WEBVTT NOTE Austrian Economics 1 00:00:00.000 --> 00:00:06.000 It's an honor and a great pleasure for the department and the university to welcome you to the campus today, Professor Hayek. 2 00:00:06.000 --> 00:00:14.000 Thank you very much. 3 00:00:14.000 --> 00:00:26.000 Although I admit that I'm really much more interested in the questions that the chairman alluded to as being the subject of my current work, 4 00:00:26.000 --> 00:00:36.400 I feel that the primary duty of, at this moment, of any economist who is worth the title, is 5 00:00:36.400 --> 00:00:44.640 to tell the public and the students that the present unemployment is a direct and inevitable 6 00:00:44.640 --> 00:00:54.160 cause of the so-called full employment policy we have been pursuing for the past 25 years. 7 00:00:54.160 --> 00:01:04.280 And most people still mistakenly believe that an increase of aggregate demand will lastingly 8 00:01:04.280 --> 00:01:09.880 remove the causes of extensive unemployment. 9 00:01:09.880 --> 00:01:18.040 And nothing short of the insight that it is the means we have employed for this purpose, 10 00:01:18.040 --> 00:01:26.440 The constant artificial increase in added debt demand that has produced that misdirection 11 00:01:26.440 --> 00:01:35.360 of labor, which now manifests itself in unemployment, will prevent people in pressing for more inflation 12 00:01:35.360 --> 00:01:39.040 as soon as unemployment becomes at all things. 13 00:01:39.040 --> 00:01:47.080 What seems to me the most important part to undeceive people about this belief that unemployment 14 00:01:47.080 --> 00:01:52.600 can be lastingly cured by just creating more dimension. 15 00:01:52.600 --> 00:02:02.420 Now, I'm afraid this contention, which I believe a steadily increasing number of economists 16 00:02:02.420 --> 00:02:13.780 begins to accept, implies, however, nothing less than the assertion that the great majority 17 00:02:13.780 --> 00:02:24.140 The majority of economists who advise governments have taken in the last 25 years have been 18 00:02:24.140 --> 00:02:31.380 forfeited the right to be listed to in the future, and orderly to do penance in sackcloth 19 00:02:31.380 --> 00:02:39.540 and ashes for what they have been saying, because the inflation has been brought about 20 00:02:39.540 --> 00:02:50.700 by Following the Dominating Economic Doctrine, the doctrine which is known as Keynesian economics. 21 00:02:50.700 --> 00:02:59.500 I stress Keynesians in the sense of the economics of a Keynesian school because I have positive 22 00:02:59.500 --> 00:03:06.500 reason to believe that if Lord Keynes had lived he would have become one of the formal 23 00:03:06.500 --> 00:03:17.900 Fighters Against Inflation, but he unfortunately died at a moment when the main effect of his 24 00:03:17.900 --> 00:03:26.900 past teaching adapted to a particular situation, tended in the inflationist direction, as he 25 00:03:26.900 --> 00:03:34.500 himself told me once that his theories were frightfully important in the 1930s when the 26 00:03:34.500 --> 00:03:44.700 The task was to combat an acute deflation, but that I could count upon him to change 27 00:03:44.700 --> 00:03:49.500 public opinion rapidly if his ideas ever should become dangerous. 28 00:03:49.500 --> 00:03:58.020 Now, unfortunately, the six weeks after he told me that it was dead, and the development 29 00:03:58.020 --> 00:04:04.260 of theories was left in the hand of his pupils, who developed it in a manner which I am not 30 00:04:04.260 --> 00:04:34.260 I'm not sure he would have fully approved their extraordinary influence as recently been let out in a publication which probably has not yet reached this country that has just been published in England, an interesting volume of essays on John Maynard Keynes published by his nephew Milo Keynes containing contributions by his greatest admirers 31 00:04:34.260 --> 00:04:52.140 In his essay we find the curious remark that admits that sometimes they, his pupils, had 32 00:04:52.140 --> 00:05:00.180 trouble in getting Maynard to see what the point of his revolution really was, that they 33 00:05:00.180 --> 00:05:06.980 were pushing him in a direction which he didn't quite like, I think is the question. 34 00:05:06.980 --> 00:05:10.820 Now, what does it really mean? 35 00:05:10.820 --> 00:05:22.380 It meant a scientific sanction to the popular view of the business man that what prosperity 36 00:05:22.380 --> 00:05:27.580 Depends Upon a Sufficient Consumer's Demand. 37 00:05:27.580 --> 00:05:35.180 Generalizing this, and raising it to the dignity of an economic theory, it became Cain's in 38 00:05:35.180 --> 00:05:46.740 economics and led to the belief that all unemployment could lastingly be cured by simply keeping 39 00:05:46.740 --> 00:05:49.780 aggregate demand high enough. 40 00:05:49.780 --> 00:06:03.780 Now this view came to a victory by a serious prejudice about what scientific method really demanded. 41 00:06:03.780 --> 00:06:14.780 Before the change in sanctification of the business man's view became dominant, 42 00:06:14.780 --> 00:06:28.780 There had been a widely accepted view about the cause of unemployment, which I still regard as a true one, which was later abandoned. 43 00:06:28.780 --> 00:06:40.780 That view was that unemployment, extensive unemployment, is due to a definite discrepancy between the manner in which demand is distributed, 44 00:06:40.780 --> 00:06:45.900 – which means the different services and commodities, and the manner in which on the 45 00:06:45.900 --> 00:06:52.580 other side the resources are distributed between producing the different services and commodities, 46 00:06:52.580 --> 00:06:59.540 with the result that there were in each individual field differences between demand and supply 47 00:06:59.540 --> 00:07:01.540 which led to unemployment. 48 00:07:01.540 --> 00:07:07.940 Although still there is one great disadvantage. 49 00:07:07.940 --> 00:07:18.700 It claims that unemployment is caused by deviation of the actual price structure from the equilibrium 50 00:07:18.700 --> 00:07:26.540 structure which would produce correspondences in demand and supply in each sector. 51 00:07:26.540 --> 00:07:34.060 For such a deviation of prices from a hypothetical equilibrium structure, it's something which 52 00:07:34.060 --> 00:07:39.180 by definition cannot be statistically measured. 