosh, there must be something funny going on here we need to investigate. 135 00:16:17.560 --> 00:16:23.960 So markets are very good at providing feedback to managers and entrepreneurs on all aspects 136 00:16:23.960 --> 00:16:27.080 of their business, including how they account for things. 137 00:16:27.080 --> 00:16:29.960 Accounting is complicated. 138 00:16:29.960 --> 00:16:34.840 Some accounting practices are appreciated by investors, some are not appreciated and 139 00:16:34.840 --> 00:16:35.840 discounted. 140 00:16:35.840 --> 00:16:39.080 Investors, of course, have the option, have the ability to show their disapproval for 141 00:16:39.080 --> 00:16:44.320 management practice by selling their shares, by getting out of the stock market and so 142 00:16:44.320 --> 00:16:46.240 on. 143 00:16:46.240 --> 00:16:50.960 In the artificial boom, financial markets tend to be much more forgiving. 144 00:16:50.960 --> 00:16:55.560 So investors didn't pay as close attention to what was going on in these companies as 145 00:16:55.560 --> 00:17:02.800 they otherwise would because of the general rise in stock prices, which made people happy. 146 00:17:02.800 --> 00:17:09.600 Concrete result of these scandals, of course, has been a result that is promulgated by the 147 00:17:09.600 --> 00:17:15.400 media, encouraged by the media and the state, of course, is that business can't be trusted. 148 00:17:15.400 --> 00:17:19.240 businessmen are out to take advantage of investors and that's why we need 149 00:17:19.240 --> 00:17:23.920 powerful benevolent regulators and so on to protect small investors and to 150 00:17:23.920 --> 00:17:29.280 protect the public at large. Well I mentioned that there we can also 151 00:17:29.280 --> 00:17:34.320 identify specific consequences of the means by which the artificial boom comes 152 00:17:34.320 --> 00:17:39.400 into existence namely credit channels, expansion of credit, reduction of 153 00:17:39.400 --> 00:17:43.880 interest rates. What are some of these manifestations? Increase in consumer debt, 154 00:17:43.880 --> 00:17:50.640 consumer debt levels reached all-time highs in the 1990s and of course 155 00:17:50.640 --> 00:17:57.440 excessive debt goes against the teachings of almost all cultural religious 156 00:17:57.440 --> 00:18:04.000 traditions virtually all of which recognize thrift and moderation as 157 00:18:04.000 --> 00:18:08.440 virtues as manifestations of self-discipline and of course I'm not 158 00:18:08.440 --> 00:18:13.720 I'm not offering a condemnation of credit markets of debt but simply pointing 159 00:18:13.720 --> 00:18:36.720 The real estate boom that typically accompanies or often accompanies credit expansion has important implications for demographics, for housing patterns, where people live, who people live with, who they live near. 160 00:18:36.720 --> 00:18:50.720 As you know, the real estate and construction sectors, like other interest rate sensitive parts of the economy, are particularly volatile during the boom-bust cycle. 161 00:18:50.720 --> 00:18:59.720 We often see real estate expansion, which can temper the effects of price inflation in consumer goods, by the way. 162 00:18:59.720 --> 00:19:06.720 We saw it in the 1920s, we saw it in the boom of the 1980s, and in the most recent boom in the 90s. 163 00:19:06.720 --> 00:19:14.720 The thing to keep in mind about expansion in the real estate and construction markets is that by its nature, 164 00:19:14.720 --> 00:19:23.720 real estate development is less mobile, less easily reversible, more durable than some other kinds of investment. 165 00:19:23.720 --> 00:19:34.720 A housing development that has begun during the boom cannot easily be returned to its previous state once the bubble bursts. 166 00:19:34.720 --> 00:19:42.720 So things like the growth of suburbs, urban sprawl, etc., all of these are associated, are consequences of credit expansion. 167 00:19:42.720 --> 00:19:52.720 And again, I'm not claiming that we shouldn't live in suburbs or that cities shouldn't be sprawling, only pointing this out as an effect. 168 00:19:52.720 --> 00:20:07.720 Now, when the credit expansion is accompanied by significant price inflation in consumer goods markets, we have even more important and typically harmful consequences. 