WEBVTT NOTE Chapter 1: The Marvel That Is Capitalism 1 00:00:00.000 --> 00:00:05.120 The Marvel that is Capitalism. This speech was given before the Adam Smith Club, Campbell 2 00:00:05.120 --> 00:00:11.440 University, Boys Creek, North Carolina, on April 4, 2002. 3 00:00:11.440 --> 00:00:16.000 Free market economics, of which the Austrian School is the preeminent exponent, asserts 4 00:00:16.000 --> 00:00:20.680 that every government intervention in the market generates consequences that are deleterious 5 00:00:20.680 --> 00:00:26.300 for prosperity and human liberty. However much such interventions may assist one group 6 00:00:26.300 --> 00:00:32.540 in the short one, everyone is made worst off in the long run. Government intervention destabilizes 7 00:00:32.540 --> 00:00:37.620 economic life in artificial ways and ultimately does not work to bring about the results that 8 00:00:37.620 --> 00:00:43.860 its proponents claim to desire. Carl Menger, the founder of the Austrian School of Economics, 9 00:00:43.860 --> 00:00:48.940 was a firm believer in the law of cause and effect. He believed that economic affairs 10 00:00:48.940 --> 00:00:54.420 could be analyzed in these terms as well. Menger's followers in this tradition of thought, 11 00:00:54.420 --> 00:00:58.160 including Ludwig von Mises and Murray and Rothbard, spelled out the implication of this 12 00:00:58.160 --> 00:01:03.420 idea for a huge range of issues that confront us on a daily basis in the world of economics 13 00:01:03.420 --> 00:01:05.180 and politics. 14 00:01:05.180 --> 00:01:09.980 They focused on universal principles that can be derived from the teaching of economics. 15 00:01:09.980 --> 00:01:15.920 The law of supply and demand, for example, cannot be repealed by any legislature or court. 16 00:01:15.920 --> 00:01:20.620 Government regulators can impose price ceilings, price floors, or limits to the size of firms 17 00:01:20.620 --> 00:01:33.680 It is important that we think of economic life as an intricate global system of exchange, 18 00:01:33.680 --> 00:01:37.940 one that works without any central direction and which generates prosperity in its own 19 00:01:37.940 --> 00:01:41.380 form of order within the framework of liberty. 20 00:01:41.380 --> 00:01:45.740 This is what is sometimes termed the magic of the marketplace, and we should never underestimate 21 00:01:45.740 --> 00:01:46.740 its power. 22 00:01:46.740 --> 00:01:51.660 By looking south to Argentina we can see how a failing economy, when thrown into shock 23 00:01:51.660 --> 00:01:58.620 by bad legislation and monetary policy, has destroyed the livelihoods of the entire population. 24 00:01:58.620 --> 00:02:02.420 We are not just talking about the earnings in people's stock portfolios. 25 00:02:02.420 --> 00:02:06.420 We're talking about whether mothers can afford to buy milk for their children and whether 26 00:02:06.420 --> 00:02:10.460 the businesses that deliver milk have the freedom to be entrepreneurial and find the 27 00:02:10.460 --> 00:02:13.620 least costly methods to make such deliveries possible. 28 00:02:13.620 --> 00:02:18.920 When we speak of economics, we're talking about the health of society, and whether medical 29 00:02:18.920 --> 00:02:23.620 equipment is working and affordable, and whether the labor market is sufficiently free to permit 30 00:02:23.620 --> 00:02:27.820 everyone a place within the division of labor. 31 00:02:27.820 --> 00:02:31.620 People who dismiss the teachings of economics forget that many of the world's wars and 32 00:02:31.620 --> 00:02:35.620 ethnic slaughters began with economic intervention. 33 00:02:35.620 --> 00:02:40.140 Before ethnic warfare broke out in Yugoslavia in the 1990s, the country was afflicted by 34 00:02:40.140 --> 00:02:45.140 by one of the most extreme hyperinflations in the history of the world. This literally 35 00:02:45.140 --> 00:02:50.020 destroyed the standard of living and helped turn a previously settled society into a killing 36 00:02:50.020 --> 00:02:53.820 field. If we look back at history, we can see that 37 00:02:53.820 --> 00:02:58.920 many wars began in trade disputes when governments attempted to reward some producers at the 38 00:02:58.920 --> 00:03:05.100 expense of others. This was the origin of the Civil War, for example. Even in our own 39 00:03:05.100 --> 00:03:09.940 times, the perception