WEBVTT NOTE Mises and Austrian Economics 1 00:00:00.000 --> 00:00:09.400 This is going to be difficult to explain the law of Austrian economics and Mises' role in a short period of time. I'll try to my best. 2 00:00:09.400 --> 00:00:16.600 First place, about Austrian economics. Contrary to many impressions, it has nothing to do with Austria. 3 00:00:16.600 --> 00:00:25.000 I know nothing about the economics of Austria. Doesn't mean it's not a viable subject. I don't know much about it. 4 00:00:25.000 --> 00:00:29.000 Also, there are very few Austrians left in Austria. 5 00:00:29.000 --> 00:00:33.000 Yeah, they're all here. 6 00:00:33.000 --> 00:00:37.000 Austrian economics began 7 00:00:37.000 --> 00:00:41.000 in the University of Vienna 8 00:00:41.000 --> 00:00:45.000 with Carl Menger. The early Austrians were indeed located in Austria 9 00:00:45.000 --> 00:00:49.000 and then the doctrine permeated outward. 10 00:00:49.000 --> 00:00:53.000 The essence of Austrian economics 11 00:00:53.000 --> 00:01:03.000 of Economics is based on, in contrast to all other schools, including alleged free market schools of economics, 12 00:01:03.000 --> 00:01:08.000 Austrian Economics is based on an analysis of individual action, 13 00:01:08.000 --> 00:01:14.000 of individuals doing things, having purposes and goals, and pursuing them. 14 00:01:14.000 --> 00:01:21.000 This immediately sets us apart, because all the other schools of economics deal with aggregates, groups, classes, 15 00:01:21.000 --> 00:01:35.000 I have to start with, I can easily make this about 5 hours instead of 45 minutes, so I am going to try to truncate this. 16 00:01:35.000 --> 00:01:44.000 Ocean economics basically builds on an earlier tradition of French and Italian, especially French continental tradition. 17 00:01:44.000 --> 00:01:54.000 beginning with the Spanish scholastics in the 16th century and then proceeding on to France with Cantillon and Turgo in the 18th century. 18 00:01:54.000 --> 00:02:06.000 This was buried for various reasons. This knowledge was lost to economic thought and superseded by the British classical school, by Smith and Ricardo and their followers. 19 00:02:06.000 --> 00:02:12.680 So this immediately starts a new history of thought, because most economists, I think, 20 00:02:12.680 --> 00:02:19.000 still think that economics began sort of out of the forehead of Adam Smith in 1776. 21 00:02:19.000 --> 00:02:23.360 He sort of created it like Athena springing from the brow of Zeus. 22 00:02:23.360 --> 00:02:28.920 Actually economics not only predated Smith by several centuries, but also was much better 23 00:02:28.920 --> 00:02:29.920 than Smith. 24 00:02:29.920 --> 00:02:31.920 In other words, Smith was the reference of the Klein. 25 00:02:31.920 --> 00:02:39.680 At any rate, the British Classical School, Smith Ricardo, etc., John Stuart Mill, focused 26 00:02:39.680 --> 00:02:45.200 on aggregates and groups and classes rather than the individual, number one. 27 00:02:45.200 --> 00:02:50.840 Basically you could sum up the Classical School as several key fallacies, and this was dominant 28 00:02:50.840 --> 00:02:55.160 until Menger came around in 1871. 29 00:02:55.160 --> 00:02:59.760 One of the value, economic value, price, was determined by the cost of production, the 30 00:03:29.760 --> 00:03:37.760 He kept inventing great things, like the radio and television and all that, except that it had already been invented 20 years before, so he didn't know about it. 31 00:03:37.760 --> 00:03:43.760 So he was a great inventor, he just invented the wheel and whatever. Too late. 32 00:03:43.760 --> 00:03:49.760 But he was working, he must have put in 100,000 labor hours into these inventions. How many of these sell? Obviously zero. 33 00:03:49.760 --> 00:03:55.760 So the economic value would not obviously depend on his quantity of labor hours. 34 00:03:55.760 --> 00:04:11.200 The classical school had to dismiss as unimportant a whole group of economic goods and not able to explain their value, namely, non-reproducible objects, goods that are not being produced anymore, like Rembrandts. 35 00:04:11.200 --> 00:04:21.720 I mean, Rembrandt put in a certain number of labor hours, I suppose, but the price of Rembrandts keeps fluctuating since then, not in accordance with somebody's input on hopes, otherwise it would be forgery. 36 00:04:21.720 --> 00:04:28.720 So what determines the value of Rembrandt's? Well, they couldn't figure it out. They just had to leave it aside as unimportant. 37 00:04:28.720 --> 00:04:41.720 They couldn't deal with consumers either, with consumers that came up against the famous value of paradox, which history and economics always tell us of that, that Smith was Buffalo by the value of paradox. 38 00:04:41.720 --> 00:04:46.720 The peculiar thing was he solved it himself about 20 years before, so it's a really odd kind of situation. 39 00:04:46.720 --> 00:04:51.720 In the Wealth of Nations, he sets forth a value paradox. 40 00:04:51.720 --> 00:04:53.720 A terrible thing, you can't understand it. 41 00:04:53.720 --> 00:04:55.720 On one hand, there's diamonds, let's say. 42 00:04:55.720 --> 00:04:58.720 On the other hand, there's bread or water, you can use either one of the two. 43 00:04:58.720 --> 00:05:05.720 Bread is a staff of life that's philosophically extremely important, very necessary, and yet it's very cheap on the market. 44 00:05:05.720 --> 00:05:07.720 In other words, the economic value is zilch. 45 00:05:07.720 --> 00:05:09.720 That's where it's cheap, not zero. 46 00:05:09.720 --> 00:05:12.720 Water is the economic value, it used to be zero. 47 00:05:12.720 --> 00:05:18.240 And on the other hand, we have diamonds, which are mere flippery, a luxury item, and so forth and so on. 48 00:05:18.240 --> 00:05:24.800 Adam Smith, being a good Calvinist, said they have zero value, diamonds, and yet they're very expensive. 49 00:05:24.800 --> 00:05:28.800 They have very high economic value. So he couldn't figure that out, the value of paradox. 50 00:05:28.800 --> 00:05:33.520 Here's bread, which is extremely useful, yet has very low economic value. 51 00:05:33.520 --> 00:05:38.960 And diamonds, which are useless, or almost useless, and have very high economic value, and he concluded 52 00:05:38.960 --> 00:05:44.960 The economics can't solve this. There's just a split between value and use and value and exchange. 53 00:05:44.960 --> 00:05:48.960 There's no way to solve it. We have to deal with exchange value and forget about use value. 54 00:05:48.960 --> 00:05:55.960 And you see right away, this sets up the conditions for the whole bunch of left-wing thoughts in the late 19th, early 20th century. 55 00:05:55.960 --> 00:05:59.960 I think it's still going on, I suppose. The separation between value for use and value for... 56 00:05:59.960 --> 00:06:01.960 I mean, production for use and production for profit. 57 00:06:01.960 --> 00:06:05.960 That's what immediately sets that up, but somehow it's a big distinction. 58 00:06:05.960 --> 00:06:12.960 He said therefore we have to, we can't deal with consumers, we can't deal with non-reproducible goods, we have to deal with reproducible goods. 59 00:06:12.960 --> 00:06:20.960 And we can only talk about, since we can't talk about consumers, value must come from something inherent in the object, namely labor hours. 60 00:06:20.960 --> 00:06:26.960 Another reason to use labor hours is that he and Ricardo were trying to measure value all the time. 61 00:06:26.960 --> 00:06:30.960 Because science meant measurement, even in those days, for these people. 62 00:06:30.960 --> 00:06:34.240 And so therefore, how do you measure value and how do you measure changes? 63 00:06:34.240 --> 00:06:39.840 Like, looking for some hard quantity and they concluded labor hours was about the best thing they could get to. 64 00:06:39.840 --> 00:06:45.880 So that was one big fallacy, one big dominant fallacy in economic thought when Menger started to write. 65 00:06:45.880 --> 00:06:53.920 The other big, another big fallacy is that they, since they couldn't deal with individuals at all, they were dealing with classes, 66 00:06:53.920 --> 00:06:59.440 they had a separate thing called distribution, theory of distribution, trying to figure out, this is Ricardo in particular, 67 00:06:59.440 --> 00:07:06.940 Who decides how much of the national output goes to wages, how much goes to profits, how much goes to landlords? 68 00:07:06.940 --> 00:07:12.440 And so the way he set it up was there's a class struggle between these three mighty groups. 69 00:07:12.440 --> 00:07:19.440 In other words, the good is produced somewhere, so they produce it, and then they fight for who gets the different shares of income. 70 00:07:19.440 --> 00:07:24.940 The laborers get messed up here. The laborers are the dirty end of the stick. 71 00:07:24.940 --> 00:07:34.940 Wages are determined by the Iron Law of Wages, the Malthusian Iron Law. It's down to subsistence levels. We all know we're sitting here living at subsistence level at the Anaheim Hilton. 