WEBVTT NOTE Entrepreneurship Under the Gold Standard 1 00:00:00.000 --> 00:00:07.200 It's truly wonderful to be here. So much, as others have said, so much has changed since 1983. 2 00:00:07.200 --> 00:00:16.920 A lot has changed for me personally. I wasn't even born in 83. 3 00:00:16.920 --> 00:00:21.600 I can see those of you who are doing the math thinking, wait a minute. 4 00:00:21.600 --> 00:00:26.280 And I should mention that I did get recognized in the airport. 5 00:00:26.280 --> 00:00:31.560 A guy ran up to me as I was getting my bags, and, oh, I'm so excited to meet you. 6 00:00:31.560 --> 00:00:36.280 I'm a great admirer of your work, Dr. Thornton, and I'm looking forward to talking to you. 7 00:00:36.280 --> 00:00:46.120 I said, no, no, the other tall, dark and handsome fellow is the one you're thinking of. 8 00:00:46.120 --> 00:00:54.680 Both Mark and Tom Woods mentioned Austrian economists as rock stars, and maybe in our 9 00:00:54.680 --> 00:01:06.680 I've been thinking about this because the real rock star, Senator Obama, happened to be giving a big rally on my campus last night. 10 00:01:06.680 --> 00:01:11.680 A large outdoor rally at the University of Missouri to get the students fired up to go and vote, you see. 11 00:01:11.680 --> 00:01:16.680 Fortunately, I missed the whole thing because I was on my way here. 12 00:01:16.680 --> 00:01:25.680 But there was something interesting in the local paper as they were doing a little write-up in advance of this rally. 13 00:01:25.680 --> 00:01:39.680 Usually the local paper will get a quotation from some University of Missouri professor or some local politician on the significance of an event that's coming up on campus or in the town. 14 00:01:39.680 --> 00:01:47.680 But it was a little bit different this time. Just to quote one line from the Columbia Daily Tribune, the Wednesday edition. 15 00:01:47.680 --> 00:01:52.680 The reporter says, Obama's planned visit had already stirred enthusiasm this morning. 16 00:01:52.680 --> 00:02:04.680 Walter R. Smith, a janitor, who this morning was sweeping the northeast corner of Broadway and 9th Street, said Obama's visit was, quote, super, super good. 17 00:02:04.680 --> 00:02:16.680 Quote, we need a change, Smith said. It's gone down as far as it can go, but one man can't do it by himself. He's only one person. We've got to join together. Close quote. 18 00:02:16.680 --> 00:02:33.680 Now at first I thought, I wonder why they interviewed a janitor. That's a little bit unusual. But as I thought about it, I realized that what Mr. Smith had said was every bit as profound as what you read in the New York Times or here on National Public Radio or editorial page of the Wall Street Journal. 19 00:02:33.680 --> 00:02:39.120 Journal. So maybe it does make sense to interview someone from the real world. 20 00:02:39.120 --> 00:02:46.160 You know, it is a very interesting time these days to be an economist. I imagine this is, you know, 21 00:02:46.160 --> 00:02:50.720 what it must, you know, what it would have been like to be an epidemiologist during the bubonic 22 00:02:50.720 --> 00:03:01.760 plague. You know, everyone wants to ask you what's going on, but no one's very encouraged by, you know, 23 00:03:01.760 --> 00:03:03.760 and other sorts of things that you have to say. 24 00:03:03.760 --> 00:03:07.640 Now, of course, I mean, it's an interesting time 25 00:03:07.640 --> 00:03:11.360 and a very challenging time to be a good economist, 26 00:03:11.360 --> 00:03:12.480 you know, one of us. 27 00:03:14.800 --> 00:03:17.640 I imagine it's much easier to be, say, 28 00:03:17.640 --> 00:03:18.980 Paul Krugman, maybe. 29 00:03:20.800 --> 00:03:23.160 You get to say, well, we've been telling you 30 00:03:23.160 --> 00:03:25.200 there's market failure everywhere, and here it is. 31 00:03:25.200 --> 00:03:27.800 Just like we said, the market broke down. 32 00:03:27.800 --> 00:03:29.000 We need more regulation. 33 00:03:29.000 --> 00:03:41.000 I should mention that, you know, there is one silver lining, or one of the silver linings in this whole mess is the downgrading of the reputation of, shall we call them, St. Alan the Wise. 34 00:03:41.000 --> 00:03:58.000 I mean, you know, like most of you, I'm no fan of the members of the U.S. Congress, but it was kind of amusing seeing Mr. Greenspan being grilled 35 00:03:58.000 --> 00:04:01.920 by the same men and women who for so many years 36 00:04:01.920 --> 00:04:03.800 praised him as the greatest central banker 37 00:04:03.800 --> 00:04:05.320 the world had ever known, 38 00:04:05.320 --> 00:04:06.800 cutting him off in mid-sentence 39 00:04:06.800 --> 00:04:11.040 and finally calling him to task for mumbling 40 00:04:11.040 --> 00:04:12.700 without actually saying anything. 