WEBVTT NOTE History of the Austrian School of Economics: Question and Answer Session 1 00:00:00.000 --> 00:00:06.000 Professor Lachmann would be very happy to try to answer some of your questions you might have. 2 00:00:06.000 --> 00:00:14.000 And so I will turn it back to him if some of you have some questions. 3 00:00:14.000 --> 00:00:17.000 If not, I have a question I'd like to ask him. 4 00:00:17.000 --> 00:00:22.000 It seems to me from my reading that in the late 30s, 5 00:00:22.000 --> 00:00:29.000 that Professor George Stiegler was very sympathetic to the Austrian School 6 00:00:29.000 --> 00:00:35.240 and his first edition of Price Theory, I forget the exact name of it, I've been told by some 7 00:00:35.240 --> 00:00:43.320 is essentially an Austrian work, but since the end of the war, he is, I would say, antagonistic 8 00:00:43.320 --> 00:00:48.600 towards the Austrian approach. I wonder if you have any ideas on that? If my interpretation 9 00:00:48.600 --> 00:00:58.600 is correct first, then secondly, if it is correct, what about the change do you think? 10 00:00:58.600 --> 00:01:12.600 I don't think Stigler has ever had much of, as it were, sympathy for the Austrians. 11 00:01:12.600 --> 00:01:18.600 We mustn't forget that Stigler, of course, was the favorite pupil of Knight. 12 00:01:18.600 --> 00:01:30.600 Now, Knight's position on this, as on so many other things, was somewhat ambivalent. 13 00:01:30.600 --> 00:01:38.600 Unfortunately, at the very moment when the Austrians ought to have concentrated all their efforts 14 00:01:38.600 --> 00:01:46.600 on dealing with Keynes, which was the great challenge of the 1930s, 15 00:01:46.600 --> 00:02:11.600 They spent part of their effort on a quarrel with night for night and in a series of articles attacked the Boehm-Bawerkian theory of capital and in the very month, February 36, in which Kinzel's general theory was published. 16 00:02:11.600 --> 00:02:20.960 Hayek, as it were, started a whole polemic against Knight, called the mythology of heaven. 17 00:02:20.960 --> 00:02:27.840 So that, in addition to everything else, the Austrians had this quarrel with Frank Knight 18 00:02:27.840 --> 00:02:36.480 on their hands, I think that explains Stigler's attitude. 19 00:02:36.480 --> 00:02:47.480 Surely what he has to say about Boehm-Bawerk and the history of production and distribution theories is anything but friendly. 20 00:02:47.480 --> 00:02:58.480 Yes, I wonder if you would give us some insights as to the type of policy recommendations that are likely to be generated by economists in the Austrian School. 21 00:02:58.480 --> 00:03:08.980 We know what Keynes' approach is and the need for fiscal policy, we know for instance what Friedman feels in the way of monetary policy. 22 00:03:08.980 --> 00:03:12.980 Is there any sort of policy outlook that the Austrian School would say that? 23 00:03:12.980 --> 00:03:17.980 Yes, there is, in favor of the market. 24 00:03:17.980 --> 00:03:35.980 The market will work in such a way that whatever knowledge there exists in any corner of society will become diffused because it is profitable for those who possess such knowledge to make use of it. 25 00:03:35.980 --> 00:03:41.980 But you cannot make use of knowledge you have without letting others know. 26 00:03:41.980 --> 00:04:00.980 This is fundamentally Hayek's argument, if you like, for the free market. You find in the article the use of knowledge in society, which is reprinted in Hayek's volume, Individualism and Economic Order. 27 00:04:00.980 --> 00:04:02.980 Question in the back. 28 00:04:02.980 --> 00:04:27.980 Do you consider Milton Friedman to be essentially Austrian in his viewpoint, and if not, where are the differences between him and the Austrian school? 29 00:04:27.980 --> 00:04:37.980 I would say, on all practical matters, so far as I can see, Austrians agree with Friedman. 30 00:04:37.980 --> 00:04:46.980 Whatever Friedman has to say in defense of the market economy, I'm sure all Austrians agree with him. 31 00:04:46.980 --> 00:04:52.980 Where we disagree, of course, is on methodology. 32 00:04:52.980 --> 00:05:02.980 I would say that what Professor Friedman appears to regard as a methodology isn't a methodology. 33 00:05:02.980 --> 00:05:09.980 If, for instance, I read Friedman's Nobel Prize lecture on inflation and unemployment, 34 00:05:09.980 --> 00:05:16.980 I'm willing to go along with everything except the beginning and the end. 35 00:05:16.980 --> 00:05:45.980 Except the beginning, because the beginning again contains a summing up of what he appears to regard as his methodology and in the end where he as it were contrasts his own position with that of Keynes and I think he is somewhat unfair to Keynes. 