WEBVTT NOTE Keynesian Predictions vs. American History 1 00:00:00.000 --> 00:00:05.880 Our next speaker is one of those old fellows. 2 00:00:05.880 --> 00:00:09.760 Now he's a senior fellow in history at the Mises Institute. 3 00:00:09.760 --> 00:00:17.240 He holds a bachelor's degree of history from Harvard and his master's and PhD from Columbia University. 4 00:00:17.240 --> 00:00:22.680 Author of a number of books, New York Times bestseller, The Politically Incorrect Guide to American History, 5 00:00:22.680 --> 00:00:28.040 33 Questions About American History You Weren't Supposed to Ask, The Church and the Market. 6 00:00:28.040 --> 00:00:35.120 He's a contributing editor to the American conservative. He has contributed to six encyclopedias. 7 00:00:35.120 --> 00:00:42.940 He's been on Fox News all over the place, Hannity and Combs, Fox and Friends, The Big Story, 8 00:00:42.940 --> 00:00:50.280 Scarborough Country, Michael Medved, various radio programs. 9 00:00:50.280 --> 00:01:03.600 And last spring, he had a New York Times bestseller called Meltdown, which was a Keynesian, or a Keynesian, 10 00:01:03.600 --> 00:01:10.540 he had an Austrian explanation, sorry about that, Austrian explanation of the Meltdown. 11 00:01:10.540 --> 00:01:16.020 Today, he's going to speak to us, the Keynesian Predictions versus American History. 12 00:01:16.020 --> 00:01:20.020 Would you please help me welcome Thomas Woods. 13 00:01:32.020 --> 00:01:35.020 Thank you very much. Doug left me an extra five minutes. 14 00:01:35.020 --> 00:01:40.020 Let's see what I use it for before you applaud that. 15 00:01:40.020 --> 00:01:43.020 I should point out first of all, my wife and I, 16 00:01:43.020 --> 00:01:46.460 Roughly two weeks from now, we're expecting our fourth child. 17 00:01:46.460 --> 00:01:52.580 So you might wonder, thanks. 18 00:01:52.580 --> 00:01:55.980 How would I be allowed to travel so close to her due date? 19 00:01:55.980 --> 00:02:04.060 And the single answer is that my wife has such esteem for the sponsor of this event, Mr. Jeremy Davis. 20 00:02:04.060 --> 00:02:06.500 She said it was OK for me to go to this. 21 00:02:06.500 --> 00:02:11.100 Months ago, when we calculated it out, 22 00:02:11.100 --> 00:02:14.600 I said to her, this baby's going to be coming right near the Houston Mises circle. 23 00:02:14.600 --> 00:02:17.640 She said, that's OK. We'll work it out one way or another. 24 00:02:17.640 --> 00:02:21.700 So again, thank you, Mr. Davis, for your very important contributions. 25 00:02:21.700 --> 00:02:28.380 And especially since I have the extra time, I'd like to acknowledge someone who, 26 00:02:28.380 --> 00:02:35.100 I would say, number two to Ron Paul would most hate being singled out. 27 00:02:35.100 --> 00:02:38.180 But, you know, I got the podium and he doesn't. 28 00:02:38.180 --> 00:02:43.780 And that's the person who really got the ball rolling with the Mises Institute, and that of course is Lew Rockwell. 29 00:02:43.780 --> 00:02:51.920 And let's just hold the applause, because let me get my rip-roaring thing, and then you'll really want to applaud like crazy. 30 00:02:51.920 --> 00:03:00.920 Lew has been a great benefactor of mine over the years, ever since I was at Mises University, 1993. 31 00:03:00.920 --> 00:03:14.920 He's been a source of inspiration and, in fact, I've been influenced by Lew as much as I have by anybody because I read his opinions and I'm embarrassed that I held any opinion other than the one he just put forth. 32 00:03:14.920 --> 00:03:25.920 Gosh, it's so obvious when I hear it coming from Lew, but when he started the Mises Institute, he did it with very little support, with a lot of opposition from people who should have supported him. 33 00:03:25.920 --> 00:03:55.920 He had an uphill battle, no major foundation grants, just the power of the ideas and knowing that, you know, the truth ultimately wins out and that the country, by and large, one of these days there would be a critical mass of the people who would follow along and he wanted to help change the tenor of the national conversation, even though he would hate a term like that, but also he wanted to help change the economics profession and I dare say within the next ten years we are going to see 34 00:03:55.920 --> 00:04:14.920 see very substantial changes that have already begun taking place, in which the Austrians are going to have a disproportionate influence, because the average person can understand what the Austrians are saying, it seems to make sense, it resonates with them, so I want to say thank you, Lew Rockwell, for doing this. 35 00:04:25.920 --> 00:04:37.920 I'm fired now, of course. 36 00:04:37.920 --> 00:04:45.920 All right, well, let's begin very briefly with the essence of Keynesianism, to make sure we all understand this. 37 00:04:45.920 --> 00:04:49.920 I don't want to take for granted everybody knows what Keynes is all about. 38 00:04:49.920 --> 00:04:52.920 In a sense, you're better off not knowing. 39 00:04:52.920 --> 00:05:04.920 Thomas Jefferson once said that speaking of the newspapers in his day, you would actually be better informed if you read no newspaper whatsoever than if you read the newspapers of his day. 40 00:05:04.920 --> 00:05:12.920 And if you read Keynes' General Theory, that was published in 1936, you find that he puts forth a great many propositions. 41 00:05:12.920 --> 00:05:27.920 The Capitalist Economy tends chronically toward unemployment or underemployment of resources. 42 00:05:27.920 --> 00:05:31.920 It's not self-correcting either. If there's a downturn, it's not self-correcting. 43 00:05:31.920 --> 00:05:37.920 We need to employ fiscal and monetary tools to keep it from falling into depression. 44 00:05:37.920 --> 00:05:39.920 It has this natural tendency. 