WEBVTT NOTE Chapter 3: Why Austrian Economics Matters 1 00:00:00.000 --> 00:00:02.560 Why Austrian Economics Matters 2 00:00:02.560 --> 00:00:11.100 Based on a lecture given as part of the Heritage Foundation Resource Bank series in Washington, D.C. December 10, 1995. 3 00:00:11.100 --> 00:00:19.200 Economics, wrote Joseph Schumpeter, is a, quote, big omnibus which contains many passengers of incommensurable interests and abilities, unquote. 4 00:00:19.200 --> 00:00:25.160 That is, economists are an incoherent and ineffectual lot, and their reputation reflects it. 5 00:00:25.160 --> 00:00:30.280 Yet it need not be so, for the economist attempts to answer the most profound question regarding 6 00:00:30.280 --> 00:00:32.360 the material world. 7 00:00:32.360 --> 00:00:36.400 Pretend you know nothing about the market and ask yourself this question. 8 00:00:36.400 --> 00:00:41.800 How can society's entire deposit of scarce physical and intellectual resources be assembled 9 00:00:41.800 --> 00:00:47.640 so as to minimize cost, make use of the talents of every individual, provide for the needs 10 00:00:47.640 --> 00:00:53.840 and tastes of every consumer, encourage technical innovation, creativity and social development 11 00:00:53.840 --> 00:00:57.600 and do all this in a way that can be sustained. 12 00:00:57.600 --> 00:01:01.760 The question is worthy of scholarly effort, and those who struggle with the answer are 13 00:01:01.760 --> 00:01:04.280 surely deserving of respect. 14 00:01:04.280 --> 00:01:05.800 The trouble is this. 15 00:01:05.800 --> 00:01:10.760 The methods used by much of mainstream economics have little to do with acting people, and 16 00:01:10.760 --> 00:01:15.320 so these methods do not yield conclusions that have the ring of truth. 17 00:01:15.320 --> 00:01:18.000 This does not have to be the case. 18 00:01:18.000 --> 00:01:22.240 The central questions of economics have concerned the greatest thinkers since ancient Greece, 19 00:01:22.240 --> 00:01:26.920 And today economic thinking is broken down into many schools of thought. The Keynesians, 20 00:01:26.920 --> 00:01:32.360 the post-Keynesians, the new Keynesians, the Classicals, the new Classicals, or the Rational 21 00:01:32.360 --> 00:01:37.540 Expectations School, the Monitorists, the Chicago Public Choicers, the Virginia Public 22 00:01:37.540 --> 00:01:43.480 Choicers, the Experimentalists, the Game Theorists, the varying brands of Supply Citism, and 23 00:01:43.480 --> 00:01:45.820 on and on it goes. 24 00:01:45.820 --> 00:01:50.720 Also part of this mix, but in many ways apart from and above it, is the Austrian School. 25 00:01:50.720 --> 00:01:57.160 It is not a field within economics, but an alternative way of looking at the entire science. 26 00:01:57.160 --> 00:02:02.760 Whereas other schools rely primarily on idealized mathematical models of the economy, and suggest 27 00:02:02.760 --> 00:02:08.000 ways the government can make the world conform, Austrian theory is more realistic and this 28 00:02:08.000 --> 00:02:11.040 more socially scientific. 29 00:02:11.040 --> 00:02:15.980 Austrians view economics as a tool for understanding how people both cooperate and compete in the 30 00:02:15.980 --> 00:02:45.980 The Austrian School is in a major upswing today. In academia, this is due to a backlash against hyper-mathematization. The resurgence of verbal logic as a methodological 31 00:02:45.980 --> 00:02:51.980 and the search for a theoretically stable tradition in the madhouse of macroeconomic theorizing. 32 00:02:51.980 --> 00:02:58.980 In terms of policy, the Austrian School looks more and more attractive given continuing business cycle mysteries, 33 00:02:58.980 --> 00:03:03.980 the collapse of socialism, the cost and failures of the welfare-warfare regulatory state, 34 00:03:03.980 --> 00:03:06.980 and public frustration with big government. 35 00:03:06.980 --> 00:03:11.980 In its twelve decades, the Austrian School has experienced different levels of prominence. 36 00:03:11.980 --> 00:03:17.100 It was central to the price theory debates before the turn of the century, to monetary 37 00:03:17.100 --> 00:03:21.380 economics in the first decade of the century, and to the controversies over socialism's 38 00:03:21.380 --> 00:03:27.300 feasibility and the source of the business cycle in the 1920s and 1930s. 39 00:03:27.300 --> 00:03:32.660 The school fell into the background from the 1940s to the mid-1970s and was usually mentioned 40 00:03:32.660 --> 00:03:36.140 only in history of economic thought textbooks. 41 00:03:36.140 --> 00:03:40.920 The Proto-Austrian tradition dates from the 15th century Spanish scholastics, who first 42 00:03:40.920 --> 00:03:46.200 This presented an individualist and subjectivist understanding of prices and wages. 43 00:03:46.200 --> 00:03:51.120 But the formal founding of the school dates from the 1871 publication of Carl Menger's 44 00:03:51.120 --> 00:03:56.820 Principles of Economics, which changed economists' understanding of the valuing, economizing, 45 00:03:56.820 --> 00:04:01.560 and pricing of resources, overturning both the classical and the Marxian views in the 46 00:04:01.560 --> 00:04:04.480 quote, marginal revolution. 47 00:04:04.480 --> 00:04:09.680 Menger also generated a new theory of money as a market institution, and grounded economics 48 00:04:09.680 --> 00:04:13.520 in deductive laws discoverable by the methods of the social sciences. 