WEBVTT

NOTE What We Can Learn From Real Guerrillas

1
00:00:00.000 --> 00:00:08.000
I will be speaking in the first slot here this morning on the topic, what can we learn from real gorillas?

2
00:00:08.000 --> 00:00:19.000
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.

3
00:00:19.000 --> 00:00:28.000
The one thing that I'm going to hit on today is that you can learn a great deal about what causes business cycles,

4
00:00:28.000 --> 00:00:58.000
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.

5
00:00:58.000 --> 00:01:11.000
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.

6
00:01:11.000 --> 00:01:22.000
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.

7
00:01:22.000 --> 00:01:28.000
I also liked the Austrians on the Socialist Calculation Debate and the MacTowden strike.

8
00:01:28.000 --> 00:01:34.000
And so when I went back to school in the fall, I decided to take a course on business cycles

9
00:01:34.000 --> 00:01:38.000
and another course on the history of economic thought,

10
00:01:38.000 --> 00:01:44.000
only to find out that the Austrians were not even mentioned in either course.

11
00:01:44.000 --> 00:01:49.000
The next semester I even took a course on the Russian economy,

12
00:01:49.000 --> 00:01:52.440
fully expecting at least a mention of the Austrian economist, but over the

13
00:01:52.440 --> 00:01:54.560
entire course there was not

14
00:01:54.560 --> 00:01:57.240
even one hint of the

15
00:01:57.240 --> 00:01:58.280
looming

16
00:01:58.280 --> 00:02:00.240
economic vulnerability

17
00:02:00.240 --> 00:02:02.360
of the Soviet Union.

18
00:02:02.360 --> 00:02:04.640
My teacher in that course would regularly,

19
00:02:04.640 --> 00:02:08.120
every week on Monday, we would get a mimeograph

20
00:02:08.120 --> 00:02:09.460
piece of paper

21
00:02:09.460 --> 00:02:10.540
with a chart

22
00:02:10.540 --> 00:02:12.960
or a table or a graph,

23
00:02:12.960 --> 00:02:15.720
usually from a magazine like Newsweek,

24
00:02:15.720 --> 00:02:21.160
U.S. News and World Report, Time Magazine, and it would have a little graph on there

25
00:02:21.160 --> 00:02:26.320
or a little table and it would show the number of tanks that the Soviet Union had versus

26
00:02:26.320 --> 00:02:31.040
the U.S. and then the next week it would be the number of nuclear missiles that the U.S.

27
00:02:31.040 --> 00:02:36.560
had versus the U.S. and then the number of soldiers and this went on and on throughout

28
00:02:36.560 --> 00:02:41.400
the entire course and every week it was the Soviet Union had more of everything than we

29
00:02:41.400 --> 00:02:49.200
We did. He never ever discussed these charts or tables in class. I just assumed that he

30
00:02:49.200 --> 00:02:57.240
was trying to grind us down and convince us that we were doomed and just to accept communism.

31
00:02:57.240 --> 00:03:03.500
Undeterred, I did go to graduate school in economics and during my first year in graduate

32
00:03:03.500 --> 00:03:09.960
school I was sorely disappointed to learn from one of my major professors that the Austrian

33
00:03:09.960 --> 00:03:17.440
Austrian Theory of the Business Cycle was, quote, an embarrassing, a grisly embarrassment.

34
00:03:17.440 --> 00:03:22.760
Another warned me that Austrian Capital Theory was the black hole of economic research because

35
00:03:22.760 --> 00:03:30.040
no matter how much time and effort you put into it, nothing would ever come out.