72 00:07:34.940 --> 00:07:41.940 Everybody gets the lowest possible wages that takes care of the workers, and capitalists and landlords fight it out for the rest of it. 73 00:07:41.940 --> 00:07:50.940 But usually landlords are winning out because they get an increasing share of these unproductive group of people getting an increasing share of income. 74 00:07:50.940 --> 00:08:00.940 Well, this obviously led, this analysis seems to be led logically straight away to Marx and Henry George, two different sets of thinkers, but each focusing on different aspects of it. 75 00:08:00.940 --> 00:08:14.940 Marx focusing on the alleged surplus value going to the capitalists against the workers, and somehow capitalism conspiring to keep the wages of people, keep them down to subsistence level. 76 00:08:14.940 --> 00:08:19.500 On the other hand, Henry George focusing on evil unproductive landlords getting an increasing 77 00:08:19.500 --> 00:08:21.820 share of the national product and they should be expropriated. 78 00:08:21.820 --> 00:08:26.060 Now, of course, Smith and Ricardo did not believe they should be expropriated in thinking 79 00:08:26.060 --> 00:08:27.060 those terms. 80 00:08:27.060 --> 00:08:30.660 It seems to me it's pretty logical that if you're interested in justice rather than 81 00:08:30.660 --> 00:08:34.820 only economic analysis, you will wind up as either, if you're a Ricardian, you'll wind 82 00:08:34.820 --> 00:08:37.020 up as either a Marxist or a Georgist. 83 00:08:37.020 --> 00:08:40.020 Some people, of course, take both paths, sort of moxo-Georgists. 84 00:08:40.020 --> 00:09:09.020 The second big dominant force in British classical economics, the third thing is asking how can they be so wrong, how can they focus on this unreal situation, labor hours, and by the way the labor theory of value, I should backtrack slightly on that, this is pure speculation but I think it's probably true that it's no accident that only in Scotland does the labor theory of value originate. 85 00:09:09.020 --> 00:09:19.020 Nobody in the continent, nobody in France, Italy, none of the Spanish scholastics ever thought in terms of, they said labor comes from consumers, consumer demand, they didn't talk in terms of labor value. 86 00:09:19.020 --> 00:09:37.020 It seems to be not an accident because Scotland, of course, was the classical home of Calvinism and Calvinist doctrine is that people, labor is a key thing, everybody is doomed to work, consumer enjoyment, by the way, is evil, and as Adam Smith said, diamonds are useless. 87 00:09:37.020 --> 00:09:44.020 The only reason you consume many things is to allow you to keep working because of God's commandment, to suffer or keep suffering. 88 00:09:44.020 --> 00:09:49.020 So this sort of Calvinist anecdote leads pretty quickly, I think, to a labor theory of value. 89 00:09:49.020 --> 00:09:53.020 So that's two big fallacious aspects of British classical school. 90 00:09:53.020 --> 00:10:00.020 Labor theory of value or cost theory of value. One, two, classes or aggregate class struggle over shares of income. 91 00:10:00.020 --> 00:10:06.020 And the third thing is to focus totally on non-existent, unreal, long run equilibrium. 92 00:10:06.020 --> 00:10:13.100 This is done right now by modern microeconomics and macroeconomics for that matter. 93 00:10:13.100 --> 00:10:18.460 Current neoclassical economics focuses solely on the reason that I mentioned before, they 94 00:10:18.460 --> 00:10:19.460 don't talk about entrepreneurs. 95 00:10:19.460 --> 00:10:22.460 It's very simple why they don't talk about entrepreneurs. 96 00:10:22.460 --> 00:10:26.940 They don't talk about entrepreneurs because entrepreneurs deal with change and uncertainty. 97 00:10:26.940 --> 00:10:30.540 You make a profit if you can forecast better than the next guy. 98 00:10:30.540 --> 00:10:33.300 You make losses if you can't forecast. 99 00:10:33.300 --> 00:10:35.460 In long run equilibrium, you don't have to forecast anything. 100 00:10:35.460 --> 00:10:40.660 Nothing ever changes, since nothing ever changes, everybody has perfect knowledge as they call 101 00:10:40.660 --> 00:10:45.820 it, perfect knowledge, everybody is in perfect competition, there's no uncertainty, there's 102 00:10:45.820 --> 00:10:48.820 no risk, there's no profits and no losses. 103 00:10:48.820 --> 00:10:52.900 And so the entrepreneur then becomes a pain in the neck, it becomes a messing up your 104 00:10:52.900 --> 00:10:55.500 neat mathematical system. 105 00:10:55.500 --> 00:10:59.020 And this again stems from British classical school, they didn't have the mathematical 106 00:10:59.020 --> 00:11:04.460 diagrams or anything, but they had the essence of Ricardo in particular, focusing only on 107 00:11:04.460 --> 00:11:06.460 and Long-Run Equilibrium 108 00:11:34.460 --> 00:11:45.460 The quantity of money only determines the general price level. 109 00:11:45.460 --> 00:11:47.460 If you increase the money supply, prices go up. 110 00:11:47.460 --> 00:11:53.460 It has no impact on production, on profits, on interest, on relative prices or anything else. 111 00:11:53.460 --> 00:11:56.460 It's like two hermetically sealed spheres. 112 00:11:56.460 --> 00:12:01.460 There's a microsphere where things are going on, so it's fairly understandable, supply and demand, prices and all that. 113 00:12:01.460 --> 00:12:08.960 Then there's the macrosphere, totally cut off in the micro, where you have money and places bouncing up and down with no relationship between the two. 114 00:12:08.960 --> 00:12:11.960 Okay, it was in that kind of British classical school dominance. 115 00:12:11.960 --> 00:12:17.960 By the way, it now turns out that not everybody was a Ricardian from 1819 to 1871. 116 00:12:17.960 --> 00:12:22.960 The British themselves began to peck away at Ricardianism shortly after he died. 117 00:12:22.960 --> 00:12:25.960 By 1830, there were no Ricardians left. 118 00:12:25.960 --> 00:12:40.960 But what happened was that John Stuart Mill resurrected Ricardianism, his famous principles, in 1948, and he had such tremendous moral authority by the public that he was so revered, almost anything he said was accepted as gospel truth. 119 00:12:40.960 --> 00:12:47.960 And so he restored Ricardianism to a dominant, he replaced it with a dominant pedestal. 120 00:12:47.960 --> 00:12:55.960 And he did it because he was brainwashed by his father, who was a toprocardian and so on and so on, so I'm not going to get into that can of worms at this point. 121 00:12:55.960 --> 00:13:05.960 Anyway, it's in that atmosphere that Carl Menger, the founder of Austrian Economics, writes his great, path-breaking, magnificent book, Principles of Economics, in 1871. 122 00:13:05.960 --> 00:13:13.960 The way he does it, he builds on the earlier continental tradition, but essentially he develops this whole path-breaking system. 123 00:13:13.960 --> 00:13:21.960 What is it? To sum it up, the Austrian system is created by Menger and a student von Boehm-Bawerk at the University of Vienna. 124 00:13:21.960 --> 00:13:28.960 Essentially, it's based on methodological individualism, in other words, focusing on the individual first, the individual's actions. 125 00:13:28.960 --> 00:13:34.960 The idea is the individual has a purpose, has goals that he or she wants to pursue. 126 00:13:34.960 --> 00:13:41.960 In order to pursue these goals, you have to use resources or means to pursue them, and it takes time to do all this, etc., etc. 127 00:13:41.960 --> 00:13:42.960 etc. 128 00:13:42.960 --> 00:13:47.420 You start with crusoe and you work on up to different individuals and exchanges and building 129 00:13:47.420 --> 00:13:51.480 up the whole economic analysis from the individual. 130 00:13:51.480 --> 00:13:54.060 And it hadn't really been done before, it had been done partially but it had never been 131 00:13:54.060 --> 00:14:00.080 done systematically as Menger did it and as Boehm-Bawerk did developing it even further 132 00:14:00.080 --> 00:14:03.720 especially in capital theory and entrepreneurial theory. 133 00:14:03.720 --> 00:14:08.020 So looking at it that way you realize that the purpose of production is consumption. 134 00:14:08.020 --> 00:14:12.300 The idea of the reason why the inventor worked 200,000 labor hours is that he hopes that 135 00:14:12.300 --> 00:14:18.260 somebody will buy it, and so value is conferred by the consumers, by the demand of consumers, 136 00:14:18.260 --> 00:14:23.540 and goes backward from the subjective valuations of consumers down through to the factors of 137 00:14:23.540 --> 00:14:26.660 production that people receive income. 138 00:14:26.660 --> 00:14:30.100 So you have, in other words, the demand theory or the consumer demand theory of value, the 139 00:14:30.100 --> 00:14:33.900 subjective value theory, instead of the cost of production doctrine. 