49 00:04:13.520 --> 00:04:19.120 Menger's books of Ludwig von Mises made an economist of him, and it is still of huge 50 00:04:19.120 --> 00:04:20.120 value. 51 00:04:20.120 --> 00:04:24.640 Eugen von Boehm-Bawerk was the next important figure in the Austrian School. 52 00:04:24.640 --> 00:04:28.760 He showed that interest rates, when not manipulated by a central bank, are determined by the 53 00:04:28.760 --> 00:04:33.640 time horizons of the public, and that the rate of return on investments tends to equal 54 00:04:33.640 --> 00:04:35.720 the rate of time preference. 55 00:04:35.720 --> 00:04:40.720 He also dealt a deadly blow to Marx's Theory of Capital and Exploitation and was a key 56 00:04:40.720 --> 00:04:45.960 defender of theoretical economics at a time when historicists of every stripe were trying 57 00:04:45.960 --> 00:04:47.360 to destroy it. 58 00:04:47.360 --> 00:04:52.520 Boehm-Bawerk's greatest student was Ludwig von Mises, whose first major project was the 59 00:04:52.520 --> 00:04:55.300 development of a new theory of money. 60 00:04:55.300 --> 00:05:00.760 The Theory of Money and Credit, published in 1912, elaborated on Menger, showing not 61 00:05:00.760 --> 00:05:05.440 only that money had its origins in the market, but there was no other way it could have come 62 00:05:05.440 --> 00:05:13.440 Mises also argued that money and banking ought to be left to the market and that government intervention can only cause harm. 63 00:05:13.440 --> 00:05:20.440 In that book, which remains a standard work today, Mises also sowed the seeds of his business cycle theory. 64 00:05:20.440 --> 00:05:28.440 He argued that when the central bank artificially lowers interest rates, it causes distortions in the capital goods sector of the structure of production. 65 00:05:28.440 --> 00:05:34.440 When malinvestments occur, an economic downturn is necessary to wash out bad investments. 66 00:05:34.440 --> 00:05:40.320 Along with his student, F. A. Hayek, Mises established the Austrian Institute for Business 67 00:05:40.320 --> 00:05:45.000 Cycle Research in Vienna, and he and Hayek showed that the central bank is the source 68 00:05:45.000 --> 00:05:50.080 of the business cycle. Their work eventually proved to be most effective in combating Keynesian 69 00:05:50.080 --> 00:05:55.680 experiments and fine-tuning the economy through fiscal policies and the central bank. 70 00:05:55.680 --> 00:06:00.520 The Mises-Hayek theory was dominant in Europe until Keynes won the day by arguing that the 71 00:06:00.520 --> 00:06:05.120 The Market itself was responsible for the business cycle. It didn't hurt that Keynes's 72 00:06:05.120 --> 00:06:10.080 theory advocating more spending, inflation and deficits was already being practiced by 73 00:06:10.080 --> 00:06:15.440 governments around the world. At the time of the business cycle debate, Mises and Hayek 74 00:06:15.440 --> 00:06:22.000 were also involved in a controversy over socialism. In 1920, Mises had written one of the most 75 00:06:22.000 --> 00:06:27.600 important articles of the century, quote, Economic Calculation in the Socialist Commonwealth, 76 00:06:27.600 --> 00:06:33.200 Followed by his book, Socialism. Until then, there had been many critiques of Socialism, 77 00:06:33.200 --> 00:06:38.400 but none had challenged Socialists to explain how their economy would actually work absent 78 00:06:38.400 --> 00:06:44.800 free prices and private property. Mises argued that rational economic calculation requires 79 00:06:44.800 --> 00:06:50.360 a profit and loss test. If a firm makes a profit, it is using resources efficiently. 80 00:06:50.360 --> 00:06:56.520 If it makes a loss, it is not. Without such signals, the economic actor has no way to 81 00:06:56.520 --> 00:07:01.400 test the appropriateness of his decisions. He cannot assess the opportunity costs of 82 00:07:01.400 --> 00:07:07.800 this or that production decision. Prices and the profit and loss corollary are essential. 83 00:07:07.800 --> 00:07:12.160 Mises also showed that private property and the means of production is necessary for these 84 00:07:12.160 --> 00:07:17.000 prices to be generated. Socialism holds that the means of production 85 00:07:17.000 --> 00:07:22.080 should be in collective hands. This means no buying or selling of capital goods and 86 00:07:22.080 --> 00:07:27.760 and thus no prices for them. Without prices there is no profit and loss test. Without accounting 87 00:07:27.760 --> 00:07:34.200 for profit and loss there can be no real economy. Should a new factory be built? Under socialism 88 00:07:34.200 --> 00:07:39.040 there is no way to tell. Everything becomes guesswork. 89 00:07:39.040 --> 00:07:45.120 Mises' essay ignited debate all over Europe and America. One top socialist, Oscar Lange, 90 00:07:45.120 --> 00:07:49.700 conceded that prices are necessary for economic calculation, but he said that central planners 91 00:07:49.700 --> 00:07:54.340 could generate prices out of their own heads, watch the length of lines at stores to determine 92 00:07:54.340 --> 00:07:59.740 consumer demand, and provide the signals of production themselves. Mises countered that 93 00:07:59.740 --> 00:08:05.100 playing market wouldn't work either. Socialism by its own internal contradictions had to 94 00:08:05.100 --> 00:08:11.980 fail. Hayek used the occasion of the calculation debate to elaborate upon and broaden the Misesian 95 00:08:11.980 --> 00:08:17.260 argument into his own theory of the uses of knowledge in society. He argued that the knowledge 96 00:08:17.260 --> 00:08:24.260 The knowledge generated by the market process is inaccessible to any single human mind, especially that of the central planner. 