41 00:04:14.120 --> 00:04:16.600 Remember, this is the man who was part 42 00:04:16.600 --> 00:04:19.840 of Ayn Rand's inner circle in the 1950s and 60s 43 00:04:19.840 --> 00:04:21.920 and actually wrote a couple pretty good articles 44 00:04:21.920 --> 00:04:24.960 in the 60s, one on the gold standard and one on antitrust, 45 00:04:24.960 --> 00:04:27.920 but the man who upon his appointment 46 00:04:27.920 --> 00:04:34.520 to the Fed Chair in 1987, as the New York Times reminded its potentially worried readers, 47 00:04:34.520 --> 00:04:39.520 this is the man who believes in laissez-faire, quote, at the high philosophical level. 48 00:04:39.520 --> 00:04:42.920 You know what that means, of course. 49 00:04:42.920 --> 00:04:45.920 That means in principle, he might actually support laissez-faire, 50 00:04:45.920 --> 00:04:50.520 but that would have no impact whatsoever on his policy decisions. 51 00:04:50.520 --> 00:04:57.120 In fact, Greenspan's kind of approach, his approach is the epitome of the kind of analysis 52 00:04:57.120 --> 00:05:04.480 that Austrians would say is exactly the wrong way to go about understanding or analyzing an economy, right? 53 00:05:04.480 --> 00:05:13.880 Greenspan was committed to no theoretical framework whatsoever, the man who had this reputation for pouring over reams and reams of data 54 00:05:13.880 --> 00:05:24.680 and thinking about the numbers and what the numbers really mean, but having no understanding of what are the causal mechanisms associated with economic change. 55 00:05:24.680 --> 00:05:27.120 I actually saw Greenspan not too long ago. 56 00:05:27.120 --> 00:05:34.320 I was in Washington, D.C. for a conference and a bunch of us went to lunch and went to a pizza place. 57 00:05:34.320 --> 00:05:38.640 And as I was waiting for my pizza, to pick up my pizza at the counter, I look over and there's Alan Greenspan. 58 00:05:38.640 --> 00:05:40.620 He's picking up a pizza. 59 00:05:40.620 --> 00:05:51.680 And he gets his pepperoni pie and the clerk says, would you like that cut into eight slices or ten? 60 00:05:51.680 --> 00:05:55.680 He says, he says, you know, I'm really, I'm extra hungry today, you better make it ten. 61 00:05:55.680 --> 00:06:06.680 Okay, I'm not here to talk about Alan Greenspan. 62 00:06:06.680 --> 00:06:12.680 I'm here to talk about the entrepreneur and the role that the entrepreneur plays in the economy, 63 00:06:12.680 --> 00:06:19.680 in the free economy, but also in the statist or interventionist economy that we have today. 64 00:06:19.680 --> 00:06:25.680 Mises describes the entrepreneur as the driving force of the market economy. 65 00:06:25.680 --> 00:06:31.680 The driving force. Now what did he mean by that? Why did Mises place so much emphasis on the entrepreneur? 66 00:06:31.680 --> 00:06:34.680 Why did Mises think the entrepreneur was so important? 67 00:06:34.680 --> 00:06:40.680 Well it's important to note first that Mises uses the term entrepreneur in a particular way. 68 00:06:40.680 --> 00:06:47.680 A way that's a little bit different from the way it's typically used today in the business press and by mainstream academics and so on. 69 00:06:47.680 --> 00:06:48.680 and so on. 70 00:06:48.680 --> 00:06:54.800 Nowadays, the word entrepreneur tends to refer to a specific job description. 71 00:06:54.800 --> 00:06:59.560 A person who is a self-employed individual, someone who runs their own business, or someone 72 00:06:59.560 --> 00:07:02.900 who is responsible for establishing a new company. 73 00:07:02.900 --> 00:07:09.860 But owners of existing enterprises, managers, sorry, owners or founders of large enterprises 74 00:07:09.860 --> 00:07:14.560 are not considered to be entrepreneurs, they're considered to be something else, businessmen. 75 00:07:14.560 --> 00:07:19.760 But Mises really has in mind not so much a job title or a type of firm, like a small 76 00:07:19.760 --> 00:07:24.520 firm or a startup firm or a technology firm, but he really has something more general in 77 00:07:24.520 --> 00:07:27.000 mind by the entrepreneur. 