53 00:07:39.180 --> 00:07:43.740 We can only find out what the equilibrium prices will be if we let the market under 54 00:07:43.740 --> 00:07:48.380 appropriate conditions work and establish an equilibrium position. 55 00:07:48.380 --> 00:07:52.940 But since we don't know what equilibrium prices would be, we cannot measure the deviation 56 00:07:52.940 --> 00:07:56.220 of actual prices from the flow. 57 00:07:56.220 --> 00:08:09.220 It is very clear, the result, that a generation which was taught that no theory should be adopted, it could not be proved statistically, dismissed this theory as not scientific. 58 00:08:09.220 --> 00:08:18.220 It's a very clueless procedure to say something, because we cannot prove it, must be false. 59 00:08:18.220 --> 00:08:24.220 But the rest is on the belief that we had in our power to find scientific evidence forever. 60 00:08:24.220 --> 00:08:32.160 On the other hand, there was a much simpler contention that unemployment was caused by 61 00:08:32.160 --> 00:08:41.420 a insufficiency of aggregate demand, and there it was in fact possible to show statistically 62 00:08:41.420 --> 00:08:51.220 there was a rough approximation between fluctuations in aggregate demand and fluctuations in unemployment. 63 00:08:51.220 --> 00:09:01.900 Although this is only a very approximate correspondence, it happened to be the theory for which we could 64 00:09:01.900 --> 00:09:04.420 adduce statistic levitation. 65 00:09:04.420 --> 00:09:08.940 And according to the current fashion, the theory, which was probably the better theory, 66 00:09:08.940 --> 00:09:14.580 but which could not be statistically understood, was discarded, and the inferior theory, which 67 00:09:14.580 --> 00:09:20.060 was only an approximate, which was the only one for which there was some statistical confirmation, 68 00:09:20.060 --> 00:09:23.980 are going to be adopted as the ruling theory. 69 00:09:23.980 --> 00:09:35.940 And so we began acting on a theory which economists up to 1935 had regarded as a theory of cranks 70 00:09:35.940 --> 00:09:43.420 and beliefs of practical men, but undefensible scientifically, was suddenly raised to the 71 00:09:43.420 --> 00:09:50.540 and the strength of the dominant theory and came to dominate act of policy. 72 00:09:50.540 --> 00:09:59.940 The reason why some of us at that time objected to this was that we had known from experience 73 00:09:59.940 --> 00:10:09.580 and knew from the theory we based from this that such a policy of raising aggregate demands 74 00:10:09.580 --> 00:10:15.860 At every moment, sufficient to secure full employment involved a constant addition to 75 00:10:15.860 --> 00:10:23.260 the income stream, which attracted resources to places where they could be used only for 76 00:10:23.260 --> 00:10:28.940 longer if this increase in addition to money continued to grow. 77 00:10:28.940 --> 00:10:37.660 It created jobs which were not additional in number, but which were at places where 78 00:10:37.660 --> 00:10:44.540 as it could be preserved and maintained only by continuing and even accelerating inflation. 79 00:10:44.540 --> 00:10:55.220 What it suggested to us, certainly to me and many of people at that time similarly, was 80 00:10:55.220 --> 00:11:01.460 the experience of the great German inflation, which I had watched from fairly close, and 81 00:11:01.460 --> 00:11:12.460 We had a good deal of it even in Austria where I lived through it, where during a very rapid inflation, so long as the inflation accelerates, there was no unemployment. 82 00:11:12.460 --> 00:11:20.460 But as soon as the rate of acceleration of the inflation slowed down, unemployment had once reappeared. 83 00:11:20.460 --> 00:11:34.460 It was exactly this which led us to recognize the effect of inflation on producing misdirections of the use of labor, 84 00:11:34.460 --> 00:11:47.460 which led on these past occasions to pills of unemployment, which we found, which we called then stabilization crisis, 85 00:11:47.460 --> 00:11:52.180 an almost invariable phenomenon at the end of an inflation period. 86 00:11:52.180 --> 00:11:56.740 And developing this, we began to recognize that after all, 87 00:11:56.740 --> 00:12:00.140 the great industrial fluctuations of the past, 88 00:12:00.140 --> 00:12:03.580 the so-called business cycle, were just miniature phenomena 89 00:12:03.580 --> 00:12:06.900 of the same kind, thirds of three or four years 90 00:12:06.900 --> 00:12:10.780 of rapid credit expansion, producing this misdirection 91 00:12:10.780 --> 00:12:13.540 of labor, in that case, almost entirely 92 00:12:13.540 --> 00:12:20.860 is a form of attraction of too much labor and other resources into the production of capital 93 00:12:20.860 --> 00:12:29.140 equipment, which at a certain later stage proved to be excessive and led to unemployment 94 00:12:29.140 --> 00:12:36.100 in at first the capital industries, then by a certain process of cumulative contraction 95 00:12:36.100 --> 00:12:45.520 The point we then maintained, and which I particularly tried to elaborate just before 96 00:12:45.520 --> 00:12:53.620 Keynes became so influential, was essentially that the initial cause, even of the past period 97 00:12:53.620 --> 00:13:02.740 of unemployment, was not an insufficiency of finite amount, but a misdirection of labor 98 00:13:02.740 --> 00:13:09.340 during the Boehm period, which when the Boehm came to an end, led to unemployment in this 99 00:13:09.340 --> 00:13:10.340 field. 100 00:13:10.340 --> 00:13:18.300 This unemployment then admittedly setting up a further cumulative process of contraction. 101 00:13:18.300 --> 00:13:23.340 Unemployment now becoming the cause of real insufficiency of demand, that insufficiency 102 00:13:23.340 --> 00:13:27.940 of demand leading to further unemployment, and the whole downward spiral which we know 103 00:13:27.940 --> 00:13:37.120 because for this reason that from the very beginning I opposed the Keynesian proposal 104 00:13:37.120 --> 00:13:46.920 of controlling unemployment by an expansionist policy by maintaining aggregate demand. 105 00:13:46.920 --> 00:13:52.860 I was convinced it couldn't last permanently, couldn't be effective only for a limited period 106 00:13:52.860 --> 00:14:01.860 would in the end make matters only worse because during the period of credit expansion it created more and more misdirection of labor. 