97 00:08:24.260 --> 00:08:31.260 The millions of decisions required for a prosperous economy are too complex for any one person to comprehend. 98 00:08:31.260 --> 00:08:38.260 This theory became the basis of a fuller theory of the social order that occupied Hayek for the rest of his academic life. 99 00:08:38.260 --> 00:08:46.260 Mises came to the U.S. after fleeing the Nazis and was taken in by a handful of free-market businessmen, preeminently Lawrence Furtig. 100 00:08:46.260 --> 00:08:52.260 Here he helped build a movement around his ideas, and most free market economists acknowledged their debt to him. 101 00:08:52.260 --> 00:08:57.260 No one, as Milton Friedman has said, did as much as Mises to promote free markets in this country. 102 00:08:57.260 --> 00:09:06.260 But those were dark times. He had trouble finding the paid university post he deserved, and it was difficult to get a wider audience for his views. 103 00:09:06.260 --> 00:09:13.260 During those early years in America, Mises worked to rewrite his just completed German language treatise into Human Action, 104 00:09:13.260 --> 00:09:43.260 and all-encompassing work for English-language audiences. In it, he carefully reworked the philosophical grounding of the social sciences in general and economics in particular. This proved to be a significant contribution. Long after the naïve dogmas of empiricism had failed, Mises's praxeology, or logic of human action, continues to inspire students and scholars. This magnum opus swept aside Keynesian fallacies and historicist pretensions and ultimately made possible the revival of the 105 00:09:43.260 --> 00:10:13.260 Until the 1970s, however, it was hard to find a prominent economist who did not share the Keynesian tenets, that the price system is perverse, that the free market is irrational, that the stock market was driven by animal spirits, that the private sector could not be trusted, that government is capable of planning the economy to keep it from falling into recession and that inflation and unemployment are inversely related. 106 00:10:13.260 --> 00:10:20.260 Rothbard was a great student of Mises, who wrote a massive economic treatise in the early 1960s called Man Economy and State. 107 00:10:20.260 --> 00:10:24.260 In his book, Rothbard added his own contributions to Austrian thought. 108 00:10:24.260 --> 00:10:31.260 Similarly, the work of two other important students of Mises, Hans F. Sennholz and Israel Kirzner, carried on the tradition. 109 00:10:31.260 --> 00:10:40.260 And Henry Hazlitt, then writing a weekly column for Newsweek, did more than anybody to promote the Austrian school and made contributions to the school himself. 110 00:10:40.260 --> 00:10:45.820 The stagflation of the 1970s undermined the Keynesian School by showing that it was possible 111 00:10:45.820 --> 00:10:50.140 to have both high inflation and high unemployment at the same time. 112 00:10:50.140 --> 00:10:55.260 The Nobel Prize that Hayek received in 1974 for his business cycle research with Mises 113 00:10:55.260 --> 00:10:59.580 caused an explosion of academic interest in the Austrian School and free market economics 114 00:10:59.580 --> 00:11:00.580 in general. 115 00:11:00.580 --> 00:11:05.840 A generation of graduate students began studying the works of Mises and Hayek and that research 116 00:11:05.840 --> 00:11:07.940 program continues to grow. 117 00:11:07.940 --> 00:11:12.540 Today the Austrian School is most fully embodied in the work of the Mises Institute. 118 00:11:12.540 --> 00:11:17.400 The concept of scarcity and choice in a world of uncertainty lie at the heart of Austrian 119 00:11:17.400 --> 00:11:22.900 economics. Man is constantly faced with a wide array of choices. Every action implies 120 00:11:22.900 --> 00:11:27.860 foregone alternatives or costs, and every action by definition is designed to improve 121 00:11:27.860 --> 00:11:32.540 the actor's lot from his point of view. Moreover, every actor in the economy has a 122 00:11:32.540 --> 00:11:37.740 different set of values and preferences, different needs and desires, and different time schedules 123 00:11:37.740 --> 00:11:44.060 for the goals he intends to reach. The needs, tastes, desires and time schedules of different 124 00:11:44.060 --> 00:11:49.340 people cannot be added to or subtracted from other people's. It is not possible to collapse 125 00:11:49.340 --> 00:11:55.640 tastes or time schedules into one curve and call it consumer preference. Why? Because 126 00:11:55.640 --> 00:12:01.580 economic value is subjective to the individual. Similarly, it is not possible to collapse 127 00:12:01.580 --> 00:12:06.940 the complexity of market arrangements into enormous aggregates. We cannot, for example, 128 00:12:06.940 --> 00:12:12.300 say that the economy's capital stock is one big blob, summarized by the letter K, and 129 00:12:12.300 --> 00:12:17.020 put that into an equation and expect it to yield useful information. 130 00:12:17.020 --> 00:12:19.940 The capital stock is heterogeneous. 