36
00:03:30.040 --> 00:03:36.180
I learned during my first year in graduate studies that there were probably only two

37
00:03:36.180 --> 00:03:43.180
two dozen Austrian economists in the entire world, most of whom were either nearing retirement

38
00:03:44.460 --> 00:03:51.460
or in marginal academic positions. The situation, as I saw it, between the mainstream economists

39
00:03:51.700 --> 00:03:58.700
and the Austrian School made the Alamo look like a fair fight. And then miraculously in

40
00:03:58.700 --> 00:04:06.100
and then miraculously in my second year the Mises Institute was formed and it

41
00:04:06.100 --> 00:04:13.700
showed up in Auburn, Alabama where I was located at the University that I was at

42
00:04:13.700 --> 00:04:20.020
in the same building that I was at right down the hall from me and I was you know

43
00:04:20.020 --> 00:04:25.840
that was a miracle how lucky can one get and then ten years later the Austrian

44
00:04:25.840 --> 00:04:55.840
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

45
00:04:55.840 --> 00:05:22.840
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.

46
00:05:22.840 --> 00:05:33.160
It seems that Austrians have gone from being ignored and harshly disparaged to being acknowledged

47
00:05:33.160 --> 00:05:35.080
and dismissed.

48
00:05:35.080 --> 00:05:44.400
In a guerrilla war, this is the first sign of victory.

49
00:05:44.400 --> 00:05:50.160
I decided to take up Rosen's challenge, do the Austrians pass the market test on the

50
00:05:50.160 --> 00:06:20.160
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

51
00:06:20.160 --> 00:06:50.160
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,

52
00:06:50.160 --> 00:06:54.360
was one of the most prominent economists during this period and is still

53
00:06:54.360 --> 00:06:59.560
considered by mainstream economists to be one of the greatest American economists

54
00:06:59.560 --> 00:07:07.160
of all time. On the eve of the great stock market crash in 1929, on September

55
00:07:07.160 --> 00:07:13.400
5th, Fisher reassured investors that he foresaw no problem in the stock market.

56
00:07:13.400 --> 00:07:20.140
Quote, there may be a recession in stock prices but nothing in the nature of a

57
00:07:20.140 --> 00:07:27.260
Dividend returns on stocks are moving higher. This is not due to receding prices for stocks

58
00:07:27.260 --> 00:07:33.220
and will not be hastened by any anticipated crash, the possibility of which I fail to

59
00:07:33.220 --> 00:07:39.020
see. A few years ago, people were much afraid of common stocks as they were of a red-hot

60
00:07:39.020 --> 00:07:46.080
poker. In the popular mind, there was a tremendous risk in common stocks. Why? Mainly because

61
00:07:46.080 --> 00:07:50.280
Because the average investor could afford to invest in only one common stock, today he

62
00:07:50.280 --> 00:07:55.680
obtains wide and well-managed diversification of stock holdings by purchasing shares in

63
00:07:55.680 --> 00:07:57.960
good investment trusts.

64
00:07:57.960 --> 00:08:05.000
Well, unfortunately, while Fisher continued to preach throughout October of 1929 that

65
00:08:05.000 --> 00:08:10.720
stocks had reached a, quote, permanent high plateau, unquote, stocks lost one-third of

66
00:08:10.720 --> 00:08:12.760
their value.

67
00:08:12.760 --> 00:08:19.140
Trust, which he thought was so great, fell by 95% over the two years from his prediction

68
00:08:19.140 --> 00:08:24.720
and the Dow Jones Industrial Average lost 90% of its peak value.

69
00:08:24.720 --> 00:08:31.120
So was the Great Depression, was the stock market bubble and bust predictable?

70
00:08:31.120 --> 00:08:36.580
Well Ludwig von Mises saw the problem developing in its early stages and he told his colleagues

71
00:08:36.580 --> 00:08:48.660
In addition, and probably more importantly, he wrote a full book-length treatment on Fischer's

72
00:08:48.660 --> 00:08:57.620
monetary plan, the bubble of the 1920s, exactly what was causing it, and predicting the inevitable

73
00:08:57.620 --> 00:09:00.420
bust.