78 00:07:27.000 --> 00:07:33.520 The entrepreneurship to Mises is a particular economic function, a function that is performed 79 00:07:33.520 --> 00:07:37.800 in the market economy by entrepreneurs. 80 00:07:37.800 --> 00:07:39.280 What exactly is this function? 81 00:07:39.280 --> 00:07:51.280 Well, it's the investment of assets or resources today in the present, in anticipation of rewards that accrue in the future, in the uncertain future. 82 00:07:51.280 --> 00:08:05.280 Entrepreneurship thus includes the ownership of resources, it includes the bearing of uncertainty, and a sort of ultimate responsibility for decision making about the use of those resources. 83 00:08:05.280 --> 00:08:11.160 Each of us acts entrepreneurially to a certain extent every day as we go about our business. 84 00:08:11.160 --> 00:08:16.480 For example, you're investing your time and possibly your reputation in being here at this 85 00:08:16.480 --> 00:08:21.000 conference this weekend, but you're doing so because you anticipate that you will get 86 00:08:21.000 --> 00:08:23.840 some rewards out of here. 87 00:08:23.840 --> 00:08:25.400 You don't know this for sure ahead of time. 88 00:08:25.400 --> 00:08:29.460 You don't know exactly what the conference will bring, but you anticipate that the benefits 89 00:08:29.460 --> 00:08:32.600 will exceed the costs. 90 00:08:32.600 --> 00:08:37.400 Mises placed particular emphasis on a certain type of entrepreneur, what he called the capitalist 91 00:08:37.400 --> 00:08:41.200 entrepreneur or the entrepreneur promoter. 92 00:08:41.200 --> 00:08:47.740 These are owners of productive assets, resource owners, business people, investors, shareholders 93 00:08:47.740 --> 00:08:54.680 and so on, speculators, other decision makers who own and ultimately manage or govern business 94 00:08:54.680 --> 00:08:55.680 enterprises. 95 00:08:55.680 --> 00:09:01.060 It is the actions of these entrepreneurs that drive the market economy and historically 96 00:09:01.060 --> 00:09:07.820 are largely responsible for the economic prosperity that we enjoy today. 97 00:09:07.820 --> 00:09:11.620 Entrepreneurship in this sense is really a kind of responsibility. 98 00:09:11.620 --> 00:09:17.700 It represents an ultimate kind of decision authority that is exercised by those who own 99 00:09:17.700 --> 00:09:18.700 resources. 100 00:09:18.700 --> 00:09:22.820 And this ultimate decision authority cannot be delegated to someone else. 101 00:09:22.820 --> 00:09:26.900 We usually think of an entrepreneur as someone who doesn't work for someone else and take 102 00:09:26.900 --> 00:09:48.900 He said, well, it was something that my last boss said to me, what was that? You're fired. 103 00:09:48.900 --> 00:09:55.660 So this man decided to take ultimate responsibility. There was also a homeless man who asked to 104 00:09:55.660 --> 00:10:00.660 There's a passerby, he said, hey, I haven't eaten all day, can you give me 50 bucks? 105 00:10:00.660 --> 00:10:05.660 The passerby says, you know, I think you'd have a lot better luck if you would just ask for a dollar. 106 00:10:05.660 --> 00:10:15.660 And the panhandler says, look, give me a dollar, give me 50, but don't tell me how to run my business. 107 00:10:15.660 --> 00:10:19.660 The entrepreneur doesn't have anyone telling him how to run his business. 108 00:10:19.660 --> 00:10:25.660 Now, for our purposes here, we need to focus on how exactly the entrepreneur exercises this function. 109 00:10:25.660 --> 00:10:27.660 How does the entrepreneur run his business? 110 00:10:27.660 --> 00:10:37.660 Well, he engages in a particular practice or uses a specific tool that Mises calls calculation, economic calculation or monetary calculation. 111 00:10:37.660 --> 00:10:40.660 Now, what does Mises mean? 112 00:10:40.660 --> 00:10:42.660 Well, imagine a world without money. 113 00:10:42.660 --> 00:10:47.660 Imagine a pure barter economy where people trade goods against goods. 114 00:10:47.660 --> 00:10:58.660 In a world like that, it would be impossible for entrepreneurs to analyze rationally the expected benefits and costs of various business activities. 115 00:10:58.660 --> 00:11:05.660 Does combining one cow and one worker to produce ten buckets of milk make economic sense? 116 00:11:05.660 --> 00:11:09.660 Is that a profitable activity? Does it bring a net gain or a net loss? 117 00:11:09.660 --> 00:11:15.660 Is it more efficient to use one cow and two workers or two cows and one worker? 