169 00:20:07.720 --> 00:20:21.720 Like artificially low interest rates, price inflation provides an incentive to borrow and a disincentive to save, promotes a tendency toward instant gratification, 170 00:20:21.720 --> 00:20:51.720 can lead to class conflict between debtors and creditors as Mises pointed out all of us are creditors almost all of us are creditors in some sense if you have a bank account you're at least a gross if you have a savings account you're at least a gross creditor the unevenness in the rise in prices can cause conflicts within society remember how the Austrian Austrian style credit expansion works some segments of the economy receive the new credit first 171 00:20:51.720 --> 00:21:21.720 and those and the monetary expansion channel constitutes leads to a transfer of real wealth from those sectors that receive the new money last to those individuals in those sectors that receive it first so there are some at least short-term beneficiaries and some who are some losers through this process and the monetary transmission mechanism introduces conflicts of interest among groups of consumers and business people 172 00:21:21.720 --> 00:21:27.720 And of course, in the case of hyperinflation, the consequences can be much more severe. 173 00:21:27.720 --> 00:21:35.720 And here I would recommend the very interesting piece by Paul Cantor in the review of Austrian economics in 1994, 174 00:21:35.720 --> 00:21:45.720 where he interprets Thomas Mann's story, Disorder and Early Sorrow, in terms of the German hyperinflation, in terms of Austrian business cycle theory. 175 00:21:45.720 --> 00:22:01.720 This story tells the day in the life of a history professor in Germany between the wars during the hyperinflation and it sort of describes how things become completely absurd. 176 00:22:01.720 --> 00:22:10.720 Hyperinflation led to what Cantor described as a detached sense of reality or a hyper-reality to go along with the hyperinflation. 177 00:22:10.720 --> 00:22:14.920 The young had the authority and the prestige, the old were denigrated. 178 00:22:14.920 --> 00:22:18.920 Instead of saving, housewives struggled to spend as much money as possible. 179 00:22:18.920 --> 00:22:25.420 In Cantor's phrase, hyperinflation led to a kind of hyperreality in which nothing has a fixed meaning. 180 00:22:25.420 --> 00:22:27.720 Society spun out of control. 181 00:22:27.720 --> 00:22:34.920 The great German economist Wilhelm Rippke called inflation a moral disease. 182 00:22:34.920 --> 00:22:39.120 He said, inflation is a moral disease leading to a disorder of society. 183 00:22:39.120 --> 00:22:47.120 And there's quite a lot written by Mises and others on the social harm of inflation. 184 00:22:47.120 --> 00:22:52.120 Okay, well that's the boom. What about the bust? 185 00:22:52.120 --> 00:22:56.120 The case is a little more obvious here. 186 00:22:56.120 --> 00:23:06.120 Remember that we're not talking simply about unemployment per se or a firm that goes out of business. 187 00:23:06.120 --> 00:23:15.120 We're talking about the cluster of errors, the systematic persistent business failure and widespread unemployment that constitutes the bust. 188 00:23:15.120 --> 00:23:21.120 I referred earlier to this social psychology literature, actually quite a few economists working on this too. 189 00:23:21.120 --> 00:23:35.120 There are surveys of happiness across various countries where respondents are asked to rate how happy or unhappy they feel on a 1 to 10 scale, something like that. 190 00:23:35.120 --> 00:23:47.120 And then these ratings are associated with various social, economic, cultural factors to try to determine what makes people happy, what makes people unhappy. 191 00:23:47.120 --> 00:24:03.120 And not surprisingly, unemployment is associated with unhappiness, and there's data suggesting that unemployment leads to increase in substance abuse, domestic violence, divorce, even suicide. 192 00:24:03.120 --> 00:24:13.120 and Suicide. There's a recent NBER paper by Justin Wolfers at the Stanford Business School 193 00:24:13.120 --> 00:24:18.920 who finds that not only unemployment itself but also volatility in unemployment, cyclical 194 00:24:18.920 --> 00:24:25.520 unemployment has very harmful social psychological effects. So this suggests that it's not just 195 00:24:25.520 --> 00:24:30.720 being out of a job that's bad but this recurring pattern of employment, unemployment, employment, 196 00:24:30.720 --> 00:24:36.880 Unemployment that characterizes the business cycle that is a further source of trouble. 