74
00:09:00.420 --> 00:09:06.260
He concluded, because of the imperfections of the index number of Fischer, these calculations

75
00:09:06.260 --> 00:09:13.460
would necessarily lead in time to errors of very considerable proportions. Further, it

76
00:09:13.460 --> 00:09:21.900
is clear that the crisis must come sooner or later, and that's Mises writing in 1928.

77
00:09:21.900 --> 00:09:31.300
He also went on to say that basically in order to solve the problem you have to do away with

78
00:09:31.300 --> 00:09:38.700
Fisher System, and the trade cycle that it generates. Mises' student, F. A. Hayek, published

79
00:09:38.700 --> 00:09:47.580
several articles in 1929 predicting the collapse of the American boom. So the Austrians had

80
00:09:47.580 --> 00:09:53.300
the correct predictions while the mainstream economists were totally off the mark. As we

81
00:09:53.300 --> 00:10:00.260
move to the boom of the 1960s and the bust of the 1970s, we find a prominent academic

82
00:10:00.260 --> 00:10:04.900
The American economist named Arthur Oaken, who was a prominent member of President Johnson's

83
00:10:04.900 --> 00:10:07.300
Council of Economic Advisers.

84
00:10:07.300 --> 00:10:13.940
Right before the crash, he described the economic expansion as, quote, unparalleled, unprecedented

85
00:10:13.940 --> 00:10:15.740
and uninterrupted.

86
00:10:15.740 --> 00:10:20.820
He believed that the economy was on a new, dramatic departure from the past.

87
00:10:20.820 --> 00:10:25.580
Quote, the persistence of prosperity has been the outstanding fact of the American economic

88
00:10:25.580 --> 00:10:28.200
history of the 1960s.

89
00:10:28.200 --> 00:10:33.760
The absence of recession for nearly nine years marks a discreet and dramatic departure from

90
00:10:33.760 --> 00:10:37.240
the traditional performance of the American economy.

91
00:10:37.240 --> 00:10:43.280
Oaken declared that the business cycle was dead, that there was no longer even a need

92
00:10:43.280 --> 00:10:47.200
to do research on business cycles anymore.

93
00:10:47.200 --> 00:10:51.760
That was a thing of the past and that we had a new system and that the death of the business

94
00:10:51.760 --> 00:10:57.960
The cycle was proof par excellence that economic controversies can be solved and of course

95
00:10:57.960 --> 00:11:04.520
Okun himself believed that these were in favor of the Keynesian economic approach and against

96
00:11:04.520 --> 00:11:09.520
the old fiscal religion as he called it of limiting the size of government and keeping

97
00:11:09.520 --> 00:11:11.240
the budget in balance.

98
00:11:11.240 --> 00:11:18.240
So he was the manipulator, the Keynesian manipulator and he actually believed that he was in control

99
00:11:18.240 --> 00:11:24.120
of the Economy, and that without him, and he said this, the economy would be just to

100
00:11:24.120 --> 00:11:28.120
be flying blind.

101
00:11:28.120 --> 00:11:30.760
So he was the one with the eyes looking forward.

102
00:11:30.760 --> 00:11:37.280
Well he published this book, okay, and it came out, and then the next month, after he

103
00:11:37.280 --> 00:11:42.800
had been predicting perpetual prosperity, and the next month a recession started.

104
00:11:42.800 --> 00:11:51.080
unemployment increased from below 4% to over 6% very quickly by the end of 1970. Then the

105
00:11:51.080 --> 00:11:58.920
rate retreated to 5% in 1973, only to skyrocket to 9% by mid-1975, the highest unemployment

106
00:11:58.920 --> 00:12:05.840
rate since the Great Depression. And of course we had persistence high rates of unemployment

107
00:12:05.840 --> 00:12:12.800
and Higher Price Inflation, triple the rate experienced by consumers in the previous period.