107 00:14:01.860 --> 00:14:07.860 I confess that I never thought the thing could last as long as it did during the pre-war period. 108 00:14:07.860 --> 00:14:19.860 When the great post-war boom started, I expected it might be conducted for a continue for five, six, perhaps eight, mostly ten years. 109 00:14:19.860 --> 00:14:28.980 For that we should lead into that great prosperity of 25 years with only minor recessions, never 110 00:14:28.980 --> 00:14:35.980 leading to any really deflationary interval in between, for that was something I did not 111 00:14:35.980 --> 00:14:38.980 really foresee. 112 00:14:38.980 --> 00:14:49.140 But I had not really, perhaps fully understood that in the past, the kick into the expansion 113 00:14:49.140 --> 00:14:57.140 It usually does not come from any inherent cause, as it has already become impossible to continue, but by external factors. 114 00:14:57.140 --> 00:15:06.140 The mechanism of the gold standard during the 19th century and early 20th century provided an early automatic check to expansion. 115 00:15:06.140 --> 00:15:08.140 We have removed that. 116 00:15:08.140 --> 00:15:16.940 Wherewith Bretton Woods removed another check by placing subverting of adjustments entirely 117 00:15:16.940 --> 00:15:23.940 on the surplus countries and relieving the deficit countries from ever having to contract. 118 00:15:23.940 --> 00:15:31.900 When there then became a danger of expansion being checked, we invented a method of creating 119 00:15:31.900 --> 00:15:38.780 additional international liquidity, surely for the purpose to prolong the period of expansion. 120 00:15:38.780 --> 00:15:46.640 And in the end, by removing fixed rates of exchange, we removed the last automatic check 121 00:15:46.640 --> 00:15:57.340 on the expansion, and that made it possible to continue the inflationist prosperity for 122 00:15:57.340 --> 00:16:05.780 practically 25 years till the obstacle came from people feeling they no longer would put 123 00:16:05.780 --> 00:16:11.780 up with that amount of rise of prices, which at that stage it was all about. 124 00:16:11.780 --> 00:16:19.020 But they are still in a mood where they believe, and in fact all the politicians still promised 125 00:16:19.020 --> 00:16:29.780 that they would get at the same time cessation of inflation and very soon full employment. 126 00:16:29.780 --> 00:16:35.660 Once they realize that this is impossible, that if you stop now inflation, you must get 127 00:16:35.660 --> 00:16:41.620 unemployment, there will be an outcry for more inflation. 128 00:16:41.620 --> 00:16:55.620 Now, that partly with a reservation in people's minds that after all we can deal with the effect of inflation by price controls. 129 00:16:55.620 --> 00:17:07.620 And I fear what we are actually heading for is that the unemployment, which has now appeared as a result of checking the process of inflation, 130 00:17:07.620 --> 00:17:14.740 will cause such pressure on the politician that the inflation will be resumed, but its 131 00:17:14.740 --> 00:17:21.020 approaches against rising prices will force government to combine continued expansion 132 00:17:21.020 --> 00:17:25.540 of the quantity of money with extensive price controls. 133 00:17:25.540 --> 00:17:31.140 That will make the whole market mechanism largely ineffective and that we shall get 134 00:17:31.140 --> 00:17:37.280 this worst of all possible worlds, a so-called repressed inflation where there is too much 135 00:17:37.280 --> 00:17:44.280 I always add that so far as this country is concerned, the one spark of hope which I see is that I knew from long observations, 136 00:17:44.280 --> 00:17:47.280 that the market is entirely suspended. 137 00:17:47.280 --> 00:17:51.280 I'm afraid I feel very pessimistic about the immediate future. 138 00:17:51.280 --> 00:18:02.280 I always add that so far as this country is concerned, the one spark of hope which I see is that I knew from long observations, 139 00:18:02.280 --> 00:18:10.160 which I see is that I knew from long observation that you people here are 140 00:18:10.160 --> 00:18:16.200 capable of changing your opinions amazingly rapidly and that the present 141 00:18:16.200 --> 00:18:21.600 state of opinion which forces a certain development may no longer be the 142 00:18:21.600 --> 00:18:29.080 dominant state of opinion in a year's time or in two years time. Then it would 143 00:18:29.080 --> 00:18:40.080 Would it be possible to do what has been done in the past, that some skillful man believing, 144 00:18:40.080 --> 00:18:48.200 not in any kind of very sophisticated theory, but who has grasped the bare elements of the 145 00:18:48.200 --> 00:18:52.720 quantity theory of money, which for practical purposes is still the most useful thing, although 146 00:18:52.720 --> 00:18:59.000 I have many objections against it as an adequate explanation, and will, as people like young 147 00:18:59.000 --> 00:19:12.000 Yalmer Schacht did in 1924, or Dr. Erhard did in 1949, just say, well, we should stop the increase in the quantity of money and carry it out. 148 00:19:12.000 --> 00:19:21.000 Only doubt I have is that with all your willingness to change your opinions, you are prepared in such a crisis situation, 149 00:19:21.000 --> 00:19:28.000 if a suitable man should turn up to give him the power he would need to carry such a program through. 150 00:19:28.000 --> 00:19:49.000 I'm not sure that Dr. Ehrhardt, who really achieved a miracle in Germany by having the courage of bringing about the currency reform and removing all controls at the same time, could do the same sort of thing in this country. 151 00:19:49.000 --> 00:19:55.000 I think it's much too dependent on the whole machinery of government. 152 00:19:55.000 --> 00:20:01.000 I will just tell you in conclusion a joke, which was not a joke, a true story, 153 00:20:01.000 --> 00:20:05.000 which Dr. Erhard loves to tell about his own experience. 