140 00:14:33.900 --> 00:14:37.700 And now, of course, we immediately explain why Rembrandts are now, it might be two million 141 00:14:37.700 --> 00:14:41.020 dollars now, one million dollars ten years ago, because consumers are paying more for 142 00:14:41.020 --> 00:14:42.020 it. 143 00:14:42.020 --> 00:14:43.980 They're willing to pay more for it now than they were before. 144 00:14:43.980 --> 00:14:48.300 Their valuations are higher, either because of general inflation, they have more money, 145 00:14:48.300 --> 00:14:54.780 or because Rembrandts are now preferred more to other art than they were ten years ago. 146 00:14:54.780 --> 00:15:01.580 So secondly, looking and focusing on individual action, we can see that individuals make their 147 00:15:01.580 --> 00:15:31.580 Evaluations and Marginal Units. This is the so-called marginal revolution. In other words, they don't take the bread-diamond paradox, which Menger and the other marginalists solved, namely, nobody is confronted in real life. See, we're looking at real life action. Nobody is confronted with the choice of all the bread on the world versus all the diamonds in the world. In other words, if the angel Gabriel came down to us tonight and said, you know, captured nationwide television, worldwide television, and said, people of earth, listen, you're not confronted with a choice, but 148 00:16:01.580 --> 00:16:06.580 and the other half is, if diamonds are very rare, each individual diamond is going to be worth a lot. 149 00:16:06.580 --> 00:16:14.580 In other words, these valuations take place in units, in so-called marginal units, in loaves of bread or pounds of butter or whatever. 150 00:16:14.580 --> 00:16:25.580 If you look at it that way, you'll see why water might be priced very highly in the desert and worth not much in a very high-water area. 151 00:16:25.580 --> 00:16:30.380 and so this solved the value paradox. It had been solved before on the continental centuries 152 00:16:30.380 --> 00:16:36.860 before but this is a much better, neater, and more fuller explanation. Another thing 153 00:16:36.860 --> 00:16:42.340 that Austrianism focused on is that economics is not really a quantitative subject. It's 154 00:16:42.340 --> 00:16:48.140 not really a subject where you can make correlations and quantitative measurements and that sort 155 00:16:48.140 --> 00:16:55.420 of stuff because value is subjective and can't be measured. How much do I prefer, for example, 156 00:17:25.420 --> 00:17:31.420 And one of the reasons is because it's not really a mathematical subject. It's really a philosophic subject. 157 00:17:31.420 --> 00:17:41.420 Okay, and the distribution front, I saw the British classical school talk in terms of a class struggle between different classes of income receivers. 158 00:17:41.420 --> 00:17:48.420 Again, the Austrians focus on each individual, individual factor owner, the individual laborer, individual capitalist, etc. 159 00:17:48.420 --> 00:17:54.420 By doing that, they were able to explain individual factor prices, which the classes have never even talked about. 160 00:17:54.420 --> 00:18:09.420 And it's pointed out that the free market through competitive action, entrepreneurial action tends to impute to each individual factor how much productive share of a product, a so-called marginal product or marginal value product. 161 00:18:09.420 --> 00:18:16.420 Each factor tends on the market to earn its marginal value product, its contribution to the goods being produced. 162 00:18:16.420 --> 00:18:19.420 So there's no longer any split between production on the one hand and distribution on the other. 163 00:18:19.420 --> 00:18:24.420 The Theory of Production is all worked out. It's totally separate from the Theory of Distribution. 164 00:18:24.420 --> 00:18:29.420 This, of course, leads very quickly to a socialist position, because you say, well, sure, we're in favor of production. 165 00:18:29.420 --> 00:18:33.420 We'll allow people to produce. No one will grab this for the income and divide it. 166 00:18:33.420 --> 00:18:39.420 Equal shares, or more to people six feet tall, whatever theory of distribution you've got. 167 00:18:39.420 --> 00:18:43.420 With Austrian economics, you realize there's no separate process called distribution. 168 00:18:43.420 --> 00:18:48.420 Distribution comes right out of production. People earn what they contribute to the production. 169 00:18:48.420 --> 00:18:51.420 It's very simple then. 170 00:18:51.420 --> 00:18:57.420 And also, von Boehm-Bawerk pointed out for the first time, and Frank Fetter, the American Austrian, developed it, clarified it. 171 00:18:57.420 --> 00:19:03.420 Interest, long-run profit, is a term that comes from time preference. 172 00:19:03.420 --> 00:19:07.420 This is something, by the way, the poor anti-usury people could never figure out. 173 00:19:07.420 --> 00:19:12.420 The Catholic Church theologians, who tended to be in favor of the free market, 174 00:19:12.420 --> 00:19:16.420 they couldn't figure out what the justification for interest is, interest in a pure loan. 175 00:19:16.420 --> 00:19:25.420 They could understand about risk. They understood about uncertainty and all that. They just didn't understand about why should people be able to charge 3% or 8% or whatever on a pure loan? 176 00:19:25.420 --> 00:19:34.420 And the answer is that people prefer a good right now to waiting for it or the present expectation of a good coming in a year from now, 10 years from now or 100 years from now. 177 00:19:34.420 --> 00:19:43.420 Everybody's got a time premium rate on present goods immediately available and a discount for the future. That determines the rate of interest. 178 00:19:43.420 --> 00:19:54.420 Also, von Boehm-Bawerk pointed out in Menger II, the capital, by the way, modern economics still is not learned. Capital takes time. Production takes time. Capital is a time structure. 179 00:19:54.420 --> 00:20:01.420 Some goods are very close to consumers, like producing Wonder Bread, and the retailer, of course, is very close to the consumer. 180 00:20:01.420 --> 00:20:08.420 On the other hand, machinery, iron ore that goes into making the machinery that produces Wonder Bread is way up the structure. 181 00:20:08.420 --> 00:20:15.420 Capital is a latticework, a network, a structure, which all has to fit in together, and by the way, only the free market can fit it in, only entrepreneurs with a profit and loss test, profit and loss incentive and a free price system can do the fiat money. 182 00:20:38.420 --> 00:20:43.020 One of the problems with socialism, for example, is they can make some stuff but they can't 183 00:20:43.020 --> 00:20:44.020 fit it together. 184 00:20:44.020 --> 00:20:48.020 Often in Russia they have a situation where the bristles, there's a toothbrush shortage. 185 00:20:48.020 --> 00:20:49.460 All of a sudden there's a toothbrush shortage. 186 00:20:49.460 --> 00:20:50.460 Why is there a toothbrush shortage? 187 00:20:50.460 --> 00:20:54.620 Well, the bristles are in omsk and the handles are in tumpsk and they just didn't, they never 188 00:20:54.620 --> 00:20:56.620 fit the bristles together by the handle. 189 00:20:56.620 --> 00:20:58.860 In the free market you never have this problem. 190 00:20:58.860 --> 00:21:03.260 Everything fits because there's a constant feedback mechanism, so to speak, of profit 191 00:21:03.260 --> 00:21:06.700 and loss and a free price system. 192 00:21:06.700 --> 00:21:11.700 Eugen von Boehm-Bawerk pointed out that the capitalist entrepreneur, and we focus on the 193 00:21:11.700 --> 00:21:16.700 entrepreneur in Austria. In other words, the equilibrium is a tendency that was never reached. 194 00:21:16.700 --> 00:21:22.620 It's a goal. It's an ever-changing goal and you never reach it. So Austrians focus on 195 00:21:22.620 --> 00:21:28.060 the process, the real-world process by which the economy tends to move toward equilibrium. 196 00:21:28.060 --> 00:21:31.020 And thereby, of course, we have the whole world of risk and uncertainty and change, 197 00:21:31.020 --> 00:21:36.380 which is the real world, which equilibrium economics doesn't talk about. So therefore, 198 00:21:36.380 --> 00:21:39.860 The entrepreneur becomes a key figure in the whole process, the profit and loss system, 199 00:21:39.860 --> 00:21:43.460 the incentive to make profits and to avoid losses. 200 00:21:43.460 --> 00:21:48.180 And so the capitalist entrepreneur in Austrian theory earns a two-part return. 201 00:21:48.180 --> 00:21:52.420 One is an entrepreneur by forecasting better than the next guy, and be able to forecast 202 00:21:52.420 --> 00:21:56.460 the future, forecast what demand will be for his product, what cost will be. 203 00:21:56.460 --> 00:22:01.260 And also two is a capitalist saving up money and then paying workers right now in advance 204 00:22:01.260 --> 00:22:06.100 of their production and sale, for which the workers in a sense pay him a discount. 205 00:22:06.100 --> 00:22:12.100 and they pay them the interest return and they're happy to do it because they don't have to wait five years for payroll. 