in the Muslim world that US-UN sanctions against Iraq have slaughtered 40 00:03:09.940 --> 00:03:20.320 The General Lesson we can draw is that economics is really just a fancy word for the quality 41 00:03:20.320 --> 00:03:25.000 of our lives, and that the quality of our lives has no greater enemy than the governments 42 00:03:25.000 --> 00:03:30.560 that attempt to restrict economic liberty. Looking at people's lifespans, we see the 43 00:03:30.560 --> 00:03:36.100 hidden history of the rise of economic development. Throughout the first huge period of human 44 00:03:36.100 --> 00:04:06.100 The Standard of Living for the average person throughout all but the smallest slice of human history can be aptly seen as the standard of living for the average person throughout all but the smallest slice of human history can be aptly seen as the standard of living 45 00:04:06.100 --> 00:04:18.100 At nature's mighty feast, there is no vacant cover for him. She tells him to be gone and will quickly execute her own orders. 46 00:04:18.100 --> 00:04:24.100 That was life as everyone but kings knew it after the fall and before the Industrial Revolution. 47 00:04:24.100 --> 00:04:33.100 But in the last tiny fragment of the history of the world, lifespans have more than doubled and the world's population has increased 1,000 times. 48 00:04:33.100 --> 00:05:03.100 by far the largest improvements in these vital statistics have occurred since 1800, at a time when the division of labor expanded dramatically around the world, when property rights were secure, when capital could be accumulated, invested, and a return paid and reinvested, when technological improvements permitted new forms of productivity. What made this possible was the free market. We take for granted such luxuries as refrigeration, the air conditioner, the internal combustion engine, and electricity 49 00:05:03.100 --> 00:05:08.580 to say nothing of email, the web and fiber optics, but we rarely reflect on the fact 50 00:05:08.580 --> 00:05:13.900 that all of these technologies so integral to our lives were absent when our great-great-grandfathers 51 00:05:13.900 --> 00:05:18.860 were alive, along with every previous generation in the history of the world. 52 00:05:18.860 --> 00:05:23.380 What set this revolution in motion was the world of ideas, when great thinkers began 53 00:05:23.380 --> 00:05:28.580 to understand the internal logic of the market economy and its potential for liberating mankind 54 00:05:28.580 --> 00:05:32.780 from poverty, dependency and despotic rule. 55 00:05:32.780 --> 00:05:36.500 Given this history meant one might think that everyone would sit and marvel at the products 56 00:05:36.500 --> 00:05:41.040 of capitalism. We might think that intellectuals would dedicate their lives to defending this 57 00:05:41.040 --> 00:05:45.640 system and explaining its merits. We might imagine that statesmen would dedicate themselves 58 00:05:45.640 --> 00:05:52.780 to protecting the system of economic progress from every attempt to curb or abolish it. Alas, 59 00:05:52.780 --> 00:05:57.980 that is not true. Quite the opposite. The intellectual world often appears to be a conspiracy 60 00:05:57.980 --> 00:06:03.860 against Market Economics, and the media routinely ridicule capitalism. Statesmen spend every 61 00:06:03.860 --> 00:06:10.380 waking minute trying to curb, regulate, hamper or otherwise loot the capitalist system. Those 62 00:06:10.380 --> 00:06:14.440 who attacked the World Trade Center were driven by revenge, but also by a belief that the 63 00:06:14.440 --> 00:06:19.540 towering products of the commercial society semi-represented evil that must be destroyed 64 00:06:19.540 --> 00:06:24.380 rather than a virtue that should be emulated. They were merely absorbing a view that is 65 00:06:24.380 --> 00:06:30.500 is pervasive in our culture today, where the anti-capitalist mentality runs rampant. In 66 00:06:30.500 --> 00:06:35.300 our own times we've seen the evil produced by this mentality, in the former Soviet Union 67 00:06:35.300 --> 00:06:40.340 and in many third world countries, where politicians do everything possible to keep the entrepreneurial 68 00:06:40.340 --> 00:06:45.040 spirit penned up, where property rights are not secure and where investment for the long 69 00:06:45.040 --> 00:06:52.040 term is not permitted. The result is always the same. Poverty, despotism, death. 