36 00:05:45.980 --> 00:05:55.980 Man is an old man. After all, it is permissible to ask, where would Friedman be without hands? 37 00:05:55.980 --> 00:06:02.980 But one doesn't have to be an Austrian to ask that sort of question. 38 00:06:02.980 --> 00:06:20.380 The Austrian School has a view on macroeconomic policy, a set of policy prescriptions for the 39 00:06:20.380 --> 00:06:24.780 macroeconomy, I imagine directly towards the government. 40 00:06:24.780 --> 00:06:39.020 The Austrian policy prescriptions for a macroeconomy simply follow from what I said, that if you 41 00:06:39.020 --> 00:06:50.740 interfere with the market, you prevent some knowledge which exists from becoming diffused. 42 00:06:50.740 --> 00:07:15.300 In the British situation of 1932, Hayek and his friends rejected the proposals of Keynes 43 00:07:15.300 --> 00:07:20.460 and some non-Keynesian British economists that at the bottom of the depression the government 44 00:07:20.460 --> 00:07:33.220 Hayek has now realized that that was wrong. That is to say, I think Austrians today would 45 00:07:33.220 --> 00:07:44.820 not reject all measures to relieve unemployment and increase employment in a situation in 46 00:07:44.820 --> 00:07:48.020 in which nothing really is scarce. 47 00:07:48.020 --> 00:08:01.900 In this respect, I think Austrians would have, Austrians have learned. 48 00:08:01.900 --> 00:08:10.180 It remains a fact that I think most Austrians will hold that as long as we are living in 49 00:08:10.180 --> 00:08:17.580 in a world in which money wage rates can only rise but never fall, it is inevitable that 50 00:08:17.580 --> 00:08:23.700 we should have a more or less permanent inflation, which is bound to be worse. That is Hayek's 51 00:08:23.700 --> 00:08:29.700 view and I think most Austrians would accept that. 52 00:08:29.700 --> 00:08:34.700 What do you think of Hayek's proposals for the denationalization of money? 53 00:08:34.700 --> 00:08:52.660 I am asked a question about Hayek's new pamphlet on denationalizing money. I am afraid I have 54 00:08:52.660 --> 00:09:00.300 not quite understood that proposal, I am sure. I have thought about it, I have talked to Hayek 55 00:09:00.300 --> 00:09:25.300 Could we take something very alive to this? What would the Austrian position be on the role of gold, then, in a monetary system? And secondly, what might Mises' idea be as opposed to the Austrian one? 56 00:09:25.300 --> 00:09:36.180 Now, Mises, of course, was a great defender of the gold standard, and Mises appears to 57 00:09:36.180 --> 00:09:47.060 have thought that in the end only a gold standard can vouchsafe us a world without inflation. 58 00:09:47.060 --> 00:09:52.140 I don't think that all Austrians would agree to this. 59 00:09:52.140 --> 00:10:07.140 Speaking for myself, seems to me obvious, that in the present world, in a world in which money, wage, rights can only rise but never fall, any attempt to return to the gold standard will simply defeat itself. 60 00:10:07.140 --> 00:10:19.140 The price of gold will always turn out to have been too low. 61 00:10:19.140 --> 00:10:48.140 As regards the Friedman Proposals, Hayek's view has been that since this is better than nothing and certainly better than the world we have got, he would be willing, as it were, to go along with it, but he didn't feel sure that modern credit creation would not be enough. 62 00:10:49.140 --> 00:11:02.140 be able to, as it were, to find loopholes for inflation even in such a Friedmanian world. 63 00:11:02.140 --> 00:11:07.940 Yes, it seems to me that, from the Austrian point of view, there is nothing in principle 64 00:11:07.940 --> 00:11:16.300 against Friedman's proposal of a fixed rate of increase in what is called high-powered 65 00:11:16.300 --> 00:11:28.940 Suppose the Austrian economics came into power in a country where currently there was a great 66 00:11:28.940 --> 00:11:36.540 unequal distribution of wealth based on past non-Austrian pre-market principles, the original 67 00:11:36.540 --> 00:11:52.660 The Austrian point of view is that it is quite wrong in a market economy, if we are talking 68 00:11:52.660 --> 00:11:59.900 about it, to speak of any given distribution of wealth. In a market economy there is a 69 00:11:59.900 --> 00:12:09.400 In the stock exchange every day capital gains and losses are being made. There is no such 70 00:12:09.400 --> 00:12:19.100 thing as a given distribution of wealth. There may be one today, next month, two months time, 71 00:12:19.100 --> 00:12:29.740 it will be different. The Austrian point is that as the market not merely distributes incomes 72 00:12:29.740 --> 00:12:39.300 It also distributes wealth, and any attempt to interfere with the wealth-distributing 73 00:12:39.300 --> 00:12:46.300 function of the market must have the, as it were, the obvious consequences. 