206 00:22:12.100 --> 00:22:19.100 So these are the two basic functions of a capitalist entrepreneur, entrepreneurship and capital saving investment. 207 00:22:19.100 --> 00:22:28.100 Okay, in this atmosphere, in this kind of briefly sketch out Austrian economics before von Mises, Menger, von Bawerk, Federer, 208 00:22:28.100 --> 00:22:37.100 Ludwig von Mises comes and was born in 1881. He was a brilliant young student of Boehm-Bawerk's famous seminar at the University of Vienna. 209 00:22:37.100 --> 00:22:46.100 Essentially what he saw was that the Austrians had already fixed up these classical errors, the four big British classical errors, value, distribution and equilibrium. 210 00:22:46.100 --> 00:22:52.100 But the one thing they hadn't done yet, one of the main things they hadn't done yet, was to heal the micro-macro split. 211 00:22:52.100 --> 00:22:56.100 In other words, the Austrians still had only talked about micro. 212 00:22:56.100 --> 00:23:01.500 and weren't able to extend Austrian economics to the theory of money. 213 00:23:01.500 --> 00:23:06.860 So that was Mises' first great accomplishment and his magnificent first book Theory of Money 214 00:23:06.860 --> 00:23:12.380 and Credit came out in 1912 and it's still the best thing ever written on money. 215 00:23:12.380 --> 00:23:16.020 What he did was he healed the split, this artificial split, he applied the marginal 216 00:23:16.020 --> 00:23:21.860 utility theory of Austrian economics to money, integrated it, he made Michael and Mackle 217 00:23:21.860 --> 00:23:26.860 One whole beautiful integrated system of economic analysis. 218 00:23:26.860 --> 00:23:31.860 He pointed out, for example, when you get the money, you don't use M and V, you don't forget about supply and demand. 219 00:23:31.860 --> 00:23:39.860 Purchasing power of money, in other words, the value of money, can be decided on the same basis as individual goods and services, namely supply and demand. 220 00:23:39.860 --> 00:23:45.860 An increase of the supply of money lowers its value, just as in the case of bubble gum or coffee. 221 00:23:45.860 --> 00:23:49.860 An increase of demand for money raises its value, just like any other good. 222 00:23:49.860 --> 00:23:55.860 However, there's a big difference. In this he applies some of the Ricardian currency school insights. 223 00:23:55.860 --> 00:24:00.860 The big difference between money on the one hand and other goods on the other hand is that other goods are necessary to production. 224 00:24:00.860 --> 00:24:11.860 In other words, specific quantities. For example, if other things being equal, if you increase resources or increase the supply of goods and services, people's standard of living go up. 225 00:24:11.860 --> 00:24:19.860 It's a good thing, so to speak, to have more, to find new resources, to find a new oil strike, or to increase productivity, okay? 226 00:24:19.860 --> 00:24:26.860 In the field of money, it's very different. The only real use of money is exchange. You don't eat money, to put it bluntly. 227 00:24:26.860 --> 00:24:32.860 And once you have enough money to become money on the market, you don't need any more. 228 00:24:32.860 --> 00:24:38.860 In other words, any supply of money which is arrived at on the market is optimal. You don't need any more money coming in. 229 00:24:38.860 --> 00:24:52.860 So the only thing that an increase in the money supply does then, the only social effect is to dilute the purchasing power of each existing, pre-existing dollar or gold ounce or mark or whatever the currency unit is. 230 00:24:52.860 --> 00:25:07.860 So any increase in the money supply, as an increase in goods and services is good, it increases the standard of living, an increase in capital equipment is good, it increases future standards of living, an increase in the money supply is pointless because all it does is dilute the purchasing power of the original or the existing unit. 231 00:25:37.860 --> 00:25:43.700 It destroys economic calculation, generally messes everything up, messes up the production 232 00:25:43.700 --> 00:25:44.700 system. 233 00:25:44.700 --> 00:25:49.100 What happens is a tax where the first receivers of money benefit at the expense of the late 234 00:25:49.100 --> 00:25:50.100 receivers. 235 00:25:50.100 --> 00:25:51.100 It's pretty much like counterfeiting. 236 00:25:51.100 --> 00:25:52.940 As a matter of fact, it is. 237 00:25:52.940 --> 00:25:58.980 The Fed is essentially our legalized monopoly counterfeiter and the effect of the Fed increasing 238 00:25:58.980 --> 00:26:04.340 the money supply on the Bank of England or any central bank is almost the same as any 239 00:26:04.340 --> 00:26:05.340 counterfeiter. 240 00:26:05.340 --> 00:26:35.340 The legalized counterfeiter pouring out money down here in Anaheim, you'll have the same sort of effect, an increase in the income of the people in Anaheim, first of the counterfeiters, next of the people the counterfeiters spend the money on, retailers, let's say, in Anaheim, they're in great shape, they love counterfeiting, right, and so then they begin to spend more, prices begin to go up, those of us who don't live in Anaheim, who have fixed income, lose. So the inflation process is essentially a counterfeiting process, except it's not people on the run from the treasury, 241 00:26:35.340 --> 00:26:42.020 Department. It is the Treasury, it is the Federal Reserve doing it. Okay, so Mises also 242 00:26:42.020 --> 00:26:47.980 built on Carl Menger's classic article on the origin of how money originates and expanded 243 00:26:47.980 --> 00:26:52.100 it to show that money has to originate in this way, namely out of the free market, out 244 00:26:52.100 --> 00:26:57.420 of the voluntary actions of individuals trying to overcome the tremendous difficulties of 245 00:26:57.420 --> 00:27:02.660 barter. He shows that money has to originate that way. Money cannot originate as a government 246 00:27:02.660 --> 00:27:07.660 by edict or by some social contact, everybody gets together at one big convention and says let's make that money. 247 00:27:07.660 --> 00:27:10.660 It can't work that way, it has to work out of a market commodity. 248 00:27:10.660 --> 00:27:13.660 Unfortunately, of course, then the government can take it over and mess it up, 249 00:27:13.660 --> 00:27:18.660 but it has to originate as a market, valuable market commodity such as gold or silver, 250 00:27:18.660 --> 00:27:23.660 which have always out-competed all the other marketable commodities once it's given a chance. 251 00:27:23.660 --> 00:27:28.660 People know about gold and silver, if society knows about it, they will out-compete them. 252 00:27:28.660 --> 00:27:34.660 Also, Mises showed in The Theory of Money and Credit that fractional reserve banking is essentially fraudulent, 253 00:27:34.660 --> 00:27:42.660 essentially issuing fraudulent warehouse receipts to non-existent gold or cash creates this whole process. 254 00:27:42.660 --> 00:27:45.660 And the ideal system would be 100% reserve banking. 255 00:27:45.660 --> 00:27:50.660 He believed, however, and I think it's true, under a genuine free banking system, 256 00:27:50.660 --> 00:27:55.660 in other words, if the banks were compelled to meet their contracts, like everybody else is, forced to meet their contracts, 257 00:27:55.660 --> 00:28:18.920 In the theory of money and credit, he fixed up the marginal utility theory, he showed 258 00:28:18.920 --> 00:28:22.920 The other is ordinal and can't be measured. The other, Mimbaweck, was a little bit weak on that. 259 00:28:22.920 --> 00:28:27.920 He showed you can't, since it's subjective, you can't, you can't mathematics it. 260 00:28:27.920 --> 00:28:32.920 I mean, right now, micro-textbooks, look at any micro-textbook, they talk about utils. 261 00:28:32.920 --> 00:28:35.920 They talk about utility theory. They say, well, we have utils. 262 00:28:35.920 --> 00:28:39.920 Some people, some things are worth five utils, other things are worth eight utils. 263 00:28:39.920 --> 00:28:43.920 Those are things that you use, an extra util. It doesn't exist. 264 00:28:43.920 --> 00:29:07.200 The Theory of Money and Credit had the genesis and a few pages he outlined what would become 265 00:29:07.200 --> 00:29:10.360 his theory of the business cycle, the late Austrian theory of the business cycle, the 266 00:29:10.360 --> 00:29:12.320 Misesian theory of the business cycle. 267 00:29:12.320 --> 00:29:42.320 During the 1920s he expanded on that and the work which has been translated since then called on manipulation of money and credit and interestingly enough what happened was most of his from Boehm-Bawerk and most of his students of course rejected this whole application of money in business cycles because of the sound and so forth and Mises was a pioneer of scoring even in Austria in that situation. In Austrian business cycle theory which develops during the 1920s with F.A. Hayek as the famous 268 00:29:42.320 --> 00:29:47.320 The Theory of Money and Banking 269 00:30:12.320 --> 00:30:17.320 This is essentially a business cycle theory, never talked about as such in the textbooks. 