131 00:12:19.940 --> 00:12:25.560 Some capital may be intended to create goods for sale tomorrow, others for sale in 10 years. 132 00:12:25.560 --> 00:12:30.260 The time schedules for capital use are as varied as the capital stock itself. 133 00:12:30.260 --> 00:12:35.420 Austrian theory sees competition as a process of discovering new and better ways to organize 134 00:12:35.420 --> 00:12:46.540 This way of looking at the market is markedly different from every other school of thought. 135 00:12:46.540 --> 00:12:51.820 Ever since Keynes, economists have developed the habits of constructing parallel universes 136 00:12:51.820 --> 00:12:54.260 having nothing to do with the real world. 137 00:12:54.260 --> 00:13:00.300 In these universes, capital is homogeneous and competition is a static end state. 138 00:13:00.300 --> 00:13:04.860 There are the right number of sellers, prices reflect the costs of production and there 139 00:13:04.860 --> 00:13:09.660 There are no excess profits. Economic welfare is determined by adding up the utilities of 140 00:13:09.660 --> 00:13:15.340 all the individuals in society. The passing of time is rarely accounted for, except in 141 00:13:15.340 --> 00:13:21.160 changing from one static state to another. Varying time schedules of producers and consumers 142 00:13:21.160 --> 00:13:26.860 are simply non-existent. Instead, we have aggregates that give us precious little information 143 00:13:26.860 --> 00:13:28.620 at all. 144 00:13:28.620 --> 00:13:33.440 A conventional economist is quick to agree that these models are unrealistic, ideal types 145 00:13:33.440 --> 00:14:03.440 One obvious example of basing policy on contrived models of the economy takes place at the Justice Department's anti-trust division. The other bureaucrats pretend to know the proper structure of industry, what kinds of mergers and acquisitions harm the economy, who has too much market share or too little, and what the relevant market is. This represents what Hayek called the pretense of the economy. 146 00:14:03.440 --> 00:14:08.540 The correct relationship between competitors can only be worked out through buying and 147 00:14:08.540 --> 00:14:14.400 selling, not bureaucratic fiat. Austrian economists, in particular Rothbard, argue that the only 148 00:14:14.400 --> 00:14:20.040 real monopolies are created by government. Markets are too competitive to allow any monopolies 149 00:14:20.040 --> 00:14:25.440 to be sustained. Another example is the idea that economic growth can be manufactured by 150 00:14:25.440 --> 00:14:30.520 manipulating aggregate demand curves through more and faster government spending. Considered 151 00:14:30.520 --> 00:14:37.520 If the hallmark of conventional economics is unrealistic models, the hallmark of Austrian 152 00:14:41.400 --> 00:14:47.440 economics is a profound appreciation of the price system. Prices provide economic actors 153 00:14:47.440 --> 00:14:52.040 with critical information about the relative scarcity of goods and services. It is not 154 00:14:52.040 --> 00:14:57.240 necessary for consumers to know, for example, that a disease has swept the chicken population 155 00:14:57.240 --> 00:15:02.460 to know that they should economize on eggs. The price system, by making eggs more expensive, 156 00:15:02.460 --> 00:15:08.840 informs the public of the appropriate behavior. The price system tells producers when to enter 157 00:15:08.840 --> 00:15:14.200 and leave markets by relaying information about consumer preferences, and it tells producers 158 00:15:14.200 --> 00:15:18.960 the most efficient, that is, the least costly way to assemble other resources to create 159 00:15:18.960 --> 00:15:24.600 goods. Apart from the price system, there is no way to know these things. But rational 160 00:15:24.600 --> 00:15:28.460 Neoclassical prices must be generated by the free market. They cannot be made up the way 161 00:15:28.460 --> 00:15:33.000 the government printing office makes up prices for its publications. They cannot be based 162 00:15:33.000 --> 00:15:38.440 on the costs of production in the manner of the post office. These practices create distortions 163 00:15:38.440 --> 00:15:43.920 and inefficiencies. Rather, prices must grow out of the free actions of individuals in 164 00:15:43.920 --> 00:15:48.620 a juridical setting that respects private property. 165 00:15:48.620 --> 00:15:53.280 Neoclassical price theory is found in most graduate texts, covers much of this territory, 166 00:15:53.280 --> 00:15:59.280 But typically it takes for granted the accuracy of prices apart from their foundation in private property. 167 00:15:59.280 --> 00:16:05.280 As a result, virtually every plan for reforming the post-socialist economies talked about the need for better management, 168 00:16:05.280 --> 00:16:12.280 loans from the West, new and different forms of regulation, and the removal of price controls, but not private property. 169 00:16:12.280 --> 00:16:16.280 The result was the economic equivalent of a train wreck. 170 00:16:16.280 --> 00:16:22.280 Free-floating prices simply cannot do their work apart from private property and concomitant freedom to contract. 171 00:16:22.280 --> 00:16:34.280 The Austrian theory sees private property as the first principle of a sound economy. Economists in general neglect the subject, and when they mention it, it is defined a philosophical basis for its violation. 