70 00:06:52.040 --> 00:06:57.720 As founder and president of the Mises Institute, I have a special attachment to the ideas of 71 00:06:57.720 --> 00:07:03.040 Mises and to the courageous life he lived in defense of the idea of freedom. 72 00:07:03.040 --> 00:07:06.960 He began his career in Vienna, writing about the problems of the business cycle and the 73 00:07:06.960 --> 00:07:10.280 role of money and credit in fostering it. 74 00:07:10.280 --> 00:07:15.660 The core point he made in his great 1912 book, The Theory of Money and Credit, was that artificial 75 00:07:15.660 --> 00:07:20.120 increases in the money supply are not a substitute for real economic production. 76 00:07:20.120 --> 00:07:24.800 Indeed, such increases cause economic damage that can only be rectified through painful 77 00:07:24.800 --> 00:07:31.360 economic contractions. His point has continuing relevance. His next book from 1919 sought 78 00:07:31.360 --> 00:07:35.640 to defend the idea that governments ought to be small and geographically limited for 79 00:07:35.640 --> 00:07:41.440 the sake of social peace. Next, in 1920 and 1922, he proved that socialism could not work 80 00:07:41.440 --> 00:07:46.040 as an economic system because it abolished property rights and capital and thus destroyed 81 00:07:46.040 --> 00:07:51.780 the system of profit and loss that allows for economic calculation. His methodological 82 00:07:51.780 --> 00:07:56.040 and business cycle writings from the 1930s are some of the most profound in the history 83 00:07:56.040 --> 00:08:01.760 of the social sciences. Finally, in 1940 and 1949, he produced what is quite possibly the 84 00:08:01.760 --> 00:08:07.600 finest product of any economist in history, his monumental treatise called Human Action. 85 00:08:07.600 --> 00:08:13.280 Incidentally, he wrote most of his treatise while in Geneva in exile from his native Austria. 86 00:08:13.280 --> 00:08:17.220 The invading German armies deemed his work dangerous. They entered Mises's apartment 87 00:08:17.220 --> 00:08:22.720 and looted his files and papers. Mises, you see, was against socialism, whether Bolshevik 88 00:08:22.720 --> 00:08:27.720 or Nazi. Reflect on that and you begin to understand the absurdity of calling communism 89 00:08:27.720 --> 00:08:33.600 leftist and Naziism rightist as if they were polar opposites. They are both varieties of 90 00:08:33.600 --> 00:08:36.840 the very opposite of freedom itself. 91 00:08:36.840 --> 00:08:40.400 If I were to give all college students a reading assignment today, I would recommend Human 92 00:08:40.400 --> 00:08:46.320 and action above all else. Yet at nearly 1,000 pages it can be intimidating and you will 93 00:08:46.320 --> 00:08:50.800 probably need to read it with a dictionary nearby, but it will open up new vistas of 94 00:08:50.800 --> 00:08:55.760 thought for you and help you to rise above conventional wisdom. I continue to believe 95 00:08:55.760 --> 00:09:00.640 that this book points the way for us to bring about rising and sustainable prosperity and 96 00:09:00.640 --> 00:09:06.480 also to guard civilization against its enemies. The headlines of the business pages have been 97 00:09:06.480 --> 00:09:11.720 And trumpeting the arrival of recovery from March 2001 until the present. So far the entire 98 00:09:11.720 --> 00:09:17.360 length of the downturn. How do the experts decide when recession has turned to recovery? 99 00:09:17.360 --> 00:09:23.360 By looking at the data, which come in packages labeled in various ways. The GDP, the leading 100 00:09:23.360 --> 00:09:29.080 indicators, the unemployment rate, industrial production, housing starts, commercial borrowings, 101 00:09:29.080 --> 00:09:34.040 office vacancy rates and a host of other considerations. If these tend in the negative direction, we 102 00:09:34.040 --> 00:09:45.880 Let's grant first that the larger the data set, the more subject to manipulation it is. 103 00:09:45.880 --> 00:09:50.080 We can count housing starts, but measuring something like national productivity is very 104 00:09:50.080 --> 00:09:55.120 tricky business. The great scandal of the way the gross domestic product is collected 105 00:09:55.120 --> 00:09:58.920 is that it does not measure wealth destruction as caused by something like the attacks on 106 00:09:58.920 --> 00:10:04.360 September 11th or the 40% of private wealth consumed by government at every level all years. 