45 00:05:39.920 --> 00:05:44.920 What is also sort of related to this is interest rates are chronically too high. 46 00:05:44.920 --> 00:05:47.920 We can make that statement across the board. They are too high. 47 00:05:47.920 --> 00:05:55.920 And when we combine this with the animal spirits and skittishness that characterize investors, 48 00:05:55.920 --> 00:05:58.920 well, the result is that investment is just much too low. 49 00:05:58.920 --> 00:06:03.920 So in other words, the economy is something that needs to be managed. 50 00:06:03.920 --> 00:06:06.920 It cannot be left to its own devices. It must be managed. 51 00:06:06.920 --> 00:06:23.360 Paul Samuelson, who died recently, was of course a great student of Keynes, and Samuelson 52 00:06:23.360 --> 00:06:26.480 wrote the following about Keynes's general theory. 53 00:06:26.480 --> 00:06:32.000 It is a badly written book, poorly organized. 54 00:06:32.000 --> 00:06:37.640 Many laymen who, beguiled by the author's previous reputation, bought the book was cheated 55 00:06:37.640 --> 00:06:44.640 of his five shillings. It is not well suited for classroom use. It is arrogant, bad-tempered, 56 00:06:45.280 --> 00:06:52.280 polemical and not overly generous in its acknowledgments. It abounds in mares' nests and confusions. 57 00:06:53.760 --> 00:07:00.760 In short, it is a work of genius. 58 00:07:00.760 --> 00:07:06.600 What I'm going to talk about today a little bit is the ability of Keynesians to predict 59 00:07:06.600 --> 00:07:07.600 what's going to happen. 60 00:07:07.600 --> 00:07:12.140 Now we understand that it is very hard in economics to make predictions in the sense 61 00:07:12.140 --> 00:07:13.140 of timing. 62 00:07:13.140 --> 00:07:17.040 You know, that next week the price of orange juice is going to be thus and so. 63 00:07:17.040 --> 00:07:18.940 I mean, nobody can do that. 64 00:07:18.940 --> 00:07:25.320 But I'm talking about broad statements that are falsifiable, you know, statements like 65 00:07:25.320 --> 00:07:29.280 next year there will be a depression because of this factor. 66 00:07:29.280 --> 00:07:32.340 And if there isn't one, then that statement was wrong. 67 00:07:32.340 --> 00:07:37.140 And if that statement is derived from Keynesian principles, well, as these statements pile 68 00:07:37.140 --> 00:07:41.460 up, eventually, you wonder, do we need to go back to the drawing board? 69 00:07:41.460 --> 00:07:46.040 Henry Hazlitt, whom many of us learned economics from initially from his book, Economics in 70 00:07:46.040 --> 00:07:55.340 One Lesson, wrote, forecasts based on Keynesian theory have had a pathetically bad record. 71 00:07:55.340 --> 00:08:00.500 And I think the greatest example of this involves World War II. 72 00:08:00.500 --> 00:08:04.220 After World War II, or during and after World War II, the prediction, Keynesian prediction 73 00:08:04.220 --> 00:08:09.060 was there's going to be a massive depression because with all these men being demobilized 74 00:08:09.060 --> 00:08:11.940 from the armed forces, it's going to overwhelm the economy. 75 00:08:11.940 --> 00:08:13.620 Again, the economy can't adjust, right? 76 00:08:13.620 --> 00:08:15.900 It needs to be pushed along one way or another. 77 00:08:15.900 --> 00:08:19.380 The economy will not be able to adjust to this on its own. 78 00:08:19.380 --> 00:08:20.900 And so we're going to have a massive depression. 79 00:08:20.900 --> 00:08:24.740 And you can verify this, you're going to hear economists saying this. 80 00:08:24.740 --> 00:08:30.940 Robert Gordon, a Keynesian economist who's written on economic history quite a bit, writes, 81 00:08:30.940 --> 00:08:36.740 In the summer of 1945, the belief was fairly widely held in Washington that unemployment 82 00:08:36.740 --> 00:08:45.100 would be a serious problem during the winter of 1945 to 1946. During the war in 1943, Alvin 83 00:08:45.100 --> 00:08:53.180 Hanson, who was considered to be Keynes' best known American disciple, Alvin Hanson said, 84 00:08:53.180 --> 00:08:58.900 When the war is over, the government can't just disband the army, close down munitions 85 00:08:58.900 --> 00:09:06.020 factories, stop building ships and remove all economic controls. So we should keep building 86 00:09:06.020 --> 00:09:12.180 ships for a war we're not even fighting. This is considered to be a good Keynesian sense. 87 00:09:12.180 --> 00:09:17.200 So we can't do any of these things. But the government did do those things. That's exactly 88 00:09:17.200 --> 00:09:21.720 what they did. They did exactly those things, although it may have taken up to a year to 89 00:09:21.720 --> 00:09:51.720 And as far as I know the earth did not break free of its axis and go spinning toward the sun. I mean things still still continue on. In fact, the Keynesian remedies for unemployment, various Keynesian stimulus proposals like a massive public work spending, were not used. By late 1945, economists are still predicting there's going to be massive unemployment. 90 00:09:51.720 --> 00:10:03.720 Unemployment. This transition is going to be accompanied by massive unemployment. Ten million people, by some accounts, will be unemployed. Others said six to nine million people. 91 00:10:03.720 --> 00:10:19.720 Even these less pessimistic estimates were exaggerations of three or more times. Because it turns out that in 1946, the United States experienced the single greatest year 92 00:10:19.720 --> 00:10:26.740 for the private economy in all of American history before or since this is 93 00:10:26.740 --> 00:10:31.240 the year by the way when the sky was supposed to fall because the economy 94 00:10:31.240 --> 00:10:34.440 won't be able to adjust with a massive depression no we not have the massive 95 00:10:34.440 --> 00:10:38.920 depression it wasn't like you know we just managed to scrape by we had the 96 00:10:38.920 --> 00:10:43.200 best most robust year you know production up 30% that we've ever seen 97 00:10:43.200 --> 00:10:48.540 ever so a lot of them said you know what I guess we're just wrong I guess maybe 98 00:10:48.540 --> 00:10:52.060 Maybe this whole thing needs to be revisited. 