74 00:12:46.300 --> 00:12:57.020 Let me put it to you like this, suppose you, society could agree that the existing distribution 75 00:12:57.020 --> 00:13:12.020 The distribution of wealth is unjust, so we'll have some system of capital levies, as a result of which, on the 1st of January, 1978, we'll have a distribution of wealth which is completely just. 76 00:13:12.020 --> 00:13:27.020 As long as we have a market economy, the distribution of wealth in February will be different from what it was on the 1st of January, and in April it will be even more different. 77 00:13:27.020 --> 00:13:30.020 Professor McKee 78 00:13:30.020 --> 00:13:37.020 Whatever one may think of that came to the forewell of the neoclassicalism synthesis, 79 00:13:37.020 --> 00:13:43.020 it has generated a number of empirically testable hypotheses. 80 00:13:43.020 --> 00:13:48.020 To consumption function to name just one, both in the aggregate and for individuals. 81 00:13:48.020 --> 00:13:54.020 I was wondering what empirically testable hypotheses the Austrian School has generated 82 00:13:54.020 --> 00:14:06.860 The answer, sir, is that the Austrian economics is not that sort of economics. I tried to 83 00:14:06.860 --> 00:14:17.860 explain that a social science cannot be practiced the way a natural science can be because there 84 00:14:17.860 --> 00:14:25.740 There are problems of which the natural sciences know nothing, the problems of the interpretation 85 00:14:25.740 --> 00:14:28.380 of meaning. 86 00:14:28.380 --> 00:14:38.180 If you in any case, an empirical hypothesis testable, presumably would be only testable 87 00:14:38.180 --> 00:14:46.580 in over a certain time, at another time it would be different. 88 00:14:46.580 --> 00:14:56.620 It is not that Austrians despise statistics. Austrians interpret statistics or Austrians 89 00:14:56.620 --> 00:15:03.940 regard all statistics as essentially historical records, records from which we can learn 90 00:15:03.940 --> 00:15:11.500 a lot about history, of course, and in so far as history moves slowly, we can learn 91 00:15:11.500 --> 00:15:23.740 A lot from them about the present, but this particular formulation, the testable hypothesis, 92 00:15:23.740 --> 00:15:31.540 is presupposing an unchanging world, because testable, presumably, a la Friedman, by making 93 00:15:31.540 --> 00:15:32.540 predictions. 94 00:15:32.540 --> 00:15:40.540 And I spent some time at the beginning to explain why, where human action is concerned, 95 00:15:40.540 --> 00:15:47.900 is not possible. You will ask, and rightly, what do we do then about assumptions? We have 96 00:15:47.900 --> 00:15:59.180 to make some assumptions. How do we distinguish sensible assumptions from others if we cannot 97 00:15:59.180 --> 00:16:08.060 test? The answer is precisely because we cannot test hypothesis. We have to be very careful 98 00:16:08.060 --> 00:16:14.060 When we introduce assumptions, we can't generalize without introducing assumptions. 99 00:16:14.060 --> 00:16:21.060 But we should be very, very careful when introducing such assumptions. 100 00:16:21.060 --> 00:16:24.060 That seems to me to be one of the lessons. 101 00:16:27.060 --> 00:16:31.060 What in the view of the Austrian School is the proper role of government? 102 00:16:31.060 --> 00:16:35.060 I mean, how big should government be? What kind of a role does it play? 103 00:16:35.060 --> 00:16:44.060 How much should taxing and spending influence economic activity? 104 00:16:44.060 --> 00:16:53.060 Should it be completely hands-off, laissez-faire, or does it regulate the market, and if so, how? 105 00:16:53.060 --> 00:17:01.060 The Austrian view is the view, as far as I can see, of classical liberalism. 106 00:17:01.060 --> 00:17:19.060 The market cannot exist, to be sure, without a certain institutional framework. That is true. So there must be a state. Most Austrians are not anarchists, though they are some who are. 107 00:17:19.060 --> 00:17:28.380 Now, the role of the state, on the other hand, should be confined fundamentally to upholding 108 00:17:28.380 --> 00:17:38.620 property and contract, protecting property and protecting contract. 