118 00:11:15.660 --> 00:11:21.660 Is it more profitable to produce milk or to produce meat or to produce leather? 119 00:11:21.660 --> 00:11:27.660 Without money, there's no way for the entrepreneur to compare those courses of action 120 00:11:27.660 --> 00:11:31.660 because you can't express the results in a common unit. 121 00:11:31.660 --> 00:11:38.660 You'd have heterogeneous things to add up, cows and workers and gallons of milk and pounds of meat and so on. 122 00:11:38.660 --> 00:11:42.660 On the other hand, with money and with prices expressed in money, 123 00:11:42.660 --> 00:11:47.660 The entrepreneur can calculate the benefits and costs of various activities in a common unit. 124 00:11:47.660 --> 00:12:01.660 He can add up these heterogeneous resources and outputs and use cost accounting to come up with total dollar figures for the cost of the inputs, the anticipated prices of the outputs, and so on. 125 00:12:01.660 --> 00:12:11.660 He can use accounting to compare the efficiency or effectiveness of various methods of production, various goods and services that might be produced, and so on. 126 00:12:11.660 --> 00:12:30.660 Now, when you hear the term economic calculation, you might be thinking about Mises' research on socialism, and the concept of economic calculation was formulated by Mises, at least in part in the context of the so-called socialist calculation debate. 127 00:12:30.660 --> 00:12:38.660 And as Mises pointed out in his famous 1920 essay in his 1922 book, under socialist central 128 00:12:38.660 --> 00:12:45.260 planning, the central planner of the economy is in much the same position as our entrepreneur 129 00:12:45.260 --> 00:12:50.340 thinking about the cows and the gallons, cows the workers and the gallons of milk. 130 00:12:50.340 --> 00:12:54.900 Because in the socialist economy, there are no markets, no exchange markets for goods 131 00:12:54.900 --> 00:12:58.220 and services, particularly for factors of production. 132 00:12:58.220 --> 00:13:04.260 So the socialist dictator has no way of comparing the various methods of producing what particular 133 00:13:04.260 --> 00:13:09.540 good or service to know which is the least costly or most efficient method of production. 134 00:13:09.540 --> 00:13:12.940 The dictator has no way of knowing whether it is economically efficient to produce a 135 00:13:12.940 --> 00:13:15.820 particular good or not. 136 00:13:15.820 --> 00:13:21.540 But my point here is that while this argument has sort of devastating implications for socialist 137 00:13:21.540 --> 00:13:26.800 central planning, it's a much more general and widely applicable concept than one that 138 00:13:26.800 --> 00:13:36.800 Applies Merely to Socialism. It is in fact the tool that entrepreneurs in a capitalist economy use every day to evaluate various courses of action. 139 00:13:36.800 --> 00:13:44.800 Now we talked about prices. Entrepreneurs need prices for goods and services that are exchanged on markets today. 140 00:13:44.800 --> 00:13:52.800 They find value in looking at past prices, prices that have been paid for goods and services in the past. 141 00:13:52.800 --> 00:14:03.800 and, of course, when we talk about today's prices, present prices, we really mean the prices of the immediate past, prices of exchanges that have just taken place. 142 00:14:03.800 --> 00:14:13.800 But that isn't enough. Remember that the entrepreneur realizes the full benefits of his actions only in the future, after production has taken place. 143 00:14:13.800 --> 00:14:20.800 In the Austrian account of the production process, unlike most mainstream accounts, production takes time. 144 00:14:20.800 --> 00:14:27.800 Production isn't instantaneous. Right? That's a counterintuitive shocker, isn't it? 145 00:14:27.800 --> 00:14:36.800 And so, you know, the entrepreneur has to anticipate or forecast or estimate future prices, future market conditions 146 00:14:36.800 --> 00:14:41.800 in making this decision about whether or not to engage in a particular productive activity. 147 00:14:41.800 --> 00:14:49.800 Now, these estimates of future market conditions aren't perfect, right? They can never be perfect in a world of genuine uncertainty. 148 00:14:49.800 --> 00:14:58.800 The entrepreneur relies on what Mises called his specific, anticipative understanding of the conditions of the uncertain future. 