270 00:30:17.320 --> 00:30:22.320 It was not only a theory of money and a theory of international payments, it was also a business cycle theory. 271 00:30:22.320 --> 00:30:30.320 It's a simple model, the banks pump in money, prices go up, there's euphoria, and then something happens, they have to contract and there's bankruptcy and liquidation. 272 00:30:30.320 --> 00:30:33.320 It's a very simple model of a business cycle. 273 00:30:33.320 --> 00:30:39.960 He combined that, Mises, with Wichsel's, Wichsel was a Swedish-Austrian, Swedish-Boehm-Bawerk follower, 274 00:30:39.960 --> 00:30:46.520 combined that with Wichsel's analysis of interest rates and how if a banking rate falls below the 275 00:30:46.520 --> 00:30:51.880 natural rate of interest or the free market rate of interest, it'll be inflation. He combined that 276 00:30:51.880 --> 00:30:58.200 and he wound up with an integrated, magnificent path-breaking theory of the business cycle. 277 00:30:58.200 --> 00:31:02.040 Essentially what it is, what it says is an increase in supply of money and credit through 278 00:31:02.040 --> 00:31:06.240 through the banking system, through central banking, not only it causes inflation, everybody 279 00:31:06.240 --> 00:31:11.000 will admit that, at least all the neoclassicals will admit that, excuse me, admit that, it 280 00:31:11.000 --> 00:31:14.840 also causes other disturbances, it's not just what Milton Friedman called the helicopter 281 00:31:14.840 --> 00:31:19.800 effect, Milton Friedman said, we assume that everybody gets a proportionate increase in 282 00:31:19.800 --> 00:31:24.400 the money supply dropped by some magical government helicopter, so everybody gets 30% increase 283 00:31:24.400 --> 00:31:27.600 in their cash, it doesn't work that way of course, if it did work that way, there'd be 284 00:31:27.600 --> 00:31:34.680 The reason why, because we don't have a benefit on Angel Gabriel doubling everybody's money 285 00:31:34.680 --> 00:31:39.280 supply overnight to try to improve their lot, what we have is legalized counterfeiters in 286 00:31:39.280 --> 00:31:44.760 Washington or in London increasing their money supply first and lending it out or spending 287 00:31:44.760 --> 00:31:47.000 it and then it ripples out to the rest of the society. 288 00:31:47.000 --> 00:31:51.360 So they're always one leg up in this expropriation process. 289 00:31:51.360 --> 00:31:57.480 So at any rate, so Mises show that an increase in money and credit not only increases prices 290 00:31:57.480 --> 00:32:02.480 It also messes up the production system, the whole capital structure. 291 00:32:02.480 --> 00:32:09.480 Because one of the problems of the business cycle theory, there are two really basic problems which any business cycle theory has to explain. 292 00:32:09.480 --> 00:32:13.480 One is, how come entrepreneurs suddenly make severe losses? 293 00:32:13.480 --> 00:32:17.480 In other words, entrepreneurs are trained in forecasting. They tend to be great forecasters. 294 00:32:17.480 --> 00:32:20.480 If they're lousy forecasters, they go out of business pretty quickly. 295 00:32:20.480 --> 00:32:23.480 So, successful entrepreneurs tend to be good forecasters. 296 00:32:23.480 --> 00:32:28.480 How come all of a sudden it turns out that all of them, or many of them, or most of them, went, go bankrupt? 297 00:32:28.480 --> 00:32:33.480 They didn't, they didn't forecast successfully that their costs would be much higher than the selling prices. 298 00:32:33.480 --> 00:32:38.480 And it was sudden. There's a sudden cluster of entrepreneurial error. 299 00:32:38.480 --> 00:32:40.480 Now this doesn't usually happen, okay? 300 00:32:40.480 --> 00:32:43.480 And usually economists are trained, or Austrian is certainly trained, 301 00:32:43.480 --> 00:32:45.480 if something's really messed up in the system, you look at government. 302 00:32:45.480 --> 00:32:49.480 Government must be messing things up somewhere, and sure enough, okay, this is... 303 00:32:49.480 --> 00:32:57.480 The second thing which has to be explained is, how come there's a much greater fluctuation in capital goods than there is in consumer goods? 304 00:32:57.480 --> 00:33:04.480 In other words, there's a much bigger boom, let's say, in machine tools, construction, industrial raw materials than there is in retail sales. 305 00:33:04.480 --> 00:33:16.480 Contrarily, when the depression or recession hits, there's a much bigger crash in machine tools, construction, and a higher order of goods than there is in retail goods. 306 00:33:16.480 --> 00:33:20.480 It should be just the opposite. If the Keynesians are right, it should be just the opposite. 307 00:33:20.480 --> 00:33:23.480 The first thing that should be hit would be consumer goods. Quite the contrary. 308 00:33:23.480 --> 00:33:29.480 As a matter of fact, during the 1929-33 depression, in fact, all during the 30s, retail sales were in pretty good shape. 309 00:33:29.480 --> 00:33:34.480 They only declined about 15-20%. It was other things. It was construction. 310 00:33:34.480 --> 00:33:38.480 Machine tools had declined 90%, 80-90%, 100%, almost 100%. 311 00:33:38.480 --> 00:33:42.480 And so you have to focus on trying to explain those two things. 312 00:33:42.480 --> 00:33:48.480 Only the Austrian, only the Mises Theory, only Mises-Hayek Theory explains these two problems. 313 00:33:48.480 --> 00:33:54.480 Namely, the increase in supply of money and credit disturbs the production structure, 314 00:33:54.480 --> 00:34:02.480 messes up the interest rate, because more money is pouring into business loans and would-have by voluntary savings, 315 00:34:02.480 --> 00:34:08.480 and leads to an over-expansion of capital goods, so-called higher-order goods in particular, 316 00:34:08.480 --> 00:34:16.480 of Construction, raw materials, machine tools, plants, basic plant, and underproduction of consumer goods. 317 00:34:16.480 --> 00:34:21.480 So what you have then is a malinvestment in a whole bunch of capital goods. 318 00:34:21.480 --> 00:34:25.480 And the longer the boom continues, the more the worse the malinvestment gets. 319 00:34:25.480 --> 00:34:30.480 And so what happens is costs are bid up too high for the supply of savings available. 320 00:34:30.480 --> 00:34:35.480 And as soon as the credit expansion stops, or slows down significantly, the recession hits. 321 00:34:35.480 --> 00:35:02.880 The recession is an unfortunate but necessary process by which the market returns, washes 322 00:35:32.880 --> 00:35:36.880 have to shift out of capital goods and into consumer goods, and this means that wage rates 323 00:35:36.880 --> 00:35:42.560 and capital goods prices have to fall so that, relative to consumer goods, so that people 324 00:35:42.560 --> 00:35:44.440 will shift, the resources will shift. 325 00:35:44.440 --> 00:35:48.160 To prop the wage rates up, which is what the New Deal did, of course, to prop them up, 326 00:35:48.160 --> 00:35:52.320 to prevent them from falling, totally destroys the whole adjustment process and prolongs 327 00:35:52.320 --> 00:35:55.440 the depression permanently, which is what happened in the 1930s. 328 00:35:55.440 --> 00:36:00.200 Okay, this is essentially the very, again, a capsule summary of the Austrian business 329 00:36:00.200 --> 00:36:01.200 cycle analysis. 330 00:36:01.200 --> 00:36:04.900 And also, by the way, it also explains our current stacked inflation. 331 00:36:04.900 --> 00:36:09.200 That's the only theory that explains inflationary recession. 332 00:36:09.200 --> 00:36:14.360 Because in every business cycle, whether it was pre-World War II or right now, capital 333 00:36:14.360 --> 00:36:18.440 goods prices are always going up higher than consumer goods prices in a boom, and consumer 334 00:36:18.440 --> 00:36:23.200 goods prices are always going up higher relative to capital goods prices in a recession. 335 00:36:23.200 --> 00:36:29.040 Well, it's still doing it, except in the good old days, that means before the New Deal period. 336 00:36:29.040 --> 00:36:36.040 During a recession, everything would fall. There would be a healthy deflation. In other words, prices would fall in general. Money supply fell because the banks were in bad shape. 337 00:36:36.040 --> 00:36:43.040 So the whole money supply would go down, prices would go down, but consumer goods prices would go down not as fast as capital goods prices. 338 00:36:43.040 --> 00:36:51.040 In other words, retail sales, furniture would go down 20% in price, let's say, and construction cement would go down 50%. 339 00:36:51.040 --> 00:36:58.040 So that still, consumer goods prices would be higher relative to capital goods prices than they were before, which is what you need in a recession. 340 00:36:58.040 --> 00:37:03.240 However, consumers loved it because the absolute prices, in money terms, were cheaper. 