I will be speaking in the first slot here this morning on the topic, what can we learn from real gorillas?
And I would suggest to you that it's fairly obvious from the conference so far that you can learn a great deal from the gorillas known as the Austrian economists.
The one thing that I'm going to hit on today is that you can learn a great deal about what causes business cycles,
In college, I was an economics major, and I loved the subject of economics, but I quickly became disillusioned with my courses. It seemed that after comparative advantage in supply and demand, the courses degenerated into Keynesian economics, welfare economics, market failures, public goods, Gini coefficients, and all sorts of things.
Crazy minutiae, as far as I could tell. And I knew there was something wrong, that the first, you know, sort of solid supply and demand stuff had degenerated into nonsense in many cases.
Eventually I came across the Austrian School on my own, and I knew immediately that it held some promise. I especially liked the Austrian theory of the business cycle.
I also liked the Austrians on the Socialist Calculation Debate and the MacTowden strike.
And so when I went back to school in the fall, I decided to take a course on business cycles
and another course on the history of economic thought,
only to find out that the Austrians were not even mentioned in either course.
The next semester I even took a course on the Russian economy,
fully expecting at least a mention of the Austrian economist, but over the
entire course there was not
even one hint of the
looming
economic vulnerability
of the Soviet Union.
My teacher in that course would regularly,
every week on Monday, we would get a mimeograph
piece of paper
with a chart
or a table or a graph,
usually from a magazine like Newsweek,
U.S. News and World Report, Time Magazine, and it would have a little graph on there
or a little table and it would show the number of tanks that the Soviet Union had versus
the U.S. and then the next week it would be the number of nuclear missiles that the U.S.
had versus the U.S. and then the number of soldiers and this went on and on throughout
the entire course and every week it was the Soviet Union had more of everything than we
We did. He never ever discussed these charts or tables in class. I just assumed that he
was trying to grind us down and convince us that we were doomed and just to accept communism.
Undeterred, I did go to graduate school in economics and during my first year in graduate
school I was sorely disappointed to learn from one of my major professors that the Austrian
Austrian Theory of the Business Cycle was, quote, an embarrassing, a grisly embarrassment.
Another warned me that Austrian Capital Theory was the black hole of economic research because
no matter how much time and effort you put into it, nothing would ever come out.
I learned during my first year in graduate studies that there were probably only two
two dozen Austrian economists in the entire world, most of whom were either nearing retirement
or in marginal academic positions. The situation, as I saw it, between the mainstream economists
and the Austrian School made the Alamo look like a fair fight. And then miraculously in
and then miraculously in my second year the Mises Institute was formed and it
showed up in Auburn, Alabama where I was located at the University that I was at
in the same building that I was at right down the hall from me and I was you know
that was a miracle how lucky can one get and then ten years later the Austrian
The Austrian School was back on its feet after about a 50 year hiatus. The Mises University was putting out over 100 students each summer, the review of Austrian Economics was in full swing under Murray Rothbard, and PhDs of an Austrian bent were coming out of the Mises Institute. You get a lot of credit for nurturing that revival. Things have steadily progressed and in 1997 the Journal of Economic Perspectives published an article by Sherwin Rosen of the Economics Department at the University of Chicago
and also the editor of the Journal of Political Economy, sort of the pinnacle of mainstream economics, entitled Austrian and Neoclassical Economics, Any Gains from Trade? And it seemed that Rosen said that the Austrians no longer had anything to offer the mainstream and that they simply did no longer pass the market test.
It seems that Austrians have gone from being ignored and harshly disparaged to being acknowledged
and dismissed.
In a guerrilla war, this is the first sign of victory.
I decided to take up Rosen's challenge, do the Austrians pass the market test on the
And the important issue of predicting the economy and predicting the stock market. The question that economists are very often asked by people on the streets. And certainly a real market test. Now the Austrians of course downplay economic forecasting while mainstream economists consider prediction to be the hallmark of economic progress. So I suppose this is a fair fight. What have I found so far? Well, in terms of the Great Depression as the United
from the 1920s to the 1930s. Very few people saw the stock market bubble and the boom of the 1920s for what it was. Just about everybody thought that this was a new perpetual prosperity. Wall Street economists, government economists and government officials touted this perpetual prosperity due to the monetary stability of the Federal Reserve and the technological revolution that it had released. Irving Fisher,
was one of the most prominent economists during this period and is still
considered by mainstream economists to be one of the greatest American economists
of all time. On the eve of the great stock market crash in 1929, on September
5th, Fisher reassured investors that he foresaw no problem in the stock market.