149 00:14:58.800 --> 00:15:05.800 And that's a process which, according to Mises, quote, defies any rules in systematization. 150 00:15:05.800 --> 00:15:20.800 In Human Action, Mises describes the entrepreneur this way. He says the entrepreneur is quote, a speculator, a man eager to utilize his opinion about the future structure of the market for business operations promising profits. 151 00:15:20.800 --> 00:15:28.800 His understanding can be neither taught nor learned. If it were different, everybody could embark upon entrepreneurship with the same prospect of success. 152 00:15:28.800 --> 00:15:43.800 What distinguishes the successful entrepreneur and promoter from other people is precisely the fact that he does not let himself be guided by what was and what is, but arranges his affairs on the ground of his opinion about the future. 153 00:15:43.800 --> 00:15:49.800 He sees the past and the present as other people do, but he judges the future in a different way. 154 00:15:49.800 --> 00:15:58.960 Now, some entrepreneurs, naturally, are more skilled at performing this function than others. 155 00:15:58.960 --> 00:16:01.200 All entrepreneurs are not equally successful. 156 00:16:01.200 --> 00:16:06.920 Some are quite good at anticipating future market conditions. 157 00:16:06.920 --> 00:16:12.280 They're very skilled in having this anticipative understanding of the future, and others are 158 00:16:12.280 --> 00:16:13.840 less skilled. 159 00:16:13.840 --> 00:16:19.720 Some entrepreneurs will earn profits, others will earn losses. 160 00:16:19.720 --> 00:16:27.800 In a private property regime, the institutions of profit and loss assure that resources will 161 00:16:27.800 --> 00:16:33.160 tend to be directed into the hands of those entrepreneurs who tend to be the most skilled 162 00:16:33.160 --> 00:16:36.700 at these particular kinds of activities. 163 00:16:36.700 --> 00:16:41.900 Entrepreneurs who systematically anticipate the future incorrectly will run out of funds 164 00:16:41.900 --> 00:16:44.200 and eventually cease to be entrepreneurs. 165 00:16:44.200 --> 00:16:48.040 And that's of course exactly what we would want to happen, right? 166 00:16:48.040 --> 00:17:11.040 and efficient allocation of resources requires that unsuccessful business activities not be repeated, right, that there is bankruptcy, liquidation, the cleansing of past error and opportunities to reinvest funds in new projects guided by new entrepreneurs, those who can better manage those resources than those who are unsuccessful. 167 00:17:11.040 --> 00:17:15.040 Gee, now what does that sound like? 168 00:17:15.040 --> 00:17:23.680 firms going bankrupt, borrowers having to default on loans, of course, if we have a 169 00:17:23.680 --> 00:17:31.320 bailout economy in which losses are not penalized, in which those who speculate are able to reap 170 00:17:31.320 --> 00:17:37.280 the rewards of success and able to pass along the cost of failure onto the hapless taxpayer, 171 00:17:37.280 --> 00:17:41.320 then we have a completely different situation altogether. 172 00:17:41.320 --> 00:17:49.760 I'm merely digressing here. I wrote a recent blog entry about the current mess and this 173 00:17:49.760 --> 00:17:57.120 problem with this almost Keynesian style aggregate thinking that everyone talks about lending, 174 00:17:57.120 --> 00:18:06.000 the volume of lending and banks, banks being successful or not. Firms have too many bad 175 00:18:06.000 --> 00:18:14.920 Assets on the books. Well, I mean, which firms? Which banks? Which borrowers? Which investors? 176 00:18:14.920 --> 00:18:19.560 Okay? I mean, this isn't news to you. It's probably news to people in Washington and, 177 00:18:19.560 --> 00:18:28.480 you know, sort of in New York media houses. But, you know, all borrowers are not the same. 178 00:18:28.480 --> 00:18:35.840 Some people actually shouldn't get a loan, right? Some investors really should go bankrupt. 179 00:18:35.840 --> 00:18:39.280 But you, of course, you wouldn't know that from reading the newspapers today. 180 00:18:39.280 --> 00:18:48.800 Now, what we've talked about so far is how economic calculation works in a free society, 181 00:18:48.800 --> 00:18:55.320 in a society with money that's produced by the free market, a gold standard, for example. 