108
00:12:12.800 --> 00:12:18.920
Now, while Oaken, Arthur Oaken, was writing about this limitless, unending prosperity

109
00:12:18.920 --> 00:12:25.000
of Keynesian economics, Murray Rothbard was writing a little pamphlet called Economic

110
00:12:25.000 --> 00:12:32.080
Depressions, Causes and Cures, and Henry Hazlitt was writing a series of articles throughout

111
00:12:32.080 --> 00:12:40.080
about the late 1960s on the fallacy of the new economics of Keynes, both with full recognition

112
00:12:40.080 --> 00:12:42.800
of troubled times ahead.

113
00:12:42.800 --> 00:12:53.560
Now, as we come to the 1990s and then the bust of 2000, and we look back to the 1990s,

114
00:12:53.560 --> 00:12:55.600
what do we find?

115
00:12:55.600 --> 00:13:01.760
Well, someone who worked for the Federal Reserve System, the Reagan Administration, and several

116
00:13:01.760 --> 00:13:10.680
National Wall Street Investment Firms, Larry Kudlow, was the big promoter of the boom of

117
00:13:10.680 --> 00:13:18.480
the 1990s, quote, on the eve of the 21st century of the United States, it finds itself in a

118
00:13:18.480 --> 00:13:24.880
long wave of prosperity that began 15 years ago and could conceivably continue without

119
00:13:24.880 --> 00:13:33.680
Without serious interruption until the year 2020 or 2030, stock prices are higher, economic

120
00:13:33.680 --> 00:13:39.480
growth is faster, both inflation and unemployment are lower, technological change is more pervasive,

121
00:13:39.480 --> 00:13:44.520
the dollar is stronger, social conditions are more hopeful, the public spirit is more

122
00:13:44.520 --> 00:13:50.320
confident and the nation's future is brighter than anyone thought possible 15 or 20 years

123
00:13:50.320 --> 00:14:20.320
The Theory of Money and Credit

124
00:14:20.320 --> 00:14:28.960
Decreasing Turns on which Economic Analysis Rests.

125
00:14:28.960 --> 00:14:31.280
What did others have to say about the bubble?

126
00:14:31.280 --> 00:14:35.600
Well, when we look at Wall Street Economists, the Wall Street Journal does a survey every

127
00:14:35.600 --> 00:14:38.960
six months of Wall Street Economists.

128
00:14:38.960 --> 00:14:46.920
In January of 1999, this group was bearish on the economy.

129
00:14:46.920 --> 00:14:52.640
They were concerned about lower economic growth and higher inflation.

130
00:14:52.640 --> 00:14:54.820
What came about in reality?

131
00:14:54.820 --> 00:15:01.060
The economy was hotter than it had ever been, and the stock market skyrocketed during the

132
00:15:01.060 --> 00:15:03.820
following period.

133
00:15:03.820 --> 00:15:10.820
In July of 1999, the group of Wall Street economists raised its forecast for gross domestic

134
00:15:10.820 --> 00:15:18.980
product for the next year by 50% so they increase the rate of economic growth by 50% for the

135
00:15:18.980 --> 00:15:30.140
following year. What came to pass? They were wrong. In January of 2000, they were bullish.

136
00:15:30.140 --> 00:15:35.960
They were outright euphoric about the economy and the stock market. They quote, saw no end

137
00:15:35.960 --> 00:15:43.320
in sight. The reality? The end was right around the corner. The stock market, of course, began

138
00:15:43.320 --> 00:15:51.160
correcting in March of the year 2000. In July of 2000, while the market had declined, it soon fixed

139
00:15:51.160 --> 00:15:58.680
the situation. The reality? Well, the market continued to decline and continues, in some sense,

140
00:15:58.680 --> 00:16:04.440
to decline to today, and the economy went into recession. So in all four periods, in the two

141
00:16:04.440 --> 00:16:15.440
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.

142
00:16:15.440 --> 00:16:24.440
When we look at government economists and the survey of their predictions about the economy, we find similar results.