99 00:10:52.060 --> 00:10:53.060 I made that part up. 100 00:10:53.060 --> 00:10:55.060 That actually did not happen. 101 00:10:55.060 --> 00:10:58.700 No, they came up with some other explanation. 102 00:10:58.700 --> 00:10:59.700 Okay, okay, okay. 103 00:10:59.700 --> 00:11:03.100 We admit there really wasn't an unemployment problem. 104 00:11:03.100 --> 00:11:04.700 That was wrong. 105 00:11:04.700 --> 00:11:10.300 So instead, the explanation for why we didn't have a depression was pent-up demand. 106 00:11:10.300 --> 00:11:15.140 You see, consumers had just built up all this pent-up demand during the war years, like 107 00:11:15.140 --> 00:11:45.140 They were just dying to go out and buy some stuff as soon as they were allowed to again and so suddenly, bang, it's off to the races everybody, the controls are being lifted, go out and buy some shirts that haven't had the quality in them reduced through all the various fillers that are used during wartime, go out and buy some good quality products and that's what did it. So once again, the consumer is going out and using up stuff is what really got us out of this. But one of the problems, leaving aside the logical problem, 108 00:11:45.140 --> 00:11:51.140 One of the problems with that explanation is that the timing and the magnitudes are completely off. 109 00:11:51.140 --> 00:11:57.140 So that when you look at the magnitude, because the argument is that the government reduces its expenditures dramatically. 110 00:11:57.140 --> 00:12:03.140 But don't worry, the consumer is filled in the gap. Because spending, just spending, is what drives everything. 111 00:12:03.140 --> 00:12:08.140 So we had enough spending to make up for the lack of spending by the government. 112 00:12:08.140 --> 00:12:13.820 Okay, but you look at the actual statistics, the government is reducing its spending far, far more 113 00:12:13.820 --> 00:12:22.700 to a magnitude that's far greater than was made up for by investment and consumption spending at the same time. 114 00:12:22.700 --> 00:12:29.180 So there wasn't enough pent-up demand. In fact, there was already a smooth transition, production up, 115 00:12:29.180 --> 00:12:36.620 unemployment way down, long before consumption returned to its expected levels in 1947. 116 00:12:36.620 --> 00:12:44.540 7. The transition is already over, very smooth and seamless, so the timing can't vindicate 117 00:12:44.540 --> 00:12:49.260 this pent-up demand theory, and the magnitudes are off. So even if we accept, even from their 118 00:12:49.260 --> 00:12:57.740 own point of view, this is not the explanatory factor. So what in fact did happen? Well, 119 00:12:57.740 --> 00:13:02.420 here I recommend an article that you can find at the Mises Institute website. You can just 120 00:13:02.420 --> 00:13:17.420 The Great Depression of 1946 is an ironic title by two authors who know perfectly well we did not have a Great Depression in 1946, Richard Vetter and Lowell Galloway, professors at Ohio University. 121 00:13:17.420 --> 00:13:24.420 The point of their article is not to argue that we in fact had a depression in those years. They know we didn't. We had an extremely robust year. 122 00:13:24.420 --> 00:13:32.420 The point of their article is to say that everybody was expecting, you know, all the experts, the Keynesian experts, were all expecting a Great Depression. 123 00:13:32.420 --> 00:13:50.420 And if you look at the aggregates like national income accounting, which is extremely misleading during war, according to those statistics, which told us that the war was a time of fantastic prosperity, the very same statistics told us 1946, we were in the toilet, which should be enough to make you question the statistics. 124 00:13:50.420 --> 00:13:57.420 So, their argument in the Great Depression of 1946, which again I highly recommend that you read, 125 00:13:57.420 --> 00:14:01.420 is that the market simply absorbed the additional labor. 126 00:14:01.420 --> 00:14:05.420 It absorbed it in part because a lot of women left the labor force. 127 00:14:05.420 --> 00:14:07.420 This is it. This is not really what they signed up for. 128 00:14:07.420 --> 00:14:12.420 They wanted to go back to their lives as homemakers, so a great many of them did. 129 00:14:12.420 --> 00:14:20.420 But beyond that, wages were freely allowed to fluctuate, to absorb all the workers willing to work. 130 00:14:20.420 --> 00:14:23.420 This is not supposed to work according to Keynesians. 131 00:14:23.420 --> 00:14:29.420 The adjustment of wages is not sufficient to absorb workers, but in fact it did. 132 00:14:29.420 --> 00:14:31.420 So, I mean, you know, who are you going to believe? 133 00:14:31.420 --> 00:14:36.420 You know, these people or your own eyes looking at what actually happened. It did in fact happen. 134 00:14:36.420 --> 00:14:39.420 And then they also, I won't have time to go into this today, 135 00:14:39.420 --> 00:14:52.420 They also show how certain peculiarities of the wartime transition to peace help to mitigate some of the anti-employment effects of various New Deal measures, but I leave you to discover that in their article. 136 00:14:52.420 --> 00:15:03.420 Well meanwhile, at a time when Keynesian economists everywhere are predicting disaster and depression and there won't be enough purchasing power and all the rest of the lingo, 137 00:15:03.420 --> 00:15:07.180 Benjamin Anderson was saying something pretty much the opposite. 138 00:15:07.180 --> 00:15:11.300 Benjamin Anderson, we could more or less think of as like an Austrian fellow traveler, free 139 00:15:11.300 --> 00:15:14.100 market economist. 