107 00:10:05.480 --> 00:10:09.960 Neither does it make a distinction between private production and outright government spending. 108 00:10:10.760 --> 00:10:15.960 Because of this, looking at that data alone, without a proper theory of economics, can produce 109 00:10:15.960 --> 00:10:21.880 a highly misleading picture. For many months, the government has engaged in a serious effort 110 00:10:21.880 --> 00:10:25.800 to bring us out of recession through a variety of fiscal and monetary policies. 111 00:10:25.800 --> 00:10:30.800 If recovery is really here, can we say that these policies have worked? 112 00:10:30.800 --> 00:10:37.800 Not necessarily, because we must establish a firm relationship between cause and effect to draw such a conclusion. 113 00:10:37.800 --> 00:10:40.800 The economy might have recovered without such stimulus efforts. 114 00:10:40.800 --> 00:10:46.800 In fact, such stimulus efforts might make the recovery weaker than it otherwise might be. 115 00:10:46.800 --> 00:10:51.800 A more serious possibility is that the stimulus efforts have actually created an illusion. 116 00:10:51.800 --> 00:11:05.800 While everyone is celebrating the unexpected economic recovery, which is also unexpectedly robust, it serves us to look beneath the surface. There are aspects of this recovery that are highly unstable because they were brought about through artificial means. 117 00:11:05.800 --> 00:11:13.800 There are also certain policy trends which suggest that it might not last or that it will not be as robust as it might otherwise be. 118 00:11:13.800 --> 00:11:18.760 The Congressional Budget Office points out that new government spending has surpassed 119 00:11:18.760 --> 00:11:25.440 the amounts envisioned by the stimulus measures proposed in 2001 and 2002, exceeding what 120 00:11:25.440 --> 00:11:31.680 even the most spendthrift lawmakers dare demand. The spending surge, along with consumer debt, 121 00:11:31.680 --> 00:11:36.880 helps to explain why the recession seemed mild and why everyone is talking about recovery. 122 00:11:36.880 --> 00:11:41.240 A major increase in government spending, which has very quickly redirected $100 billion into 123 00:11:41.240 --> 00:11:48.240 to the Economy, began in October 2001. Outlays went up over 2001's increases by 13.1%. In 124 00:11:50.160 --> 00:11:55.680 terms of GDP, it accounts for fully 1%. As for consumer spending, it is financed almost 125 00:11:55.680 --> 00:12:01.960 entirely by new borrowing fueled by artificially low interest rates. Looking even deeper, we 126 00:12:01.960 --> 00:12:06.320 can see that Federal Reserve policy has been astonishingly loose since the beginning of 127 00:12:06.320 --> 00:12:13.200 2001. Reaching as high as 20% per annum by some measures. Let's say I set out to stimulate 128 00:12:13.200 --> 00:12:18.200 economic production in a college classroom. We could all gather together to write some 129 00:12:18.200 --> 00:12:22.720 software that's valued by the market, or we could teach each other new skills and increase 130 00:12:22.720 --> 00:12:27.120 our labor productivity. But what if I stood there with a photocopying machine and made 131 00:12:27.120 --> 00:12:31.520 a thousand copies of a $20 bill, passed them around and then announced that we're all 132 00:12:31.520 --> 00:12:38.080 $20,000 richer than before. Everyone be rightly skeptical of this claim. When the Federal Reserve 133 00:12:38.080 --> 00:12:43.200 does the same thing with its money creation machine, we should be skeptical also. While 134 00:12:43.200 --> 00:12:48.120 recognizing that some of the rebound may consist of sustainable investment begun after the 135 00:12:48.120 --> 00:12:53.320 great shakeout of 2000, these factors just cited strongly suggest that the current economic 136 00:12:53.320 --> 00:12:58.380 recovery consists of more myth than reality. We need to ask ourselves whether and by what 137 00:12:58.380 --> 00:13:03.260 What means it can be sustained? The only means for doing so is for it to be supported through 138 00:13:03.260 --> 00:13:09.420 strong economic development and sound investment. Investment that is borne out in consumer purchases 139 00:13:09.420 --> 00:13:13.900 and long-term profits. It turns out, however, that the federal