143
00:16:24.440 --> 00:16:33.440
During the period of 1992 to 1996, the economy was basically on trend economic growth.

144
00:16:33.440 --> 00:16:38.940
and the group of government economists basically got the trend right.

145
00:16:38.940 --> 00:16:45.940
So for that period, the economy was moving steadily upwards and their predictions were pretty correct.

146
00:16:45.940 --> 00:16:54.440
From 1996 to the year 2000, the economy was booming and they underestimated economic growth.

147
00:16:54.440 --> 00:16:59.940
In other words, they continued to predict the trend and the economy turned into a boom.

148
00:16:59.940 --> 00:17:06.560
and then over the period 2000 to 2002 the economy was in a recession and they

149
00:17:06.560 --> 00:17:10.580
overestimated economic growth. As a matter of fact their predictions were

150
00:17:10.580 --> 00:17:18.700
off by in terms of economic growth rates by 20%. Well needless to say there the

151
00:17:18.700 --> 00:17:22.820
Wall Street Economist and lots of books about the economy during this period

152
00:17:22.820 --> 00:17:38.820
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.

153
00:17:38.820 --> 00:17:47.820
What about the Austrians? Well, Christopher Maier predicted the bubble and its collapse in an article published in March of the year 2000.

154
00:17:47.820 --> 00:17:55.820
Tony Deaton identified the bubble in September of 1998 and predicted it would soon crash in December of 1999.

155
00:17:55.820 --> 00:18:02.820
Guido Holstmann wrote about the bubble and its inevitable crash in August of 1999.

156
00:18:02.820 --> 00:18:07.820
Frank Shostak predicted and identified the bubble in 1999.

157
00:18:07.820 --> 00:18:12.820
And while the whole world continued to be ecstatic about the economy, Frank said,

158
00:18:12.820 --> 00:18:19.820
George Reisman said, quote, there is very little reason for being optimistic in the current economic climate.

159
00:18:19.820 --> 00:18:25.820
Of course, in the fall of 1999, the current economic climate was euphoric.

160
00:18:25.820 --> 00:18:35.820
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.

161
00:18:35.820 --> 00:18:43.220
Sean Corrigan likewise in October of 1999 predicted that quote, a raft of entrepreneurial

162
00:18:43.220 --> 00:18:49.340
errors lies ahead and Lew Rockwell wrote in November of 1999 of a coming collapse in the

163
00:18:49.340 --> 00:18:58.120
stock market and Hans Senholtz identified the bubble in early 2000 as did William Anderson.

164
00:18:58.120 --> 00:19:03.900
Some of our non-Austrian friends also made similar correct predictions and only Robert

165
00:19:03.900 --> 00:19:12.680
Mark Schiller was the only major mainstream economist to make a correct and timely prediction.

166
00:19:12.680 --> 00:19:18.100
And he, like many value-oriented investment analysis, simply saw the market as overvalued

167
00:19:18.100 --> 00:19:23.300
according to historic guidelines and provided no analysis of what was causing it or what

168
00:19:23.300 --> 00:19:27.060
would cure it like the Austrians did.

169
00:19:27.060 --> 00:19:32.640
So I'm running out of time here, but just to summarize, I mean, I would basically say

170
00:19:32.640 --> 00:19:42.640
The Austrian's got a firm handle on the stock market bubble of the late 1990s and the crash of 2000 and subsequent events.

171
00:19:42.640 --> 00:19:48.640
And as we go back in time, we see that the same thing held true during the 1920s.

172
00:19:48.640 --> 00:19:51.640
The mainstream economists were far off the mark.

173
00:19:51.640 --> 00:19:57.640
The Austrian's not only made a prediction but identified its cause and its cure.

174
00:19:57.640 --> 00:20:00.640
The same thing happens during the 1960s.

175
00:20:00.640 --> 00:20:17.640
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.

176
00:20:17.640 --> 00:20:35.640
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.