154 00:20:05.000 --> 00:20:14.000 When he had decided and informed the other authorities that he was to announce on a certain day in 1949 155 00:20:14.000 --> 00:20:20.640 It was on the one hand carrying out the currency reform which involved the complete stoppage 156 00:20:20.640 --> 00:20:29.640 of the increase in the quantity of money and at the same moment to scrap all price controls 157 00:20:29.640 --> 00:20:36.160 General Mark Clark, the commander of the American Army of Occupation came to see him and said 158 00:20:36.160 --> 00:20:42.120 Dr. Earhart, all my advisors tell me you are making a great mistake, from which Earhart 159 00:20:42.120 --> 00:20:49.120 I wonder whether there could be, with the existing American system of government, a man who would act according to his conviction, disregarding the advice of his advisors. Thank you. 160 00:21:12.120 --> 00:21:20.120 If you could address your questions to Professor Hayek distinctly so that they can be heard around the room, please. 161 00:21:21.120 --> 00:21:28.120 Professor Hayek, you said you were surprised that we didn't have a collapse center. 162 00:21:30.120 --> 00:21:40.120 Now by hindsight, do you have any explanations why we kept on going for 25 years, why the collapse didn't come center? 163 00:21:42.120 --> 00:21:51.120 Because for a long time, a slower acceleration of the rate of inflation was sufficient to 164 00:21:51.120 --> 00:21:54.240 keep the boom going than I should have expected. 165 00:21:54.240 --> 00:21:58.840 I should have thought, without any definite evidence for it, it's a matter of feeling, 166 00:21:58.840 --> 00:22:05.560 which you can't have quantitative evidence, that in order to continue inflationary boom 167 00:22:05.560 --> 00:22:09.880 of this kind, the acceleration of inflation would have to start much earlier. 168 00:22:09.880 --> 00:22:13.880 It was a much more long-drawn process than I expected. 169 00:22:13.880 --> 00:22:20.880 I believe my rather unreflected expectation of a soon end 170 00:22:20.880 --> 00:22:25.880 was really based on the purely factual experience 171 00:22:25.880 --> 00:22:31.880 that in the past the check which had come from external restraints, 172 00:22:31.880 --> 00:22:34.880 the ones I mentioned, had come so much sooner. 173 00:22:34.880 --> 00:22:43.880 had never been in the past a real experiment of letting this thing go on indefinitely without any check. 174 00:22:43.880 --> 00:22:51.880 We were the first generation who had the courage in the belief in a theory, I believe a wrong theory, 175 00:22:51.880 --> 00:22:59.880 to remove all those safety devices which in the past restricted the discretion of the monetary authorities 176 00:22:59.880 --> 00:23:03.880 in order to enable them to act indefinitely on that theory. 177 00:23:03.880 --> 00:23:09.640 So we have for the first time tried it out and it turned out that evidently that 178 00:23:09.640 --> 00:23:15.560 inflation, which is necessary, achieves alarming proportion only after a period of 179 00:23:15.560 --> 00:23:24.040 something like 20 or 25 years. It didn't then, but as I say, later than I expected. 180 00:23:24.040 --> 00:23:36.800 If the policies of aggregate demand, increased aggregate demand, that has been followed over 181 00:23:36.800 --> 00:23:43.280 the last 20 years, the post-war period according to Keynesian economics, had not been put into 182 00:23:43.280 --> 00:23:50.720 effect, had not the world economy follow the same pattern of economic activity that it 183 00:23:50.720 --> 00:23:58.720 What did it have before the war, which was one of high unemployment and low inflation? 184 00:24:20.720 --> 00:24:26.640 to preserve the employment effect which they had before, which meant a greater 185 00:24:26.640 --> 00:24:32.840 speeding up of inflation that had actually, now speaking not of the last eight 186 00:24:32.840 --> 00:24:38.200 months when the thing has become so acute, but the last two years when the thing began 187 00:24:38.200 --> 00:24:43.960 to slow down and unemployment to appear in the market. The great 188 00:24:43.960 --> 00:24:51.660 question which I have no answer is, would it still have been possible by sufficiently 189 00:24:51.660 --> 00:24:59.080 speeding up inflation in this period to achieve or maintain nearly full employment? 190 00:24:59.080 --> 00:25:01.080 I just don't know. 191 00:25:01.080 --> 00:25:05.840 I rather hope that now it is no longer possible. 192 00:25:05.840 --> 00:25:11.120 I rather say I rather hope for the reasons given before because if we succeeded once 193 00:25:11.120 --> 00:25:28.120 And once more, the continuing near-full employment for, say, another two years would add to the amount of misdirection of labor and would merely postpone the evil day and have an even worse crisis in two years' time. 194 00:25:28.120 --> 00:25:38.120 For that reason, I say, I hope we shall have to face the facts now and change our policies rather than another two years' time. 195 00:25:38.120 --> 00:26:03.120 If the politicians knew that, that there is still a chance of, say, recovering full employment for a few months before the next election, they would certainly try that and say, after after the deluge, if we only can assure by a short spurt of near full employment that we are re-elected or that we are elected, they will do it. 196 00:26:03.120 --> 00:26:13.880 That, of course, is incidentally an illustration to a point I only implied. 197 00:26:13.880 --> 00:26:23.160 What many of my fellow economists do not seem to see is that, very frequently, what from 198 00:26:23.160 --> 00:26:31.040 an economic point of view is only the second or third best institution may still be the 199 00:26:31.040 --> 00:26:36.040 from a political point of view in the world in which we live. 200 00:26:36.040 --> 00:26:43.040 It may well be, I doubt it, but it may well be that the monetary authority, 201 00:26:43.040 --> 00:26:51.040 with complete freedom to act as it wanted, without any rules, merely doing the appropriate things, 202 00:26:51.040 --> 00:27:00.040 but completely protected against political pressure, would act more wisely than any kind of mechanical system. 203 00:27:00.040 --> 00:27:09.040 But in the world in which we live the most important system is that the monetary authority has an excuse of saying no to political pressure. 204 00:27:09.040 --> 00:27:17.040 And for that reason I personally believe that certainly fixed rates of exchange are absolutely indispensable. 205 00:27:17.040 --> 00:27:25.040 They may be inferior in a system where the monetary authorities are wise to flexible exchanges. 206 00:27:25.040 --> 00:27:38.040 But the reference to the necessity of maintaining exchange rates is almost the only defense monetary authorities have against the political pressure to do a little more inflation. 