140 00:15:14.100 --> 00:15:19.700 And he contributed to a book that was compiled during the war, you know, what's going to 141 00:15:19.700 --> 00:15:20.860 happen after the war? 142 00:15:20.860 --> 00:15:23.300 What do you predict is going to happen to the economy? 143 00:15:23.300 --> 00:15:27.720 And what do you recommend to sort of see things through from a policy perspective? 144 00:15:27.720 --> 00:15:31.320 And the first contribution is by Benjamin Anderson. 145 00:15:31.320 --> 00:15:34.980 And listen to his absolute confidence, the market will solve this, and this doesn't mean 146 00:15:34.980 --> 00:15:39.040 that he worships the market or any of this other crazy nonsense, it's just common sense. 147 00:15:39.040 --> 00:15:44.240 He says, how can we expect in the post-war years to give employment to 55 or 56 million 148 00:15:44.240 --> 00:15:48.640 people when we employed few more than 45 million in 1939? 149 00:15:48.640 --> 00:15:54.780 And he goes on, there are those who see in this an almost insurmountable problem which 150 00:15:54.780 --> 00:16:00.840 calls for heroic efforts on the part of government to create new purchasing power through governmental 151 00:16:00.840 --> 00:16:06.440 People borrowing from the banks, heroic programs of public works expenditures, make-work policies 152 00:16:06.440 --> 00:16:12.300 on the part of business enterprises, taxation schemes to force investment, and vast monetary 153 00:16:12.300 --> 00:16:15.800 and credit schemes to force a big export trade. 154 00:16:15.800 --> 00:16:22.440 I see in it merely the problem of relaxing the restraints and inhibitions which government 155 00:16:22.440 --> 00:16:29.560 itself in recent years has placed upon capital, business enterprise and labor, which prevent 156 00:16:29.560 --> 00:16:35.180 they are getting together on mutually advantageous terms, producing goods and services the sale 157 00:16:35.180 --> 00:16:40.980 of which will give them the income which makes them good customers for other producers. 158 00:16:40.980 --> 00:16:44.900 And then he goes on, who will employ the 10 million workers? The answer is in part they 159 00:16:44.900 --> 00:16:49.440 will give employment to each other. And then he continues from there and reminds us that 160 00:16:49.440 --> 00:16:54.940 in the days when the making of jobs was not looked upon as a federal government function, 161 00:16:54.940 --> 00:17:01.140 The problem solved itself amazingly well, which is something that typically Keynesians 162 00:17:01.140 --> 00:17:05.580 would rather that we forget. That's why when I talked about the Great Depression of 1920-21, 163 00:17:05.580 --> 00:17:10.300 this is never mentioned, because there the economy adjusts completely with no problems 164 00:17:10.300 --> 00:17:13.180 and without Keynesian stimulus. 165 00:17:13.180 --> 00:17:16.060 Now another issue I want to talk about, which we're not supposed to talk about because it's 166 00:17:16.060 --> 00:17:22.620 supposed to be not his fault, is not just Paul Samuelson, but other Keynesian economists. 167 00:17:22.620 --> 00:17:26.040 And what they said about, there's another aspect of American history, the likelihood 168 00:17:26.040 --> 00:17:32.380 that the United States would fall behind the Soviet Union economically. Now, you may say 169 00:17:32.380 --> 00:17:35.900 to yourself, well, Paul Samuelson just died. I mean, isn't it the case that, you know, 170 00:17:35.900 --> 00:17:41.380 you're not supposed to speak ill of the dead? Well, that's actually an incorrect rendering 171 00:17:41.380 --> 00:17:46.740 of the, the maxim actually is that you should not speak untruths of the dead. And I don't 172 00:17:46.740 --> 00:17:51.740 I don't intend to do that, so we'll stay in line with the maxim. 173 00:17:51.740 --> 00:17:58.740 Paul Samuelson had an economics textbook, Economics, that was a bestseller, it was used 174 00:17:58.740 --> 00:18:01.740 in classrooms all over the place, he was the guy. 175 00:18:01.740 --> 00:18:07.740 There's a famous photograph of him that appeared next to all the obituaries where there he is standing 176 00:18:07.740 --> 00:18:10.740 and behind him on the blackboard is all this incomprehensible math. 177 00:18:10.740 --> 00:18:15.740 This is going to explain the economy, all this math, this accounts for human beings behavior. 178 00:18:15.740 --> 00:18:26.740 And so here he is a guy who at some level is a very smart guy. I mean he knows an awful lot and yet this guy who knows all his math thinks the Soviet Union is going to overtake the U.S. 179 00:18:26.740 --> 00:18:33.740 Like at some level, the synapses just aren't firing or something here. Like there's something, kind of a blockage or something. 180 00:18:33.740 --> 00:18:43.740 So how did this happen? Like what is it that he's actually saying? Well the 1973 edition of his book, his textbook, so American kids are learning from this thing, 181 00:18:43.740 --> 00:18:54.740 He predicts that, okay, the Soviet Union, sure, its per capita income is about half that of the U.S., but it's going to catch up to the U.S. in per capita income by 1990. 182 00:18:54.740 --> 00:19:02.740 But certainly, at the very least by 2015, it will catch up or it will have exceeded it. 183 00:19:02.740 --> 00:19:12.740 In the 1976 edition of the book, Samuelson wrote that it was a vulgar mistake to think that most people in Eastern Europe are miserable. 184 00:19:12.740 --> 00:19:21.740 Notice, Samuelson did not himself move to Eastern Europe at the time. 185 00:19:21.740 --> 00:19:28.740 In the edition issued the next year, he removed the word vulgar from before vulgar mistake, but he kept the rest. 186 00:19:28.740 --> 00:19:31.740 Well, then in 1985, that whole passage is gone. 187 00:19:31.740 --> 00:19:34.740 Okay, he had the good sense to just ink that one out. 188 00:19:34.740 --> 00:19:38.740 Instead, he substituted something that's even worse. 