109 00:17:38.620 --> 00:17:45.420 But there is no doubt, Austrians will point out, that there is a difficult problem in 110 00:17:45.420 --> 00:17:53.580 In modern democracy, where the distribution of votes is such that everybody has one vote, 111 00:17:53.580 --> 00:18:03.340 those who are economically unsuccessful can, with their voting papers in their hands, partly 112 00:18:03.340 --> 00:18:10.460 nullify that distribution of wealth and incomes that the market has brought about. 113 00:18:10.460 --> 00:18:19.160 This is, I think, the fundamental problem of modern democracy, which Hayek has not always 114 00:18:19.160 --> 00:18:26.360 accepted, but he now does accept it, that there is a problem of society in which the 115 00:18:26.360 --> 00:18:31.860 market distributes incomes in one way and then the voters try to redistribute it in 116 00:18:31.860 --> 00:18:32.860 another way. 117 00:18:32.860 --> 00:18:33.860 There is a problem. 118 00:18:33.860 --> 00:18:50.020 Is Austrian methodology consistent with Carl Popper's theory of scientific discovery? 119 00:18:50.020 --> 00:18:59.740 It is completely consistent, sir, with the latest version of Popper's methodology, the 120 00:18:59.740 --> 00:19:07.860 One he presented to the Mont Pelerin Society in 1972 under the characteristic title, Indeterminism 121 00:19:07.860 --> 00:19:09.860 is not enough. 122 00:19:09.860 --> 00:19:18.100 And where Popper says that there are three worlds, there is the world of nature, which 123 00:19:18.100 --> 00:19:23.380 we deal with in the ordinary way by natural science, there is the world of our feelings 124 00:19:23.380 --> 00:19:30.300 and Sentiments, which to which there is no scientific access, but there is what he calls 125 00:19:30.300 --> 00:19:38.300 world three and I permit myself to add, as it were, in parenthesis or in a footnote as 126 00:19:38.300 --> 00:19:45.880 it doesn't belong to my theme, so far as I can see is what Hegel meant by the realm of 127 00:19:45.880 --> 00:19:58.520 Objective Mind, the manifestations of the human mind which are accessible to us. 128 00:19:58.520 --> 00:20:07.960 It seems to me that Austrian methodology is consistent with that distinction between the 129 00:20:07.960 --> 00:20:14.840 world of nature which is not accessible to our understanding and the world of human action 130 00:20:14.840 --> 00:20:25.440 which is. I may add that this also was Keynes's view. I have, at the end of the review, that 131 00:20:25.440 --> 00:20:33.440 Professor Glan was kind enough to quote. I have a quotation from Keynes, from a letter 132 00:20:33.440 --> 00:20:40.920 of his to Herod, on the matter of natural and social sciences. I will, as I've learned 133 00:20:40.920 --> 00:21:10.480 Cane's in a letter to Herod, 16th July 1938, upgrades him for not having defended sufficiently 134 00:21:10.480 --> 00:21:17.400 and very strongly the methodological independence of the social sciences, saying the social 135 00:21:17.400 --> 00:21:25.280 sciences are moral sciences and we must continuously say so. And then he continues trying to explain 136 00:21:25.280 --> 00:21:31.400 to Herra the difference between the social sciences and natural sciences. It is as though 137 00:21:31.400 --> 00:21:39.640 the fall of the apple to the ground depended on the apple's motives, on whether it was 138 00:21:39.640 --> 00:21:55.640 on whether the ground wanted the apple to fall and on mistaken calculations on the top of the apple as to how far it was from the center of the earth. 139 00:21:55.640 --> 00:22:10.640 I'm very interested in either yours or the Austrian's solution to this fundamental problem of democracy versus the market that you've outlined in the previous question. 140 00:22:10.640 --> 00:22:27.540 This depends now on what you believe of human nature. If you believe that all men are rational 141 00:22:27.540 --> 00:22:37.440 in the sense that they will learn from experience. If you believe that it is possible to persuade 142 00:22:37.440 --> 00:22:44.320 workers that trade unions are not really in their interest but that a world without trade 143 00:22:44.320 --> 00:22:55.320 unions would be a better world for them too. Then, if you like, that is the way out. There 144 00:22:55.320 --> 00:23:04.360 is nothing those who have these, who are inspired by these ideas, but continuously to go about 145 00:23:04.360 --> 00:23:20.120 and telling their fellow citizens that this is so. If we do not succeed in this, all I 146 00:23:20.120 --> 00:23:27.120 What I can do is to retreat to the position, the general position that the future is unknowable 147 00:23:27.120 --> 00:23:30.120 or not unimaginable. 148 00:23:30.120 --> 00:23:32.120 Thank you very much.