Quote, there may be a recession in stock prices but nothing in the nature of a
Dividend returns on stocks are moving higher. This is not due to receding prices for stocks
and will not be hastened by any anticipated crash, the possibility of which I fail to
see. A few years ago, people were much afraid of common stocks as they were of a red-hot
poker. In the popular mind, there was a tremendous risk in common stocks. Why? Mainly because
Because the average investor could afford to invest in only one common stock, today he
obtains wide and well-managed diversification of stock holdings by purchasing shares in
good investment trusts.
Well, unfortunately, while Fisher continued to preach throughout October of 1929 that
stocks had reached a, quote, permanent high plateau, unquote, stocks lost one-third of
their value.
Trust, which he thought was so great, fell by 95% over the two years from his prediction
and the Dow Jones Industrial Average lost 90% of its peak value.
So was the Great Depression, was the stock market bubble and bust predictable?
Well Ludwig von Mises saw the problem developing in its early stages and he told his colleagues
In addition, and probably more importantly, he wrote a full book-length treatment on Fischer's
monetary plan, the bubble of the 1920s, exactly what was causing it, and predicting the inevitable
bust.
He concluded, because of the imperfections of the index number of Fischer, these calculations
would necessarily lead in time to errors of very considerable proportions. Further, it
is clear that the crisis must come sooner or later, and that's Mises writing in 1928.
He also went on to say that basically in order to solve the problem you have to do away with
Fisher System, and the trade cycle that it generates. Mises' student, F. A. Hayek, published
several articles in 1929 predicting the collapse of the American boom. So the Austrians had
the correct predictions while the mainstream economists were totally off the mark. As we
move to the boom of the 1960s and the bust of the 1970s, we find a prominent academic
The American economist named Arthur Oaken, who was a prominent member of President Johnson's
Council of Economic Advisers.
Right before the crash, he described the economic expansion as, quote, unparalleled, unprecedented
and uninterrupted.
He believed that the economy was on a new, dramatic departure from the past.
Quote, the persistence of prosperity has been the outstanding fact of the American economic
history of the 1960s.
The absence of recession for nearly nine years marks a discreet and dramatic departure from
the traditional performance of the American economy.
Oaken declared that the business cycle was dead, that there was no longer even a need
to do research on business cycles anymore.
That was a thing of the past and that we had a new system and that the death of the business
The cycle was proof par excellence that economic controversies can be solved and of course
Okun himself believed that these were in favor of the Keynesian economic approach and against
the old fiscal religion as he called it of limiting the size of government and keeping
the budget in balance.
So he was the manipulator, the Keynesian manipulator and he actually believed that he was in control
of the Economy, and that without him, and he said this, the economy would be just to
be flying blind.
So he was the one with the eyes looking forward.
Well he published this book, okay, and it came out, and then the next month, after he
had been predicting perpetual prosperity, and the next month a recession started.
unemployment increased from below 4% to over 6% very quickly by the end of 1970. Then the
rate retreated to 5% in 1973, only to skyrocket to 9% by mid-1975, the highest unemployment
rate since the Great Depression. And of course we had persistence high rates of unemployment
and Higher Price Inflation, triple the rate experienced by consumers in the previous period.
Now, while Oaken, Arthur Oaken, was writing about this limitless, unending prosperity
of Keynesian economics, Murray Rothbard was writing a little pamphlet called Economic
Depressions, Causes and Cures, and Henry Hazlitt was writing a series of articles throughout
about the late 1960s on the fallacy of the new economics of Keynes, both with full recognition
of troubled times ahead.
Now, as we come to the 1990s and then the bust of 2000, and we look back to the 1990s,
what do we find?