189 00:19:38.740 --> 00:19:46.640 Now we have, instead of that passage, the question of whether Soviet political repression was, quote, 190 00:19:46.640 --> 00:19:51.340 worth the economic gains. 191 00:19:51.340 --> 00:19:55.840 I mean, talk about completely misunderstanding the question, right? 192 00:19:55.840 --> 00:20:01.440 The economic gain. Like, no toilet paper. Is this a good trade-off for going to the gulag? 193 00:20:01.440 --> 00:20:12.440 Now you folks seem to think this is an easy matter. 194 00:20:12.440 --> 00:20:19.440 Samuelson describes this as one of the most profound dilemmas of human society. 195 00:20:19.440 --> 00:20:24.440 He writes, it would be misleading to dwell on the shortcomings. 196 00:20:24.440 --> 00:20:27.440 Every economy has its contradictions. 197 00:20:27.440 --> 00:20:32.440 Yeah, every economy has tractors rusting because they don't have enough gas to power them. 198 00:20:32.440 --> 00:20:35.440 Yeah, that characterizes a lot of economies, right? 199 00:20:35.440 --> 00:20:38.440 Everybody's got a rear end and nobody's got toilet paper. 200 00:20:38.440 --> 00:20:45.440 I mean, that's a contradiction most economies don't have, but every economy has its contradictions. 201 00:20:45.440 --> 00:20:47.440 What counts is results. 202 00:20:47.440 --> 00:20:52.440 And there can be no doubt that the Soviet planning system has been a powerful engine, 203 00:20:52.440 --> 00:20:56.440 a powerful engine for economic growth. 204 00:20:56.440 --> 00:21:04.440 Let me also mention to you the 1989 edition of the textbook. 205 00:21:04.440 --> 00:21:09.440 I mean, this is where really, I mean, unless you're some type of serious shill you are seeing, 206 00:21:09.440 --> 00:21:14.440 he says, contrary to what many skeptics had earlier believed, 207 00:21:14.440 --> 00:21:23.440 the Soviet economy is proof that a socialist command economy can function and even thrive. 208 00:21:23.440 --> 00:21:25.940 Function and even Thrive. 209 00:21:25.940 --> 00:21:28.440 Now, he's been excused for this. 210 00:21:28.440 --> 00:21:32.140 Well, how could he have known that the Soviet Union is putting out phony numbers? 211 00:21:32.140 --> 00:21:34.240 Oh yeah, who would ever suspect that, right? 212 00:21:34.240 --> 00:21:42.040 I mean, they lie about every single thing on earth, but the GDP figures, those are sound, right? 213 00:21:42.040 --> 00:21:48.440 And the GDP figures are extremely misleading, even on a good day. 214 00:21:48.440 --> 00:21:52.640 But at the hands of the Soviet Union, what could the figures possibly mean? 215 00:21:52.640 --> 00:21:58.040 I mean, none of this has anything to do with consumer choice. The capital markets are all controlled. 216 00:21:58.040 --> 00:22:02.520 There's no freedom, there's no free competition in consumer goods markets, so 217 00:22:02.520 --> 00:22:06.240 the prices don't have their roots in consumer choice, which is the only way they 218 00:22:06.240 --> 00:22:07.840 would be meaningful. 219 00:22:07.840 --> 00:22:09.920 So yeah, if you add up 220 00:22:09.920 --> 00:22:14.140 all the concrete that the Soviets are producing and all the steel, 221 00:22:14.140 --> 00:22:17.100 you get a great big number. 222 00:22:17.100 --> 00:22:20.760 But in the 1980s, other people are producing things like, you know, computer 223 00:22:20.760 --> 00:22:21.980 chips. 224 00:22:21.980 --> 00:22:23.780 and the Soviets are still boasting about, 225 00:22:23.780 --> 00:22:26.220 Conrad, look at all the concrete we produced this year. 226 00:22:26.220 --> 00:22:27.820 Look at the figures. 227 00:22:27.820 --> 00:22:28.860 Yeah, okay. 228 00:22:28.860 --> 00:22:32.220 Well, at a time when the United States in the 1980s 229 00:22:32.220 --> 00:22:35.300 had 25 million personal computers, 230 00:22:35.300 --> 00:22:37.780 the Soviet Union had 150,000. 231 00:22:38.800 --> 00:22:42.100 Something tells me the various apparatchiks 232 00:22:42.100 --> 00:22:43.980 and Politburo members had those 233 00:22:43.980 --> 00:22:45.860 and the average person did not. 234 00:22:45.860 --> 00:22:48.020 So yeah, you could add up a lot of numbers. 235 00:22:48.020 --> 00:22:48.860 What did they mean? 236 00:22:48.860 --> 00:22:52.540 Do they mean that consumers are having their needs met? 237 00:22:52.540 --> 00:22:53.940 They don't mean anything. 238 00:22:53.940 --> 00:22:59.180 Again, this seems, for all this math that's behind Samuelson in the picture, how do you 239 00:22:59.180 --> 00:23:01.900 miss such a fundamental, obvious point? 240 00:23:01.900 --> 00:23:03.620 And again, don't tell me, oh, how could he have known? 241 00:23:03.620 --> 00:23:05.180 Of course you have to know. 242 00:23:05.180 --> 00:23:06.940 This is what an economy is. 243 00:23:06.940 --> 00:23:10.380 It's to produce things for use by consumers. 244 00:23:10.380 --> 00:23:15.360 This economy was some kind of crazy, nightmarish scenario in which a group of bureaucrats made 245 00:23:15.360 --> 00:23:17.380 a bunch of arbitrary decisions. 246 00:23:17.380 --> 00:23:24.460 You add up the sum of arbitrary decisions, you get a gigantic arbitrary number. 247 00:23:24.460 --> 00:23:29.560 I want to point out by the way what Gene Epstein said in Barron's, he's the economics writer 248 00:23:29.560 --> 00:23:33.540 in Barron's, talking about this Samuelson thing, like, you know, shouldn't he have 249 00:23:33.540 --> 00:23:34.540 known? 250 00:23:34.540 --> 00:23:40.380 He says, a bona fide economist, or even just a non-economist with common sense, would have 251 00:23:40.380 --> 00:23:45.880 realized that the Soviet Union was not producing gross national product to begin with, much 252 00:23:45.880 --> 00:23:58.880 and much less price-adjusted GNP. In the Soviet system of non-market prices, with no capital markets and no competition in the consumer markets, there was no role for entrepreneurship, which drives meaningful growth and development. 