182 00:18:55.320 --> 00:19:00.480 Now, we should point out, and Mises is quite explicit, that even under a gold standard, 183 00:19:00.480 --> 00:19:03.440 economic calculation is not perfect. 184 00:19:03.440 --> 00:19:25.440 And it's not perfect not only because entrepreneurs will make errors in forecasting and estimating future conditions, but also because the purchasing power of money can change from day to day as the quantity of species changes and as consumers adjust their demands for money, their demands to hold cash balances. 185 00:19:25.440 --> 00:19:30.440 So the purchasing power of money is not stable in a free society under a gold standard. 186 00:19:30.440 --> 00:19:33.240 It fluctuates within modest limits. 187 00:19:33.240 --> 00:19:37.240 Now that makes the system of economic calculation less than perfect. 188 00:19:37.240 --> 00:19:43.240 It's possible that prices may rise or fall because of changes in the purchasing power of money, 189 00:19:43.240 --> 00:19:48.740 rather than real changes in the economy, which might distort the profit and loss signals 190 00:19:48.740 --> 00:19:52.540 that the price mechanism brings about. 191 00:19:52.540 --> 00:20:00.540 But these are relatively modest and not modest effects that aren't subject to strong concern. 192 00:20:00.540 --> 00:20:13.540 Mises says, quote, the aims of monetary calculation are such that they cannot be frustrated by the inaccuracies which stem from slow and comparatively slight movements in purchasing power. 193 00:20:13.540 --> 00:20:21.540 Cash induced changes in purchasing power of the extent to which they occurred in the last two centuries, this is Mises writing in the middle of the 20th century, 194 00:20:21.540 --> 00:20:33.540 with metallic money, i.e. gold, especially with gold money, cannot influence the result of the businessman's economic calculations so considerably as to render such calculations useless. 195 00:20:33.540 --> 00:20:42.540 Historical experience shows that one could, for all practical purposes of the conduct of business, manage very well with these methods of calculation. 196 00:20:42.540 --> 00:20:47.540 It is impossible to design and still less possible to realize a better method. 197 00:20:47.540 --> 00:20:53.660 Method. So economic calculation under free market money like a gold standard is the best 198 00:20:53.660 --> 00:21:02.660 of all feasible forms of business accounting. Now what happens with state controlled money? 199 00:21:02.660 --> 00:21:07.740 Well of course first in a status interventionist economy the role of the entrepreneur changes 200 00:21:07.740 --> 00:21:14.140 in many ways. Right? The entrepreneur is no longer an agent, solely an agent who performs 201 00:21:14.140 --> 00:21:19.900 Sometimes economic calculation to decide how to invest resources, but the entrepreneur 202 00:21:19.900 --> 00:21:25.660 must also become what they sometimes call a political entrepreneur, someone who lobbies, 203 00:21:25.660 --> 00:21:29.300 someone who tries to influence decision makers, and so on. 204 00:21:29.300 --> 00:21:38.500 Mises also points out in his 1944 book, Bureaucracy, that profit and loss signals under an interventionist 205 00:21:38.500 --> 00:21:43.820 system are less valuable, less informative than they are in a free market economy. 206 00:21:43.820 --> 00:21:48.060 Because of all the various interventions into the price mechanism, taxes and regulations 207 00:21:48.060 --> 00:21:54.300 that distort profits, laws that interfere with the affairs of business, hiring and promotions, 208 00:21:54.300 --> 00:21:58.980 production methods and so on, the constant threat of arbitrary antitrust or regulatory 209 00:21:58.980 --> 00:22:05.620 activity, all of these things render much less informative the tools that the entrepreneur 210 00:22:05.620 --> 00:22:06.900 would otherwise have. 211 00:22:06.900 --> 00:22:11.780 But there are some aspects that relate very specifically to the problem of the value of 212 00:22:11.780 --> 00:22:12.780 money. 213 00:22:12.780 --> 00:22:25.780 Right now we've already had a little primer from Professor Woods earlier this afternoon on the Austrian Theory of the Business Cycle and I think he didn't do too bad, you know, for a history professor, he got it more or less right. 214 00:22:25.780 --> 00:22:39.780 But, you know, a critical aspect of the theory is this idea that the expansion of money or expansion of credit in the economy distorts some particularly important market signals, the interest rate in particular. 