Well, someone who worked for the Federal Reserve System, the Reagan Administration, and several
National Wall Street Investment Firms, Larry Kudlow, was the big promoter of the boom of
the 1990s, quote, on the eve of the 21st century of the United States, it finds itself in a
long wave of prosperity that began 15 years ago and could conceivably continue without
Without serious interruption until the year 2020 or 2030, stock prices are higher, economic
growth is faster, both inflation and unemployment are lower, technological change is more pervasive,
the dollar is stronger, social conditions are more hopeful, the public spirit is more
confident and the nation's future is brighter than anyone thought possible 15 or 20 years
The Theory of Money and Credit
Decreasing Turns on which Economic Analysis Rests.
What did others have to say about the bubble?
Well, when we look at Wall Street Economists, the Wall Street Journal does a survey every
six months of Wall Street Economists.
In January of 1999, this group was bearish on the economy.
They were concerned about lower economic growth and higher inflation.
What came about in reality?
The economy was hotter than it had ever been, and the stock market skyrocketed during the
following period.
In July of 1999, the group of Wall Street economists raised its forecast for gross domestic
product for the next year by 50% so they increase the rate of economic growth by 50% for the
following year. What came to pass? They were wrong. In January of 2000, they were bullish.
They were outright euphoric about the economy and the stock market. They quote, saw no end
in sight. The reality? The end was right around the corner. The stock market, of course, began
correcting in March of the year 2000. In July of 2000, while the market had declined, it soon fixed
the situation. The reality? Well, the market continued to decline and continues, in some sense,
to decline to today, and the economy went into recession. So in all four periods, in the two
In the two years that I covered the survey, this group of economists missed the reality of the situation by a wide and consistent mark.
When we look at government economists and the survey of their predictions about the economy, we find similar results.
During the period of 1992 to 1996, the economy was basically on trend economic growth.
and the group of government economists basically got the trend right.
So for that period, the economy was moving steadily upwards and their predictions were pretty correct.
From 1996 to the year 2000, the economy was booming and they underestimated economic growth.
In other words, they continued to predict the trend and the economy turned into a boom.
and then over the period 2000 to 2002 the economy was in a recession and they
overestimated economic growth. As a matter of fact their predictions were
off by in terms of economic growth rates by 20%. Well needless to say there the
Wall Street Economist and lots of books about the economy during this period
You've got it all wrong. You may remember there was a book called Dow 36,000, there was a book called Dow 40,000, and finally there was a book called Dow 100,000.
What about the Austrians? Well, Christopher Maier predicted the bubble and its collapse in an article published in March of the year 2000.
Tony Deaton identified the bubble in September of 1998 and predicted it would soon crash in December of 1999.
Guido Holstmann wrote about the bubble and its inevitable crash in August of 1999.
Frank Shostak predicted and identified the bubble in 1999.
And while the whole world continued to be ecstatic about the economy, Frank said,
George Reisman said, quote, there is very little reason for being optimistic in the current economic climate.
Of course, in the fall of 1999, the current economic climate was euphoric.
George Reisman wrote in August of 1999 that there was clearly something wrong and that, quote, it was inescapable that the bull market must end.
Sean Corrigan likewise in October of 1999 predicted that quote, a raft of entrepreneurial
errors lies ahead and Lew Rockwell wrote in November of 1999 of a coming collapse in the
stock market and Hans Senholtz identified the bubble in early 2000 as did William Anderson.
Some of our non-Austrian friends also made similar correct predictions and only Robert
Mark Schiller was the only major mainstream economist to make a correct and timely prediction.
And he, like many value-oriented investment analysis, simply saw the market as overvalued
according to historic guidelines and provided no analysis of what was causing it or what
would cure it like the Austrians did.
So I'm running out of time here, but just to summarize, I mean, I would basically say
The Austrian's got a firm handle on the stock market bubble of the late 1990s and the crash of 2000 and subsequent events.
And as we go back in time, we see that the same thing held true during the 1920s.
The mainstream economists were far off the mark.
The Austrian's not only made a prediction but identified its cause and its cure.
The same thing happens during the 1960s.
The Austrians identify the problem, whereas the mainstream economists see no problem lying ahead, and ultimately what we fell into in the 1930s, the 1970s, and in the 2000s, some of the most troubled economic times of the past 100 years.
So I think in terms of what can we learn from these gorillas, well the gorillas known as the Austrian economist, I think we can learn the answer to one of the most puzzling economic phenomenons, the business cycle, and one of the most important sets of economic events of the century. Thank you very much.