172 00:16:34.280 --> 00:16:43.280 The logic and legitimacy of market failure analysis and its public goods corollary is widely accepted by non-Austrian schools of thought. 173 00:16:43.280 --> 00:16:51.280 The notion of public goods is that they cannot be supplied by the market and instead must be supplied by government and funded through its taxing power. 174 00:16:51.280 --> 00:16:58.280 The classic case is the lighthouse, except that as Ronald Coase has shown, private lighthouses have existed for centuries. 175 00:16:58.280 --> 00:17:05.280 Some definition of public goods can be so broad that if you throw out common sense, everyday consumer goods qualify. 176 00:17:05.280 --> 00:17:12.280 Austrians point out that it is impossible to know whether or not a market is failing without an independent test, 177 00:17:12.280 --> 00:17:15.280 of which there is none outside the actions of individuals. 178 00:17:15.280 --> 00:17:21.280 The market itself is the only available criterion for determining how resources ought to be used. 179 00:17:21.280 --> 00:17:27.280 Let's say I deem it necessary for various social reasons that there be one barber for every hundred people, 180 00:17:27.280 --> 00:17:30.280 and as I look around I notice this is not the case. 181 00:17:30.280 --> 00:17:36.280 Thus I might advocate that a national endowment for barbers be established to increase the barber supply. 182 00:17:36.280 --> 00:17:40.280 But the only means for knowing how many barbers there ought to be is the market itself. 183 00:17:40.280 --> 00:17:49.280 If there are fewer than one per hundred, we must assume that a larger number is not supposed to exist by any reasonable standard of efficient markets. 184 00:17:49.280 --> 00:17:56.280 It is not economically proper to develop a wish list of jobs and institutions that stands apart from the market itself. 185 00:17:56.280 --> 00:18:08.280 Conventional economics teaches that if the benefits or costs of one person's economic decisions spill over onto others, an externality exists and ought to be corrected by the government through redistribution. 186 00:18:08.280 --> 00:18:14.220 Education. But broadly speaking, externalities are inherent in every economic transaction 187 00:18:14.220 --> 00:18:19.640 because cost and benefits are ultimately subjective. I may be delighted to see factories belching 188 00:18:19.640 --> 00:18:24.860 smoke because I love industry, but that does not mean I should be taxed for the privilege 189 00:18:24.860 --> 00:18:29.780 of viewing them. Similarly, I may be offended that most men don't have beards, but that 190 00:18:29.780 --> 00:18:35.720 doesn't mean that the clean shaven ought to be taxed to compensate me for my displeasure. 191 00:18:35.720 --> 00:18:40.560 The Austrian School redefines externalities as occurring only with physical invasions 192 00:18:40.560 --> 00:18:47.560 of property, as when my neighbor dumps his trash in my yard. Then the issue becomes crime. 193 00:18:47.560 --> 00:18:52.620 There can be no value-free adding up of utilities to determine subjective costs or benefits 194 00:18:52.620 --> 00:18:57.880 of economic activity. Instead, the relevant criterion should be whether economic actions 195 00:18:57.880 --> 00:19:00.680 occur in a peaceful manner. 196 00:19:00.680 --> 00:19:04.400 Another area where Austrians differ is how the government is supposed to go about the 197 00:19:04.400 --> 00:19:07.400 is a practical problem of correcting for market failures. 198 00:19:08.400 --> 00:19:10.400 Granted that somehow the government can spot a market failure, 199 00:19:11.400 --> 00:19:13.400 the burden of proof is still on the government to demonstrate 200 00:19:14.400 --> 00:19:16.400 that it can perform the task more efficiently than the market. 201 00:19:17.400 --> 00:19:20.400 Austrians would refocus the energy that goes into finding market failures 202 00:19:21.400 --> 00:19:23.400 to understanding more about government failures. 203 00:19:24.400 --> 00:19:27.400 But the failure of government to do what mainstream theory says it can 204 00:19:28.400 --> 00:19:29.400 is not a popular subject. 205 00:19:30.400 --> 00:19:31.400 Outside of the public choice schools, 206 00:19:31.400 --> 00:19:38.400 The question is often asked in James B. Cannon's famous 207 00:20:01.400 --> 00:20:04.400 What should economists do? 208 00:20:04.400 --> 00:20:07.400 Mainstream answers, in part, forecast the future. 209 00:20:07.400 --> 00:20:12.400 The goal is legitimate in the natural sciences because rocks and sound waves do not make choices. 210 00:20:12.400 --> 00:20:16.400 But economics is a social science dealing with people who make choices, 211 00:20:16.400 --> 00:20:21.400 respond to incentives, change their minds, and even act irrationally. 212 00:20:21.400 --> 00:20:27.400 Austrian economists realize that the future is always uncertain, not radically so, but largely. 