197 00:24:36.880 --> 00:24:43.440 It's well known that philanthropic activity is curtailed during a recession, charitable 198 00:24:43.440 --> 00:24:53.840 giving tends to track the business cycle pretty closely, and I might add that community organizations, 199 00:24:53.840 --> 00:24:59.220 religious organizations, charitable groups are also susceptible to the overinvestment 200 00:24:59.220 --> 00:25:04.940 problem or malinvestment problem that private businesses are susceptible to during the business 201 00:25:04.940 --> 00:25:06.580 cycle. 202 00:25:06.580 --> 00:25:12.960 So charitable and religious groups may initiate a new program during the boom phase and then 203 00:25:12.960 --> 00:25:17.420 be unable to continue that program, have to abandon it in midstream during the bust. 204 00:25:17.420 --> 00:25:23.560 Of course this can have very serious effects on the recipients of aid or those to whom 205 00:25:23.560 --> 00:25:26.020 such a program is targeted. 206 00:25:26.020 --> 00:25:52.020 The most important consequence of the boom-bust cycle is this, as I mentioned before, is this feeling among the public that capitalism is unstable, that the free market is unreliable, that it's subject to these periodic periods of crisis and only the sure hand of the state can protect us. 207 00:25:52.020 --> 00:25:57.620 In other words, that government is necessary not only to run the economy, to steer the economy, 208 00:25:57.620 --> 00:26:05.620 but to control all aspects of social life, education, health, welfare, the arts, and so on. 209 00:26:05.620 --> 00:26:09.820 The Great Depression is perhaps the quintessential example. 210 00:26:09.820 --> 00:26:21.420 I mean, almost all of us were educated, were taught growing up that Roosevelt saved capitalism from itself, 211 00:26:21.420 --> 00:26:31.420 The Great Depression proved that unbridled capitalism, dog-eat-dog capitalism doesn't work 212 00:26:31.420 --> 00:26:40.420 and that a new form of capitalism, a social market economy, a mixed economy and so on, is necessary. 213 00:26:40.420 --> 00:26:47.420 Robert Higgs, of course, has brilliantly shown that during periods of crisis like depression and, more importantly, war, 214 00:26:47.420 --> 00:26:55.420 Those are the periods when government tends to grow the most, and of course it doesn't shrink back when the crisis is over, as we know. 215 00:26:55.420 --> 00:27:05.420 Politicians are all too eager to help out those who are suffering from economic recession, to provide a safety net, to offer social and humanitarian services, 216 00:27:05.420 --> 00:27:13.420 typically crowding out private providers of such services, churches, religious organizations, other charitable groups, and so on. 217 00:27:13.420 --> 00:27:25.920 You know, sort of the manifestation of this attitude that the state has to run things is, you know, it's in almost every news report about Iraq or about what's going on in other parts of the world. 218 00:27:25.920 --> 00:27:38.420 I remember just a few weeks ago when listening to National State Radio, NPR as some people call it, when Charles Taylor was finally ousted from Liberia and all the pundits were talking about, 219 00:27:38.420 --> 00:27:42.420 Now that Charles Taylor isn't running the country, who is going to run the country? 220 00:27:42.420 --> 00:27:48.740 Will it be this group? Will it be that group? Who is going to run Iraq? Paul Bremmer can't 221 00:27:48.740 --> 00:27:53.900 run Iraq forever. At some point, some other perhaps indigenous government body has to 222 00:27:53.900 --> 00:27:59.320 run the country. The phrase just sort of rolls off these commentators' tongues. The idea 223 00:27:59.320 --> 00:28:08.140 that maybe the country can run itself is considered beyond the pale. I think David Gordon was 224 00:28:08.140 --> 00:28:15.940 I was talking about the Constitution this morning, and when I read about the struggle to draft the Constitution for Iraq, 225 00:28:15.940 --> 00:28:20.340 I wanted to reply, why don't we just give them ours, since we're obviously not using it. 226 00:28:20.340 --> 00:28:37.940 So, to conclude, I would urge my fellow Austrians to investigate further, to investigate this area further. 227 00:28:37.940 --> 00:28:45.940 There's very little Austrian literature on social and cultural consequences of monetary policy. 228 00:28:45.940 --> 00:28:54.940 But I hope that this brief overview shows that there are some potentially very serious consequences of the boom-bust cycle, 229 00:28:54.940 --> 00:29:04.940 which is all the more reason to return to laissez-faire, to establish sound money, to abolish the institution of central banking altogether.