215 00:22:39.780 --> 00:22:50.780 In the expansionary phase of the boom, we tend to see substitution away from consumption expenditure towards investment expenditure, at least in the early stages of the boom. 216 00:22:50.780 --> 00:23:01.780 We see entrepreneurs investing in longer-term, more roundabout methods of production, as the Austrians would call it. 217 00:23:01.780 --> 00:23:06.860 Rothbard has points out in Man Economy and State 218 00:23:06.860 --> 00:23:10.580 that business accounting 219 00:23:10.580 --> 00:23:14.940 quote is traditionally geared to a world where the value of the monetary unit is 220 00:23:14.940 --> 00:23:15.700 stable 221 00:23:15.700 --> 00:23:19.300 so the entrepreneur in an inflationary world 222 00:23:19.300 --> 00:23:22.580 a world where the government is expanding the money supply increasing the 223 00:23:22.580 --> 00:23:23.620 quantity of credit 224 00:23:23.620 --> 00:23:27.260 has much less 225 00:23:27.260 --> 00:23:35.760 has information available that is much less useful than would be the case under market provided money. 226 00:23:35.760 --> 00:23:40.760 There tends to be an over-investment in particular stages of production, 227 00:23:40.760 --> 00:23:47.260 a distortion of investment resources toward particular projects, malinvestment as the Austrians would call it. 228 00:23:47.260 --> 00:23:54.260 There are additional problems associated with entrepreneurs trying to anticipate 229 00:23:54.260 --> 00:24:02.260 how fast the rate of monetary expansion will be to try to incorporate into long-term contracts, 230 00:24:02.260 --> 00:24:08.540 into their present value calculations, considering whether to make particular investments, how 231 00:24:08.540 --> 00:24:15.860 to factor in anticipated changes in prices, the results of unanticipated increases in 232 00:24:15.860 --> 00:24:24.760 and Money by the Central Bank, there's what economists have called relative price variability, 233 00:24:24.760 --> 00:24:30.520 meaning that when new credit enters the system, it doesn't affect all prices equally. 234 00:24:30.520 --> 00:24:35.600 So there are changes in relative prices, it's not just the price level that is important 235 00:24:35.600 --> 00:24:39.220 to entrepreneurs, it's just the prices of goods and services relative to other goods 236 00:24:39.220 --> 00:24:40.220 and services. 237 00:24:40.220 --> 00:24:46.500 All of those are distorted by the injection of new money or credit into the system. 238 00:24:46.500 --> 00:24:53.860 Now the Austrian theory of the business cycle teaches us that the boom that is ignited by 239 00:24:53.860 --> 00:24:57.740 the injection of money and credit into the system, the lowering of interest rates below 240 00:24:57.740 --> 00:25:01.500 their market levels, is not ultimately a sustainable boom. 241 00:25:01.500 --> 00:25:09.060 Gee, that's a shock, that credit-induced booms might be unstable. 242 00:25:09.060 --> 00:25:11.660 You wouldn't think anyone would doubt that today. 243 00:25:11.660 --> 00:25:17.180 And yet, while it is true, as Tom Woods reminded us, that people are taking the Austrian account 244 00:25:17.180 --> 00:25:22.960 of the business cycle more seriously than they did before, we have not yet seen a rush 245 00:25:22.960 --> 00:25:26.140 among mainstream economists to adopt it. 246 00:25:26.140 --> 00:25:32.220 And I should mention, it isn't, there's a misconception that the Austrian account of 247 00:25:32.220 --> 00:25:38.100 the business cycle doesn't give entrepreneurs enough credit, that it assumes that entrepreneurs 248 00:25:38.100 --> 00:25:42.580 Entrepreneurs are fooled systematically, that they're misled by credit expansion in 249 00:25:42.580 --> 00:25:48.900 ways that should be predictable and that entrepreneurs should be able to contract around. 250 00:25:48.900 --> 00:25:52.180 Why don't they recognize that the boom is unsustainable? 251 00:25:52.180 --> 00:25:55.340 Why don't they see that the bubble will eventually pop? 252 00:25:55.340 --> 00:25:59.500 Why can't they just adjust their behavior to avoid the consequences? 253 00:25:59.500 --> 00:26:04.420 You might keep in mind at first that in a world in which mainstream economists and journalists 254 00:26:04.420 --> 00:26:15.420 and Entrepreneurs and Politicians are constantly shouting that the boom will never stop, that the bubble will never pop. It's a little bit unfair to say, well, now, why don't entrepreneurs recognize that the boom is unstable? 