213 00:20:27.400 --> 00:20:33.120 Human action in an uncertain world with pervasive security poses the economic problem in the 214 00:20:33.120 --> 00:20:38.840 first place. We need entrepreneurs and prices to help overcome uncertainty, although this 215 00:20:38.840 --> 00:20:45.200 can never be done completely. Forecasting the future is the job of entrepreneurs, not 216 00:20:45.200 --> 00:20:49.800 economists. This is not to say that Austrian economists cannot expect certain consequences 217 00:20:49.800 --> 00:20:54.020 of particular government policies. For example, they know that below market price ceilings 218 00:20:54.020 --> 00:21:24.020 One final area of theoretical concern that distinguishes Austrians from the mainstream is economic statistics. Austrians are critical of the substance of most existing statistical measures of the economy. They are also critical of the uses to which they are put. Take, for example, the question of price elasticities, which supposedly measure 219 00:21:24.020 --> 00:21:30.520 The Problem lies in the metaphor and in its applications. 220 00:21:30.520 --> 00:21:34.940 It suggests that elasticities exist independent of human action, that they can be known in 221 00:21:34.940 --> 00:21:40.580 advance of experience, but measures of historical consumer behavior do not constitute economic 222 00:21:40.580 --> 00:21:42.340 theory. 223 00:21:42.340 --> 00:21:46.780 Another example of a questionable statistical technique is the index number, the prime means 224 00:21:46.780 --> 00:21:49.060 by which the government calculates inflation. 225 00:21:49.060 --> 00:21:53.460 The problem with index numbers is that they obscure relative price changes among goods 226 00:21:53.460 --> 00:22:00.460 This is not to say that the consumer price index is irrelevant, only that it is not a solid indicator, is subject to wide abuse and masks highly complex price movements between sectors. 227 00:22:00.460 --> 00:22:07.460 And the gross domestic product statistic is riddled with composition fallacies inherent in the Keynesian model. 228 00:22:07.460 --> 00:22:14.460 Government spending is considered part of aggregate demand, and no effort is made to account for the destructive costs of taxation, regulation and redistribution. 229 00:22:14.460 --> 00:22:23.460 Government spending is considered part of aggregate demand and no effort is made to account for the destructive costs of taxation, regulation and redistribution. 230 00:22:23.460 --> 00:22:28.460 If Austrians had their way, the government would never collect another economic statistic. 231 00:22:28.460 --> 00:22:32.460 Such data are used primarily to plan the economy. 232 00:22:32.460 --> 00:22:42.460 For Austrians, economic regulation is always destructive of prosperity because it misallocates resources and is extremely destructive of small business and entrepreneurship. 233 00:22:42.460 --> 00:22:47.460 Environmental regulation has been among the worst offenders in recent years. 234 00:22:47.460 --> 00:22:56.460 Nobody can calculate the extraordinary losses associated with the Clean Air Act or the absurdities associated with wetlands or endangered species policies. 235 00:22:56.460 --> 00:23:02.460 However, environmental policy can do what is explicitly intended to do, lower standards of living. 236 00:23:02.460 --> 00:23:07.460 But antitrust policy, in contrast to its stated policy, does not generate competitiveness. 237 00:23:07.460 --> 00:23:12.620 Justice. Such bogeymen as predatory pricing still scare the bureaucrats at justice, whereas 238 00:23:12.620 --> 00:23:17.420 simple economic analysis can refute the idea that a competitor can sell below the cost 239 00:23:17.420 --> 00:23:21.900 of production to take over the market and then sell at a monopoly price later. Any firm 240 00:23:21.900 --> 00:23:26.540 that attempts to sell below the cost of production will indefinitely suffer losses. The moment 241 00:23:26.540 --> 00:23:31.540 it attempts to raise prices, it invites competitors back into the market. 242 00:23:31.540 --> 00:23:35.560 Civil rights legislation represents one of the most intrusive regulatory interventions 243 00:23:35.560 --> 00:23:40.440 in Labor Markets. When employers are not able to hire, fire and promote based on their 244 00:23:40.440 --> 00:23:46.000 own criteria of merit, dislocations occur within the firm and in labor markets at large. 245 00:23:46.000 --> 00:23:50.680 Moreover, civil rights legislation, by creating legal preferences for some groups, undermines 246 00:23:50.680 --> 00:23:55.360 the public's sense of fairness that is the market's hallmark. 247 00:23:55.360 --> 00:24:00.820 There is another cost of economic regulation. It impedes the entrepreneurial discovery process. 248 00:24:00.820 --> 00:24:05.540 This process is based on having a wide array of alternatives open to the uses of capital. 249 00:24:05.540 --> 00:24:19.540 Yet government regulation limits the options of entrepreneurs and erects barriers to the exercise of entrepreneurial talent. Safety, health and labor regulations, for example, not only inhibit existing production, they impede the development of better production methods. 250 00:24:19.540 --> 00:24:23.540 Austrians have also developed impressive critiques of redistributionism. 251 00:24:23.540 --> 00:24:28.540 Conventional welfare theory argues that if the law of diminishing marginal utility is true, 252 00:24:28.540 --> 00:24:30.540 then total utility can easily be increased. 253 00:24:30.540 --> 00:24:34.540 If you take a dollar from a rich man, his welfare is slightly diminished, 254 00:24:34.540 --> 00:24:37.540 but that dollar is worth less to him than to a poor man. 255 00:24:37.540 --> 00:24:43.540 Thus redistributing a dollar from a rich man to a poor man increases the total utility between the two. 256 00:24:43.540 --> 00:24:48.540 The implication is that welfare can be maximized through perfect income equality. 