341 00:37:03.240 --> 00:37:11.040 Well, now that we have a Keynesian, monetarist, semi-Keynesian takeover since the 1930s, the 342 00:37:11.040 --> 00:37:13.320 money slides never permitted the fall ever, ever again. 343 00:37:13.320 --> 00:37:16.720 In other words, the Fed is always pumping more money into the system, sometimes a little 344 00:37:16.720 --> 00:37:17.720 less, sometimes a little more. 345 00:37:17.720 --> 00:37:22.920 As a result, during a recession, we never had a fall in prices, ever. 346 00:37:22.920 --> 00:37:27.640 And so this healthy mask of the sugar-coating of the pill is now gone, so the consumers 347 00:37:27.640 --> 00:37:31.080 in a recession are faced with two problems, one unemployment and bankruptcies and all that, 348 00:37:31.080 --> 00:37:36.080 which they always were faced with, plus, because cost of living keeps going up, because consumer 349 00:37:36.080 --> 00:37:39.840 goods prices are still going up relative to capital goods prices, except now they're both 350 00:37:39.840 --> 00:37:43.320 going up in absolute terms, they're not going down because of healthy deflation. 351 00:37:43.320 --> 00:37:47.560 So at any rate, we now have a situation where we're getting the worst of both worlds every 352 00:37:47.560 --> 00:37:48.560 time there's a recession. 353 00:37:48.560 --> 00:37:52.640 We've still got a big increase in the cost of living, plus we've got unemployment, this 354 00:37:52.640 --> 00:37:58.640 This is the result of 50 years of fine-tuning by a beloved economic expert in Washington. 355 00:37:58.640 --> 00:38:06.640 Okay, to get back to Mises personally, Mises taught and developed his views at the University of Vienna, it's true. 356 00:38:06.640 --> 00:38:10.640 He never had a pay post at the University of Vienna. He was discriminated against, even in Austria. 357 00:38:10.640 --> 00:38:15.640 And he worked for the Chamber of Commerce, or Department of Commerce, I guess it is, in Austria. 358 00:38:15.640 --> 00:38:20.880 in Austria, and his seminar, the very famous seminar, was purely private. He held it held 359 00:38:20.880 --> 00:38:25.200 in his offices in Chamber of Commerce, and this seminar is the one that attracted all 360 00:38:25.200 --> 00:38:29.840 the top young economists in Europe and philosophers and whatever, and he converted very many of 361 00:38:29.840 --> 00:38:35.640 them. I mean, I just list a few of Hayek, Machlab, Haberler, Robbins, Vogel and Schutz, 362 00:38:35.640 --> 00:38:41.240 and on and on. Even future British Prime Minister Gatesgold, it was a Mises seminar, was a Labour 363 00:38:41.240 --> 00:38:44.560 Party Prime Minister, it wasn't nearly as bad as the other Labour Party people, possibly 364 00:38:44.560 --> 00:38:50.280 because of Misesian influence. In addition to that, this tremendous intellectual force 365 00:38:50.280 --> 00:38:55.360 that Mises had and the so-called Mises Christ, which means Mises Circle. By the way, it must 366 00:38:55.360 --> 00:38:58.520 have been a wonderful thing. They used to go out. Every group of intellectuals in Vienna 367 00:38:58.520 --> 00:39:05.280 in those days had their own café. There were 2,000 cafés and so each one had the psychoanalysts, 368 00:39:05.280 --> 00:39:09.960 the shrinks had their café and the positivists had their café and the Misesians had their 369 00:39:09.960 --> 00:39:24.960 Mises single-handedly stopped the Austrian inflation in the 1920s, stopped it from becoming hyperinflation. 370 00:39:24.960 --> 00:39:32.660 There was a big inflation, but it didn't get as bad as Germany, largely because of Mises constant pressure by memos and political influence. 371 00:39:32.660 --> 00:39:38.160 He later, in his notes in recollection, said maybe he shouldn't have done that, maybe it would have been better if the whole thing collapsed earlier. 372 00:39:38.160 --> 00:39:41.660 Anyway, he was quite depressed at that point, I'll mention in a minute. 373 00:39:41.660 --> 00:39:44.560 Another thing that Mises did is he warned about the Great Depression. 374 00:39:44.560 --> 00:39:51.360 The 1920s was a period where essentially a Friedmanite period in many ways, a monetarist period. 375 00:39:51.360 --> 00:39:59.360 Benjamin Strong, the leader of the Federal Reserve Banks here, was putting into effect Irving Fischer's Doctrine, which is essentially pre-Freedmanite. 376 00:39:59.360 --> 00:40:05.360 And basically what it was is to keep the price level constant. That's just the key thing, to keep the price level. And the price level was indeed constant. 377 00:40:05.360 --> 00:40:12.360 Wholesale prices remained the same all during the 1920s, so they figured there's no problem with inflation. What's everybody complaining about? 378 00:40:12.360 --> 00:40:20.360 By definition, if the price level was constant, there's no problem. However, the Austrian position was, and still is, that the price level is not the key thing. 379 00:40:20.360 --> 00:40:25.760 Especially because in capitalist development, in free market capitalism, prices tend to 380 00:40:25.760 --> 00:40:30.640 fall because you have a tremendous increase in outpouring of goods and services, especially 381 00:40:30.640 --> 00:40:35.700 in productive goods, and so prices tend to fall in a free and unhampered market, thereby 382 00:40:35.700 --> 00:40:40.600 spreading the advantages of capitalist development to everybody in the country. 383 00:40:40.600 --> 00:40:44.880 We can see that now with specific things like computers and calculators, you know, which 384 00:40:44.880 --> 00:40:49.920 calculators stole it all for $500 and have much better ones at $18, or TV sets or personal 385 00:40:49.920 --> 00:40:55.920 and Computer. Tremendous fall in prices during a tremendous inflationary period, by the way. 386 00:40:55.920 --> 00:40:59.040 And so, what Mises pointed out was that the fact that price levels constant is not such 387 00:40:59.040 --> 00:41:01.840 a great thing, but they should be falling. The reason why it's not falling is that the 388 00:41:01.840 --> 00:41:05.880 Fed and other central banks were inflating money and credit and propping it up and causing 389 00:41:05.880 --> 00:41:09.760 malinvestment, which will cause a recession, a big recession, even though prices haven't 390 00:41:09.760 --> 00:41:16.520 gone up. He was laughed at, considered ridiculous. Of course, the depression and the crash proved 391 00:41:16.520 --> 00:41:26.520 Socialism correct. He was doing that during the 20s. He was developing his business cycle theory. He did many other things during the 20s. Unbelievable achievements, unbelievable decades for Mises. 392 00:41:26.520 --> 00:41:43.520 Socialism arises, of course, in World War I. After World War I, communism was really the same thing. And everybody had to start analyzing socialism, socialist economy. Everybody realizes then and now, by the way, that socialism has an incentive problem. That's clear to everybody. 393 00:41:43.520 --> 00:41:47.520 In other words, even socialists will admit this. Yes, yes, we have an incentive problem. 394 00:41:47.520 --> 00:41:53.520 The incentive problem is summed up in the famous motto, under socialism, who will take out the garbage? 395 00:41:53.520 --> 00:41:58.520 That doesn't really work. Or who will go to Siberia? That's another way to put it. 396 00:41:58.520 --> 00:42:04.520 Who will go to Alaska? Who's going to develop the underdeveloped? Who will schlep out the underdeveloped region and build it up? 397 00:42:04.520 --> 00:42:12.520 Well, you can't use economic incentive under socialism because either incomes are equal or less than set by some government authority. 398 00:42:12.520 --> 00:42:15.480 Communist get higher incomes, whatever it is, it's certainly not set by marginal 399 00:42:15.480 --> 00:42:19.600 productivity. So who's going to go to Siberia? Who's going to carry out the garbage? 400 00:42:19.600 --> 00:42:24.240 Well the answer, the socialist traditional answer is of course moral incentive. In other words, 401 00:42:24.240 --> 00:42:27.920 people will, or the creation of this is called a new socialist man. Everybody will be 402 00:42:27.920 --> 00:42:31.280 molded by socialist government to become totally altruistic and love the 403 00:42:31.280 --> 00:42:35.840 collective and do everything for the collective. In other words, slave laborer 404 00:42:35.840 --> 00:42:40.760 will carry out the garbage and go to Siberia. So even socialists recognize 405 00:42:40.760 --> 00:42:47.760 The Theory of Money and State The Theory of Money and State The Theory of Money and State 406 00:43:10.760 --> 00:43:15.760 What price do we set? Who's going to carry out the garbage? How many people should carry out the garbage? 407 00:43:15.760 --> 00:43:20.760 There's no way the socialist government can calculate because, as Mises pointed out, there's no free price system. 408 00:43:20.760 --> 00:43:23.760 There's no private ownership of the means of production, by definition. 409 00:43:23.760 --> 00:43:27.760 And therefore, there's no property titles. There's no free market in property titles. 