207 00:27:38.040 --> 00:27:46.040 And if you remove that one restraint, it's inevitable that they are being driven in inflationary policy. 208 00:27:46.040 --> 00:27:54.040 Therefore I believe that what is second best from an economic point of view may still be indispensable from a political point of view 209 00:27:54.040 --> 00:28:03.040 If you want to place the monetary authorities in a position where they can avoid doing greater harm. 210 00:28:05.040 --> 00:28:15.040 I wonder if you could give some specific examples of the misdirection of labor activity associated with monetary claims? 211 00:28:15.040 --> 00:28:25.640 Well, that is actually, in our present situation, actually extraordinarily difficult in the past, during the business cycles. 212 00:28:25.640 --> 00:28:38.740 It was comparatively simple, because then nearly all the credit expansion came by way of an expansion of credits for the purpose of industrial investment. 213 00:28:38.740 --> 00:28:52.740 So we had the typical overdevelopment of the production of iron and steel, of heavy machinery, of building, and they were the overdevelopments with the over-attraction of labor. 214 00:28:52.740 --> 00:28:59.740 Now the process of credit expansion during the last 25 years has only been partly of that character. 215 00:28:59.740 --> 00:29:03.740 It has come very largely by different routes. 216 00:29:03.740 --> 00:29:33.740 roots. So I believe you can make new general statement about it. You would really have to analyze the situation separately for every country, and even for every part of the epoch of 25 years. And what the net effect is, whether there still is any one large block of misdirected labor, or whether it's widely spread with all kinds of very specific things, whether what is more important is 217 00:29:33.740 --> 00:29:42.140 that overinvestment has been going into industries connected with investment or in industries 218 00:29:42.140 --> 00:29:48.620 or trades where the expectation of a future rise of prices was a guiding factor, I simply 219 00:29:48.620 --> 00:29:49.620 do not know. 220 00:29:49.620 --> 00:29:56.140 The general model tells me that a great many misdirections must have occurred. 221 00:29:56.140 --> 00:30:01.060 In a simple situation like the past business cycle, I can point to a class of industries. 222 00:30:01.060 --> 00:30:19.060 I know now it must be very dispersed. That may have the advantage that less serious, widely dispersed misdirections may be easier to correct as a great block of misdirection, a great mass of labor drawn from the capital industries is stuck there. 223 00:30:19.060 --> 00:30:28.060 We can only know if we find a way of establishing a new standard of relatively stable equilibrium. 224 00:30:28.060 --> 00:30:35.060 But what sort of corrections are there for it? I think the market is the only way of finding out. 225 00:30:49.060 --> 00:30:59.060 The chairman was very kind to me and gave all kinds of reasons for you speaking out, but he mentioned the main fact that I am semi-deaf. 226 00:30:59.060 --> 00:31:15.060 I am literally deaf on one ear and the other, which might amuse you, that I am deaf on the left ear has given rise to a great deal of joking about the political significance of this. 227 00:31:15.060 --> 00:31:21.060 And since I've since discovered that Karl Marx was deaf on the right ear, I'm beginning almost to believe it. 228 00:31:24.060 --> 00:31:31.060 But if you will speak up and speak so it can see your mouth, I think I should be able to answer your question. 229 00:31:31.060 --> 00:31:42.060 Oh, do you envisage any kind of model building that could deal with this effect of over-investment 230 00:31:42.060 --> 00:31:47.060 and other factors? 231 00:31:47.060 --> 00:31:54.060 Well, there is of course the model for the typical business cycle of the past based on 232 00:31:54.060 --> 00:31:55.060 industrial over-investment. 233 00:31:55.060 --> 00:32:04.540 and I think you might build quite a number of models corresponding to the alternative 234 00:32:04.540 --> 00:32:10.460 methods of maintaining full employment which have been used. 235 00:32:10.460 --> 00:32:16.540 I believe you could possibly, at least for any one country, build a model on the assumption 236 00:32:16.540 --> 00:32:22.060 that it was all done by fiscal policy, by deficit or government spending. 237 00:32:22.060 --> 00:32:28.860 You might have another one, but assume that it's based on low interest and private borrowing, 238 00:32:28.860 --> 00:32:36.460 and so you might build a number of models for different assumptions, but I'm not sure 239 00:32:36.460 --> 00:32:42.620 that it's very well worthwhile because they have such specific... 240 00:32:42.620 --> 00:32:47.860 But I think, well, in a way, yes, anyone who wrote a history, an economic history, would 241 00:32:47.860 --> 00:32:52.860 would, where he wants to explain what has happened, would really have to do that on 242 00:32:52.860 --> 00:33:01.860 the basis of a model based on the realistic assumptions applied to that period of time. 243 00:33:01.860 --> 00:33:27.860 You seem to be saying, too, that the misdirection is between the man that is actually distributed where it goes into a new, what we call in Germany, rationalization, right? And what would be your alternative? I mean, how would it be ideally distributed? 244 00:33:27.860 --> 00:33:33.260 Well, again, we don't have the concrete manifestation. 245 00:33:33.260 --> 00:33:37.940 We can only state the conditions in which it would be avoided. 246 00:33:37.940 --> 00:33:44.820 And that is, in very simple terms, really a condition in which currently the amount 247 00:33:44.820 --> 00:33:52.580 of funds available for investment is kept approximately equal to current voluntary savings. 248 00:33:52.580 --> 00:34:07.580 are still formula, try to keep investment in step with current voluntary savings, and you can hope to achieve some approach to a equitable situation. 249 00:34:07.580 --> 00:34:14.580 Have you considered rewriting your book, The Road to Serfdom, and taking into account 250 00:34:14.580 --> 00:34:19.580 any increases in the amount of books you've written? 251 00:34:19.580 --> 00:34:22.580 Again, I must ask you to speak up. I heard that the question about... 