government is on everything 140 00:13:13.900 --> 00:13:19.620 possible to undermine the likelihood of a sustainable recovery. In 2002, the U.S. imposed 141 00:13:19.620 --> 00:13:25.080 a 30% tariff on steel. The idea here was to help one inefficient, bloated and pampered 142 00:13:25.080 --> 00:13:30.080 Industry at the expense of all U.S. consumers of steel, including U.S. businesses and all 143 00:13:30.080 --> 00:13:36.720 producers in Europe, Asia, Brazil and Australia. This is brazen protectionism, deeply harmful 144 00:13:36.720 --> 00:13:42.640 all around, not to mention morally repugnant. Did it help the steel industry? In the short 145 00:13:42.640 --> 00:13:46.880 run, yes, but we have to ask ourselves whether this kind of help is a good thing in the long 146 00:13:46.880 --> 00:13:52.280 run. The tariffs for an inefficient industry to continue to produce inefficiently and for 147 00:13:52.280 --> 00:13:56.960 for stall improvements in technology and cutbacks in wages that are necessary if the industry 148 00:13:56.960 --> 00:14:03.540 is to adjust to 21st century realities. There's no virtue to keeping dying and inefficient 149 00:14:03.540 --> 00:14:08.440 technology humming along so that workers who would be better employed elsewhere can continue 150 00:14:08.440 --> 00:14:15.440 to enjoy fat checks doing outmoded work. How long must these tariffs remain in place? 151 00:14:15.440 --> 00:14:19.940 The steel industry said they are only necessary in order to get it back on its feet. But that 152 00:14:19.940 --> 00:14:25.940 That belies the question of what precisely is going to inspire this sector to clean up its act. 153 00:14:25.940 --> 00:14:32.940 Protecting an industry from competition is a method that permits everything wrong with the industry to persist and not change. 154 00:14:32.940 --> 00:14:38.940 Either the tariff will have to be in place permanently or the industry will have to be shaken up. 155 00:14:38.940 --> 00:14:44.940 If you think about it, Soviet socialism survived for 74 years on precisely such policies. 156 00:14:44.940 --> 00:14:50.940 The Soviet state protected all its industries from market competition under the alleged need to build socialism. 157 00:14:50.940 --> 00:14:57.940 Factories were never closed, workers were never let go except for political reasons when their services were employed in the gulag. 158 00:14:57.940 --> 00:15:03.940 The system worked only if the standard was not efficiency, but merely the guarding of the status quo. 159 00:15:03.940 --> 00:15:12.940 Eventually the system collapsed, as status systems must, and the Soviets woke up to a world that was backward and decayed. 160 00:15:12.940 --> 00:15:19.940 The steel tariff imposed by the Bush administration is different from Soviet socialism only in degree, not in kind. 161 00:15:19.940 --> 00:15:25.940 It is an attempt to circumvent the market process through a centrally administered system of rewards and subsidies 162 00:15:25.940 --> 00:15:29.940 for industry to abide by political priorities rather than market dictates. 163 00:15:29.940 --> 00:15:34.940 In the meantime, all purchases of steel, whether consumers or other businesses, 164 00:15:34.940 --> 00:15:39.940 are harmed by being forced to pay a higher price for an inferior product. 165 00:15:39.940 --> 00:16:09.940 Also in 2002, the U.S. imposed massive punitive duties on softwood imports from Canada. Why? Because Canada refused to obey a U.S. demand that it place a new tax on its softwood. The new duties raised the price of softwood used for building nearly every home in America by 27%. This is going to distort the housing market among any other sectors that use wood. Higher prices for steel and wood put additional pressure on other businesses to use these products in production. 166 00:16:09.940 --> 00:16:22.940 In economic terms, tariffs are indistinguishable from sales taxes. They take people's property by force by requiring businesses and consumers to pay higher prices for goods than they would otherwise pay in a free market. 167 00:16:22.940 --> 00:16:34.940 To that extent, they harm the prospects for economic growth. If anyone says otherwise, he's ignoring hundreds of years of scholarship and the entire story history of government interference with international trade. 