257 00:24:48.540 --> 00:24:54.540 The problem with this, say Austrians, is that utilities cannot be added or subtracted since they are subjective. 258 00:24:54.540 --> 00:25:01.540 Redistributionism takes from property owners and producers and gives by definition to non-owners and non-producers. 259 00:25:01.540 --> 00:25:05.540 This diminishes the value of the property that has been redistributed. 260 00:25:05.540 --> 00:25:09.540 Far from increasing total welfare, redistributionism diminishes it. 261 00:25:09.540 --> 00:25:17.540 By making property and its value less secure, income transfers lessen the benefits of ownership and production and thus lower the incentives to both. 262 00:25:17.540 --> 00:25:23.300 Both. Austrians reject the use of redistribution to stimulate the economy or otherwise manipulate 263 00:25:23.300 --> 00:25:28.860 the structure of economic activity. Increasing taxes, for example, can do nothing but harm. 264 00:25:28.860 --> 00:25:33.780 A shorthand for taxes is wealth destruction. They forcibly confiscate property that could 265 00:25:33.780 --> 00:25:38.300 otherwise be saved or invested, thus lowering the number of consumer options available. 266 00:25:38.300 --> 00:25:45.540 Moreover, there is no such thing as a strict consumer tax. All taxes decrease production. 267 00:25:45.540 --> 00:25:49.500 Deficits do not go along with the view that deficits don't matter. In fact, the requirement 268 00:25:49.500 --> 00:25:54.120 that deficits be financed by the public or foreign bondholders drives up interest rates 269 00:25:54.120 --> 00:25:59.200 and thus crowds our potential private investment. Deficits also create the danger that they 270 00:25:59.200 --> 00:26:03.880 will be financed through central bank inflation. Yet the answer to deficits is not to increase 271 00:26:03.880 --> 00:26:09.100 taxation, which is more destructive than deficits, but rather to balance the budget through necessary 272 00:26:09.100 --> 00:26:14.360 spending cuts. Where to cut? Anywhere and everywhere. 273 00:26:14.360 --> 00:26:19.080 The ideal situation is not simply a balanced budget. Government and spending itself, regardless 274 00:26:19.080 --> 00:26:25.020 of deficit or surplus, should be as small as possible. Why? Because such spending diverts 275 00:26:25.020 --> 00:26:31.780 resources from better uses in private markets. We hear talk of this or that government investment. 276 00:26:31.780 --> 00:26:36.820 Austrians reject this term as an oxymoron. Real investment is taken on by capitalists 277 00:26:36.820 --> 00:26:41.620 risking their own money in hope of satisfying future consumer demands. Government limits 278 00:26:41.620 --> 00:26:46.860 is the satisfaction of consumer demands by hampering production in the private sector, 279 00:26:46.860 --> 00:26:51.300 besides government investments are notorious waste of money and are in fact consumption 280 00:26:51.300 --> 00:26:56.820 spending by politicians and bureaucrats. Mainstream economists hold that the government 281 00:26:56.820 --> 00:27:01.940 must control monetary policy and the structure of banking through cartels, deposit insurance 282 00:27:01.940 --> 00:27:08.060 and a flexible fiat currency. Austrians reject this entire paradigm and argue that all are 283 00:27:08.060 --> 00:27:12.460 are better controlled through private markets. In fact, to the extent that today we have 284 00:27:12.460 --> 00:27:16.480 serious and radical proposals for having the market play a greater role in banking and 285 00:27:16.480 --> 00:27:20.820 monetary policy, it is due to the Austrian School. 286 00:27:20.820 --> 00:27:24.860 Deposit insurance has been on the public mind since the collapse of the SNL industry. The 287 00:27:24.860 --> 00:27:29.960 government guarantees deposits and loans with taxpayer money, so this makes financial institutions 288 00:27:29.960 --> 00:27:35.000 less careful. Government effectively does to financial institutions what a permissive parent 289 00:27:35.000 --> 00:27:41.240 does to a child, encourages poor behavior by eliminating the threat of punishment. 290 00:27:41.240 --> 00:27:45.280 Austrians would eliminate compulsory deposit insurance and not only allow bank runs to 291 00:27:45.280 --> 00:27:50.560 occur but appreciate their potential as a necessary check. There would be no lender 292 00:27:50.560 --> 00:27:56.640 of last resort that is the taxpayer in an Austrian monetary regime to bail out bankrupt 293 00:27:56.640 --> 00:28:01.480 and illiquid institutions. Much of the Austrian critique of central banking centers around 294 00:28:01.480 --> 00:28:06.000 and the Mises-Hayek Business Cycle Theory. Both argued that the central bank and not 295 00:28:06.000 --> 00:28:11.200 the market itself is responsible for the cyclical behavior of business activity. To illustrate 296 00:28:11.200 --> 00:28:16.280 the theory, Austrians have undertaken extensive studies of many historical periods of recession 297 00:28:16.280 --> 00:28:22.120 and recovery to show that each was preceded by central bank machinations. The theory argues 298 00:28:22.120 --> 00:28:26.240 that central bank efforts to lower interest rates below the free markets level causes 299 00:28:26.240 --> 00:28:31.240 borrowers in the capital goods industry to over invest in their projects. A lower interest 300 00:28:31.240 --> 00:28:35.940 This rate is normally a signal that consumer savings are available to back up new production. 