255 00:26:15.420 --> 00:26:25.420 But the point is, even if they do, right, knowing that we're in the midst of an unsustainable credit boom is not sufficient information to tell you exactly what to do, right? 256 00:26:25.420 --> 00:26:31.420 I mean, entrepreneurs are still eager to benefit from particular phases of the boom while they can, right? 257 00:26:31.420 --> 00:26:35.420 You want to get out before the bubble pops, but you don't want to sit by the side. 258 00:26:35.420 --> 00:26:42.420 I mean, you may not want to sit by the side and not participate at all, even if you know that the boom is ultimately unsustainable. 259 00:26:42.420 --> 00:26:46.420 Let me close with a quote from Mises in an essay on forecasting. 260 00:26:46.420 --> 00:26:49.420 It's published in Economic Freedom and Interventionism. 261 00:26:49.420 --> 00:26:55.420 I think Mises explains this point quite well in this essay from 1956. 262 00:26:55.420 --> 00:27:01.420 Mises says, economics can only tell us that a boom engendered by credit expansion will not last. 263 00:27:01.420 --> 00:27:07.420 It cannot tell us after what amount of credit expansion this lump will start, or when this event will occur. 264 00:27:07.420 --> 00:27:15.420 All that economists and other people say about these quantitative and calendar problems partakes of neither economics nor any other science. 265 00:27:15.420 --> 00:27:22.420 What they say in the attempt to anticipate future events makes use of specific understanding. 266 00:27:22.420 --> 00:27:26.420 The same method which is practiced by everybody and all dealings with his fellow men. 267 00:27:26.420 --> 00:27:35.420 Specific understanding has the same logical character as that which characterizes all anticipations of future events in human affairs. 268 00:27:35.420 --> 00:27:46.420 Anticipations concerning the course of Russia's foreign policy, religious and racial conditions in India or Algeria, ladies fashions in 1960, 269 00:27:46.420 --> 00:27:51.940 in 1960, the political divisions in the U.S. Senate in 1970, and even such anticipations 270 00:27:51.940 --> 00:27:56.860 as the future marital relations between Mr. X and his wife, or the success in life of 271 00:27:56.860 --> 00:28:00.780 a boy who has just celebrated his 10th birthday. 272 00:28:00.780 --> 00:28:04.900 There are people who assert that psychology may provide some help in such prognostications. 273 00:28:04.900 --> 00:28:08.940 However, that might be, it is not our task to examine this problem. 274 00:28:08.940 --> 00:28:13.840 We merely have to establish the fact that forecasts about the course of economic affairs 275 00:28:13.840 --> 00:28:17.040 cannot be considered scientific. 276 00:28:17.040 --> 00:28:21.500 Okay, so keep that in mind when you hear forecasts from the mainstream 277 00:28:21.500 --> 00:28:25.080 economists and the media pundits about exactly what will happen in the next 278 00:28:25.080 --> 00:28:26.160 month 279 00:28:26.160 --> 00:28:29.020 or the next six months or the next year. 280 00:28:29.020 --> 00:28:30.960 So, in conclusion, 281 00:28:30.960 --> 00:28:34.600 when we think about the differences between a system with 282 00:28:34.600 --> 00:28:36.400 sort of a market-based money, 283 00:28:36.400 --> 00:28:37.620 true money, 284 00:28:37.620 --> 00:28:41.840 like the gold standard, and the sort of inflationary fiat money regimes we have 285 00:28:41.840 --> 00:28:42.880 today, 286 00:28:42.880 --> 00:28:47.040 it's important to consider not only the sort of overall or macroeconomic effects 287 00:28:47.040 --> 00:28:50.800 but what people today call the microeconomic effects, the effects on 288 00:28:50.800 --> 00:28:53.280 the individual entrepreneur 289 00:28:53.280 --> 00:28:56.800 economic prosperity depends on entrepreneurship 290 00:28:56.800 --> 00:28:59.620 entrepreneurship depends on economic calculation 291 00:28:59.620 --> 00:29:03.040 and economic calculation depends on sound money 292 00:29:03.040 --> 00:29:05.580 that's the main point 293 00:29:05.580 --> 00:29:07.200 that's the main lesson of my talk 294 00:29:07.200 --> 00:29:09.560 you know if only somebody in washington 295 00:29:09.560 --> 00:29:16.560 or the New York media or the Ivy League universities were listening. Thank you.