253 00:23:58.880 --> 00:24:11.880 Well, this is not an isolated instance. Arthur Oaken, who was on the President's Council of Economic Advisors in the 1960s and who chaired it in 1968 and 1969, 254 00:24:11.880 --> 00:24:16.880 He wrote a book immediately on the conclusion of his tenure there, called The Political 255 00:24:16.880 --> 00:24:24.280 Economy of Prosperity, and in that book he writes, so this is Arthur Oaken, great, well 256 00:24:24.280 --> 00:24:31.580 known Keynesian, he writes, between 1956 and 1961, real gross national product rose at 257 00:24:31.580 --> 00:24:39.080 an average rate of 2.1% in the US, so far below the 6.4% estimated rate of the Soviet 258 00:24:39.080 --> 00:24:44.080 Union, that it made credible Khrushchev's threat to bury us economically. 259 00:24:44.080 --> 00:24:49.080 Yeah, that's, there's our expert. That's the guy in charge of giving the president's advice. 260 00:24:49.080 --> 00:24:54.080 Great. So, who is this Arthur Oaken fellow anyway? 261 00:24:54.080 --> 00:25:00.080 Well, all through his book, he's telling us about the wonderful experience of the 1960s, right? 262 00:25:00.080 --> 00:25:06.080 We had robust growth, you know, unemployment was reasonable, inflation was reasonable. 263 00:25:06.080 --> 00:25:15.080 So he predicts throughout this book, we're just going to continue on, we've gotten rid of the business cycle. There's no need for recessions anymore. 264 00:25:15.080 --> 00:25:25.080 Well, here's another law that you can memorize. Anytime you're being promised that the business cycle has been conquered forever, that means a big one is coming. 265 00:25:25.080 --> 00:25:32.080 It's consistently true. In the 20s, that was the consensus. In the 60s, that was the consensus. In the 90s, that was the consensus. 266 00:25:32.080 --> 00:25:37.080 So yeah, we don't need these things, everything's going great. 267 00:25:37.080 --> 00:25:45.080 Okay, well, let's delve into this a bit, because he argues that recessions are not necessary, 268 00:25:45.080 --> 00:25:50.080 and he condemns those, particularly by implication the Austrians, 269 00:25:50.080 --> 00:25:56.080 who would argue that recessions perform a healthy, purgative function for the economy. 270 00:25:56.080 --> 00:25:59.080 The Keynesian solution to recessions, remember, 271 00:25:59.080 --> 00:26:12.080 The Keynesian solution is keep the boom going, somehow. Just keep interest rates super low, just keep fueling it. There's no reason that we shouldn't jump off this train, even if it's headed for a cliff. We step on the accelerators, keep it going. 272 00:26:12.080 --> 00:26:23.080 And that is not a caricature. In the general theory, Keynes makes this clear, that the solution to a bust is not to let it occur, but to keep the economy in a quasi-boom, permanently. 273 00:26:23.080 --> 00:26:27.680 permanently, and this can be done through various Keynesian measures. 274 00:26:27.680 --> 00:26:33.720 And so likewise, this was Oaken's view, whereas the Austrian view, of course, which I have 275 00:26:33.720 --> 00:26:40.360 to summarize with great brevity here, is that interest rates are real things, they actually 276 00:26:40.360 --> 00:26:47.000 mean something, they can't just be arbitrarily interfered with without causing massive discoordination. 277 00:26:47.000 --> 00:26:51.640 And so the Austrian argument is that during a boom, an artificial boom, when the economy 278 00:26:51.640 --> 00:26:56.840 is going gangbusters because of artificially low interest rates. What's actually happening 279 00:26:56.840 --> 00:27:01.560 is the economy is being set up for a crash because the artificially low interest rates 280 00:27:01.560 --> 00:27:08.200 encourage investment in stages of production that won't be sustainable in the long run. 281 00:27:08.200 --> 00:27:12.440 The economy is trying to do too many things at once. It's become too ambitious because 282 00:27:12.440 --> 00:27:17.840 of these artificially low rates. We're consuming as much or more than before and at the same 283 00:27:17.840 --> 00:27:29.840 At the same time, the long-term sectors of investment or interest rate-sensitive sectors of the economy are being stretched at the same time, and this is an incompatible mix of market forces, and eventually it has to come to grief. 284 00:27:29.840 --> 00:27:35.840 And you can't solve that by just pushing interest rates lower. That just intensifies the problem. 285 00:27:35.840 --> 00:27:45.840 But for guys like this, for the Keynesians, this is exactly what you do. You just push interest rates lower, you fiddle with fiscal policy, and you just keep the boom going. 286 00:27:45.840 --> 00:27:52.340 Now, what in fact happened? Well, one month after the guy's book is published, the recession hits. 287 00:27:52.340 --> 00:27:55.640 So one month after he says, well, we've licked it forever, then it hits. 288 00:27:55.640 --> 00:27:59.840 I mean, perfect, beautiful, poetic justice, right, that this happens. 289 00:27:59.840 --> 00:28:05.340 And what he and all other Keynesians are doing are thinking in terms of gigantic aggregates, 290 00:28:05.340 --> 00:28:13.340 like consumption and labor and investment, when in fact the problems that beset the economy, 291 00:28:13.340 --> 00:28:17.340 particularly in a bust following an artificial boom are not of this sort of 292 00:28:17.340 --> 00:28:22.700 aggregate nature, macro nature. There are a series of micro problems. We've had 293 00:28:22.700 --> 00:28:26.660 this stage has been artificially expanded, this one has been artificially 294 00:28:26.660 --> 00:28:31.420 starved, we need more of this type of labor, less of that type of labor. It's a 295 00:28:31.420 --> 00:28:35.460 series of little micro problems and they're trying to fix this with 296 00:28:35.460 --> 00:28:41.180 extremely crude macro tools. Well, let's just increase the supply of money overall. 