252 00:34:22.580 --> 00:34:31.580 Have you considered rewriting your book, The Road to Serfdom, and taking into account any increases in the amount of books you've written? 253 00:34:31.580 --> 00:34:41.580 Have you considered rewriting The Road to Serfdom, taking into account trends towards socialism in the United States? 254 00:34:41.580 --> 00:34:45.580 No, I couldn't do that again. 255 00:34:45.580 --> 00:34:51.580 That was in a very particular flush of excitement about a problem. 256 00:34:51.580 --> 00:35:08.580 I wish somebody would do it. I think it's worth doing. But you cannot always write the books which may be wanted by the times. Your mind develops in a certain course, and I feel other things, I'm better quality. 257 00:35:08.580 --> 00:35:14.580 In fact, I refused. Actually, in the beginning, if I may tell you a story. 258 00:35:14.580 --> 00:35:25.580 Immediately after I had published the Road to Serfdom, within six months, I was asked for a lecture tour over to this country. 259 00:35:25.580 --> 00:35:36.580 And because of this lecture tour, I was visited at one place by a gentleman who shall be anonymous for this purpose, 260 00:35:36.580 --> 00:35:44.580 I was trying to be very brief and said, I'm not going to take up much of your time. 261 00:35:44.580 --> 00:35:47.580 A book like this would be written especially for this country. 262 00:35:47.580 --> 00:35:48.580 I said, yes. 263 00:35:48.580 --> 00:35:50.580 Are you prepared to do it? 264 00:35:50.580 --> 00:35:51.580 No. 265 00:35:51.580 --> 00:35:53.580 Could somebody else do it? 266 00:35:53.580 --> 00:35:54.580 Yes, probably. 267 00:35:54.580 --> 00:35:55.580 We've been doing this for two years. 268 00:35:55.580 --> 00:35:58.580 We've been intimately acquainted with the conditions, with fashion. 269 00:35:58.580 --> 00:36:00.580 How much would it cost? 270 00:36:00.580 --> 00:36:13.580 Oh, I suppose at that time, I said, engaging the first class men who was interested in it for two years, it was all the cost for $30,000, I think, could be done. The money is yours. 271 00:36:13.580 --> 00:36:18.580 Well, I didn't side with that. 272 00:36:18.580 --> 00:36:43.580 Let's raise, yeah right, I'll get back to that. You know, on the surface, one of your primary arguments, a positive argument against socialism, is that it cannot work because of the informational quality required by the planner, which is impossible to obtain. What about the counter-argument of decentralized socialism, or market-based socialism? 273 00:36:43.580 --> 00:36:48.700 Well, I think it found us on one difficulty. 274 00:36:48.700 --> 00:36:54.200 It wouldn't be socialism if you didn't also decentralize the acquisition and formation 275 00:36:54.200 --> 00:36:55.780 of capital. 276 00:36:55.780 --> 00:37:01.500 And so long as the allocation of capital remains a matter for the central authority, you don't 277 00:37:01.500 --> 00:37:03.500 solve the problem. 278 00:37:03.500 --> 00:37:12.300 You see, they have never faced this fact, that if the decentralized industries are dependent 279 00:37:12.300 --> 00:37:20.420 For every new investment, and what some central investment board is willing to give them, it 280 00:37:20.420 --> 00:37:27.180 is not in their power to restore a really competitive system. 281 00:37:27.180 --> 00:37:34.180 And if you allow the individual firms to own their capital, it would really restore capital 282 00:37:34.180 --> 00:37:58.180 In other words, if you just say you had a capital offense, you turned the factory down for the work, you eliminated the increasing your children's wealth from the factory, only the point of your work in the factory had to say, in the allocation of the capital, what was being produced, how was the price and so on. You would not call that social equilibrium. 283 00:38:04.180 --> 00:38:13.540 And you've got, as you would in this case, substantial incomes from the return on capital. 284 00:38:13.540 --> 00:38:20.420 You would retain all those features of capitalism, which, so far as I can judge, the socialists 285 00:38:20.420 --> 00:38:22.260 most dislike. 286 00:38:22.260 --> 00:38:30.380 You would leave the distribution of incomes to the market, including to the pricing of 287 00:38:30.380 --> 00:38:37.180 of Capital, and to the accident of people being able to build up capital resources. 288 00:38:37.180 --> 00:38:47.980 I mean, I have, in these discussions in the 1930s, found some of my opponents being driven 289 00:38:47.980 --> 00:38:51.940 by the argument and practically proposing to restore capitalism. 290 00:38:51.940 --> 00:38:57.460 All they objected in the end is that to begin with, capital ought not to be distributed by 291 00:38:57.460 --> 00:39:16.460 by Historical Accidents, but in some just manner, which my answer is, of course, yes, to begin with, you might have it, but even if then the system works, in five years it is again distributed by the accidents of the market, and no longer by justice, and you are back very well. 292 00:39:16.460 --> 00:39:28.460 Mr. President, could you comment on the opportunity of direct involvement, direct subsidy by the government towards unemployed families? 293 00:39:31.460 --> 00:39:37.460 I don't know what these proposals are. I've found that you're referring to some Americans. 294 00:39:37.460 --> 00:39:44.460 In other words, a pool of experience in Germany back in the 1930s? 295 00:39:44.460 --> 00:39:49.460 Are you just thinking of public works as a means of creating employment? 296 00:39:49.460 --> 00:39:51.460 That could be one method or... 297 00:39:51.460 --> 00:40:08.460 Well, that may in certain circumstances be necessary when it comes to the question of what I've before called the secondary depression, that cumulative deflationary process which is started by the initial appearance of unemployment. 298 00:40:08.460 --> 00:40:15.780 In fact, I knew no other way of combating it, except some form of public work, which in 299 00:40:15.780 --> 00:40:28.140 that case I knew that it also creates certain difficulties by potentially creating misdirections 300 00:40:28.140 --> 00:40:29.140 of labor. 