301 00:28:35.940 --> 00:28:40.040 That is, if a producer borrows to build a new building, there is enough saving for consumers 302 00:28:40.040 --> 00:28:44.860 to buy the goods and services that will be made in that building. 303 00:28:44.860 --> 00:28:49.500 Projects undertaken can be sustained, but artificially lowered rates lead businesses 304 00:28:49.500 --> 00:28:52.080 into undertaking unnecessary projects. 305 00:28:52.080 --> 00:28:56.800 This creates an artificial boom followed by a bust, since it is clear that savings weren't 306 00:28:56.800 --> 00:29:00.920 high enough to justify the degree of expansion. 307 00:29:00.920 --> 00:29:05.080 Please point out that the monitor-risk growth rule ignores the injection effects of even 308 00:29:05.080 --> 00:29:07.800 the smallest increase in money and credit. 309 00:29:07.800 --> 00:29:12.340 Such an increase will always create this business cycle phenomenon, even if it works to maintain 310 00:29:12.340 --> 00:29:17.780 a relatively stable index number as in the 1920s and 1980s. 311 00:29:17.780 --> 00:29:22.640 What then should policy makers do when the economy enters recession? 312 00:29:22.640 --> 00:29:23.640 Mostly nothing. 313 00:29:23.640 --> 00:29:28.040 It takes time to wipe out the malinvestments created by the credit boom. 314 00:29:28.040 --> 00:29:32.280 Profits that were undertaken have to go bankrupt, employees mistakenly hired must lose their 315 00:29:32.280 --> 00:29:37.480 jobs and wages must fall. After the economy is clean of the bad investments induced by 316 00:29:37.480 --> 00:29:42.880 the central bank, growth can begin anew based on a realistic assessment of the future behavior 317 00:29:42.880 --> 00:29:48.880 of consumers. If the government wants to make the recovery process work faster, if, say, 318 00:29:48.880 --> 00:29:53.580 there is an election coming up, there are some things it can do. It can cut taxes, putting 319 00:29:53.580 --> 00:30:00.580 Central Banking also creates incentives towards inflationary monetary policies. There is not a coincidence that ever since the creation of the Federal Reserve System, the value of the dollar has declined 95%. 320 00:30:23.580 --> 00:30:35.580 The market did not make this happen. The culprit is the central bank, whose institutional logic drives it towards an inflationary policy, just as a counterfeiter is driven to keep the printing presses running. 321 00:30:35.580 --> 00:30:52.580 Austrians would reform this in fundamental ways. Rothbardians advocated a return to 100% gold coin standard, an end to fractional reserve commercial banking and the abolition of the central bank, while Hayekians advocated a system where consumers select currencies from a variety of alternatives. 322 00:30:52.580 --> 00:31:03.580 Today Austrian economics is on the upswing. Mises' works are read and discussed all over Western and Eastern Europe and the former Soviet Union, as well as Latin America and North Asia. 323 00:31:03.580 --> 00:31:10.580 But the new interest in America, where the insights of the Austrian School are even more sorely needed, is especially encouraging. 324 00:31:10.580 --> 00:31:15.580 The success of the Ludwig von Mises Institute is testimony to this new interest. 325 00:31:15.580 --> 00:31:21.580 The primary purpose of the Institute is to ensure that the Austrian School is a major force in the economic debate. 326 00:31:21.580 --> 00:31:28.580 To this end we have cultivated and organized hundreds of professional economists, providing scholarly and popular outlets for their works, 327 00:31:28.580 --> 00:31:58.580 The Mises Institute assists 328 00:31:58.580 --> 00:32:28.580 Students and Faculty at hundreds of colleges and universities. We have a program for visiting fellows to complete dissertations, for visiting scholars to pursue new research, as well as being a major center for graduate students. New books on the Austrian School appear every few months, and Austrians are writing for all the major scholarly journals. Misesian Insights are presented in hundreds of economic classrooms all over the country, whereas just 20 years ago, no more than a dozen classrooms presented them. Austrians are the rising 329 00:32:28.580 --> 00:32:36.580 are the stars in the profession. The economists with the new ideas that attract students, the ones on the cutting edge with the pro-market and anti-statist orientation. 330 00:32:37.580 --> 00:32:43.580 Many of these scholars have been cultivated through the Mises Institute's academic conferences, publications and teaching programs. 331 00:32:44.580 --> 00:32:53.580 With the Institute back in the Austrian School, tradition and constructive radicalism combine to create an attractive and intellectually vibrant alternative to conventional thought. 332 00:32:53.580 --> 00:32:59.580 The future of Austrian economics is bright, which bodes well for the future of liberty itself. 333 00:32:59.580 --> 00:33:04.580 For if we are to reverse the trends of statism in the century, and re-establish a free market, 334 00:33:04.580 --> 00:33:08.580 the intellectual foundation must be the Austrian school. 335 00:33:08.580 --> 00:33:11.580 That is why Austrian economics matters.