297 00:28:41.180 --> 00:28:47.300 Well, that doesn't fix micro-level adjustments that need to be made. 298 00:28:47.300 --> 00:28:54.980 And so Hayek, writing in the 60s, so at this time, so there were sane people, says full 299 00:28:54.980 --> 00:29:00.620 employment policies, as at present practiced, attempt the quick and easy way of giving men 300 00:29:00.620 --> 00:29:06.460 employment where they happen to be, while the real problem is to bring about a distribution 301 00:29:06.460 --> 00:29:12.580 of Labor, which makes continuous high employment without artificial stimulus possible. 302 00:29:12.580 --> 00:29:18.260 What this distribution is, we can never know beforehand. The only way to find out is to 303 00:29:18.260 --> 00:29:22.980 let the unhampered market act under conditions which will bring about a stable equilibrium 304 00:29:22.980 --> 00:29:28.220 between demand and supply. So that is to say, the market will have to adjust as the government 305 00:29:28.220 --> 00:29:33.260 can't possibly know what the various resource allocations ought to be, what the optimal 306 00:29:33.260 --> 00:29:48.260 Now, we hear in Oaken's book the typical trade-off that we can stimulate the economy through various ways, public works, whatever, increase the money supply, to lower unemployment. 307 00:29:48.260 --> 00:29:53.260 We can do the opposite if we need to lower price inflation. 308 00:29:53.260 --> 00:29:58.260 But what if both unemployment and price inflation are rising at once? 309 00:29:58.260 --> 00:30:08.260 How can you implement a policy that's intended to lower one when you need to do the opposite policy to lower the other? 310 00:30:08.260 --> 00:30:13.260 Well, the answer is at that point a lot of Keynesians kind of figured out, well, this one is going to be a little tricky to overcome, 311 00:30:13.260 --> 00:30:19.260 because now we're coming up against the law of non-contradiction and there's just really no going against that. 312 00:30:19.260 --> 00:30:24.260 So what happens during so-called stagflation, you know, inflationary recession? 313 00:30:24.260 --> 00:30:28.260 What are you going to do? Are you going to stimulate and contract simultaneously? 314 00:30:28.260 --> 00:30:34.260 But yet, Oaken does not see this coming. He has this great confidence in this new way of managing the economy. 315 00:30:34.260 --> 00:30:39.260 And it's a new way, he says, it's really an old way. It's an old way that goes back to Keynes. 316 00:30:39.260 --> 00:30:42.260 And we're just implementing it more faithfully and consistently. 317 00:30:42.260 --> 00:30:44.260 Okay, well, let's see what the results were. 318 00:30:44.260 --> 00:30:51.260 Well, consumer price index from 1965 to 1980 goes up by over 176%. 319 00:30:51.260 --> 00:31:05.260 During and after this recession that we saw in the 70s, the unemployment rate remains above the normal 5%, what had become sort of accepted as normal for two decades, including the ten double-digit months in the early 80s, 82, 83. 320 00:31:05.260 --> 00:31:22.660 Corrected for inflation, the Dow lost 80% from its peak, and so if you look at an inflation-adjusted graph of the Dow from 1965 to 1985, you see some ups and downs, but what you really see is an unmistakable trend sharply downward. 321 00:31:22.660 --> 00:31:35.660 Meanwhile, Hayek had written in the 1960s a government which uses inflation as an instrument of policy but wants it to produce only the desired effects is soon driven to control ever-increasing parts of the economy. 322 00:31:35.660 --> 00:31:44.660 And so we got Nixon's wage and price controls. Hayek, in fact, could have been consulted if anybody had been listening. 323 00:31:44.660 --> 00:31:52.160 He had repeatedly, both before and after the fact, warned about the problems caused by making inflation a part of your policy. 324 00:31:52.160 --> 00:32:02.660 Inflation merely postpones problems. It diverts resources into sectors where they wouldn't otherwise go and where an undisturbed economy would not have allocated them. 325 00:32:02.660 --> 00:32:07.160 Eventually, resources, including labor, need to go where the market wants them to go. 326 00:32:07.160 --> 00:32:13.360 There's no avoiding that. There's no fairytale way of avoiding that with these juvenile Keynesian methods. 327 00:32:13.360 --> 00:32:15.060 Hayek says, 328 00:32:15.060 --> 00:32:26.060 To aim at securing to men who in the social interest ought to move elsewhere, the continued receipt of their former wages can only delay movements which ultimately must take place. 329 00:32:26.060 --> 00:32:35.060 If a policy is pursued over a long period which postpones and delays movements, which keeps people in their old jobs who ought to move elsewhere, 330 00:32:35.060 --> 00:32:37.860 So again, the micro-corrections that need to be made. 331 00:32:37.860 --> 00:32:42.860 The result must be that what ought to have been a gradual process of change becomes in the end 332 00:32:42.860 --> 00:32:46.860 a problem of the necessity of mass transfers within a short period. 333 00:32:46.860 --> 00:32:51.860 Continued monetary pressure, which has helped people to earn an unchanged money wage 334 00:32:51.860 --> 00:32:57.860 in jobs which they ought to have left, will have created accumulated arrears of necessary changes 335 00:32:57.860 --> 00:33:03.660 which, as soon as monetary pressure ceases, will have to be made up in a much shorter space of time 336 00:33:03.660 --> 00:33:09.320 and then result in a period of acute mass unemployment which might have been avoided. 