301 00:40:29.140 --> 00:40:36.740 But if you employ these people on work, which is really only a temporary expedient where 302 00:40:36.740 --> 00:40:41.980 that they don't want to stay, but we're looking for something else, and at the same time use 303 00:40:41.980 --> 00:40:50.260 it only to give them an income so that the general demand for consumers' goods is maintained 304 00:40:50.260 --> 00:40:54.540 at approximately the kind they would have if these people were employed. 305 00:40:54.540 --> 00:40:59.740 I think this is still the best way out, but I should explain here one thing because I 306 00:40:59.740 --> 00:41:07.740 I have a reputation for things I've faced in the past which is not fully justified, but 307 00:41:07.740 --> 00:41:09.740 which rather I can explain. 308 00:41:09.740 --> 00:41:17.740 You see, I did actually argue in the 1930s, during the beginning of the Great Depression, 309 00:41:17.740 --> 00:41:27.740 that a deflationary process of some kind had a function in restoring equilibrium. 310 00:41:27.740 --> 00:41:35.460 The reason for this was that already then, that rigidity of wages, which has now become 311 00:41:35.460 --> 00:41:40.580 a major problem, was making its first appearance. 312 00:41:40.580 --> 00:41:48.860 And I was hoping, probably wrongly, at the political considerations, that this wage rigidity, 313 00:41:48.860 --> 00:41:54.580 which made the market ineffective, might still be broken by a short process of depletion. 314 00:41:54.580 --> 00:42:05.580 That's a matter of practical judgment. I no longer think now this is an effective means. I think we should have to find other means to restore a genuine labor market. 315 00:42:05.580 --> 00:42:16.580 But I admit that in the early 1930s, perhaps partly guided by observing the British experiment. 316 00:42:16.580 --> 00:42:26.860 See, the British had, very honestly but foolishly, tried in 1925 to return to the gold standard 317 00:42:26.860 --> 00:42:37.460 at the former parity, and had for six years stuck through a very painful process of deflation, 318 00:42:37.460 --> 00:42:48.860 which in the last two years had gone very far in bringing about a play in wages, fall 319 00:42:48.860 --> 00:42:56.540 of some wages, and if it had gone on, probably would have restored a wage structure which 320 00:42:56.540 --> 00:42:58.700 corresponds to equilibrium. 321 00:42:58.700 --> 00:43:07.180 They gave up in the acute crisis of 1931, I think in the belief that this hook of bringing 322 00:43:07.180 --> 00:43:16.180 I think, after that, it was hopeless to think that any government would again try this, 323 00:43:16.180 --> 00:43:23.180 that a tent was discredited rightly or wrongly, and when I, in the early 1930s, still held 324 00:43:23.180 --> 00:43:30.180 to believe it was probably a political misjudgment, but I would just explain that it was for this 325 00:43:30.180 --> 00:43:35.660 reason, that for in general considerations I then did occasionally maintain that some 326 00:43:35.660 --> 00:43:38.660 Some little preflation might be a good thing. 327 00:44:05.660 --> 00:44:32.660 What do you mean it is already part of the market, or is it already part of the market? 328 00:44:32.660 --> 00:44:35.660 What do you mean it is already part of the market? 329 00:44:35.660 --> 00:44:43.660 Of course, it is a fact that the labor is in places where it could not be kept in employment 330 00:44:43.660 --> 00:44:47.860 without the continuance of accelerating inflation. 331 00:44:47.860 --> 00:44:55.660 That means, in my opinion, that we cannot get a stable distribution of resources without 332 00:44:55.660 --> 00:44:58.660 some considerable redistribution. 333 00:44:58.660 --> 00:45:07.500 It is true that the new equilibrium, which we must hope to achieve, will have among its 334 00:45:07.500 --> 00:45:13.020 determinants certain capital accumulations which are kept within the interval, it will 335 00:45:13.020 --> 00:45:19.220 not be the same which we would have achieved if we had not inflated and had achieved an 336 00:45:19.220 --> 00:45:20.220 equilibrium in 1925. 337 00:45:20.220 --> 00:45:26.820 There are new data which determine the present equilibrium in the form of the particular 338 00:45:26.820 --> 00:45:31.940 and other kinds of capital growth which have been created since, but it's still a problem 339 00:45:31.940 --> 00:45:38.940 of a just distribution of labor to these data, which now exist and you must accept. 340 00:45:38.940 --> 00:45:47.460 The thing is, I believe, that this will involve very good many people who cannot hope to continue 341 00:45:47.460 --> 00:45:56.460 in their present jobs, and if they are to find durable employment, they must move elsewhere. 342 00:45:56.460 --> 00:46:18.460 Professor Hayek, you stand up. Given your current research, politically unlikely that we can solve aggregate problems and the problem of relative crisis through deflation, I'd like to know what, in your opinion, 343 00:46:18.460 --> 00:46:37.660 The fact that price changes at not at the same time but successively in a certain order. 344 00:46:37.660 --> 00:46:44.460 The additional money comes in at some point of the economic system at certain prices first 345 00:46:44.460 --> 00:46:47.380 and reaches out only very late. 346 00:46:47.380 --> 00:46:55.500 And while this proceeds, there is a constant, what shall I call it, inclination in the price 347 00:46:55.500 --> 00:47:01.540 system, with those which are hit first always somewhere ahead, and those which are reached 348 00:47:01.540 --> 00:47:03.860 last always in the end. 349 00:47:03.860 --> 00:47:09.620 And this distortion of the whole price system can be corrected only if this extra influx 350 00:47:09.620 --> 00:47:20.900 At some point, or some points nowadays, I sometimes use only similar, which perhaps helps you 351 00:47:20.900 --> 00:47:23.220 to see what I have in mind. 352 00:47:23.220 --> 00:47:29.140 The effect of a change in the quantity of money on the price structure can be compared 353 00:47:29.140 --> 00:47:38.340 to the effect of a stream of silt into a pot of silt when the thing falls into the middle. 354 00:47:38.340 --> 00:47:43.340 You will have a little hill in the middle, which gradually spreads to the side. 355 00:47:43.340 --> 00:47:50.100 And so long as the stream of additional silver blasts, you still have this distortion and 356 00:47:50.100 --> 00:47:51.100 no equal level. 357 00:47:51.100 --> 00:47:54.740 It's only when the stream stops that it will level out again. 