410 00:43:27.760 --> 00:43:31.760 There's no way to set up a real price system. There's no way a socialist government can calculate. 411 00:43:31.760 --> 00:43:37.760 It's economic chaos. He pointed out in his famous article in 1920, which really upset the socialists in Europe. 412 00:43:37.760 --> 00:43:51.760 They try to answer it all the 1920s and 30s. There was a famous calculation debate. He also expanded this in his great book called Socialism a couple of years later. He dealt with other aspects of Socialism. 413 00:43:51.760 --> 00:44:03.760 At any rate, when I was going to college, too many years ago, the answer was that Oskar Lange had already solved this. No problem, because you have equations and all that. The government acts as if it was a market. 414 00:44:03.760 --> 00:44:07.840 Socialists, as Mises already pointed out, this is a lot of nonsense, this so-called 415 00:44:07.840 --> 00:44:12.000 solution assumes perfect competition, perfect knowledge, the socialist government has the 416 00:44:12.000 --> 00:44:16.200 perfect knowledge already, of course, in prices, which obviously they don't have, that's the 417 00:44:16.200 --> 00:44:17.200 whole point. 418 00:44:17.200 --> 00:44:20.840 And also, no socialist government has ever tried to put the longer solution into effect, 419 00:44:20.840 --> 00:44:21.840 never. 420 00:44:21.840 --> 00:44:25.520 As a matter of fact, what's happening is that socialist planning has broken down, 421 00:44:25.520 --> 00:44:29.240 Yugoslavia has gone, and Hungary has gone fairly rapidly toward a free price system, 422 00:44:29.240 --> 00:44:33.060 Socialism and even China have gone in the direction of the price system, they realize 423 00:44:33.060 --> 00:44:34.060 this doesn't work. 424 00:44:34.060 --> 00:44:38.920 And this is true in a situation where they still have the world market and world prices 425 00:44:38.920 --> 00:44:41.920 to which the government, socialist governments could refer, because they know what the price 426 00:44:41.920 --> 00:44:44.020 of wheat is, okay? 427 00:44:44.020 --> 00:44:48.480 And in world socialist government, they wouldn't know that, they'd be totally at a loss. 428 00:44:48.480 --> 00:44:53.080 So Mises pointed out, in other words, in addition to its other problems, socialism can't work, 429 00:44:53.080 --> 00:44:55.320 it can't calculate in a modern economic system. 430 00:44:55.320 --> 00:45:01.320 Also during the 1920s, Mises put out a theory, critique of interventionism, which shows that interventionism doesn't work. 431 00:45:01.320 --> 00:45:09.320 In other words, price controls create shortages, taxes cripple saving and investment, inflation causes problems we've seen, protectionism is destructive. 432 00:45:09.320 --> 00:45:14.320 He shows, and also he shows that interventionism tends to be cumulative, as we see all the time. 433 00:45:14.320 --> 00:45:19.320 In other words, interventionism, the government sets out to solve a problem. Somebody goes to the government and says it's a big problem. 434 00:45:19.320 --> 00:45:23.320 Too many people over 60 have hangnails, let's say, have a big hangnail gap. 435 00:45:23.320 --> 00:45:38.320 So we need a multi-billion dollar hangnail solving federal funding so that the government then investigates hangnails towards billions of dollars, doesn't solve the hangnail problem and creates other problems at the same time, whatever, I mean too many side effects and anti-hangnail drugs or whatever it is. 436 00:45:38.320 --> 00:45:49.320 So every time the government intervenes it doesn't solve the original problem and creates two or three more problems at which the government can say well we have to have more intervention to solve the two or three others or they can just forget the whole thing. 437 00:45:49.320 --> 00:45:55.320 So interventionism is unstable. It has a cumulative effect. Either you go onward towards socialism or you go back to the free market. 438 00:45:55.320 --> 00:46:05.320 But Mises has already shown that socialism can't work. So if socialism can't work and interventionism is unstable, you're left with only one viable option for modern industrial world, laissez-faire capitalism. 439 00:46:05.320 --> 00:46:16.320 And so Mises then becomes an uncompromising, hardcore laissez-faire capitalist, pounding away day after day on his question, making himself very unpopular as you might expect. 440 00:46:16.320 --> 00:46:32.320 and his great book on liberalism which came out in 1927, since his 40s, he also shows in liberalism the political and civil liberties aspect, the economic, private property rights, free market, civil liberties and international peace are all inextricably tied together. 441 00:46:32.320 --> 00:46:39.320 Well tied together, something pretty few of us even know to this day. So that's a book that everybody could read with tremendous profit. 442 00:46:39.320 --> 00:46:44.840 Profit. In addition to all this in the 1920s, and we're not through yet with Mises' accomplishments, 443 00:46:44.840 --> 00:46:49.560 you also see there's a challenge to Austrian economics and the methodological philosophical 444 00:46:49.560 --> 00:46:53.880 front. And the challenge was twofold, basically, and it's still there, by the way, seeing two 445 00:46:53.880 --> 00:46:59.000 challenges. On the one hand, institutionalism, which Mises called anti-economics, and the idea 446 00:46:59.000 --> 00:47:03.640 that economic theory is no good anyway, there's no such thing as economic theory. Essentially, 447 00:47:03.640 --> 00:47:08.840 economics becomes only history, a record of what's going on. Okay, so that's one form, 448 00:47:08.840 --> 00:47:14.520 This is quite dominant in the United States in the 1920s, institutionalist approach, and 449 00:47:14.520 --> 00:47:19.080 two, which has been the dominant neoclassical approach, logical positivism, with the idea 450 00:47:19.080 --> 00:47:24.280 that economics has to be like physics, a quantitative, measurable science where you deduce things, 451 00:47:24.280 --> 00:47:28.520 you have full vaccines, it's good because you can deduce stuff from them and predict. 452 00:47:28.520 --> 00:47:33.280 The whole thing with the whole unfortunate econometrics mechanistic approach, which we're 453 00:47:33.280 --> 00:47:37.960 very familiar with now, where people are treated as if they are stones and atoms. 454 00:47:37.960 --> 00:47:41.640 Unfortunately, people are not stoned out. They are people who have choices, they have 455 00:47:41.640 --> 00:47:46.440 consciousness, they choose their purposes and goals, etc. And so this whole neoclassical 456 00:47:46.440 --> 00:47:51.120 economics is totally off on a wrong track. And so he thinks about this and he sets forth 457 00:47:51.120 --> 00:47:55.720 his views on praxeology, what he calls the correct, what he calls praxeology, the correct 458 00:47:55.720 --> 00:48:00.960 analysis, the Austrian analysis of individual action, where economics essentially deals 459 00:48:00.960 --> 00:48:04.680 with the logical implication of the fact that people act. How do you know that people act? 460 00:48:04.680 --> 00:48:07.640 You just look at yourself and you look at other people. You see that they act. They don't 461 00:48:07.640 --> 00:48:11.520 like stones and atoms, they have purposes, and in this knowledge all the economic theory 462 00:48:11.520 --> 00:48:12.520 is deduced. 463 00:48:12.520 --> 00:48:16.280 This is very unfashionable, it's even more unfashionable now than the free market is. 464 00:48:16.280 --> 00:48:20.640 You see Mises had a tough problem, he not only had to fight for laissez-faire capitalism 465 00:48:20.640 --> 00:48:24.800 which was unfashionable enough, he also had to fight for methodology which is totally 466 00:48:24.800 --> 00:48:30.240 out of fashion, has been in a race to try to ape physics, to try to imitate physics 467 00:48:30.240 --> 00:48:35.520 and the success of nuclear energy and that sort of thing. 468 00:48:35.520 --> 00:48:40.400 So he sets forth this in his great book, Gumpal-Blemer International Economy in 1933, which has been 469 00:48:40.400 --> 00:48:41.400 translated later. 470 00:48:41.400 --> 00:48:47.200 It follows this up as Theory and History, a marvelous book he wrote in 1957, showing 471 00:48:47.200 --> 00:48:50.600 the difference between theory and history and what their roles are. 472 00:48:50.600 --> 00:48:54.040 Having done all this, as if he hadn't done enough yet, which is plenty times as much 473 00:48:54.040 --> 00:48:58.440 as the average economist accomplishes in a lifetime, he now proceeds, while he sets 474 00:48:58.440 --> 00:49:02.640 forth the proper methodology, it's now his task to do something with it, in other words, 475 00:49:02.640 --> 00:49:07.200 and he constructs a whole integrated system of economic thought based on the correct methodology 476 00:49:07.200 --> 00:49:08.200 and he does it. 477 00:49:08.200 --> 00:49:13.040 And he does it with magnificent crowning achievement, National Economy, which came out in 1940 in 478 00:49:13.040 --> 00:49:16.200 Geneva, which unfortunately was neglected, it was during the middle of the war anyway, 479 00:49:16.200 --> 00:49:20.520 so it was totally neglected and then expanded it and rewrote it in English and expanded 480 00:49:20.520 --> 00:49:26.400 it in Human Action in 1949, which is the great work, final concern of the 20th century. 