337 00:33:09.320 --> 00:33:17.040 And this is why Hayek says that the stimulus provided by inflation is due to the errors 338 00:33:17.040 --> 00:33:21.860 which it produces. That's where your stimulus comes from. Inflation is making possible the 339 00:33:21.860 --> 00:33:25.660 propping up of things that shouldn't be propped up and the starting of things that shouldn't 340 00:33:25.660 --> 00:33:30.740 be started. So these things have to be liquidated anyway and the correction will be all the 341 00:33:30.740 --> 00:33:36.740 Well, I thought I might say something about Paul Krugman, but I think Doug pretty much got him. 342 00:33:36.740 --> 00:33:43.740 I will say that Krugman claims that he predicted the bust because he saw the housing bubble coming. 343 00:33:43.740 --> 00:33:49.740 Okay, he saw the housing bubble coming the way I saw the Mises circle coming, in a certain sense. 344 00:33:49.740 --> 00:33:52.740 Well, not quite, because I didn't have much to do with it. 345 00:33:52.740 --> 00:33:57.740 It's more like I predicted that the Pepsi I put in my refrigerator would get cold. 346 00:33:57.740 --> 00:34:05.580 And the reason I put it that way is that in 2001, what is Krugman calling for? And thanks 347 00:34:05.580 --> 00:34:10.100 to the internet, we now have all his crummy columns at our fingertips, so we can go back 348 00:34:10.100 --> 00:34:15.420 and nail them. He says, what we need now are lower interest rates to spur housing. We need 349 00:34:15.420 --> 00:34:20.380 to get housing going. And then he predicts there's a housing bubble. Gee, wow, how did 350 00:34:20.380 --> 00:34:24.600 you do that? You predicted a housing bubble after you called for the very factors that 351 00:34:24.600 --> 00:34:35.440 That's exactly the problem are these Keynesian methods to get us out of recession. 352 00:34:35.440 --> 00:34:42.120 That recession we had following the Nasdaq collapse, the dot-com bust was relatively mild 353 00:34:42.120 --> 00:34:47.000 because we had Greenspan pumping up the money supply and getting interest rates super low 354 00:34:47.000 --> 00:34:49.200 and this encourages housing. 355 00:34:49.200 --> 00:34:53.520 Housing was actually housing, we had the first recession ever where there was no decline 356 00:34:53.520 --> 00:34:58.420 and Housing starts, and in fact, housing prices are going up 8.8%, so people think, 357 00:34:58.420 --> 00:35:02.700 wow, well, housing is great, it's robust even during a recession, this is where I should 358 00:35:02.700 --> 00:35:09.400 be. So Krugman and others encourage the economy to continue on a path that should have been 359 00:35:09.400 --> 00:35:14.460 halted so that when the crash came, it was all the worse because of this Keynesian fantasy 360 00:35:14.460 --> 00:35:19.340 world in which we can keep booms going through these artificial means, if only it had been 361 00:35:19.340 --> 00:35:48.340 Well, I'll conclude here by noting two things. Number one is, in spite of all the damage Paul Krugman has done, if you know anything about the finances of the New York Times, a prospect has opened before us that none of us could dream of, which is a world without the New York Times. 362 00:35:48.340 --> 00:36:05.340 But the second thing is this. Students all over the country now are challenging their professors, which, by the way, I don't encourage that till after you're safely out, you've gotten your A and whatever, but if you can't restrain yourself, you've got to be who you are, right? 363 00:36:05.340 --> 00:36:13.340 And these students, you know, they want to know about business cycle theory. Most of these professors haven't got the foggiest idea of what in the world the kids are even talking about. 364 00:36:13.340 --> 00:36:20.340 Somebody was writing to me the other day and said his professor came out first day of class and wrote John Maynard Keynes on the board. 365 00:36:20.340 --> 00:36:35.340 Well now I want to live in a world in which a professor who dares to do that trembles as he walks into the classroom, knowing there are people who are going to call him on. 366 00:36:35.340 --> 00:36:41.340 Thanks to the internet which extends our reach beyond anything we could have dreamed of 367 00:36:41.340 --> 00:36:49.340 and combined with the enthusiasm of a rising generation of students and these factors reinforce each other. 368 00:36:49.340 --> 00:36:54.340 We're facing the greatest opportunity we've ever had. We are really seeing changes. 369 00:36:54.340 --> 00:36:58.340 The Austrian School is being discussed all the time. It's gaining a foothold all over the place. 370 00:36:58.340 --> 00:37:02.340 Students are studying it. Bright young kids are coming up in this tradition. 371 00:37:02.340 --> 00:37:07.340 And so I hope you will support us. And everybody wants you to support them. I understand that. 372 00:37:07.340 --> 00:37:37.340 I understand that and our wallets are stretched and I understand that, but I mean we really are changing things, I mean we're observing this, it is measurable that we are influencing kids, we're influencing adults, we're influencing public opinion, all of us, all of us here collaborating in this great cause actually have the chance to be a part of history, and that's not just a cliché, that's real, this is what we're living through, a change, the possibility of a dramatic change in intellectual life. 373 00:37:37.340 --> 00:37:43.500 And I'll leave with this, when the Korean translation of my book Meltdown came out a few months ago, 374 00:37:43.500 --> 00:37:49.540 of course, I can't read Korean, so I didn't actually know what some of the things on the cover said till I asked people who do. 375 00:37:49.540 --> 00:37:51.660 One of the lines on the cover says, 376 00:37:51.660 --> 00:37:59.340 Canes must die so the economy may live. 377 00:37:59.340 --> 00:38:01.980 So join the Institute and help make that possible. 378 00:38:01.980 --> 00:38:03.980 Thank you very much.