358 00:47:54.740 --> 00:48:00.700 So while inflation lasts, the price structure is always distorted, just as while the influx 359 00:48:00.700 --> 00:48:07.340 of silver blasts, the level of the surface is always distorted. 360 00:48:07.340 --> 00:48:20.340 Could I just ask one partial question to that? You feel this is true even in the face of inflationary pressure through consumer credit. 361 00:48:20.340 --> 00:48:31.340 In the earlier distortions, the initiation of the business cycle, it was often because of the point of injection of additional spending power, 362 00:48:31.340 --> 00:48:43.340 We've led to an over-investment in capital goods, but we're often asserted to have a consumer-oriented inflation with the expansion of consumer credit. 363 00:49:01.340 --> 00:49:06.980 are well there is a possible change of this relationship, when some of you may have come 364 00:49:06.980 --> 00:49:13.460 across the concept of the Ricardo effect, which bases itself very largely on the fact 365 00:49:13.460 --> 00:49:18.500 that the relation, a change in the relationship between the crisis of consumer goods and the 366 00:49:18.500 --> 00:49:22.420 crisis of factors has a profound effect on the volume of investment. 367 00:49:22.420 --> 00:49:29.660 So it may well be that an increase in the demand for consumer goods may have very deep 368 00:49:29.660 --> 00:49:44.660 I would say not obtain merely to maintain the demand of consumers' goods at a level where the prices of consumers' goods will keep at the same. 369 00:49:44.660 --> 00:49:52.660 That's what I had before a man. That's the purpose for which I would employ public works if an actual inflation threatened. 370 00:49:52.660 --> 00:50:01.660 I would have the public works, essentially, to create a source for money to be spent on consumer goods, people of the golden age. 371 00:50:04.660 --> 00:50:07.660 I'm not worried about the concept of equilibrium. 372 00:50:09.660 --> 00:50:13.660 There's a statement of the human imagination and of the real world. 373 00:50:14.660 --> 00:50:18.660 Of course, it never exists, it is part of the world as an evolutionary system. 374 00:50:18.660 --> 00:50:42.660 And although it's a very useful thing, I have a great deal of attempting with the view you've expressed that the structural problems of societies are not necessarily told by these overall aggregate measures. 375 00:50:42.660 --> 00:50:48.660 The only difficulty is that the angle of measure seems to be all we know how to do. 376 00:50:48.660 --> 00:50:52.660 I think that, by the way, I can put this in a question. 377 00:50:52.660 --> 00:51:00.660 If I ask why both the change of revolution and the post is successful, well, listen to me. 378 00:51:00.660 --> 00:51:07.660 Whereas the you which you represent is essentially not. 379 00:51:07.660 --> 00:51:21.660 Well, why don't I ask you? Why don't I ask you? Because I'm not being ad hominem. I think this is back to the last 25 years. 380 00:51:21.660 --> 00:51:34.660 I'm trying as much as you to avoid the concept of equilibrium, because I appreciate its misleading character, and yet there isn't a simple short other term which you can use. 381 00:51:34.660 --> 00:51:42.020 We need a description for the state of affairs in which the activities of the different members 382 00:51:42.020 --> 00:51:48.260 of an economic system are so adjusted to each other that each has at least a good chance 383 00:51:48.260 --> 00:51:50.660 that these expectations will be met. 384 00:51:50.660 --> 00:51:56.320 Well, that's what we like to achieve, and our policy aims at bringing out something 385 00:51:56.320 --> 00:51:57.320 like that. 386 00:51:57.320 --> 00:52:05.120 This sort of state has first been described by the mathematical economy by applying the 387 00:52:05.120 --> 00:52:08.840 term equilibrium to it, and we haven't got a better term. 388 00:52:08.840 --> 00:52:15.840 I would very much prefer to have another term, and in my present writings, when I speak of 389 00:52:15.840 --> 00:52:23.640 equilibrium, I generally put it in inverted commas, I think as you do, for the same reasons. 390 00:52:23.640 --> 00:52:35.200 But it's a general dilemma in getting a rather complex set of ideas over. 391 00:52:35.200 --> 00:52:40.960 Should you use an oversimplified explanation which is readily intelligible, or should you 392 00:52:40.960 --> 00:52:49.080 be very careful, cautious, and introduce all your provisional hesitations you have about 393 00:53:19.080 --> 00:53:29.080 We must not throw the baby out with the bath water. We must occasionally simplify, even if we know that simplification is half wrong. 394 00:53:49.080 --> 00:53:55.640 and Employment, a proper approach to better understanding what you call the improper distribution 395 00:53:55.640 --> 00:53:57.840 of output and employment. 396 00:53:57.840 --> 00:54:05.680 I think there are great improvements on the crude acceptance of a macroanalysis by Keynes 397 00:54:05.680 --> 00:54:07.160 and Secaynesians proper. 398 00:54:07.160 --> 00:54:15.080 We really are a step in a return to a microanalysis, which I think is all the little knowledge 399 00:54:15.080 --> 00:54:16.480 we have. 400 00:54:16.480 --> 00:54:24.840 I think all the macro-analysis or macro-dynamics are rough approximations which we have temporally 401 00:54:24.840 --> 00:54:31.080 adopted because they help us to deal with the statistical data which we have, but which 402 00:54:31.080 --> 00:54:32.720 are really very misleading. 403 00:54:32.720 --> 00:54:40.760 Let me just add one thing, the reason why when Keynes published his general theory which 404 00:54:40.760 --> 00:54:45.360 became his most influential book, I did not return to the charge. 405 00:54:45.360 --> 00:54:53.580 I did not devote as much effort to criticizing as I had done earlier because I didn't at 406 00:54:53.580 --> 00:54:57.920 once realize that the main difference was no longer a difference of particular point of 407 00:54:57.920 --> 00:54:58.920 detail. 408 00:54:58.920 --> 00:55:04.440 Although the book really marked the transition from microeconomics to macroeconomics, it 409 00:55:04.440 --> 00:55:09.480 took me years to find it out that what I would have to do is not to criticize Cain's particular 410 00:55:09.480 --> 00:55:16.480 and the formal macroeconomics, as they are addicted to making macroeconomics research.