168 00:16:34.940 --> 00:16:40.940 The repercussions of these two actions are already being felt via damage relations in Latin America and Europe. 169 00:16:40.940 --> 00:16:44.940 The World Trade Organization will likely give the green light for retaliation. 170 00:16:44.940 --> 00:16:48.940 Protectionist lobbies all over the world are rushing to take advantage of the opportunity. 171 00:16:48.940 --> 00:16:54.940 The EU has imposed tariffs on U.S. steel, and Canada is considering retaliatory measures. 172 00:16:54.940 --> 00:17:00.940 This way lights trade war, which is the worst thing that can happen to an economy other than hot war. 173 00:17:00.940 --> 00:17:04.940 Another policy that endangers recovery is the war on terrorism. 174 00:17:04.940 --> 00:17:16.940 I'm not taking issue with the need for justice after September 11th, but it seems clear that the government used this tragedy as an excuse to vastly increase spending and regulation over the American and world economy. 175 00:17:16.940 --> 00:17:28.940 President Bush, who campaigned on a platform of cutting government, has asked for another $28 billion to pour into the military even as he is pushing for more regulations on banks and financial privacy in the name of rooting out terrorism. 176 00:17:28.940 --> 00:17:37.940 The total increases of 2002 and 2003 could be as high as 300 billion, depending on whom the U.S. plans to conquer next. 177 00:17:37.940 --> 00:17:45.940 Here again this spending can create the illusion of prosperity, but we must also remember that the first lesson of economic science is this. 178 00:17:45.940 --> 00:17:51.940 The world is a finite place where the use of any and all resources are constrained by scarcity. 179 00:17:51.940 --> 00:17:57.940 This is just another way of saying that you cannot always get what you want and when you do it must come from somewhere. 180 00:17:57.940 --> 00:18:01.940 from somewhere. When the government spends resources, it must drain them from the private 181 00:18:01.940 --> 00:18:08.740 economy through taxation, borrowing or inflating the money supply to pay for the new spending. 182 00:18:08.740 --> 00:18:13.440 Economics doesn't deny that redirecting resources from one sector where they are valued by consumers 183 00:18:13.440 --> 00:18:19.060 to another sector where they are valued by government can create pockets of expansion. 184 00:18:19.060 --> 00:18:24.560 What economics suggests is that this is not an efficient or sustainable use of such resources. 185 00:18:24.560 --> 00:18:29.260 Only the unhampered competitive market economy with a system of market prices, profits and 186 00:18:29.260 --> 00:18:34.400 losses can reveal to us with any certainty the most desirable destination of economic 187 00:18:34.400 --> 00:18:36.120 goods. 188 00:18:36.120 --> 00:18:39.900 But in the examples I have just given, you can see how government intervention is redirecting 189 00:18:39.900 --> 00:18:45.200 resources from consumers' most desired ends to purposes deemed desirable by political 190 00:18:45.200 --> 00:18:46.200 planners. 191 00:18:46.200 --> 00:18:50.100 The politicians believe that the military needs resources more than you and I, so they 192 00:18:50.100 --> 00:18:51.420 take them. 193 00:18:51.420 --> 00:18:55.100 They believe that the profits of the steel industry are more important than the international 194 00:18:55.100 --> 00:18:58.720 division of labor, so they protect that industry. 195 00:18:58.720 --> 00:19:02.580 They believe that the softwood industry deserves to obtain the highest possible prices for 196 00:19:02.580 --> 00:19:06.620 its products, so they intervene to hamper imports. 197 00:19:06.620 --> 00:19:09.780 As for the explosion of consumer spending that has taken place over the course of the 198 00:19:09.780 --> 00:19:13.860 downturn, this does indeed encourage businesses to expand. 199 00:19:13.860 --> 00:19:19.020 If low interest rates are encouraging consumers to dig deep to borrow for and buy new homes, 200 00:19:19.020 --> 00:19:22.900 This will encourage more investment in housing on the production side as well. 201 00:19:22.900 --> 00:19:28.460 This too will be encouraged by the interest rates being depressed by the Federal Reserve. 202 00:19:28.460 --> 00:19:32.180 Artificially low interest rates also tend to discourage savings and encourage people 203 00:19:32.180 --> 00:19:37.660 to put money back into the stock markets where they hope it can earn a higher rate of return. 