481 00:49:26.400 --> 00:49:31.040 Okay while he was doing this in 1930, things were happening with Misesian economics so 482 00:49:31.040 --> 00:49:32.040 to speak. 483 00:49:32.040 --> 00:49:39.660 In 1931, Mises' follower Hayek shifts from Vienna to the London School of Economics. 484 00:49:39.660 --> 00:49:43.940 He's brought there by Robbins, who had been in Mises' seminar, and he starts giving lectures 485 00:49:43.940 --> 00:49:49.320 and translating his book, Misesian Capital and Business Cycle Theory, and he wows everybody. 486 00:49:49.320 --> 00:49:51.760 First of all, it's the middle of a depression, a depression that hadn't been predicted by 487 00:49:51.760 --> 00:49:57.200 any orthodox economist, and Hayek manages to convert all the top young economists in 488 00:49:57.200 --> 00:50:02.600 in England, Hicks, Lerner, Caldor, Sir William Beveridge, it wasn't so young, but only these 489 00:50:02.600 --> 00:50:04.200 guys became lustrients at that point. 490 00:50:04.200 --> 00:50:08.320 If you read some of the Literate Journal articles in England, in the early 30s, they all sound 491 00:50:08.320 --> 00:50:13.300 like Mises, it was fantastic, for a great few years, and they accepted the Misesian 492 00:50:13.300 --> 00:50:14.300 analysis of the Depression. 493 00:50:14.300 --> 00:50:19.440 The Depression came about because of the Federal Reserve and Bank of England, et cetera, simple 494 00:50:19.440 --> 00:50:23.680 bank credit expansion, and then was prolonged by New Deal intervention into the wage rates 495 00:50:23.680 --> 00:50:26.680 and public works, et cetera. 496 00:50:26.680 --> 00:50:36.680 Unfortunately, even Americans, in those days, Americans thought, essentially were followers of English, in other words, they looked at Britain as the big, as England as the big, as the center of economic thought. 497 00:50:36.680 --> 00:50:52.680 So with English economics becoming Hayekian, Americans began to pick up the bull. Alvin Hansen, who later became the top American Keynesian, was becoming sort of semi-Austrian, plus a few other people, and suddenly, bingo, Keynes's general theory comes out in 1936, and that's it. 498 00:50:52.680 --> 00:50:59.680 And by the way, Keynesianism did not win out by patiently refuting Austrian economics. 499 00:50:59.680 --> 00:51:01.680 It did not work that way. 500 00:51:01.680 --> 00:51:03.680 Sci-Fi can't be refuted. 501 00:51:03.680 --> 00:51:05.680 They didn't even try doing it. 502 00:51:05.680 --> 00:51:08.680 It was simply like a change in hemlines, a change in fashions. 503 00:51:08.680 --> 00:51:11.680 Everybody forgets the old stuff and goes on to the new bandwagon. 504 00:51:11.680 --> 00:51:16.680 And all these people, except Hayek, all the people Hayek converted shifted to Keynesianism, 505 00:51:16.680 --> 00:51:21.680 which is now the big fashion, which is totally the opposite in most every way of Austrian thought. 506 00:51:51.680 --> 00:51:58.680 of Money, The Theory of Money and State, The Theory of Money and State, The Theory 507 00:52:21.680 --> 00:52:46.680 Mises Menger was ruled from economics and von Bawerk committed suicide because of World War I. 508 00:52:46.680 --> 00:52:55.680 World War I, ideals of liberalism, classical liberalism, international peace, and free markets. 509 00:52:55.680 --> 00:53:02.680 Anyway, Mises comes to the United States. He's penniless. He's about 60 years old or so. 510 00:53:02.680 --> 00:53:09.680 He starts writing in a new language, and he can't get an academic post. This is an eternal blot on academia. 511 00:53:09.680 --> 00:53:20.680 This is a situation where every Marxist and semi-Marxist and three-quarter Marxists were getting cushy top chairs, the guy at Harvard and Princeton and whatever, 512 00:53:20.680 --> 00:53:29.680 and Mises couldn't find an academic post. He had finally got one at NYU as a visiting professor with a salary paid for by outside businessmen and foundations. 513 00:53:29.680 --> 00:53:37.680 And the same thing happened to Hayek. Hayek's salary at the University of Chicago was never paid for by Chicago, it was paid for by outside business groups. 514 00:53:37.680 --> 00:53:44.680 As a result, Mises was scorned at NYU. The dean was against him. The dean would advise people not to take his courses and things like that. 515 00:53:44.680 --> 00:53:51.680 See, here he was in a fantastically miserable situation. And yet, what was his? And here's where I come in the picture, because I got to know him at this point. 516 00:53:51.680 --> 00:53:58.680 When he started a seminar at NYU, what was his spirit about this? How did he act? It was magnificent. I couldn't believe it. I mean, he was cheerful. 517 00:53:58.680 --> 00:54:04.680 He was never bitter. He never said an uncalling word about anything, any person. And he was constantly trying, very sweet. 518 00:54:04.680 --> 00:54:18.680 Mises was constantly trying to urge people to be productive, any spark of productivity in any of us clunks was immediately nourished by Mises, and he was dealing with people far below the level of Hayek and Hoppe, he didn't seem to bother them at all, just great. 519 00:54:18.680 --> 00:54:27.680 He tried to reestablish the seminar atmosphere of Vienna. We went out to Child's Restaurant, I think it was, afterwards and discussed things. 520 00:54:27.680 --> 00:54:32.880 It was, he was kindly, he was uncomplaining, he was never bitter, and it was just a magnificent experience. 521 00:54:32.880 --> 00:54:36.880 I've told the story before, but I'm going to tell it again, because I think it's classic about Mises. 522 00:54:36.880 --> 00:54:40.280 People were very intimidated. First of all, half the people didn't know anything, didn't care. 523 00:54:40.280 --> 00:54:43.280 They were just there to get their automatic B or A or something. 524 00:54:43.280 --> 00:54:48.880 The rest of the people, those who were interested, outside auditors mostly, were too intimidated. 525 00:54:48.880 --> 00:54:51.080 He's a great man, what do we know? How can we say anything? 526 00:54:51.080 --> 00:54:53.480 So what he'd say is, look, say anything you want. 527 00:54:53.480 --> 00:55:01.480 Whatever you say, however idiotic it is, has already been said before you by some eminent economist. 528 00:55:01.480 --> 00:55:03.980 Of course, he was right. 529 00:55:03.980 --> 00:55:08.480 He told these great anecdotes about his friend Max Weber and things like that. 530 00:55:08.480 --> 00:55:09.980 It was just marvelous. 531 00:55:09.980 --> 00:55:13.180 Being scorned, etc., and not having any followers at the beginning. 532 00:55:13.180 --> 00:55:16.280 He writes Human Action, this great, crowning work. 533 00:55:16.280 --> 00:55:20.980 When Human Action came out, I was going up the fee at the time, which is the Foundation for Economic Education, 534 00:55:20.980 --> 00:55:25.060 Mises, which was literally the only free market outfit in the country. It's not like now, 535 00:55:25.060 --> 00:55:29.460 every Tom, Dick and Harry says he's in favor of the free market. They said, Mises, I haven't 536 00:55:29.460 --> 00:55:32.900 met Mises yet. They said he's coming out with a new book. I said, oh, what's it about? They 537 00:55:32.900 --> 00:55:37.620 said everything. And sure enough, it's about everything. That's it. It's the whole world 538 00:55:37.620 --> 00:55:42.780 of blacks. I urge you to read it. I mean, it's more than I urge you. It's magnificent. 539 00:55:42.780 --> 00:55:48.340 And I think, but despite these conditions, despite these oppression under which he worked, 540 00:55:48.340 --> 00:55:57.340 There were many good people that emerged out of this Mises seminar, Professor Zenholz, Israel Kirzner, Sylvester Petro, Percy Graves, and many other people. 541 00:55:57.340 --> 00:56:04.340 And Mises has inspired much of the current hard money movement. I think it's really all due to him. 542 00:56:04.340 --> 00:56:14.340 He died in 1992, in 1973, after a remarkably productive life, and a year later Hayek got the Nobel Prize, which sort of inspired other economists, 543 00:56:14.340 --> 00:56:17.340 Who's this guy Hayek? Why is he getting a Nobel Prize? 544 00:56:17.340 --> 00:56:22.340 And it's interesting that he got the prize specifically for his Misesian work that he did in the 1930s. 545 00:56:22.340 --> 00:56:26.340 Misesian business cycle theory, which swept away in the Keynesian Revolution. 546 00:56:26.340 --> 00:56:29.340 And since then, there's been a notable Austrian revival. 547 00:56:29.340 --> 00:56:32.340 And I think it's all due to Mises, and it's just unfortunate he didn't get to see it. 548 00:56:32.340 --> 00:56:34.340 Thank you very much.