204 00:19:37.660 --> 00:19:42.660 If credit expansion, protectionism and government spending were a path to prosperity, mankind 205 00:19:42.660 --> 00:19:45.780 would long ago have created heaven on earth. 206 00:19:45.780 --> 00:19:50.500 The politicians engaged in these activities have to contend with reality, and the reality 207 00:19:50.500 --> 00:19:56.580 is that economic forces in society must be mutually sustaining. To have production and 208 00:19:56.580 --> 00:20:01.340 borrowing there must be savings, which only occurs when people forgo consumption today 209 00:20:01.340 --> 00:20:06.820 to prepare for tomorrow, and when investment pans out in the forms of consumption. Absent 210 00:20:06.820 --> 00:20:12.220 such conditions, economic growth lacks a foundation in reality and turns to dust when economic 211 00:20:12.220 --> 00:20:18.060 conditions change. We have seen many examples of this in recent years. The Internet bubble 212 00:20:18.060 --> 00:20:22.640 was one such case. There was nothing unreal about technology or its potential to provide 213 00:20:22.640 --> 00:20:27.440 massive gains in efficiency as well as a vibrant new commercial marketplace and information 214 00:20:27.440 --> 00:20:32.480 delivery service. Nor was there anything ignoble about investors who put money into dot-coms 215 00:20:32.480 --> 00:20:37.880 on the promises of future profits. What distorted the picture was too much credit, courtesy 216 00:20:37.880 --> 00:20:56.880 When the Fed began to reduce the pace of monetary pumping, lenders pulled back, investors pulled out, and dot-coms and their support infrastructure found themselves overextended well beyond what the market would have borne if it had not been subsidized by a reckless Fed policy. 217 00:20:56.880 --> 00:21:06.880 The collapse of the Nasdaq was nothing more than reality reasserting itself. Some malinvestments were cleaned out, and the ground was prepared for new investment. 218 00:21:06.880 --> 00:21:12.880 .coms weren't the only ones affected by the bubble. Enron is another famed case in point. 219 00:21:12.880 --> 00:21:20.880 This company profited and dramatically expanded at a time when investors were encouraged to recklessly purchase stocks without regard to balance sheets. 220 00:21:20.880 --> 00:21:28.880 The auditors are catching the blame, but the truth is that Enron profited at a time when portfolio managers weren't paying very close attention either. 221 00:21:28.880 --> 00:21:38.880 The only way such a cluster of errors comes to predominate in a market economy is when the central bank unleashes new money and credit beyond anything the market can sustain for long. 222 00:21:38.880 --> 00:21:43.880 Prior to our own bubble we saw a similar situation in Asia and before that in Mexico. 223 00:21:43.880 --> 00:21:53.880 In each of these cases what we find is not market failure, but a failure of the system of money and credit provide reliable signals for investors and lenders. 224 00:21:53.880 --> 00:22:12.880 It is helpful to think of the interest rate as a price signal, so that Fed attempts to drive down rates simply misprice credit. In the same way that a government price ceiling would cause over consumption of any good, whether eggs, gas or electricity, distortions of the interest rate encourage over consumption of credit. 225 00:22:12.880 --> 00:22:20.880 It's not surprising then that we are seeing a spending boom take place today among consumers, even as producers are pulling back in many areas. 226 00:22:20.880 --> 00:22:34.880 Certain sectors have prospered since the reflation began after mid 2001. Housing in particular has boomed out of all proportion to what it would otherwise do in a free market. If any sector is being set up for a fall today, it is this one. 227 00:22:34.880 --> 00:22:47.880 Regardless of the fallout from day to day economic affairs, Mises believed that no power on earth is as strong as ideas. You live in a world of ideas, so take your responsibilities very seriously. 228 00:22:47.880 --> 00:22:53.980 The achievements of freedom should speak for themselves, but sadly they do not. 229 00:22:53.980 --> 00:22:59.160 Freedom needs courageous individuals who are willing to stand apart from the mob and state 230 00:22:59.160 --> 00:23:00.400 an unconventional truth.